Chart Industries, Inc.
Q1 2020 Earnings Call Transcript

Published: 23 Apr 2020

[Operator:]

Good morning, and welcome to the Chart Industries, Inc. 2020 First Quarter Conference Call. All lines have been placed on mute to prevent background noise. After the speaker’s remarks, there’ll be a question- and-answer session. The company’s supplemental presentation was issued earlier this morning.If you have not received the release, you may access it by visiting Chart's website at www.chartindustries.com. Our telephone replay in today’s broadcast will be available following the conclusion of the call until Thursday, April 30, 2020. 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 informational regarding forward-looking statements and risk factors included in the company's earnings release and the latest filings with the SEC. The company undertakes no obligation to update publicly or revise any forward-looking statements.I would now like to turn the conference call over to Jill Evanko, Chart Industries’ CEO.

[Jill Evanko:]

Thank you, Shannon. Good morning, everyone, and thank you for joining us today to go through our first quarter 2020 results and business update.Joining me today is Scott Merkle, our Chief Accounting Officer. You'll hear about our recent actions related to the COVID pandemic, the continued breadth of our order book, and an update on our views of 2020 given the uncertainty surrounding COVID-19 as we walk through our supplemental presentation released this morning.As you can see on slide 3, our long-term strategy is unchanged even in these uncertain times. But right now, we’re responding to here and now impacts, as well as preparing for continued uncertainty in our markets from the coronavirus.Starting on slide 5, first and foremost is the safety of our team members. In particular, given the fact that our businesses are deemed essential. We have as many team members as possible working remotely, yet we continue to have approximately 70% of our workforce that must be in our factories to manufacture critical care products.Therefore, we have taken the following measures which are just a few examples to ensure the safety of the team members; staggered start and end times to shift schedules to reduce interaction, broken lunches into rotating groups during the shift, designated time cost by department to reduce community touch points, enhanced personal protective equipment for all employees, enhanced cleaning in all facilities and have two deep cleaning companies on call nearby each of our manufacturing locations around the world, designed and installed kick plates on doors for opening and closing without using your hands. And finally, we are providing assistance for our team members to stay safe not just at work.Beginning March 6, we suspended the employee portion of our Teladoc fees to support those in need of healthcare assistance while also reducing non-critical hospital and doctor's visits. Given our essential status by all governments and the locations where we operate, keeping our employees safe is critical in particular as we ramp the production beginning in March for medical oxygen products to meet increasing demand.We were able to increase production by 50% in our Czech Republic facility, 63% in our Georgia location and doubled in our Minnesota factory for these products. We did have a total of 40 non-working days across our locations in the first quarter for which I will share the operational impacts on the coming slide. Additionally, our team did an exceptional job quickly achieving the ability to use dual certifications for US product in Europe when the urgent European demand exceeded localized manufacturing lead times.To receive this authority from the governing certifying bodies is quite an accomplishment as it typically would take up to six months. As with all companies these days, non-essential travel in the company is on hold. Last year, we averaged $1.1 million of travel and expenses per month, and in March, we save just under $1 million from those expenses. While these are temporary savings, they contribute to our bottom line until the world reopens.We are constantly assessing our manpower needs in relation to changing demand and are able to quickly adapt our variable cost structure. Since the beginning of the year, we have reduced our workforce by 13% over 600 full time heads. These reductions have been a combination of direct labor in response to declining order rates primarily in FinFans as well as flattening the organization across all segments and corporate. These reductions have resulted in $49 million of annualized cost savings of which $12.4 million of the savings were from actions taken this week.We saw a $2.2 million of savings in Q1 based on the timing of the early reductions and expect $34 million in the remainder of 2020. The largest reduction was in our E&C FinFans segment for which annualized savings from the year-to-date reductions is $23.6 million.To give you a sense of the magnitude of the go-forward run rate in December 2019, revenue per person per year in FinFans was $280,000. Coming out of March, that same metric is $450,000 per person per year. These reductions are in a chart-wide savings generated by actions taken and in addition to integration cost synergies. We'll continue to be agile based on market demand and actively and responsibly manage through this crisis.The 2019 savings are reflected in the first quarter 2020 gross margin and SG&A results. First quarter gross margin as a percent of sales increased 350 basis points sequentially over the fourth quarter of 2019 and 530 basis points over Q1 2019.Each segments gross margin as a percent of sales increased both sequentially and year-over-year with the exception of the E&C FinFans. SG&A, when normalized for onetime cost primarily severance, was $49.3 million for the first quarter of 2020 and included 2.9 million of share-based compensation expense which only a significant each year in the first quarter. We expect SG&A to continue to decrease further in 2020 as a result of the cost reduction activities we've taken year-to-date.As we've publicly stated on March 20, we quickly worked with our lender group to amend our net leverage ratio bank covenant for what we referred to as just in case scenarios. Well, we did not nor do not anticipate hitting even the prior covenant cap. We thought it was prudent to get ahead of any extreme downside case given the uncertainty of the coronavirus impacts.Flipping to slide 6, you can see that we successfully completed the amendment process on April 20. Previously, the net leverage ratio covenant stepped down to 3.5 times as of September 30, 2020. Our new covenant hold at 4.25 times through 2020 and does not step down to 3.5 until the end of 2021. It’s also worth pointing out that our pricing grid is unchanged up to our prior covenant level which we do not expect to exceed. Once above 3.5 times, there is a new pricing tier as shown in the left-hand corner of the slide.Finally, very little of our existing debt matures until 2024 inclusive of our convertible notes, revolver and term loan, our current net leverage ratio is 3.1 and our cash on hand is $89 million as of March 31. Given our balance sheet, the recent covenant amendment and our cost reduction actions, we do not currently foresee using the CARES Act.As I indicated, Chart’s business has been considered essential manufacturing in every one of our production sites, not just at the seven locations where we manufacture critical care equipment. In the United States, the transportation of medical supplies and equipment related to testing, diagnosis and treatment of COVID-19 is considered essential as are all manufacturers, warehouse operators or distributors of medical gases and manufacturers of energy infrastructure through the Department of Homeland Security. The same exceptions and approvals have been granted in our Indian and European locations including in one of the hardest hit COVID countries, Italy.We did have days where we were unable to produce in the first quarter as we either waited for the approval of our essential status or there was a mandatory government shutdown as was the case in China. We lost a total of 40 production days in the first quarter across our locations with 26 of those being in our Chinese facilities in late January and early February.We were 100% operational in China as of mid-February. We do not estimate lost revenue from these 40 days but rather revenue that pushed out of Q1 to later in 2020. The total revenue pushed out of the first quarter because of coronavirus shutdowns was $7.5 million with $3 million of that in China.So, what does critical care products for medical applications really mean with respect to Chart’s production? By way of background on slide 8, medical oxygen supplied to hospitals must meet regulatory standards to be 99.99% pure and medically certified by the FDA in the United States or to European Pharmacopoeia standards in Europe. This oxygen is either trucked in liquid form to the hospital that has specialized storage tanks that feed it into the hospital or is compressed into metal cylinders of varying capacities.Our products for these applications range from micro bulk storage systems to liquid cylinders to mobile delivery systems to bulk tanks used as the primary source of oxygen in hospitals. Our micro bulk storage systems provide liquid oxygen storage for respiratory applications and can be used for the mandatory 24-hour backup supply of liquid oxygen to a hospital’s primary bulk tank. Our Perma-Cyl units are pallet based and can be installed very quickly on any surface which are perfect for field hospitals, ideal for pop-up medical facilities or medical skids as well as our mobile options.Liquid cylinders can be used to remotely fill liquid oxygen system in home health care and nursing homes as well as being manifold it together to supply oxygen in the field hospital. Our cryobiological shippers can be used for the storage and transport of biological samples including viruses. And recently, we sold multiple units for the research of the treatment for COVID-19.The CDC assured that up to 64% of critically ill patients treated for COVID have received high full oxygen therapy. In both Europe and the US, there are over 45 million cylinders in use. However, only 15% to 20% of these cylinders are currently certified for medical oxygen service, and as mentioned already, not only are our cylinder certified, we received permission to produce dual-coated products, which can be used in both regions.Products that manufactured that can be used in medical applications run about 20% of total Chart revenue. This is 21% for the full year 2019 with just under 10% of that in the United States, 7.5% in Europe and slightly above 4% in Asia.Our customers in industrial and medical gas suppliers have reported a rise in recent weeks in demand for medical oxygen of three to five folds in both cylinder and liquid form. In places like Italy and Spain, hospital saw oxygen consumption rates as much as 10 times normal levels.Turning to slide 9, our known medical oxygen specific orders increased 34% compared to the first quarter of Q3 and 29% compared to Q4 2019. You can see each regions order increases in the middle of slide 9. As we have entered the second quarter, demand in this area has increased further in particular in both North and South America where order levels month-to-date are higher than the entire first quarter for medical oxygen kits specifically.For example, in the past week, we’ve received $2.6 million of orders for medical ready shifts for one customer that is responding to the COVID situation in Mexico. Through yesterday, April month-to-date orders for these applications are at 39% of the entire first quarter related orders. We expect these types of orders to return to pre-COVID levels later in 2020.We thank our employees who have ramped up production on our critical care products. There is not enough time on this call to share all the stories of life-saving efforts to expedite products to hospitals, pop-up medical facilities, and other healthcare locations. But you can see some of them highlighted on this slide.Let me share one additional story. On a recent Friday afternoon at 12

[Scott Merkle:]

Thanks, Jill. First quarter 2020 reported diluted earnings per share is $0.24, an increase of $0.21 compared to the first quarter of 2019. When adjusted for one-time costs shown on slide 19, adjusted earnings per diluted share is $0.57, a 46% increase over the adjusted first quarter of 2019.Adjustments include severance for the headcount reductions that Jill described, hard costs to expedite materials related to COVID-19 medical essential production, the mark-to-market impacts from our equity investments which we explained we would be calling out each quarter regardless of the positive or negative impact to that quarter, and finally integration costs.The only integration costs included are related to air exchangers, which is substantially complete and expected to be fully complete by the end of the second quarter. There are no VRV integration costs included going forward. Our adjusted EPS does not reflect the impact of the 40 days of lost production in the first quarter as Jill described. To reiterate, the total revenue pushed out of the first quarter because of COVID-19 impacts was $7.5 million with $3 million of that in China.Free cash flow from operating activities and capital expenditures is $15 million for the quarter. This is inclusive of us carrying additional safety stock in our inventory for critical raw material and components that we consciously chose to increase to offset potential supply chain disruptions. But as Jill mentioned earlier, supply chain disruptions. As Joe mentioned earlier, we ramped production for our critical care products in various locations.We estimate $13.4 million of additional inventory for these purposes was on hand at the end of the first quarter. The $15 million of free cash flow is before the $19 million of share repurchases completed in early March. Our first quarter, DSO of 55 is a 10-day improvement compared to the first quarter of 2019. And this example, of our continued working capital management, is one element as to why we continue to expect strong cash generation in 2020.Many of you have asked what's different about the Chart business during this downcycle than in the 2014 to 2016 time frame. On slide 21, you can see the changes to the composition of the portfolio of products we offer, as well as the acquisition and divestiture activities that have resulted in a much more diverse and geographically broad company.A few specifics when comparing today to the former years. We had virtually no aftermarket service and repair revenue. We are now at 13% of total Chart revenue with a roadmap to over 20%. In the prior cycle, we were heavily reliant on one big LNG project. As you've heard us discuss over the past 18 months, we think of the big LNG as icing on the cake and have a line of sight to growth in many of our base businesses across the cycle.We have a much more diversified global footprint which accesses applications and projects that previously were not able to participate in. A year-and-a-half ago, we sold into 21 countries. We now work on projects and sell-in to over 70 countries.Even with these changes, there remains a high amount of uncertainty surrounding the potential business impacts from COVID-19. As of today, we have not seen a meaningful impact on total bookings, although a shift from FinFans to D&S is expected. And certainly, the fundamentals of the business remain very much intact.But because of the high level of uncertainty that COVID-19 has created, we are withdrawing our prior 2020 full year guidance until we have more clarity on the duration and severity of the situation. While we think it's prudent to hold off on issuing new guidance until the situation stabilizes, we can provided the following data points for 2020 as shown on slide 22.Ventured Global Calcasieu Pass project remains on schedule with $100 million of expected revenue in our E&C Cryogenic segments in 2020. We are seeing a short-term increase in demand in our medical related products as described earlier. We continue to expect strong free cash flow generation in the year, have suspended our share buyback program and continue to prioritize debt paid out.Year-to-date, we have taken cost reductions totaling over $49 million of annualized savings. This is in addition to the $38 million of savings from cost reductions taken in 2019. Our expected effective tax rate remains unchanged at 20% for the full year 2020.Our capital expenditures are flexible and we will continue to assess the spend as the year progresses. At this time, we anticipate CapEx spend will be in the $25 million to $30 million range. We expect the full year diluted weighted average shares outstanding to be $35.45 million based on our March 2020 share buyback of approximately 750,000 shares.

[Jill Evanko:]

One more item before we open it up for questions. Many of you dealt with John Bishop and his Investor Relations capacity. As you have heard today, we've taken layers out of the organization and eliminated certain roles, the Chief Operating Officer role, which John occupied with them. We value John's contributions to our business and offered him the role of Vice President of Investor Relations, a role which we need going forward.Unfortunately, John declined our offer for this opportunity and therefore, we will begin a search for this role immediately. In the meantime, you all know Tom Pittet and he will be your point of contact. John’s leaving will be treated as without cost departure. We thank John for all his contributions to Chart as a valued team member.With that, I’ll now turn over to Shannon to open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from James West with Evercore ISI. Your line is open.

[James West:]

Hey, good morning, Jil.

[Jill Evanko:]

Hey, James.

[James West:]

Jill, I know Scott too big LNG, nice to have, not necessary, and you’re not expecting anything for the rest of this year to hit the backlog. But I’d love to hear how the conversations are going with customers that we’re planning the FID around this time period or maybe before midyear. What they’re telling you about their intentions, if they're canceling the ideas and totally or just pushing things back? What’s the flavor of those conversations?

[Jill Evanko:]

The majority of the conversations are around pushing things to the right. So, we haven't heard anybody that’s talking about completely negating the project in its entirety and pushing to the right being 2021 at the earliest, 2022 even in some cases. We have one particular customer that remains favorable in FID in 2020, which we’re unable to share exactly who that is.The other thing that we're hearing as well is while we're not cancelling projects, we might go about the structured differently in particular in modular midscale. So, we’re originally – a project might have had picking a hypothetical example 10 trains and starting with all 10, that particular customer might say, well, we’re going to start with 5 and incrementally add to that. So, those are really the two things that we’re hearing. Again, I think you’ll have the big guys, the ones that we continue to talk as our customers, have the intent things forward and have taken the right steps in the short term to be able to get through this next 12 months.

[James West:]

Okay. That’s very helpful. Thank you. And then with respect to the critical care medical devices that you guys are supplying, obviously, we're getting a big bump right now because of the pandemic, but there's also a big rethinking of the global supply chain here from US government, European governments as well, and talks about stockpiling and resource allocation.And so what you’re I guess early thought or what’s your thoughts on that part of your business being it won’t be the same size, I don’t think at least, as it was in, say, right now. But what's your thought on terms that business is much more sustainable going forward?

[Jill Evanko:]

Yeah. I definitely echo your comments around the current level that we're seeing won't be what we see going forward. This is a temporary significant increase in these particular products. But to your point, we've had multiple discussions with government agencies around what does the supply chain look like going forward in that time frame is, not just three months away, it’s kind of in the next 12 months and permanent supply chain situations, and how we participate in that.So, our expectation would be that, ongoing, there will continue to be higher than previous level but not at the levels that we see right now. That really goes into what the industrial gas customers used to do around how they utilized assets that can be used in industrial applications around how they utilize assets that can be used in industrial applications as well as oxygen applications and how they plan to keep a safety stock in particular on hand.What we’re also starting to see in the last week or so is that some of those industrial gas customers in North America, in particular, that utilize existing assets, in particular, MicroBulk and bulk tanks for medical oxygen-related capacity, they're now saying we need to backfill on the industrial gas side for customers that are coming back online. So, I think overall you'll see a little bit of a boost to the total bulk and MicroBulk side of the business and D&S for us.

[James West:]

Okay. Great. Thanks, Jill. It's very helpful.

[Jill Evanko:]

Thanks, James. Talk to you soon.

[Operator:]

Our next question comes from John Walsh with Credit Suisse. Your line is open.

[John Walsh:]

Hello. Good morning.

[Jill Evanko:]

Hey, John.

[John Walsh:]

Question around free cash flow, obviously, realized you're not updating the prior guidance framework. But, you know, I guess, given your comments on the debt covenants, you know, we can at least back into some semblance of an EBITDA number. You know, as we think about going through the year, you know, liquidating inventory, you know, you pulled the lever on CapEx.What are the other moving parts that you're able to do to kind of really protect free cash flow because right – when you go through these periods, what you see in the decline in free cash flow is easily much less than what you would see obviously on the EBIT line as you kind of liquidate some of the balance sheet.

[Jill Evanko:]

You're absolutely correct in – like you said, while we haven't updated a guide on free cash flow, our commentary around our continued expectation of strong free cash flow generation in 2020 should kind of give a qualitative indicator on our feelings toward the continued levels that we think we can do even with potential downturns on the horizon. With that said, we do have multiple levers to pull. We referenced some that we already have around skinnying down CapEx as well as some of the AR activities that we have in place.We also are working very diligently with our supply chain over the last four weeks. We've primarily given updates around the fact that we have very few single-digit high risk suppliers but also part of the sourcing discussions are I'm certain what you're hearing from multiple other companies around taking advantage of the opportunity for extended terms where applicable as well as cost reductions on the supply base side of things.We also have multiple different ways that we can manage our accounts receivable and we were very pleased with that we've made through our chart business services in particular on the accounts receivable side where our cash conversion cycle continues to improve month-over-month with those activities.On the inventory side of things, we did a very quick early and agile update to what we needed on the safety stock side of things and we're really well positioned from that standpoint in terms of not needing to go out and continuing to ramp our raw materials given where we sit today. So, where you saw the $13.4 million of additional inventory related to the raw material and supply chain that Scott mentioned that's a temporary bump on the inventory side and you'll see that normalize throughout the year.

[John Walsh:]

Got you. Great. And then just thinking about the cost actions, you're obviously getting ahead of it but I think demand forecasts are kind of fluid. If you were just to think if we saw another like down or worse, are there more things you can do or are there other actions around integration you can accelerate to protect the profit dollars?

[Jill Evanko:]

There are many, many more actions that we can take. We feel like we got at this very early in this situation so we were – I would say even earlier than what other companies have done in terms of cost reductions. But there is a laundry list of other actions that we can take, and we've not yet had a situation where we've had to go through a furlough.We've obviously not adjusted executive compensation at this level of demand. We also have not furthered any facility consolidations that we had a roadmap for the future on what that could look like if needed, to your – I think that was one of your references there. Facility consolidations are a little harder to do when all nonessential travel is locked down.But certainly there's a lot of quick actions that we have in our various different scenario planning that have not yet been taken. But, again, we do think that we've gotten to a level where we can sustain even further downturn in demand across all four segments based on the level of cuts that we've taken to-date.

[John Walsh:]

Great. I appreciate the color. I’ll pass it along.

[Jill Evanko:]

Thanks, John.

[Operator:]

Thank you. Our next question comes from Rob Brown with Lake Street Capital. Your line is open.

[Rob Brown:]

Hi. Good morning, Jill.

[Jill Evanko:]

Hi, Rob.

[Rob Brown:]

On the aftermarket business, could you give us a sense on what the capacity is there and maybe the amount of business mix that could become over the next 12 months or so?

[Jill Evanko:]

Yeah. We're definitely seeing that tick up as we referenced in the prepared remarks. We do have the – – we do have additional capacity in our existing facilities and part of those steps that we’ve taken to ensure that we have that capacity has been the result of adhering from our industrial customers. Some of which are on long-term agreement providing demand forecasts on the repair and service side that are greater than what they've been in the last few years.Additionally to that, we've launched various different aftermarket programs for refurbishment of different products on the E&C side in particular as well as a little bit on the D&S west side of things. So, we have the ability to take on just over 20% of Chart’s revenue for prior revenue forecasts, which obviously has been suspended in our current capacity.We are evaluating the need for a Southeast US repair and service project, which we've held off on obviously given the current situation, but also as we get through on discussions with our industrial gas customers where we've been working to understand the amount of product that will be coming our way on repair and service side and understanding if we can get minimum commitments from those customers.So, I think you'll continue to see this uptick throughout 2020 and even into 2021, and we're well on our way toward on that 20% mark by the end of 2021.

[Rob Brown:]

Great. Thank you. And then you talked about the fans business in particular seeing some strength. What markets are you seeing strength there and what's your visibility of that strength.

[Jill Evanko:]

Yes. So, we continue to see strength in the business in its entirety, which touches over 10 different end markets. So, there hasn't been one that's really been a standout market. It’s just kind of been broad based growth for fans. And just by way of giving you a size on the fans business. Last year, fans was just under $100 million in revenue in the E&C FinFans segment. Also, in the total fans business there’s about 35% of that that is aftermarket service and repair and that's been ticking up as well. So, I think those two dynamics we expect to continue throughout the year.

[Rob Brown:]

Great. Thank you. I’ll turn it over.

[Operator:]

Thank you. Our next question comes from Eric Stine with Craig-Hallum. Your line is open.

[Eric Stine:]

Hi, Jill. Hi, Scott.

[Jill Evanko:]

Hey, Eric.

[Eric Stine:]

Hey. So, you touched on industrial gas in terms of oxygen and you just did on the aftermarket. But just wondering could you talk about that more broadly. I mean, certainly different than it has been in the past since you've got long-term contracts, you know, but also know that, you know, that's typically a GDP-plus business and the outlook going forward given all going on and how much it last is somewhat uncertain.

[Jill Evanko:]

We're seeing continued, I would say, strength. At a minimum, I would characterize it as consistent to the last couple of years from the industrial gas side of things on the more positive side better than the last couple of years to-date. And the total industrial gas arena, from an order standpoint, orders increased kind of year-over-year over 4% in that particular area and that was – you know, we had guided originally at just under 3%, I think, we’re like 2.8%. So, slightly ahead of what we had originally thought.From a broader and more macro commentary with our industrial gas customers, you know, there has been this industry consolidation over the last three years, and we're seeing that sort itself out where assets have landed and there's more industrial gas players than what there had been in 2018 and 2019, so you have kind of the messers and mathesons of the world are now entering into that larger tier industrial gas customer which gives us a little bit of a broader based growth opportunity across more customers.But also I think everybody, from what we were hearing commercially, is looking at the repair and service side and how can they utilize existing assets. So, we'd expect the kind of a 3%, 4%, if not a little bit better to continue but also have a margin mix which we're unable to share with you guys but around the repair and service side, that should be improving.

[Eric Stine:]

Got it. And I would assume that that's the business just given oil and some other things across the rest of your business that that's going to be a bigger percentage of your business going forward. I think what today now, it's 40% to 45%?

[Jill Evanko:]

That's correct. Both of your statements are correct.

[Eric Stine:]

Okay. Maybe just turning to China. You mentioned the largest order there that you've gotten in some time. Just curious do you think that now that things have restarted there that some of those trends that that is sustainable? And also should we take it from your, at least the guy that you could provide on the tax rate. Should we take that as an indication that you expect to be profitable in China in 2020 still?

[Jill Evanko:]

We do expect to be profitable in China in 2020. We are – I think for the last two years, the term I've used is cautiously optimistic and I would probably drop the cautiously at this point. I think we're seeing continued demand and the shift in demand has really been to more of the industrial gas side of things.Our backlog at the end of the first quarter in China is $68 million. The last time it was that high was the second quarter of 2015 and that included a lot of that LNG related PetroChina backlog that subsequent to that got canceled.related petro-China backlog that subsequent to that got cancelled. So, the backlog is a nicer mix of product in the current state and the profitably is continued to be expected in 2020 in that region.

[Eric Stine:]

Got it. Okay. Maybe last one for me just on the CapEx. You’re pulling that number back a little bit in this part of that – the tank facility or the expansion there. I mean, is that something you still plan that we should think about more in 2021?

[Jill Evanko:]

Actually almost done with that LNG vehicle tank line in our Italian facilities. So, that CapEx is already baked on almost in full. We expect that facilities line to go on line in June of this year. And that's the critical part of serving our European customers and also margin expansion to reduce the costs of shipping from the States to Europe.

[Eric Stine:]

Got it. I mean any – anyway, if you can then point out that would be part of that CapEx. I mean I think you reduced it by $10 million to $20 million versus last go around. I don't know if you can provide that clarity.

[John Bishop:]

Without going to project specific detail, I would say that we have – because we constantly have very low level maintenance capital almost every year below $30 million, we've always taken productivity and capacity expansion projects that are on top of that maintenance and included them in our outlook for the year. So, we haven't ever said, well, we don't want to do a productivity project.And now we really kind of batten down the hatches instead, all right, let's take each one of these as we go and based on product line demand and see what we need to do. So, it's really kind of a bucket of productivity and capacity expansion that's being much more disciplined than what we would have been if we had really high demand across the business going forward.

[Eric Stine:]

Okay. Got it. Thanks.

[Jill Evanko:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from Ben Nolan of Stifel. Your line is open.

[Ben Nolan:]

Hi. So, my first question relates to sort of I get the guidance for the removal guidance, I completely understand that. Although, I'd say at least in my opinion, Jill, it sounds like you guys have a lot better visibility than I would imagine into a lot of projects and the backlog and into the back half of the year. Do you envision a point later in the year where you can reinstate some guidance? And are you feeling like now things maybe your settling and you're getting closer to a point where you could do that?

[Jill Evanko:]

I’d certainly hope so in terms of being able to provide a guide sooner rather than later. I'm not yet there yet. I think is the best way to characterize it. There's certainly still a lot of things that haven't settled down. There's still a lot of flux around timing of reopening with respect to COVID as well as how do the projects that are from a longer-term nature in FinFans side of the business, how does that sort itself out.There's varying different views on how the oil and gas situation rebounds and what that timing looks like. So, a lot of that's going to be dependent on those types of factors. But the goal will be the next time we talk next quarter, I'll, hopefully, be able to share an updated guide.

[Ben Nolan:]

Okay. Helpful. And then you mentioned something that I'm curious, I guess, with respect to, I think, the brazed aluminum for Qatar. It sounds like Qatar is moving forward. Any sense of maybe what the potential project size for that would be? Just trying to think through the magnitude a little bit.

[Jill Evanko:]

Sure. Without giving specifics on that project, magnitude a little bit.

[John Bishop:]

Sure. Without giving specifics on that projects, our international content tends to be for pre-cooling as well as for the upfront activities on these projects, and those can be anywhere from kind of $20 million to $50 million. It wouldn’t be bigger than that then.

[Ben Nolan:]

Okay. All right. I appreciate it. Thank you, Jill.

[Jill Evanko:]

Thanks, Ben. Thank you.

[Operator:]

Thank you. Our next question comes from Martin Malloy with Johnson Rice. Your line is open.

[Martin Malloy:]

Good morning.

[Jill Evanko:]

Hey, Martin.

[Martin Malloy:]

My first question is on the LNG fueling stations and it sounds like you had a pretty good quarter in terms of terms of order flow there and the potential arrangement with Shell. Could you maybe talk about geographies that you're seeing strength in demand for these LNG fueling stations?

[Jill Evanko:]

Yes. It's been both Europe as well as India. And we’ve started to see much more activity on the quoting side in the rest of Southeast Asia and beyond India. But the actual order activity has been Europe and India.

[Martin Malloy:]

Okay. And then on the beverage side, you mentioned there are a few restaurant chains that you're selling into, and I know that a lot of – you’ve had a few customers out there testing this. Are those restaurant chains for those want their test were testing it and you’re dosing and now moving to actual purchases and maybe could you give us kind of a broad update on the beverage area?

[Jill Evanko:]

Sure. Those customers use both our tanks as well as our dosers in some cases, So, these are either customers that have been around for a while. Some of them buy through distribution and some buy directly with us. In terms of some of the pilot programs that we've referenced over the last couple of quarters with some of the beverage customers in particular, those are much more on the larger named beverage companies that provide beverages to the restaurants that we reference as our customers and those pilot continue to progress.We haven’t seen any breakthrough in terms of purchases from any of those pilots, but we’ve received favorable feedbacks from 100% of them. We've also just begun a new pilot which were under a confidentiality agreement to not be able to discuss, but it's a very interesting one that goes into a new way of packaging of water, in particular with one of these major beverage customers.We see this – to your – to the second half of your question, we see this particular business, you know, we kind of lump it as food & beverage, but even just beverage specifically. This is where you're going to continue innovation and because it's so global in nature, even with a minor hiccup where you have the casual restaurant chains having the impact from having to shut down, we think that from a medium – even short and medium long term perspective, beverage continues to be a key part of our growth story in specialty markets.

[Martin Malloy:]

Great. Thank you.

[Jill Evanko:]

Thanks, Martin.

[Operator:]

Thank you. Our next question comes from Connor Lynagh with Morgan Stanley. Your line is open.

[Connor Lynagh:]

Yeah. Thanks. Good morning. Thanks for squeezing me in here.

[Jill Evanko:]

Hey, Connor.

[Connor Lynagh:]

Hey. I'll just leave it with just one, although elates to a bit of a long answer, I'd imagine. But if we look at the slide 14 and 15, this is a helpful framework, I'm wondering if you could just frame, you know, sort of a percentage of revenue as opposed to a percentage of products, how significant the – like, what percentage of your portfolio is strengthening versus weakening over the past couple of weeks there?

[Jill Evanko:]

Let me answer in reverse. So, on the weakening side of things, if you were to kind of stay in the worst case scenario, I quantified HLNG vehicle tanks as $15 million to $20 million, net gas approximately is $5 million and then gave you the up and midstream revenue from 2019 being $110 million.So, if you kind of framed it that way, I think that’s the best way to try to assess what a worst case impact would be on total revenue to sort of pay the number of decline on the air cooled up in midstream, probably take a pretty big number on that one and then add the $25 million on the others that I referenced. And that’s probably the best way to go about it. But the other way I could answer it for you is there's a much more significant portion of the business that’s consistent and strengthening than is in the weakening category, in the not just [indiscernible].

[Connor Lynagh:]

All right. Yeah. Got it. All right. Thanks very much.

[Jill Evanko:]

Thanks, Connor.

[Operator:]

Thank you. Our next question comes from Walt Liptak with Seaport. Your line is open.

[Walt Liptak:]

Hi. Thanks. Good morning.

[Jill Evanko:]

You're welcome.

[Walt Liptak:]

Hi. I wanted to ask about the covenant redo? And is there going to be a change to interest expense? I wonder if you can help us understand that or amortization fees throughout the year?

[Jill Evanko:]

No. There's not going to be a change unless you go above the original covenant of 3.5 which we do not expect to have that situation. So, your original interest and amortization forecast still hold.

[Walt Liptak:]

Okay. And then kind of along those lines, the corporate expenses were a little bit higher and I guess it was because of the 2019 bonus comp. What's the rest of the year run rate per quarter for corporate expense?

[Jill Evanko:]

Yeah. There is probably about $4 million or so of unusual than the corporate expense in the first quarter. So, if you reduce that and that would be a good run rate report.

[Walt Liptak:]

Okay. Got it. And then maybe a last one for me. Thinking about China a little bit more and just the trajectory of it. Your opinion is China went back to work. Is it rebounding back to previous levels which sounds like is there and with a better mix? Or is it a slow recovery as they go back to work? Just kind of thinking about China is sort of guide for how the US and Europe and maybe rest of the world recovers in the future?

[Jill Evanko:]

What we saw in our particular products in China was a very quick rebound back to pre-shut down levels, if not, in some cases a little bit better. I'm not certain that that can be used as a proxy for the other regions, for ours. Some of it is very region specific. And customer behaviors differ in the United States and Europe and in India. But certainly China was a very quick rebound for our products.

[Walt Liptak:]

Okay. Great. Thank you.

[Jill Evanko:]

Thanks.

[Operator:]

Thank you. Our next question comes from J.B. Lowe with Citi. Your line is open.

[J.B. Lowe:]

Hey, Jill. Hey, Scott.

[Jill Evanko:]

Hey, J.B.

[J.B. Lowe:]

I know we’re in the overtime here, so I'll be quick with this one. I guess we'll get kind of a better idea of the pullback in your different segments on product lines next quarter. I'm just wondering are there any particular product lines that you think could have a sharp rebound after seeing the down take in Q2 and which segments would that be?

[Jill Evanko:]

I think in D&S West in Asia new vehicle tanks there's continued demand for that and that’s really a matter of those particular key customers getting back to work. So, it’s less about the demand side than it is about having people in their production facilities. So that's one that could very quickly come back for us. I don’t think that will be the case in that gas processing. And I do expect the air cooler side to deal a little bit further out in terms of recovery, so not just a quick bounce back, but at a minimum a couple quarters of what we're starting to see here, if not a little bit longer.So, really on that weakening column, the one that could surprise us is HLNG vehicle tanks, but we think the rest of the business again we haven't seen any sharp declines at this point.

[J.B. Lowe:]

All right. Great. Thanks, guys.

[Jill Evanko:]

Thanks, J.B.

[Operator:]

Thank you. Our next question comes from Greg Lewis of BTIG. Your line is open.

[Greg Lewis:]

Yes. Thank you and good morning. Just one for me. In the prepared remarks, you talked a little bit about some of the impacts you're seeing as business continues in the environment, spacing, moving employees around. Is there any way we can kind of think about the margin impact of that across the businesses like we could – could some of these areas be less exposed or more exposed to maybe having some margins, having some margin compression related to that? Just kind of curious any comments around that would be helpful. Thanks very much.

[Jill Evanko:]

Sure. It's hard to quantify that. We've, I would say, in the areas that probably had that impact without being able to specifically give you a number in India and in Italy you’d have impacts from having fewer production, employees being able to be in the factories at the same time. But I would go so far as to say that I think it’s de minimis margin impact at this point to the business.

[Greg Lewis:]

Okay. Perfect. Thank you.

[Jill Evanko:]

Thanks.

[Operator:]

Thank you. Our next question comes from Tom Hayes with Northcoast Research. Your line is open.

[Tom Hayes:]

Morning, Jill. Morning, Scott. Thanks for squeezing me in. I guess as far as the – looking at the uses of cash use real quickly, would you expect to kind of continue to use some of the share repurchases and any comments on potential debt payments in 2020?

[Jill Evanko:]

Debt paydown is absolutely our priority right now in terms of the use of our cash. We feel great of the share repurchases that we were able to do in the open window in March that have been completed. But at this point, that given the program has been suspended, we don't anticipate that we’ll be doing any more at this point.

[Tom Hayes:]

All right. Thank you.

[Operator:]

Thank you. Our next question comes from Patrick Baumann with JPMorgan. Your line is open.

[Patrick Baumann:]

Hi, Jill. Thanks for taking my questions.

[Jill Evanko:]

Hi. Good morning.

[Patrick Baumann:]

So, first off – yeah. Good morning. First off, just want to say sorry to hear John’s gone, you know, I’m not sure if he’s listening, but want to wish him the best. I had a few questions. First off, it sounds like you're seeing stable demand for small scale LNG at this stage which, I guess, I was kind of surprised to hear. Any color on the pluses and minuses to the outlook there?Just thought that with oil coming down so hard and also just the general economic uncertainty you would weaken the outlook for that area. And, you know, maybe on that Jacksonville where you announced in January, did that ever closed?

[Jill Evanko:]

Sure. So, first of all, we all will miss John as well. He was a great member of our team, so there’ll be big shoes to fill for the new IR person coming in.On the LNG side of things, so, overall, you know, I want to make sure that it characterize that we do expect a sharp downturn in our – in the air cooler side of the FinFans business, so that’s making sure that you're carving that particular piece out. So, all the negatives that we called out on the E&C side, we do expect those to be softening in the coming weeks and months.But in – with respect to the small scale LNG side of things, a lot of these projects have customers already and are pretty far down the road. So, you're talking about weeks and months of possible delays, not full project delays or quarters types of delays. On the Eagle Jacksonville LOI, we have not booked the particular order which is in the mid $30 million. We wait on that for FID to formally occur on the project. So, we do expect that to be booked in the coming months here.In terms of whether it's close or moving forward, we do expect limited notice to proceed on the work with the EPC that they chose which is Matrix here very quickly in the second quarter.

[Patrick Baumann:]

Okay. And you mentioned FinFans. I was surprised to see the order strength today we can see in the quarter, but it very so. Just curious, any sense on how this cycle could look relative to the last one? I think back then, revenue went from $200 million or so down to a little bit under $100 million at the trough. Is there any reason it could hold up better this time?

[Jill Evanko:]

So that was particular for the air exchanger side of the business. And you're correct in terms of the last downturn, would it drop. We do have more aftermarket service and repair which would be a minor help to that. But I don't see any particular fundamental on the air cooler side that's different this time than the last time.

[Patrick Baumann:]

Got it. And then quickly on a specialty markets. It looks like some pluses and minuses on slide 14. Do you think the aggregate can still grow this year? Or is the weakening like in trailer and grow this year or the weakening in like the trailer and the HLNG stuff too big to overcome? I just don’t know the size of those buckets within specialty.

[Jill Evanko:]

Specialty markets absolutely will grow this year. That something that we have a lot of confidence in a high-single digits.

[Patrick Baumann:]

Okay. All right. I didn’t know you mention that. Okay.

[Jill Evanko:]

Yes.

[Patrick Baumann:]

And then, if I could just squeeze one, last one in the restructuring. Can you just walk through how we should think about related send through the balance of the year? Just seems like the magnitude of the savings that you're talking about outweighs the actual spend. But I think like as if I look at an earlier slide, it seems like 25% of the savings came this week. So, maybe there's a step up in restructuring in the second quarter. Just kind of curious if you give some color on that and kind of what you're targeting with the spend.

[Jill Evanko:]

Yes. So, if I understand your question correctly, the savings, you can take $34 million of 2020 savings across the next three quarters and you can do that evenly across the quarters. If you're splitting the total 40 – call it, $48.8 million between SG&A and gross margin, $45% of it is SG&A and 55% is gross margin.

[Patrick Baumann:]

Is there more restructuring spending that needs to happen to generate that for the rest of the year or that's just based on what you've already spent?

[Jill Evanko:]

That's based on what we've already spent. At this point, we don't have further restructuring spend in our thinking but it will – obviously we constantly assess needs against the demand by product category.

[Patrick Baumann:]

How did you get that $12 million just this week then? Where did that come from?

[Jill Evanko:]

There was – there were specific headcount reduction actions taken primarily in the E&C businesses both in Cryo and FinFans, and then we had a couple of changes in the corporate structure which were delayering of the organization.

[Patrick Baumann:]

And that restructuring spend, no, I'm sorry to belabor this, will occur in the second quarter because you just generated the savings this week? Or that already occurred in the first quarter?

[Jill Evanko:]

That will be in the second quarter, so the total restructuring for April for Q2 is just under $3 million for all assets.

[Patrick Baumann:]

Okay. Thanks so much. Thanks so much. I appreciate all the detail. Good luck.

[Jill Evanko:]

Thank you.

[Operator:]

Thank you. Our next question comes from Pavel Molchanov with Raymond James. Your line is open.

[Pavel Molchanov:]

Thank you for taking the question. You've been very active in M&A in the previous commodity down cycle, 2014 to 2016. Obviously, you've got less debt than you do today but different business mix as well. If there are some opportunities to do bolt-on M&A particularly some small, maybe middle market distressed M&A situations, would you even consider doing those?

[Jill Evanko:]

We would opportunistically consider a very small bolt-on if they were ones that are part of our long-term strategy. And right now those really would look like on the cryogenic fund side of the business and potentially on the hydrogen side of the business. But beyond that there's really nothing strategically that is in the hopper that we need to continue down the path that we've laid out.

[Pavel Molchanov:]

Okay. And in terms of your manufacturing capacity, obviously, you're operating below capacity today as everybody is. What level of revenue could you theoretically generate on a calendar year basis if demands were limitless and you had your existing production capacity?

[Jill Evanko:]

We could get to about $2.2 billion, a little bit of that would depend on where the demand is. So, for example, we really have a lot of the capacity and plan for that capacity in our La Crosse, Wisconsin facility, in our New Iberia, Louisiana facility in anticipation of some of the bigger LNG projects. So, a little bit of it would be a mix driven, but 2.2% is a pretty good number to use.

[Pavel Molchanov:]

Okay. Very helpful. Thanks very much.

[Jill Evanko:]

Thanks, Pavel.

[Operator:]

Thank you. Our next question comes from Craig Shere with Tuohy Brothers. Your line is open.

[Craig Shere:]

Morning, Jill. Thanks for taking the question.

[Jill Evanko:]

Hey, Craig.

[Craig Shere:]

You mentioned de minimis ongoing impact on margins from adjusted staffing shifts. But I wonder in the first quarter if the margins could have been even better, barring onetime margin impacts on less efficient logistics and maybe product deliveries from that 40 days of manufacturing shut-ins in various regional locations.

[Jill Evanko:]

Yes. I think it could have been very hard to quantify what that would have looked like.

[Craig Shere:]

But whatever hit that was would be gone. Ongoing, we should be slightly better than even what you just posted. Is that correct?

[Jill Evanko:]

That is correct.

[Craig Shere:]

Okay. Thank you.

[Operator:]

Thank you. And we’re currently showing no further questions at this time. I’d like to turn the call back over to Jill Evanko for closing remarks.

[Jill Evanko:]

Thanks, Shannon. During this unprecedented time, my closing remarks are for our Chart team members on slide 23. Thank you for all you've done and are continuing to do as essential workers to help save lives. Your efforts are noticed, appreciated, and impactful, and we'll talk more tomorrow on our global CEO update. Thanks, everybody, for joining us today, and goodbye.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.