Chart Industries Inc Q1 FY2020 Earnings Call

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 will 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 of 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 information 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’ Chief Executive Officer.

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 slots by department to reduce common 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 in the locations where we operate, keeping our employees safe is critical, in particular as we ramped 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 production 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 saved 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 $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 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 segment's 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 one-time costs primarily severance, was $49.3 million for the first quarter of 2020 and included $2.9 million of share-based compensation expense which is only 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. While we did not and 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 holds 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 do 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 systems in home health care and nursing homes as well as being manifolded 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 has stated that up to 64% of critically ill patients treated for COVID have received high-flow 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 cylinders certified, we received permission to produce dual-certified products, which can be used in both regions. Products that are 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 supply have reported a rise in recent weeks in demand for medical oxygen of three- to five-fold in both cylinder and liquid form. In places like Italy and Spain, hospitals 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 region's 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 kits 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 12:15 PM, the Chart Commercial team received a call that three main tanks at hospitals in the New York City area failed. While the reason is unknown, there is industry assumption that they overdrew the oxygen system and it shut down supply. By 3:00 PM that same afternoon, we were able to have 20 DuraCyls on a dedicated truck, which I'm sure you know isn't easy to find given the supply chain challenges of late, that arrived onsite the very next afternoon. Our operations team stayed all Friday evening to load the truck so there wouldn't be a headline news story. We hope that these 20 units helped save 50 to 70 people’s lives. For cryobiological products, the first quarter started slowly, in particular with the shutdown in China. As impacts from COVID-19 began happening in late February and early March, orders dramatically increased with total first-quarter orders of just under $21 million, a 14% increase over the first quarter of 2019. The demand increase is driven both directly and indirectly by COVID. As mentioned, with China reopened, there has been increased activity from biobanks in the region. We have sold our cryobio products to many institutions for COVID research. And as elective surgeries are delayed, we have sold freezers to companies that need to store biological inventory for longer periods of time so those valuable assets do not perish. Flipping to slide 10, it makes me proud to share that while we continue to serve our customer needs, our employees have banded together to identify hospitals and health care providers in our local communities to donate personal protective gear from our safety stock. To date, we have donated thousands of N95 industrial masks to hospitals in each community that we live and work in. We thank those working to keep people safe through this crisis. Let's move from the COVID discussion to our medium- and long-term fundamentals, market dynamics and recent demand trends starting on slide 12. We continue to see long-term strength in the fundamentals of our markets in particular the transition to clean energy and the needed infrastructure associated with that. Many have asked about whether carbon emissions reduction targets that were so important before this global crisis will exist going forward. From what we hear, this will be more top of mind coming out of this crisis ranging from global leaders seeing more need for energy independence given the recent oil price impacts and that there will be a focus on actions that can be achieved by 2030 versus the longer 2050 timeline. Even during the recent shutdown, the Indian parliament approved an increase in the excise duty on gasoline and diesel which will help protect their transition to natural gas. Backlog of $733 million is flat to the first quarter of 2019 which included $135 million of Venture Global Calcasieu Pass take-or-pay LNG orders. As of the end of the first quarter of 2020, there was $93 million of Calcasieu Pass backlog remaining which is expected to be recognized as revenue fairly evenly over the next four quarters. When removing that, backlog increased 7% year-over-year as shown on slide 13. In D&S West, first-quarter backlog of $151 million is the highest in the history of the business, up 19% over the first quarter of 2019. D&S East backlog of $221 million is the highest backlog for March 31 for the segment since the first quarter of 2015 which included a significant portion of PetroChina LNG related backlog. Also worth noting is that we have not had any material cancellations in our backlog to-date. We sold to 120 new customers in the first quarter of 2020 of which 84 were outside of North America. This included 23 new customers in India, 26 in Europe and China, 12 in Southeast Asia, 1 in Africa, and 1 in Mexico. Thirty-six of these new customers were obtained in March. To-date, in April, we have orders from 29 new customers as well as a $4.7 million order for an industrial plant application in E&C Cryo; a $3.1 million air-cooled heat exchanger retrofit order for a refinery in E&C FinFans; and a $1.5 million order for space launch application in D&S West. Sales of $321 million is an increase of 11% over the first quarter of 2019 and flat organically. E&C Cryo sales were up nearly 77% with the inclusion of $22.9 million of Venture Global Calcasieu Pass revenue. The first quarter of 2019 did not include any Calcasieu Pass revenue. On slides 14 and 15, we’ll walk through each segment right to left from weakening to consistent to strengthening demand. These categories we are showing are based on the last six weeks of information since the pandemic took full hold of the global environment. In Distribution & Storage West, the product line with weakening short-term demand is our HLNG fuel systems, known to you as HLNG vehicle tanks. This product line has two main sole-source customers whose operations are located in Europe. These customers’ production lines have been closed for the prior month and are expected to reopen in the coming weeks. Order activity with these customers dropped by 75% over the past four weeks with our current expectation that orders return to normal levels in June. Assuming a three-month period of this level of orders, our annual forecasted revenue in this product line would be reduced by $15 million to $20 million in 2020. We reduced our workforce for this line by 50% early in March to adjust to the current demand situation. We’ve made significant progress on other potential customers' use of our HLNG fuel systems products. Specifically, we expect customers in both India and Russia to move ahead this year with LNG mine haul trucks, and two large logistics companies in the US to add to their LNG fleet, one having recently completed a successful pilot program. Also, late-breaking news, yesterday we received formal notice that a second significant patent for LNG fuel systems will be granted to us in Europe. This further enhances our leadership position for LNG vehicles in the region. Dosing equipment, space applications and water treatment orders are consistent. Originally, I would have thought water treatment, being primarily with municipalities, would have slowed given COVID, but we’ve booked four different municipality orders in the first quarter and already one in the second quarter. The reason for this is that municipalities are also considered essential business and they have a budget with a timeline that is lost if not used. Dosing order activity is consistent with the prior quarter although we have seen a wide swath of new applications being used for our dosers in recent weeks. In particular, we are working with a fuel additive company, which is a new industry using dosers to help change the way they are packaging their products. Just this past week, we sold our first doser for an eyelash enhancement product. In addition to the critical care products for which I've already discussed the increasing demand, specialty markets orders continue at and above our previously forecasted level. Orders in the first quarter of 2020 were up 9% over the fourth quarter of 2019 and up nearly 11% over the first quarter of 2019. Hydrogen, cannabis, food & beverage and space all show strengthening demand. Our customers associated with fast food and convenience stores are increasing demand for our products, somewhat offset by independent and casual restaurants that are hit by having to shut down. Customers including McDonald's, Yum! and Chick-Fil-A have all confirmed that they will continue with their new builds. Q1 food & beverage sales included strong beverage tank sales driven by Speedway convenience stores that had 3,000 stores with new tanks, each with a new telemetrics feature on the content gauges. Many states that have issued shelter-in-place orders to combat COVID-19 continue to include alcohol, wine, beer, and cannabis in the essential category. In today's ever-changing lifestyle, the demand for canned premium wine has also risen. One of our key customers, the Francis Ford Coppola Winery, one of the first to offer premium wine in a can, we supported in packaging their wine in cans with our liquid nitrogen dosing systems. Overall, food & beverage orders were up 17% as compared to the fourth quarter of 2019 and 36% compared to the first quarter of 2019. The reason that food & beverage showed on this slide in two categories is that while we have seen the demand described above, in the past week, beverage has been weaker than typical as we believe we are now seeing the tail of impacts from the casual restaurant shutdowns. Finally, D&S West aftermarket service and repair demand is increasing. This is a theme that you'll hear throughout all segments and there is a trend to utilization of existing infrastructure versus new purchases. For D&S West, parts, repair and service revenues increased 11% with operating income up more than 200% over the first quarter of 2019 driven by increased demand from the industrial gas majors and cost reductions taken in the second half of 2019. D&S West aftermarket service and repair as a percent of total sales was 9.8% in the first quarter, up from 8.2% in the fourth quarter of 2019. In both D&S West and East, we're seeing an increasing number of bid requests for regasification terminals. In the first quarter, we booked the first regas station for the Malaysian region. We are also expecting regas orders for military locations in the United States in the third quarter, as well as quoting on 20 regas stations for South America. D&S East is shown on the second row on slide 14. In the first quarter, we booked 14 LNG fueling stations which is the same level as Q1 2019 and on par with the average per quarter throughout 2019, which was a record year. Additionally, in April, we received verbal commitment from Shell for the supply of seven LNG filling stations. Our teams are currently working toward a multi-year, long-term contract, which will allow for expansion of all the first seven stations. In the Middle East and Asia Pacific outside of China region, March 2020 was the second-best order intake month in the last year, second only to December which was a record. This region had above-average intake in E&C products with the sale of a cold box for Korea and a brazed aluminum heat exchanger for IOCL India. India had its second-highest order month in the history of the business in March. We have seen softening in trailer demand in recent weeks. This is not surprising as both 2018 and 2019 were record trailer order years for us, but it is happening sooner than we expected in 2020. Any softening in trailer orders would not be expected to impact 2020 revenue as lead times on trailers are 10-plus months. Moving to our energy and chemical segment and starting with cryo which is shown on the top row of slide 15. Starting on the far right columns, we saw a significant demand for natural gas processing plant related equipment in 2017 and 2018 after a few years of none whatsoever. In 2019, this dramatically fell with three plants for which we received a total of $1.6 million of orders. Our original expectation in 2020 was five to seven plants being ordered with none in the first half. Given the current oil and gas situation, we would expect very few to none of these types of orders in 2020, which would impact our 2020 revenue by approximately $5 million. Additionally, we do not expect to receive any big LNG new orders in 2020. Yet there are some positives in the sea of LNG morose these days: our work on Venture Global's Calcasieu Pass Project continues on schedule, and there are no anticipated delays for that project. This project is $100 million of 2020 equipment revenue. Venture Global continued their offtake agreements for 1 million ton per annum capacity on their next project, Plaquemines. As a reminder, Venture Global already has final clearance for Plaquemines, and projects that have not yet reached FID continue to progress even in these difficult times. Florian extended their 2019 term loan to November 2021. On March 19, FERC approved the Jordan Cove LNG project. If Jordan Cove moves ahead to FID and construction, we would have $60 million of equipment content on that project. Qatar Petroleum stated that they have zero projects being cancelled for the development of the north field including the second phase. We're currently bidding on brazed aluminum and other equipment content for this project. Moving to the middle column labeled consistent demand for E&C Cryo. You can see that global petrochemical applications, industrial gas applications and small-scale LNG demand continues as we have expected even into recent weeks. While some petrochemical projects may have slower schedules, they have all confirmed that they plan to move ahead. Specifically, there are three that we expect to still be awarded in 2020 and these range in Chart content from $15 million to $30 million on average each. In late February, we received an order of $29.5 million to deliver process design and equipment for a US Gulf Coast PDH plant. This project is to be revenue recognized in 2020 which was included in our original revenue forecast for the year. The air-cooled heat exchangers for this project have not yet been awarded and we are in a bid for those coolers which would be in the $5 million to $10 million range. We received an LOI for process technology and equipment on Eagle Jacksonville's small-scale LNG facility in January. We expect a limited notice to proceed on the project to begin engineering work in conjunction with Matrix in the second quarter. Additionally, we continue to see small-scale projects in particular for power generation and utilities, progress on their original bid timelines. We have 17 terminals in our 2020 bid pipeline that the operators have indicated continue to have a realistic chance to move ahead to an order point this year. These 17 projects total over $355 million of potential order content. Even the major international oil companies that have begun the small-scale journey, as evidenced by the letter of cooperation that we signed with ExxonMobil and Indian Oil Corporation in February, are continuing on their global infrastructure build out using small-scale LNG in many cases. Finally, our Lifecycle business is seeing increased demand in particular in the past few weeks around repair and service opportunities. There is one potential repair and service project that would be $4 million for which we expect a decision to be made in the next month. Additionally, as many of you know, we have four competitors globally for brazed aluminum heat exchangers. One of those competitors had a regional certification permanently revoked late in the first quarter. As a result of this, we have seen an uptick in requests for bids from their customers that are looking for alternative supply of brazed. Moving to E&C FinFans, shown on the bottom of slide 15, FinFans is our hardest-hit segment to-date, not just from COVID but also from the oil-and-gas situation. While orders in the first quarter were the highest out of the past three quarters, including $23 million in the month of March, we anticipate that this will quickly fall off; in particular, on the air-cooled heat exchanger side of the business related to our midstream and upstream end use. In 2019, approximately $110 million of our total Chart revenue related to midstream and upstream applications. To-date, some of our midstream and upstream customers have publicly announced CapEx spending cuts of over 30%. As I commented during the COVID update, we have taken over 40% of total headcount out of this segment in the first quarter and with the possibility of 35% year-over-year order and revenue declines in the air coolers out of the segment, we expect that we can maintain profitability at these operating levels. The fans business continues to breathe along with our Cofimco fan order levels the highest in the year; and like D&S West, E&C FinFans has seen an increase in aftermarket service and repair. Service and repair as a percent of sales for this segment was 26.4% in the first quarter, up from 22.5% in Q4 2019. A portion of this increase is attributable to the strength in demand for fans, and a portion is from our customers looking for creative ways to differentiate themselves in the medium and long term. Examples of first-of-a-kind orders for FinFans are shown on slide 16 as part of the total 15 firsts we had in Q1. For example, we completed the first high-specification vertical order for one of the US Department of Energy strategic petroleum reserves for emergency crude oil storage facilities; as well as putting our first vertical fan into field trials with a key customer. Other first-of-a-kind orders are related to our medium- and long-term market fundamentals that I described earlier. These types of orders, in combination with 35 customers ordering over $1 million in the first quarter, demonstrate the varied applications we serve as well as the global view that the clean energy transition will be as important as ever coming out of the current situation. A few examples: we received an order for a study for liquid-hydrogen-propelled marine vessels including passenger ships. This order came to us in the last week of March. And while you might think that the passenger cruise industry is completely at a standstill, this further reiterates the clean energy transition will continue as we come through the COVID-19 situation. We booked an order for our first biomethane LNG project in Italy. These plants use biogas from farm fields to generate power. The Italian government recently renewed their subsidies for these applications so we expect this trend to continue. And finally we are working with a large retail food company that is in a process of transitioning their larger chicken farms from propane to gas for higher efficiencies. Many of these first-of-a-kind orders support our customers in their ESG initiatives and carbon footprint reductions. Slide 17 shows our 2019 figures and in 2020 our customers are looking to future applications that reduce their carbon footprint while becoming more efficient. I'll now hand it over to Scott to walk through our earnings and free cash flow.

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. As Jill 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. In 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 into 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 provide the following data points for 2020 as shown on slide 22. Venture 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 paydown. 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.

One more item before we open it up for questions. Many of you dealt with John Bishop in his Investor Relations capacity. As you have heard today, we've taken layers out of the organization and eliminated certain roles, including the Chief Operating Officer role, which John occupied. 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 a voluntary 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 Instructions: At this time we will open the call for questions. Our first question comes from James West with Evercore ISI. Your line is open.

Hey, good morning, Jill.

Hey, James.

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 totally or just pushing things back? What’s the flavor of those conversations?

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; pushing to the right means 2021 at the earliest, 2022 even in some cases. We have one particular customer that remains favorable to 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 structure them differently, in particular in modular midscale. So, we’re originally looking at, hypothetical example, 10 trains and starting with all 10; that particular customer might say, well, we’re going to start with five and incrementally add to that. So, those are really the two things that we’re hearing. Again, I think you’ll see the big guys, the ones that we continue to talk with as our customers, have the intent to move things forward and have taken the right steps in the short term to be able to get through this next 12 months.

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. So what are your early thoughts on that part of your business being — it won’t be the same size, I don’t think at least as it is right now, but what's your thought in terms of that business being much more sustainable going forward?

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 the supply chain looks like going forward 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 levels 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 as well as oxygen applications and how they plan to keep a safety stock 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 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.

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

Thanks, James. Talk to you soon.

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

Hello. Good morning.

Hey, John.

Question around free cash flow. Obviously, realized you're not updating the prior guidance framework. But, as you think about going through the year, liquidating inventory, you pulled the lever on CapEx. What are the other moving parts that you're able to do to protect free cash flow? When you go through these periods, the decline in free cash flow is often much less than what you see on the EBIT line as you liquidate some of the balance sheet.

You're absolutely correct. 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 give a qualitative indicator of our view. With that said, we do have multiple levers to pull. We referenced some that we already have around reducing 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, as you are hearing from multiple other companies, 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 what 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 continue to ramp our raw materials given where we sit today. So, where you saw the $13.4 million of additional inventory related to raw materials that Scott mentioned, that's a temporary bump on the inventory side and you'll see that normalize throughout the year.

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 to see another downturn or worse, are there more things you can do or are there other actions around integration you can accelerate to protect profit dollars?

There are many more actions that we can take. We feel like we got at this very early in this situation, even earlier than some other companies 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 adjusted executive compensation not at the level of demand reductions yet. We also have not pursued facility consolidations that we had a roadmap for in the future on what that could look like if needed. 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 scenario planning that have not yet been taken. 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.

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

Thanks, John.

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

Hi. Good morning, Jill.

Hi, Rob.

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?

Yeah. We're definitely seeing that tick up as we referenced in the prepared remarks. 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 realignment with our industrial customers, some of which are on long-term agreements 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 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 environment. We are evaluating the need for a Southeast US repair and service project, which we've held off on given the current situation, but also as we get through 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 that 20% mark by the end of 2021.

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?

Yes. 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 been broad-based growth for fans. 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.

Great. Thank you. I’ll turn it over.

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

Hi, Jill. Hi, Scott.

Hey, Eric.

So, you touched on industrial gas in terms of oxygen and you just did on the aftermarket. Could you talk about that more broadly? Different than it has been in the past since you've got long-term contracts, you know, but also know that that's typically a GDP-plus business and the outlook going forward given all that's going on is somewhat uncertain.

We're seeing continued—I would say consistent strength—at a minimum, consistent with the last couple of years from the industrial gas side of things, and on the positive side, a bit better to-date. The total industrial gas arena, from an order standpoint, orders increased year-over-year over 4% in that particular area and that was slightly ahead of what we had originally guided. From a broader and more macro perspective with our industrial gas customers, there has been 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 there were in 2018 and 2019, so you have companies like Messer and Matheson entering into larger-tier industrial gas customers which gives us broader-based growth opportunity across more customers. But also I think everybody is looking at the repair and service side and how they can utilize existing assets. So, we'd expect around 3% to 4% growth, if not a little bit better to continue, and also a margin mix benefit around the repair and service side.

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 today it's 40% to 45%?

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

Okay. Maybe just turning to China. You mentioned the largest order there that you've gotten in some time. Do you think now that things have restarted there that some of those trends are sustainable? And also, should we take from your tax-rate comment that you expect to be profitable in China in 2020 still?

We do expect to be profitable in China in 2020. For the last two years I characterized our view as '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 LNG-related PetroChina backlog that subsequently got canceled. So, the backlog is a nicer mix of product in the current state and the profitability is expected to continue in 2020 in that region.

Got it. Okay. Maybe last one for me just on CapEx. You’re pulling that number back a little bit. Is that tank facility or the expansion there still something we should think about more in 2021?

We are almost done with that LNG vehicle tank line in our Italian facility. So, that CapEx is already basically in. We expect that facility's line to go online in June of this year. 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.

Got it. If you can point out what would be part of that CapEx — you reduced it by $10 million to $20 million versus last go around — any clarity would be helpful.

Without going into project-specific detail, I would say that because we constantly have 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.' Now we really kind of batten down the hatches instead, and take each one of these as we go and base them on product-line demand. 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.

Okay. Got it. Thanks.

Okay. Thanks.

Our next question comes from Ben Nolan with Stifel. Your line is open.

Hi. So, my first question relates to the guidance removal. I completely understand that. Although, at least in my opinion, 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? Are you feeling like now things are settling and you're getting closer to a point where you could do that?

I’d certainly hope so and the goal will be that the next time we talk next quarter, I’ll hopefully be able to share an updated guide. I'm not there yet. There's still a lot of flux around timing of reopening with respect to COVID as well as how the projects in FinFans sort themselves out. There's varying views on how the oil and gas situation rebounds and what that timing looks like. So a lot of this is dependent on those factors.

Okay. Helpful. And then you mentioned brazed aluminum for Qatar. Any sense of the potential project size for that would be? Just trying to think through magnitude.

Without giving specifics on that project, our international content tends to be for precooling as well as for the upfront activities on these projects, and those can be anywhere from about $20 million to $50 million. It wouldn’t be bigger than that.

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

Thanks, Ben. Thank you.

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

Good morning.

Hey, Martin.

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

Yes. It's been both Europe as well as India. And we’ve started to see 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.

Okay. And then on the beverage side, you mentioned some restaurant chains that you're selling into and pilots. Are those pilots moving to actual purchases? Could you give a broad update on the beverage area?

Sure. Those customers use both our tanks as well as our dosers in some cases. These are either customers that have been around for a while. Some buy through distribution and some buy directly with us. In terms of some of the pilot programs we referenced over the last couple of quarters with major beverage companies, those are progressing and we haven't seen breakthrough purchases from any of those pilots yet, but we've received favorable feedback from all of them. We've also begun a new pilot under confidentiality with one major beverage customer on a new way of packaging water. We see beverage continuing to be a key part of our growth story in specialty markets in the short and medium term, even with impacts from casual restaurant shutdowns.

Great. Thank you.

Thanks, Martin.

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

Thanks. Good morning. I'll leave it with just one. On slides 14 and 15, this is a helpful framework. I'm wondering if you could just frame, like a percentage of revenue, how significant the strengthening versus weakening buckets are over the past couple of weeks?

Let me answer in reverse. On the weakening side, if you were to stay in a worst-case scenario, I quantified HLNG vehicle tanks as $15 million to $20 million, midstream gas processing approximately $5 million, and noted the up- and midstream revenue from 2019 being $110 million. So, if you framed it that way, that's the best way to assess a worst-case impact on total revenue from declines in air-cooled midstream. But the other way to answer is that a much more significant portion of the business is consistent and strengthening than is in the weakening category.

All right. Got it. Thanks very much.

Thanks, Connor.

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

Hi. Thanks. Good morning.

You're welcome.

I wanted to ask about the covenant redo. Is there going to be a change to interest expense? Help us understand that or amortization fees throughout the year?

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 happen. So, your original interest and amortization forecast still holds.

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

There is probably about $4 million or so of unusual items in the corporate expense in the first quarter. If you reduce that, that would be a good run rate to use.

Okay. Got it. And then maybe last one — thinking about China a little bit more and the trajectory. China went back to work and is it rebounding back to previous levels with a better mix? Or is it a slow recovery as they go back to work?

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

Okay. Great. Thank you.

Thanks.

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

Hey, Jill. Hey, Scott. I know we’re in overtime here, so I'll be quick. I guess we'll get a better idea of the pullback in your different segments next quarter. Are there any particular product lines that you think could have a sharp rebound after seeing a down-take in Q2 and which segments would that be?

I think in D&S West, the LNG vehicle tanks in Asia have continued demand; that could very quickly come back as those customers get back to work. It’s less about demand and more about people being in production facilities. I don’t think that will be the case in gas processing. I do expect the air-cooler side to be a bit longer in recovery, so not just a quick bounce back but a couple quarters. So, on the weakening column, the one that could surprise us is HLNG vehicle tanks, but we don't expect other sharp declines at this point.

All right. Great. Thanks, guys.

Thanks, J.B.

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

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 to think about the margin impact of that across the businesses? Could some areas be more exposed to margin compression related to that?

It's hard to quantify. We've had impacts in India and Italy from having fewer production employees in factories at the same time. I would say it's de minimis margin impact at this point to the business.

Okay. Perfect. Thank you.

Thanks.

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

Morning, Jill. Morning, Scott. Thanks for squeezing me in. As far as uses of cash, would you expect to continue to use the share repurchase program and any comments on potential debt payments in 2020?

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

All right. Thank you.

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

Hi, Jill. Thanks for taking my questions.

Hi. Good morning.

First off, thanks. You've been very active in M&A in the previous commodity down cycle, 2014 to 2016. If there are opportunities for bolt-on M&A, particularly small distressed situations, would you consider those?

We would opportunistically consider very small bolt-ons if they fit our long-term strategy. Right now those would look like the cryogenic and hydrogen sides of the business. Beyond that there's nothing strategically in the hopper that we need to pursue; we will continue down the path we've laid out.

Okay. And in terms of manufacturing capacity, what level of revenue could you theoretically generate on a calendar-year basis if demand were limitless and you had existing production capacity?

We could get to about $2.2 billion. A bit depends on the mix of demand because we have capacity planned in La Crosse, Wisconsin and New Iberia, Louisiana for bigger LNG projects, but $2.2 billion is a pretty good number to use.

Okay. Very helpful. Thanks.

Thanks, Pavel.

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

Thank you for taking the question. A couple quick ones. Would you consider small bolt-on M&A, and what level of revenue could your manufacturing capacity support if demand were limitless?

We would consider opportunistic small bolt-ons that align with our long-term strategy, primarily in cryogenic and hydrogen businesses. And our manufacturing capacity could reach about $2.2 billion in revenue, depending on mix and where demand is concentrated.

Okay. Very helpful. Thanks very much.

Thanks, Pavel.

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

Morning, Jill. Thanks for taking the question.

Hey, Craig.

You mentioned de minimis ongoing impact on margins from adjusted staffing shifts. In the first quarter could margins have been even better barring one-time margin impacts like less efficient logistics and product deliveries from the 40 days of manufacturing shut-ins? That hit would be gone, and ongoing we should be slightly better than what you posted. Is that correct?

Yes. It's hard to quantify exactly, but that is correct. Those impacts were temporary and ongoing margins should normalize and be slightly better than posted.

Okay. Thank you.

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.

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. We'll talk more tomorrow on our global CEO update. Thanks, everybody, for joining us today, and goodbye.

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