Q2 2019 Earnings Call
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Replay of today's broadcast will be available following the conclusion of the call until Thursday July 25th 2019.
The replay information is contained in the company's press release.
Before we begin the company would like to remind you that statements made during this call that are not historical in fact are forward looking statements. Please refer to the information regarding forward looking statements and risk factors included in the company's earnings release and latest filings with the SEC.
The company undertakes no obligation to update publicly or revise any forward looking statement.
I would now like to turn the conference call over to Jill You Banco chart industries CEO .
Thank you Daniel Good morning, everyone and thank you for joining us today to go through our second quarter 2019 result in full year outlook.
As usual, we will walk through our supplemental presentation that was released this morning, starting on slide two.
The medically we are seeing significant demand for LNG not just for big LNG, but also for the global infrastructure build out.
This is a unique opportunity for us as our distribution and storage and energy and chemicals products serve various global applications, ranging from small and utility scale LNG facilities to dig LNG export terminals.
To fueling stations to re gasification plants.
The scaling of this infrastructure build is happening quickly in particular as the number of countries importing LNG is rising currently at 42 countries, including Panama, Gibraltar and Bangladesh. The three newest additions in 2018.
What is important about the increasing number of countries importing LNG is that all of these countries regardless of size will need infrastructure to utilize the gas.
The need for alternative energy in conjunction with ramping regulatory requirements, such as IMO 2020 are driving decisions towards natural gas.
Also unique to US is our access to global geographic in specialty growth markets.
The additions of Viavi in air Exchangers, which closed on July onest, broaden our product offering across the gas to liquids cycle as well as access to regions, such as India with localized manufacturing capabilities.
You will hear more today about how we will leverage our footprint increase international opportunities inclusive of taking air cooled heat exchangers outside of the United States.
We will conclude today's call with a reiteration of our prior full year 2019 guidance inclusive of the impacts from our recent strategic financing and the addition of air exchangers.
We are able to reiterate our guidance because of the strength in backlog with all three segments backlog increasing sequentially over the first quarter and our self help margin expansion actions benefiting gross margin in SG universe.
Moving to slide three while the second quarter 2019 orders faced tough comps to both Q1 2019 in Q2 2018 order activity continues to be robust.
Orders of $322 million grew 1.8% over the second quarter of 2018, which included three large orders totaling $53 million.
In the second quarter of 2019, we received 15 orders that each were greater than $2 million in value totaling $80.2 million. The first time in our history with 15 orders of this magnitude in a single quarter.
This trend supports the strength across our markets and demonstrate broad based growth.
Also in the second quarter, we received our largest order for fans in the history of the business for refinery project in the U.S Virgin Islands.
Already in July we have received a 9 million dollar order for hydrogen recovery system in ammonia plant located in Saudi Arabia.
The past six quarters of order strength supports continued sales growth with second quarter 2019 revenue of $310 million, a 7% increase over the first quarter as well the 5% organic increase over the second quarter of 2018.
Before we dig into the status on big LNG projects I will spend some time on slide four which shows a depiction of global small and utility scale LNG opportunities. We have shared that we have booked over $20 million of utility scale related LNG orders in the past eight months, yeah. We have not explained in depth the magnitude of the opportunity for our equipment and process in the space.
By way of background small scale LNG is not new yet has only recently been recognized as part of the global LNG infrastructure Buildout.
Small scale LNG serves a different set of customers than mid or base load LNG export terminal operator serve and in the case of the United States do not require FERC approval.
These smaller liquefaction plants typically have a production capacity of less than 500000 tons per year.
And serve specific uses such as marine Bunkering fuel for over the road transport in power generation and targeted locations.
Utility clients are moving toward LNG as an option for a peak capacity market demand solution in gas pipeline constrained areas. A good example of where the solution could be useful is in New York City, where 72000 people were without electricity for over five hours last Saturday and utility companies are indicating that outages across our networks could occur this coming weekend due to high temperatures in excess of stress on the grid.
We have executed an agreement with utility scale focused MPC owed in to work together to develop the utility scale market in the northeastern United States.
The northeast United States is noteworthy as there are multiple projects moving ahead in the short term.
In addition to the three recent orders we received Philadelphia gas works receive city Council approval on June 13th to move their pass young LNG plant ahead, which owed and chart will develop and construct together.
Additionally, in Massachusetts, the Northeast Energy Center project continues to progress through the necessary steps to begin construction. This project, which we are also working with owed in on is a proposed multifaceted LNG facility that would obtain gas from the Tennessee gas 200 line that runs across the state chill, the gas for storage and tanks and low gas on to trucks for transport ultimately supplying national grid customers.
What is important to stress is that this is a growing global market much of what you hear about is north American centric as it is very active right now ranging from small scale LNG for mining customers in Mexico to power customers in locations, such as the Caribbean and East and West coast of the United States.
Yet as you can see on the map on slide four this small scale market is global in Europe small scale LNG facilities are quickly progressing with the recently opened Gibraltar Regasification terminal that enables the country to switch from diesel fueled power generation to cleaner burning natural gas. We designed the cryogenic vessels for LNG storage provided vaporizers loading arm transportation say construction and startup for that project.
The market opportunity for our equipment and process is expected to be greater than $650 million in the next three years, not even including the associated repair and service opportunities that tend to come with small scale plants.
To give you a sense of the current pipeline of opportunity. We're now working in various stages of bidding on 15 potential projects globally, not even including reduced terminals, which will discuss shortly.
Speaking of repair and service, we continue to progress toward our goal of over 20% of our revenue from aftermarket repair and service within three years from our current level of 13% of sales.
In the second quarter, we launched our chart parts website, where customers can easily find to use tank or place an aftermarket order. The tool has generated $1.2 million of internet sales for the first half of 2019 compared to last year's full year part sales through the web of $1.8 million.
Let me start on slide five by stating that we continue to expect potential 2019, large LNG related orders of 600 million to $800 million.
Much progress has been made in the second quarter against specific projects that are in our pipeline.
This slide has been updated for other big LNG projects that we expect content and we have removed. The small scale project that previously were included as we are now talking about them separately.
The new projects on this slide our rose seven through 10, which I will discuss shortly.
Before diving into specifics, we have exciting news to share regarding forward Sbcs agreement announced yesterday with China's top speed Energy Corp to supply 53000 tons from its Tilbury facility in British Columbia as of 2021 for two years. The Tilbury facility uses IP of Somar process technology and charter equipment.
Starting on row, one on the chart not only does venture global Calcs, you pass project for which we booked $135 million order in March have all necessary permits to precede, including FERC authorization and non FTA export authorization from the department of energy They secured $1.3 billion of Stonepeak equity funding in May and have commenced construction on the 10 million tons per annum project.
We are currently working with Baker Hughes GE under a limited notice to proceed and expect final notice to proceed in the near future.
Venture Global has also made significant strides in additional commitments for their Plaquemines 20 million ton per annum export terminal project, which is now included in the slide on rose seven.
In the quarter Vg secured two and a half million tonnes per annum with PG NRG and raise an incremental $675 million of institutional equity commitments replacements, a 36 cold box project for us.
To Lorean and subsidiaries have to tell US a entered into definitive agreements last week agreeing to invest $500 million in Driftwood holdings and purchased 1 million tonne per annum from driftwood LNG as well as taking one and a half million tons per annum of off take LNG volume.
Turing has indicated that Chinese customers are not critical to getting driftwood FSD in phase, one or 16.6 million ton per annum. As I'd is continued to be expected in the second half of 2019.
Shinier advances Corpus Christi stage three project plan for a 2000 20-F I'd with the announcement of their supply side liquefaction agreement with Apache Corporation.
Also meaningful Ishares recent statement that they are comfortable that stage three is a 2020 event with or without China.
We've now included Juniors Corpus Christi stage for Golar as Gandria floating LNG project in Freeport LNG train four in rose eight through 10.
We're currently bidding on corpus stage for for potential Brazed aluminum in air cooled heat exchanger content as well as cold box in corn kettle content.
Goal, our third LNG vessel Gandria will be the same design is the hilli and Gimme both of which utilized charter equipment and finally, we supplied brazed aluminum heat exchangers for the NGL plant on the Freeport trained already in place and currently are bidding on the breeze content for the feed gas pretreatment on train four.
IP as Amar has been chosen for both driftwood NCL stage three.
Some are already has undergone technology qualification and has been accepted by two international oil companies. We are also working directly with one other Io SEC that is keenly interested in implementing IPO. Some are at the early stages of their project plans.
The us patent and trademark office recently recently granted a process patents covering the use of the cold vapor separator in our IP as Amar liquefaction process, the cold vapor separators significantly enhances efficiency of charts liquefaction technology.
This is the fifth us patent in the IP from our family covering liquefaction heavy hydrocarbon removal in end flash gas cooled recovery.
We also have significant international patent coverage of the technology to complement us coverage. Several other patent applications are currently undergoing examination by the U.S. Peto in foreign patent offices.
So speaking of international Big LNG projects lets turn to slide six.
This international Buildout of Big LNG is another contributor to the global LNG infrastructure opportunities that we participate in.
On the left hand side of the page our subset of international liquefaction projects of varying sizes.
Most of our equipment content on these projects relates to pre treatment and we anticipate having content on 14 of the 19 international projects shown.
Also worth noting on the right hand side of the page is the need for re gasification once the export terminals produce re gas capacity is expected to expand by 55% by 2025 with Asia Pacific and Europe as a key regions for re gasification terminals.
These facilities are in our wheelhouse from a DNS and GNC standpoint in revenue varies based on size and content of the facility.
For a vaporizer only project our content could be in a 15% to $30 million range for a multi use terminal that includes regus marine loading in England, truckload and capabilities, our content range would be 25% to $40 million and for large scale power reclassification, which are multi level skids, they're vaporization packages for direct ship to shore power applications, our content can be north of $75 million.
We have numerous re gas terminal terminals that we are bidding on right now.
Moving to slide seven from left to right on the slide.
Another key aspect of global LNG infrastructure Buildout is over the road transport.
As we announced earlier this year, we executed two long term agreements with key European over the road trucking customers for H LNG fueling systems.
In May in official decision was made to grant European patents for our integrated H LNG fuel system.
This is important as our customers continue to request innovation to this particular product, which creates further stickiness beyond just LTAC and keeps us as a first mover in LNG fueling systems globally.
Specific innovations for the next generation LNG fuel system include a performance enhancing design for new higher horsepower natural gas engines, and a space optimize package, which improves driving range by up to 7% in certain applications.
As over the road LNG transport continues to grow so to the associated fueling stations.
In the first half of 2019, we received 28 fueling station orders compared to 13 in the first half of last year.
Moving to specialty markets for which sales increased 24% in the first half of 2019 compared to the first half of 2018, the middle of slide seven shows our chiller bulk system, which supplies consistent liquid nitrogen for optimum freezing performance.
This quarter, we booked $1.5 million per kilo order for a new food and beverage and customer that makes beef patties for large fast food operation.
Last quarter, we shared our penetration with large beverage companies on nitrile beverages.
This is just another example of the over $500 million market opportunity for our products in food and beverage in the next three years.
The third column on slide seven shows an example of one of our specialty markets, taking hold outside of the United States.
In the quarter, we delivered India's largest hydrogen tank, which was manufactured in collaboration with the Indian space Research organization at our facility in India.
Liquid hydrogen is used as a rocket propellant and due to the low temperatures involved storage projects always posed complex challenges both from a technical and safety perspective.
As hydrogen grows globally, we are uniquely positioned to provide large liquid hydrogen tanks for various applications.
This is also a good example of specialty markets, taking hold outside of the Western hemisphere. The combination of specialty market activity with Indias LNG infrastructure growth provides us even more opportunity in the region infrastructure build is beginning to be a reality in India as we booked our first order for L. CNG bus station in our first order for five LNG trailers in the region.
We have $20 million of bidding activity currently happening for India, including bids related to our annual you with iOS deal that we signed in March.
India's petroleum natural gas regulatory board has designated seven significant companies that are responsible for the city gas distribution in 250 geographic areas.
These companies have control over how the gas distribution networks inclusive of CNG and LNG are developed and operated within the geographical areas. I also feel has the most with 35 areas.
Last night, we signed a memorandum of understanding with AG NP. Another one of the significant companies with responsibility to execute their infrastructure for their city gas requirements in a certain amount of time per the agreement with the Indian government.
A DMP is global industrial infrastructure company with deep expertise in LNG modularization and fuel construction.
Aging NP has multiple LNG initiatives worldwide, including the development and rollout of the falling.
A DMP city gas distribution business in India, where they have one long term exclusive concessions to connect millions of people to compressed natural gas for their vehicles and pipe natural gas directly into their homes across 28 districts.
Small and medium scale LNG import terminals, such as AG NPS pending terminals in care recall, India that will provide the vital link to bring commercially attractive convenience save gas to population centers that today rely on more expensive fuels.
LNG applications and logistics, such as LNG delivery to end customers by different transportation options and finally additional intellectual property that has made a GNP and his engineering company gas and tech leaders in the design build testing and commissioning of LNG bunkering vessels floating storage and re gasification.
As we have mentioned numerous times. These Indian opportunities are the direct result of the addition of Viavi to our portfolio. We also have captured synergies and other regions, including Singapore and Malaysia through longer in Israel.
Revenue synergies totaled $6 million in our first six months of ownership or said differently. We have nine new customers that neither chart, nor viavi could have access to prior to the combination.
In the first quarter of 2019 year view than in operating margin loss as we move low margin backlog out to be replaced by higher margin work and the teams executed identify cost synergies. The second quarter 2019, Viavi results were operating income and EBITDA positive when adjusted for onetime costs well on the way to our anticipated, 15% plus EBITDA margins expected exiting the fourth quarter of 2019.
The RV second quarter orders of $27.8 million were 6.2% higher than the first quarter, resulting in viavi backlog of $85.8 million, an increase of 9% over the first quarter of 2019.
Another benefit of our global footprint is bringing our traditionally north American manufactured energy products into other regions, thereby penetrating markets and customers that previously were off the radar screen due to the economics of shipping from the United States with the completion of the Air Exchangers acquisition as of July Onest, we are not only starting to execute on a $20 million of cost synergies, but we are also beginning to leverage our global footprint to bring what traditionally was nearly all north American air coolers to international markets, adding revenue synergies, we intend to utilize our Indian and European manufacturing facilities to add a new set of markets and projects that neither our chart legacy Air coolers, nor air exchangers played in previously.
We continue to see growing order activity for the newly formed energy and chemicals Finance segment, which is where the air exchangers business will report.
Total backlog as of the end of Q2 first in vans inclusive of a ICSI was $223 million, which covers over 80% of our second half 2019 revenue forecast for that segment.
While there has been recent concern over softening compression markets, we're not seeing any significant decline the Permian basin, where we have our largest presence is the most active basins in the U.S largely because the well results are the best economics in the country.
We have seen in the last few weeks some decline in rig activity in the Permian, although less than other basins. The gas production, which is a byproduct of desired oil production growth continues to climb as operators increased rig efficiencies.
Furthermore, new compression will be needed for the infrastructure to move gas to downstream markets.
There is also recently been consolidation activity in the compression sector largely focused in the Permian as new entrants have been attracted to the Permian growth story and are looking to capitalize trend toward larger horsepower compression units. We expect these well capitalized operators will continue to invest more capital into largely HP compression units, a sweet spot for air exchangers.
Before we move into our strengthening margin profile I'll take a few minutes to discuss some other market drivers that are not included in our guidance or 2020 outlook. It could have significant upside impacts for us over the next three years.
These two areas are IMO 2020, and LNG by rail recently FDA LNG released a study showing that LNG as a marine fuel delivers the best return on investment.
The study highlights key findings LNG has a better return on investment the Capex hurdle is diminishing it delivers competitive energy costs has higher environmental performance and as most financially effective long term method for complying with the 2020 sulfur cap all of these trends further support that once enforced those complying with IMO 2020, Ninee chart equipment.
We briefly discussed LNG by rail on our last earnings call and our unique position with our gas by rail offering May 2020 is the expected date for the completion of the regulatory efforts based on the executive order signed by President Trump.
Since the signing of the order there has been continued interest in our LNG tank cars for transporting LNG by rail as freight for both domestic consumption and export.
In addition, there is renewed interest in LNG fuel tenders for dual fuel locomotives.
For example, Florida East Coast Railway is the first North American railway to operate its entire fleet of trains on LNG and has reduced carbon emissions by 25% and sulfur emissions by more than 40% on the Jacksonville to Miami, Florida Route.
We designed and built Florida East Coast Railways tender cars to ensure safety and economic benefits for SEC.
Moving to slide eight and into the margin discussion on the top half of the slide adjusted gross margin as a percent of sales is shown for the second quarter of 2019 compared sequentially to the first quarter and the bottom half of the slide shows the comparison to the second quarter of 2018.
Sequentially each segment's adjusted gross margin as a percent of sales is up over 125 basis points with DNS west up 270 basis points, reflecting the pricing and 80 20 efforts taking hold.
Also noteworthy and not to be overshadowed by the improvements in gross margin are the continued reductions in ESG today.
As DNA in the second quarter was $50.3 million or 47.1 million, excluding restructuring and transaction related costs. This is a sequential decline from first quarter, SG nay of $55.3 million or $50.6 million, excluding onetime costs.
To provide detailed on a pieces of what is driving the bottom line benefits turn to slide nine which recaps, our first quarter 2019 restructuring activities, while I won't repeat what we shared with you in April . We included this so that you can build to our year to date impacts.
Quickly moving to slide 10, which shows our second quarter restructuring actions.
In the quarter, we had $4.4 million of restructuring costs, which will result in annual benefit in 2020 $4.2 million and $3 million incremental benefit in the second half of 2019. The following are the specifics.
We completed the consolidation of our lacrosse, Wisconsin office location into our plant. This is shown in Red box because it was previously included in our assumptions.
Across all the segments in corporate we further took advantage of chart business services and reduced overlapping head count in various facilities.
Finally in with the most impact was the closure of our LNG vehicle tank line in China in China. This is a very competitive and fragmented market with numerous changes from the government to the LNG truck emission standards.
Over the course of producing vehicle tanks in China, starting in 2013, we have not had a year, where we have made money.
This product line last anywhere from $1 million in 2000 $13 million to $1.5 million in 2018 on $1.8 million of revenue.
We can serve the region from our Italian or U.S.H. LNG fuel systems lines.
Year to date, we have executed restructuring actions that will result in $10.7 million of annualized savings beginning in 2020.
In addition to the restructuring it is also worth noting that against our original five and a half million dollars of expected annualized sourcing savings we have to date achieved $6.3 million.
Obviously I was in the Moody's maps in this deck today, and so to keep that trend going lets flip to slide 11, where you can see the extent of our global footprint.
Out of our 27 locations nine have been added since September of 2017, including the key locations from the Viavi acquisition.
Not only has having regional manufacturing around the world open new markets and customers to us and has allowed us to in conjunction with our 80 20 process strategically utilize our capacity both from a lead time perspective as well as from a cost perspective. For example, we've been able to reduce lead times and 27 of our 44 distribution and storage product categories. Since the beginning of this year.
We've done this through utilizing various locations to build the core bottles to have on hand, which can be customizing a shorter period of time to customer requirements holds dock on product that is critical to customers spread high demand product between facilities and make products closer to the end customer.
The combination of the margin expansion activities. The addition of air X changers and underlying fundamentals of the industry tailwinds contribute to the reiteration of our prior guidance as shown on slide 12.
Sales for the full year of 2019 are expected to be in the range of $1.41 billion to $1.46 billion with corresponding adjusted earnings per share $2.85 to $3.20 on approximately 34.7 million weighted average shares outstanding.
This excludes any restructuring and transaction related costs and assumes an effective tax rate of 21%.
Our guidance assumes LNG project revenue in 2019 from the venture global Calcs to pass in Golar, Gimme projects, which is subject to project timing.
We've included additional impacts from our strategic financing activities and our guidance as shown on rate. We had included in initial estimate in our prior guidance from early May when we announced the transaction.
The combination of the second quarter beat on EPS in the further restructuring benefits in the second half of the year are expected to offset the additional financing drag.
While we have not seen negative impacts to our supply chain from the Chinese tariff situation. We are carefully monitoring any impacts to our orders and sales in the second quarter, we experienced a few bidding losses in China to local suppliers, which we articulated as driven by the tree tension.
The only other tangible negative from the trade dynamic has been the inability to ship stainless steel cryobiological freezers into China, which has delayed $2 million of sales.
These sales will be recognized very quickly after the trade situation is resolved.
I will now turn it over to Jeff to walk through the specifics of the second quarter earnings on Slide 13, and provide information related to our four segments second half 2019 expectations.
Thanks Joel.
The margin expansion activities. Joe described contributed to our net income for the second quarter of 2019 $40.4 million an increase over the first quarter 2019 that income was zero point $9 million.
On an earnings per share or 41 cents is an increase over the first quarter 29 EPS of three cents.
Slide 13 shows adjusted EPS of 68 cents for the second quarter of 2019, which included $6.7 million of restructuring and transaction related costs.
Zero point $8 million of PRB associated integration costs and dilution impact from convertible notes that are fully hedged.
Second quarter 2019, adjusted EPS of 68 cents, 74% increase over the first quarter adjusted EPS of 39 cents and a 42% increase over the second quarter 2018, adjusted EPS of 48 cents as shown on the West Road chart.
Slide 14 is a recap of our reiterated guidance. So just walk you through in addition to the sales EPS tax rate guidance already shared our capital expenditure guidance remains at $35 million to $40 million of anticipated spend.
Year to date, we have spent $15.1 million.
Finally, while we do not share or guide at the segment level. The following will give you a sense of a second half 2019 revenue and gross margin ranges by the four segments.
We expect to see fin fans gross margin as a percent of sales to be in the range of 26.5% to 28% on revenue of 270 million to $285 million.
See cryo revenue range is anticipated to be a $135 million to $150 million with associated gross margin of 25% to 28%.
DNS West revenue range of 245 million to $260 million with expected gross margin as a percent of sales between 35% 37%.
And finally DNS use gross margin as a percent of sales is expected to be 22% to 23.5% with associated second half revenue of $150 million to $165 million.
I will now turn it over to Daniel to open it up for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your touched on telecom.
The question has been answered or you wish from yourself from the queue. Please press the pound.
Again, that's star then one to ask a question.
In the interest of time, we ask that you. Please limit yourselves to one question and one follow up.
Our first question comes from James West with Evercore ISI. Your line is now open.
Hey, good morning, Joe Good morning, Jeff.
Hey, James.
Thank you Thats all another solid so the third quarter.
Hey, Bill.
With all the moving parts that we've seen over the last 18 months or so.
Acquisitions and divestitures will work on the margin side, where do you think you might if I exclude big LNG, which can be episodic as you know where do you think you're kind of mid cycle earnings would shake out at this point I think it's about $4 to them I'm curious to hear your thoughts on that.
I would agree with your estimate there and mid cycle from our perspective is looking like me on a seven year cycle type of view and from our 2020 outlook. We will we maintain what we put out in early may that our updated outlook inclusive of big LNG projects is $8 to $8.75.
Adjusted EPS in 2020, we also.
Anticipate that 2020 is not the peak in the cycle.
Right, Okay, Great and then just a follow up for me on the on the on the base.
I guess, maybe on the base business ex the large scale LNG orders that you make your growth rate is now.
Normalized growth rate post all the acquisitions.
Cedrik.
We forecast, 7% to 9% organic growth will on the base business pre any big LNG. That's our that's our outlook for 2020, and others, a little bit of upside potential to that but that's that's really available to us in.
We have a good line of sight to achieving that into next year.
Thank you and our next question comes from Martin Malloy with Johnson Rice. Your line is now open.
Good morning, congratulations on the quarter.
Thanks Marty.
Oh Theres been some news recently about in some international markets.
Mid scale LNG liquefaction projects in conjunction with Bunkering.
Opportunities related to marine.
Can you maybe talk about how you're seeing that market develop and opportunities there for you it seems like its.
A combination of those two markets figure you are well suited for.
Yes, absolutely.
That is correct that is an opportunity thats recently been developing and I think folks mix between small scale and mid scale, we tend to call the small scale and.
Re gasification terminals, but that's inclusive also of some of the marine Bunkering applications. We are starting to see interest in the utilization of IP as Amar process technology for.
Certain terminals overseas and Thats something that also has been leveraged through the work that's been done over the last three years with the international oil companies that that I referenced.
With respect to their projects in their development, whether through joint ventures or investment in some of the smaller mid scale terminals. So we see a lot of opportunity. Those opportunities are included in the small scale and re gasification numbers that I provided on the call today.
Okay.
And then.
On Harsco, you mentioned international markets for.
Growth there and could you maybe just talk about some of the potential applications that you are seeing for their equipment.
So this is an area that this first time, we're talking about revenue synergies from the acquisition and there's a huge opportunity for us to take air coolers overseas.
It's something that neither we chart did nor harsco way exceeded previously and that was really a function of the localized manufacturing needed needed in the region just not economical to ship. These things from anywhere in North America, two applications ranging from NDP to Petrochem two other large facility builds and we're seeing a significant desire for air coolers in the middle East.
As well as starting to see that in southeast Asia in locations, such as Thailand, Vietnam My anymore, So southeast Asia and Middle East are really the two targeted geographies.
Thank you and our next question comes from Tom Hayes with Northcoast Research. Your line is now open.
Hi, Thanks, Good morning, Thanks for taking my question.
Sure Scott on the on the manufacturing front.
Comparable maybe a softening on the manufacturing front.
Globally.
Changing your demand for your industrial gas storage business.
We have not yet seen any negative impacts on that side of the house, we are monitoring it because it's certainly something thats.
A macroeconomic factors that could impact us, but I think the other thing to remember is our markets while tied to industrial gas also are very broad and have a wide set of applications. So the linkages to some of these industry Tailwinds that we talked about today also help in in terms of keeping industrial gas moving forward.
And as well as the fact that we are on long term agreements with the major industrial guys that gives us a little bit better visibility than perhaps the general macroeconomic situation gives so not yet, but it's something that we're watching.
Great.
Excuse me just on a follow up.
Longer term margin profile.
Through the gap between the gross margin on DNS Wes.
Closing over time.
We do see that gap closing overtime. So DNS west was the the front runner in our business purposely on the 80 20 actions. We have started 80 20 and DNS east, but Theres also some just fundamental margin opportunities for us to get to get quickly out of the DNS East business, We would anticipate that DNS West Canada is at its peak in the high 30%.
Possibly up to 40% gross margin as a percent of sales, whereas DNS Easton can enjoy up towards 30%.
We don't see DNS East just given the China dynamic ever overlapping where DNS west gross margins are.
Thank you and our next question comes from Rob Brown with Lake Street Capital markets. Your line is now open.
Good morning, Jeff.
Or up the road.
On this on the sourcing.
Effort, you said, you're running ahead of ahead of plan there.
Okay, then where you think that can go and how much more room you have there.
We we've been extremely pleased with the results of the sourcing activities and a big part of that is credit to the to our business service team inclusive of naming an individual to run the global sourcing project and all the folks around the globe that have participated in the efforts. So I want to make sure that I don't diminish what they've done because they really just hammered away. The first half of this year.
We see another $5 million of sourcing savings from the core business and then on top of that inclusive in our $20 million of AMC is $3 million to $4 million of sourcing.
Correct.
And then moving to the fueling station LNG fueling station opportunity.
What geographies are you seeing the most growth and.
What's the size of that market opportunity in your view at this point.
So of the 28 in the first half of the year 10 of those were in China and the other 18 were in Europe .
I think Europe by far is our most.
Early days significant grower between the two regions.
LNG fueling station for us depending on the size and the construct ranges between $650000 and $1 million one per station.
The opportunity there for we are we are quoting like crazy on these fueling stations in Europe , I'm not going to cite a number for you because its I don't want everybody to get out over their skis, but suffice it to say that it is a it is a very active market right now and the infrastructure in Europe .
Buildout is supporting.
At least that in the second half.
Thank you and our next question comes from Eric Stine with Craig Hallum. Your line is now open.
Hi, Jeff.
Eric.
Well, maybe bigger picture.
And he and see obviously would have some aren't IPO. Some are plus share in a good position are very good position. This current cycle, but as you think long term.
Just curious do you feel like the market fully realize the benefits of that versus other process technologies and then you've got you mentioned the acceptance would the two global energy majors just.
Aside from what that means from an overall market perspective should we view that as if those majors have projects.
We're committed exclusively to go IPO somar.
Or anything you can share there would be helpful.
Sure and I do want to just restate, what I said on the call that there is a third that's highly interested in working with us as well. So I think that the process is starting to get its starting to get better known in a wider audience certainly the fortis British Columbia facility and installation of IP as Amar.
Is the more that we can take future customers to see it working and running so as as it starts to take hold we are seeing an acceleration of others interested in it and as you are well aware there is only a certain number of process technologies in the market.
I do think that this bodes well for us in the next 10 years. So just like you're seeing right now projects that.
Our.
Coming online from 789 years ago. This cycle I think you'll start to see that happen again in the next cycle in that we'll have even more of a foothold for IP as Amar on with respect to the second half of your question around what does that mean with diabetes.
My hands are pretty tight in terms of what I can share publically on our homes.
Agreements in relationships with those Lcs.
But we do work closely when they have a project or when they are invested in a project.
To move the process technology and get it involved there, but that's the extent of what I can tell you on that.
Okay fair enough.
Maybe last for me just on the vehicle tanks side I know you've got the two agreements in Europe , and you're adding capacity there.
I think in the last call or two you've mentioned talking to more than a handful in terms of LNG interest, which I guess, probably means you're talking to everyone. So I mean, just maybe any.
God detail on how that.
How thats progressed.
In the market.
We haven't seen any meaningful progression with any of the new guide that we're talking to so.
It's really been maintained with the two that we have long term agreements with Theres, a third that we do sell some tanks to.
What we're seeing though is the folks that we have the long term agreements with our working very closely with us on that next gen that I spoke about and that is ramping next three year volumes.
So we'll see.
Significant uptick is our.
Anticipation in 2020 and again in 2021 from those guys.
I think it's going to be a slower roll for some of these other regions and or customers that we're working to penetrate while we've been talking with them for a few years and.
What.
Has been evidenced in certainly in the European market is it takes one mover and then some of the other folks follow and I think thats going to be the case in places like India or places like Southeast Asia.
Thank you and our next question comes from Pavel Molchanov with Raymond James Your line is now open.
Thanks for taking the question I remember in 2013, and 14 Petro China.
Was a huge traffic and more specifically for those natural gas fueling stations and.
That business essentially went away for for a period of time, and you're indicating that it's coming back including in China.
I am curious kind of white, what the dynamic there is that.
Let the revival of of something that seems to have disappeared.
Well, it's certainly not coming back to any level close to 2013 or 2014, so I'll be perfectly crystal clear on that 10 stations in the first half of the year is an increase over last year and Thats a good sign but we're talking about increasing of 10% versus what we saw in 2013 2014 of 30%. So we don't forecast and nor do we expect anything higher than kind of that 10% to 12% going forward.
And with respect to the second piece of your question, we are seeing a little bit of movement in the market and that's really what's been happening over the last five to seven years of when the government is pushing for certain regulations in certain requirements. Then you see the market move that way, but it's not been.
Nor will it be close to what it was back in the in the boom time of 13 or 14.
Okay. Thanks, guys.
Alan sheet.
With the equity raise from a month ago are you essentially where you want to be in terms of your leverage metrics.
Yes. Thanks.
Post.
Closure of the Harsco deal right out of the gates were 3.3, which is a little north of our stated.
The range of two to three acts, but we've got visibility to delivering against that very quickly.
And I think that that will continue to be the way that we think about the business we want to.
Ill work with a strong balance sheet and give ourselves the ability to take advantage of opportunities that are in the market from time to time. So yes, I think we're we're where we want to be.
Thank you and our next question comes from Craig Shere with Tuohy Brothers. Your line is now open.
Good morning.
Congratulations great quarter.
Sure.
Hi, I'm, just trying to understand the 79%.
Organic growth for big LNG seems like.
Theres a little disconnect between <unk>.
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How much.
Very doable target.
Some of these.
Other opportunities really manifest.
Generally describing that code.
Okay are you calling me sandbagger.
Just just one.
Yes, so hopefully all of you have been around us for a period of time now understand that we like to guide to something that we have a high level of confidence in and that's that's what we've done again in this 2020 outlook.
So to your point, Craig there is upside to that certainly in the base business as well as the specialty markets business.
What we are waiting on in terms of.
Increasing that any further is with respect to the timing around the new H LNG designed for the vehicle tank that we talked about today, so that could be a significant lever for us.
We do have a good line of sight on potential hydrogen projects that.
Would increase this as well and probably the other one I would I would talk to is around the fueling stations that theres high potential for more than what we've included here.
And then layer on IMO in LNG by rail you could be in a.
A live in the 13% growth.
Very quickly here, but the seven to nine we have we have tangibly actions and order books in order bidding activity that give us comp the high level of confidence in that forecast.
Is it fair to say.
Low double digit growth.
Yes.
Yes.
Yes.
One last question here.
Following up on Paul's balance sheet.
Given your low.
Wrapping free cash flow.
Sure.
Yeah.
Organic deleveraging.
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Assuming there's no more real.
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At some point.
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Two and a half times leverage.
What do you think.
Just a couple of years.
Potentially.
Yes, I would say.
Weve articulated our priorities for free cash flow as continue to invest in growth and productivity in the business and from a capex perspective, we sort of giving you that that guidance and in certainly in the near term, we're going to focus on on de leveraging the business, but to your point, we should be able to achieve that relatively quickly and the other business ought to continue to generate.
Very healthy free cash flows beyond that but.
As we sort of survey that field and continue to think about our potential growth initiatives. We have we have an active.
M&A pipeline that we evaluate we still we still see opportunities in the marketplace and that we would prioritize that.
At this point in time down the road.
Never realizing output, but those are our priorities that we stated and I think we're going to stick to those for the foreseeable future.
Thank you and our next question comes from John Sturges with Oppenheimer and company. Your line is now open.
Thank you.
Impressive margin improvements for ROE for the quarter. So congrats on that I have two questions.
They are mostly top down policy. One is recent regulation reductions in the us does that have.
Has that had any impact on margin improvement or is that mostly internally generated.
And the second one is.
As to do with Us chair.
Policy to reduce global tariffs.
I'm curious as to how that may impact us versus.
Your global manufacturing sites in terms of flow, where you might have shipped production.
So the margin expansion is nearly hole from internal activities to the first half of your question to the second half of your question. We are uniquely positioned in very clean with the position of having the options to decide where we make what we have a lot of flexibility in our lines in terms of being able to produce into various different geographic locations and that is something that we constantly are looking at based on the economic in the treated situations that are happening.
So we will take advantage of having the opportunity to manufacture closer to our customers and also think through the the impacts from any tariffs on our on our products.
Okay. Thank you.
Thank you.
If there are no more questions I will now turn the call back over to Joe Evanko for some concluding remarks.
Thanks Daniel.
As you heard today, our unique position in serving liquefaction storage and transport for global LNG infrastructure provides a strong and varied Orderbook ahead, we continue to be bullish on our big LNG opportunities and while we are carefully watching the macroeconomic industrial in China trade worse situation. We are pleased to reiterate our 2019 full year guidance I want to thank our team members for executing the quarter results continuing to drive order opportunities in completing the air exchangers acquisitions.
Last but certainly not least in official warm chart welcome to the air Exchangers team. Thank you all for your time today and Goodbye.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect.
Everyone have a wonderful day.