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Chart Industries Inc  (NASDAQ:GTLS)
Q3 2018 Earnings Conference Call
Oct. 18, 2018, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Chart Industries, Inc. Third Quarter 2018 Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

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. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statements. Please refer to the information regarding forward-looking statements and risk factors included in the Company's earnings release and latest filings with the SEC. These filings are available through the Investor Relations section of the Company's website or through the SEC website, www.sec.gov. 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 -- Chief Executive Officer

Thank you, Gigi. Good morning and thank you for joining us to walk through our third quarter 2018 results. We will also discuss our updated increased 2018 guidance reflecting the movement of our oxygen related products into discontinued operations and a 2019 first look. In order to facilitate today's discussion, I will walk through the slides included in the presentation released this morning.

We will walk through the adjusted EPS in a few slides, but first I would like to provide commentary around the order and sales activity. We have seen accelerated dynamics of growth in the market, in particular in LNG, as shown on Page 2 of the supplemental deck. Before we get into the numbers, during the third quarter we strategically realigned the business to support and focus on our core growing energy and chemicals and distribution and storage businesses. We announced the completion of our strategic review of the oxygen related products with a definitive agreement to sell CAIRE Medical to NGK for over $130 million, a gain on the sale and an expected fourth quarter of 2018 close.

In that regard, we moved out of this non-core business to better leverage our core cryogenic expertise. We also announced the signing of a definitive agreement to purchase VRV, a diversified multinational corporation that designs and manufactures pressure equipment serving the cryogenic and energy and petrochemical end markets. This acquisition is expected to add initial annual net sales of $120 million, achieve significant cost synergies related to operational efficiencies and sourcing and close in the fourth quarter of 2018. For the purposes of our third quarter and year-to-date 2018 results, CAIRE results are shown in discontinued operations.

The third quarter of 2018 sales of $272.2 million grew 34% or 16% organically over the third quarter of 2017 driven by strength in natural gas processing and US packaged gas. Orders in the third quarter continue to reflect strength driven by global activity related to the liquefaction, transport and storage of natural gas. Orders of $264 million increased 21% over the third quarter of 2017 and, in particular, distribution and storage Eastern Hemisphere had a 28% increase in orders over the third quarter of 2017 and 11% increase over the second quarter of 2018. Both Asia-Pacific and Europe experienced strength driven by standard tanks and LNG trailers. Asia Pacific orders were at their highest level since the second quarter of 2015, and European orders were at the highest level since the second quarter of 2008. Macro tailwinds of governmental policy, pollution control, and fuel taxes all drive additional regional opportunities in the East.

We continue to see a demand increase for LNG fueling stations in Europe and key customers continue to order LNG vehicle tanks for over the road trucking. We expect that to continue over the next three to five years. Over the past six months, this has been further supported by rising diesel prices in the region. In China, orders are up 11% year-to-date and sequentially are up 20% over the second quarter of 2018. The main driver of the increases are bulk products, including industrial gas trailers and engineered tanks. The third quarter saw an increase in operating rate of air separation plants in China, which were up 8% compared to the first half of the year. Additionally, in the third quarter LNG demand is running at 200,000 tons per month, up 9% versus the first half of the year in preparation for the heating supply needs in the fourth quarter. While sequential orders decreased from the second quarter of 2018 by 17%, the decline was driven in its entirety by three large orders received in Q2. Specifically, the three orders totaled $53 million. Two of the orders that totaled $41 million were for Hudson and one order was $12 million in D&S West for a space launch application. No revenue related to these orders has been recognized yet.

On the E&C side of the business, while we have not yet received a significant order for large LNG terminal projects, growth in the mid-scale liquefaction market continues. We are more confident now than at the end of the second quarter that we will receive orders related to mid-scale LNG export terminals in the first half of 2019. In the third quarter, there was increased activity from FERC with stated target dates for regulatory approvals. Additionally, several LNG projects had incremental positive moveS toward FID and FERC approvals in the quarter, including several with which Chart will have content.

Slide 3 is an update to the infamous Slide 52 that we showed at our Investor Day in June and I'll speak to certain projects that had forward progress in the third quarter. FERC announced that its final order for the Driftwood project is expected in April of 2019. Driftwood has indicated that it will use Chart's IPSMR process technology and our brazed aluminum heat exchangers and cold boxes for this 27 million ton per annum project. We expect to receive notices to proceed in late second quarter of 2019. Venture Global's two projects, Calcasieu and Plaquemines have received indications that they will get their final orders from FERC in January 2019 and August 2019 respectively. While IPSMR will not be the process on these projects, we anticipate associated cold box orders.

Additionally, during the quarter Venture Global announced their agreement with Repsol for the supply of 1 million tons per annum for a 20-year period. During the quarter, Pointe LNG asked FERC to initiate pre-filing review for their proposed LNG liquefaction and export facility to be located in Louisiana. The facility is to have an initial export capacity of 6 million tons per annum and will be designed using three 2 million tons per annum modular trains provided by our IPSMR+ technology. Of note is that in 2014, a significant portion of this site was reviewed by FERC in connection with the previously proposed LNG export terminal project. From a market perspective, we continue to see strong interest in our IPSMR technology. A major oil and gas company has completed an initial technical evaluation of our IPSMR technology and indicated that they may consider IPSMR for inclusion to compete in future LNG projects. Additionally, we see increased opportunities for floating LNG awards in 2019.

While thinking about LNG projects, let me share our view on the impact from the 10% import tariff on natural gas that China put in place, as well as our perspective on cost impacts from pending retaliatory tariffs related to our supply chain and production. First, there is increasing concern in the market over the trade dispute between China and the United States. While there could be an effect, to date we have not seen a negative impact to the speed or size of projects on the US Gulf Coast. In particular, those that are further along in FID and Orford processes. It is possible that we may see others that are more in the developmental stage be prolonged or fall off. While the full effect is yet to be seen, United States continues to be well positioned against other alternatives, given our low gas price and our political stability. In addition to China, other major buyers of LNG in Asia, who are targets for supply and to which the tariffs have little to no effect are Korea, Japan and India.

A side benefit to Chart from the continued strong growth of natural gas in China is that our production facilities in the region will grow from the additional demand. Secondly, as we have previously mentioned on prior earnings calls, we have certain protection from a material cost perspective on tariffs, specifically certain long-term agreements in our D&S businesses have material escalation clauses, which are meant to have neither side win nor lose in a changing commodity cost market.

In our E&C business, project material costs are quoted and agreed upon with time limits to the quotes. Additionally, given our global manufacturing footprint and our regional purchasing, we are naturally hedged in our supply chain. In some cases where tariffs may impact importing products into certain regions, we are able to strategically move between our geographic manufacturing facilities.

The margin expansion in the third quarter as well as year-to-date, as seen on Slide 4 reflects our efforts over the past 18 months to right size our cost structure and leverage additional volume. On 38% additional sales year-to-date, we have expanded adjusted earnings per share by four times, and improved both gross margin as a percent of sales and SG&A.

Gross profit for the third quarter of 2018 was $82.3 million or 30.2% of sales from continuing operations. This is a 400 basis point improvement over the second quarter of 2018 gross profit as a percent of sales. The sequential increase in gross margin was driven by both the D&S West and E&C segments. While, D&S West sales increased 1.2% sequentially over the second quarter, gross margin as a percent of sales increased 510 basis points. Excluding costs associated with the second quarter recall, D&S West gross margins as a percent of sales increased 190 basis points sequentially, driven by margin improvement in bulk and packaged gas products as well as in the parts repair and service business. E&C gross margin of $26.9 million or 27.4% of sales improved sequentially 630 basis points. The third quarter results reflect improved cost structure and included an atypical fast turn order received within the quarter. We expect E&C gross margin levels to continue at 24% to 25% for the remainder of the year.

SG&A expenses for continued operations improved sequentially by $1.9 million net of transaction and restructuring related costs. The improved SG&A is a result of our restructuring actions this year. While we are pleased with the margin expansion to date, there is significant additional margin available to us through operational activities that we have under way.

In particular, our special operational excellence team and the recently launched 80/20 process. The $2.5 million of additional annual savings resulting from our segment realignment that was completed in mid September is not yet reflected in our SG&A, but will be beginning in the fourth quarter of 2018.

Additionally, we have identified quick wins through the 80/20 process for D&S West and will be rolling 80/20 to D&S East within the month. Moving to Slide 5, the table shows reported and adjusted EPS for both the third quarter and year-to-date. Third quarter 2018 reported EPS of $0.65 per share grew over the same period in 2017 by $0.67, while adjusted earnings per share of $0.74 more than tripled over the prior year.

The third quarter adjustments were related to transaction and restructuring related costs of $0.07 and $0.02 related to the dilutive effect from our convertible notes, which is fully offset by our hedge. Slide 6 is a recap of the numbers you've seen already. In the third quarter, discontinued operations' EPS was $0.02 and year-to-date is $0.14 per share. The driver of the low third quarter was primarily due to the effect of US and foreign tax costs directly related to the divestiture, which resulted in an 82% effective tax rate for the discontinued operations negatively affecting discon's EPS.

Now let's move to our 2018 and 2019 outlooks on Slide 7 of the deck. The left hand side of the slide shows our prior 2018 full year guidance, which included CAIRE. The middle column takes our prior guidance and shows it on an apples-to-apples basis for continuing operations. Our new 2018 guidance excludes CAIRE or said differently is on a continuing operations basis for the full year. This does not include any VRV information in 2018 and normalizing the entire year for CAIRE.

Sales guidance has increased over prior guidance and is expected to be in the range of $1.06 billion to $1.1 billion. Full year adjusted earnings per diluted share guidance is also increased over prior guidance and is expected to be in the range of $1.90 to $2 per share on approximately 32 million weighted average shares outstanding. This excludes any restructuring and transaction related costs and excludes full year CAIRE adjusted EPS contribution.

Full year capital expenditures are expected to be approximately $40 million and our ETR is anticipated to be 24% for the fourth quarter of 2018. We are excited about the addition of VRV to the Chart family. VRV is a pure play addition to us and complements both our D&S and E&C products and technologies. Not only will this bring significant product pull-through opportunities, the addition of VRV expands our ability to be at the forefront of solution offerings to our customers that are needing to respond to IMO 2020.

India, in particular, is a market that we have not historically been able to penetrate. With its overall 7% growth rate in LNG rising even faster, India offers an expanded addressable market for us. Both China and India have enough market available that it will not be cannibalizing our current market share in China.

Additionally, all of our customers should benefit from the expanded global footprint of six sites inclusive of India and Italy that will allow us to offer the highest quality product with the shortest lead time. Moving to Slide 8 of the presentation, our full year 2019 guidance assumes that both the divesture of CAIRE and the acquisition of VRV close in the fourth quarter of 2018 and conservatively assumes no large LNG project revenue in 2019.

Sales guidance is expected to be in the range of $1.24 billion to $1.3 billion and full year adjusted earnings per diluted share are expected to be in the range of $2.40 to $2.75 per share on approximately 32 million weighted average shares outstanding. This excludes any restructuring and transaction related costs.

We expect our effective tax rate to be approximately 22% to 23% and capital expenditures to be in the range of $30 million to $40 million for 2019.

I will now turn it over to the operator to open it up for questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question is from Eric Stine from Craig-Hallum, your line is now open.

Eric Stine -- Craig-Hallum -- Analyst

Good morning, Jill. So just wanted to start with IPSMR in the initial technical evaluation, just wondering if you could, I mean, as much as you're able to share, talk about the potential size of a project that might be under consideration, your history with this customer or the pipeline of that customer?

Jill Evanko -- Chief Executive Officer

Yes, absolutely. So I'm fairly well constrained on what I can say with respect to this, but just a little bit of color by way of background is we have worked with our customers over the last three to four years to vet and validate the IPSMR process technology. In so doing, it also compares to other process technologies in terms of efficiency and capital cost and through a very rigorous process with this particular oil and gas major, we've been able to at least get on to the potential for future projects, which opens our market up on IPSMR to not only further US projects but also projects outside of the US. I can't put a size to that, again, I mean, fairly constrained on what I can say but it is significant movement for us and reiterates the the market view toward IPSMR.

Eric Stine -- Craig-Hallum -- Analyst

Got it. I guess, it was worth a shot, but thank you for that. And then maybe on the LNG project list versus what you gave at the Analyst Day, I mean, it definitely is more built out, more expansive, just curious, does that now include Hudson's potential content. I know at the Analyst Day it did not, anything there?

Jill Evanko -- Chief Executive Officer

The current view that you see in today's deck also does not include Hudson content. So we're specifically going to call that out going forward. Hudson content generally on each of these projects ranges between 5% and 10% of Chart legacy content. So there is additional somewhere between year $20 million and $100 million per project.

Eric Stine -- Craig-Hallum -- Analyst

Got it, OK. And then maybe last one from me just China, I know on previous calls, I mean, clearly Europe were very strong this quarter, but it has been strong for some time. In China. I think you are a little more subdued in terms of trends there and that seems like you definitely saw an uptick this quarter. So just curious, do you view that as sustainable and then maybe just to comment on the profitability in that segment, since I know that's a factor in the tax rate for next year?

Jill Evanko -- Chief Executive Officer

Absolutely. So as we've said in the last two earnings calls, cautiously optimistic and I would say slightly more positive than cautiously optimistic given the last four quarters' order trends, it's from Q4 '17 to Q3 '18, this is our highest quarter considerably on the orders side. Backlog continues to grow sequentially. Operating income is positive, which is what we needed for the tax rate to be benefited in 2019. So I would say from a market perspective within the region, we're more positive than we have been the last two quarters. Still with an element of cautiousness to it, but the operation itself is performing from a manufacturing and an operating income standpoint, which sets us up well for 2019.

Operator

Thank you. Our next question is from Rob Brown from Lake Street Capital Markets, your line is now open.

Rob Brown -- Lake Street Capital -- Analyst

Good morning, Jill. First on the LNG orders that if you get in 2019, could you give us a range of what that could do to 2019 revenue, if some of those start to hit?

Jill Evanko -- Chief Executive Officer

Yes, absolutely. So the range on that would be between $300 million and $700 million to 2019 revenue. And then, obviously, across -- those aren't -- there are projects in their entirety that revenue generally is spread between two and three years based on how it's recognized. So the $300 million to $700 million would be a piece of a few different projects, orders that would come in in the first half of the year.

Rob Brown -- Lake Street Capital -- Analyst

Okay. So backlog would go up by $300 million to $700 million and then the revenue would go up by sort of a third of that, OK. And then maybe on the 80/20 effort that you talked about a little bit, you started some work on the D&S West and opportunities for the D&S East, but could you give us a sense of sort of where that's at, what you see for opportunities and maybe some sense of impact?

Jill Evanko -- Chief Executive Officer

Yes, so we see quite a bit of opportunity both in D&S West and D&S East. From a D&S East perspective, a lot of our opportunities are around LNG fueling and over-the-road trucking that we continue to see strength in. Let me step back to each of those respectively. From a vehicle tank standpoint, which is related to the LNG over-the-road trucking, we've seen consistent growth in our order trends over the last seven quarters, which really those orders started at the beginning of 2017 and have grown sequentially. We also through our discussions with the key customers in that space have a decent line of sight to the next three years of revenue commitments that we expect to see both in the market as well as with Chart content. So that's a key area of potential further growth. On the LNG fueling side as well as the shipbuilding and marine bunkering opportunities, which we kind of view as those three together, we see considerable pipeline activity for projects, which as a reminder, the range of revenue projects for us per project is somewhere between $10 million and $30 million per one of these bunkering projects and we would anticipate to receive out of our current request for quote backlog, we'd expect to receive one of these projects in 2019. And I will caveat our guidance for 2019 does not include that one project. So we've kind of gone toward the conservative end of our 2019 guidance. So continuing to build upon that.

All of this conversation really is around our organic opportunities. So we see further penetration of the market in the geographic regions that we will get through the VRV acquisition and certainly have spoken about those over the last three to four weeks. On the D&S West side, we continue to build out our full solution offering for our industrial gas customers, which is something that they're very interested in having the service and repair piece of the business be part of our longer-term agreements. And we see continued growth on our parts repair service side of the business as well as considerable growth in the gross margin side of that business.

So we're excited to continue to build on that full solution offering for our key customers there. And then all of this market opportunity is underpinned by the operational excellence in 80/20 processes that we're working on starting in the D&S both West and East that will allow us to further leverage margin on these additional volume opportunities.

Rob Brown -- Lake Street Capital -- Analyst

It was a great review. Thank you. I'll turn over.

Jill Evanko -- Chief Executive Officer

Thanks, Rob.

Operator

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

Martin Malloy -- Johnson Rice -- Analyst

Good morning. Congratulations on the quarter.

Jill Evanko -- Chief Executive Officer

Hi, Marty. Thank you.

Martin Malloy -- Johnson Rice -- Analyst

Could you talk maybe a little bit about working capital, cash usage and your expectation on the free cash flow generation and timing there?

Jill Evanko -- Chief Executive Officer

Yes, absolutely. So working capital continues to improve and it's stepping back from the change in our strategic realignment where we divested the CAIRE business. One of the reasons that we did the divestiture was that it's not like our other core assets and working capital was one of those elements, where as a percent of sales it's considerably higher than the core Chart business. So the remaining continuing ops business runs between 15% and 16% of sales from a working capital perspective. And we continue to expect to see that improve in 2019, a big driver of the improvement on the horizon is through these larger projects in the E&C business for which we receive cash upfront on a materials standpoint and drives working capital down, if not in some cases negative.

We expect further free cash flow generation in 2019 to be kind of in that $75 million to $100 million range and then there's on top of that, the VRV cash that we'll be generating, which VRV historically generates about 10% of revenue from a free cash flow standpoint.

Martin Malloy -- Johnson Rice -- Analyst

Great. And then on IMO 2020 and opportunities outside of Europe related to that, could you maybe talk about the status of some of the customer conversations that you're having and also is it -- will we potentially see small scale or mid-scale liquefaction facilities in conjunction with the bunkering facility?

Jill Evanko -- Chief Executive Officer

So let me take your second piece of the question first. That is, there is potential for that. To date, we have not seen that. But there's conversation in the market around on that being a secondary step in the bunkering. For the time being, what we see in terms of what we're quoting on is more around our tanks in the storage for the bunkering applications. In terms of the pipeline that we see, as I briefly touched on, there's five in our pipeline right now and all of them are European based in various different port locations and they vary in size but the max project for us in 2019 would be a EUR30 million project.

Martin Malloy -- Johnson Rice -- Analyst

Great. Thank you.

Jill Evanko -- Chief Executive Officer

Thank you.

Operator

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

Tom Hayes -- Northcoast Research -- Analyst

Thanks. Good morning, Jill.

Jill Evanko -- Chief Executive Officer

Hi, Tom.

Tom Hayes -- Northcoast Research -- Analyst

I was just wondering maybe you could circle back all the -- maybe discuss the margin differences between the D&S West and the D&S East and your thoughts on how you could narrow the gap?

Jill Evanko -- Chief Executive Officer

Absolutely. So D&S West reported gross margin as a percent of sales for this quarter of 37.6% and East of 19.7%. The biggest driver of the differential is China in current state. Well, China is now operating income positive, gross margins still are running in that mid-teens range. And that's pretty typical for what we're going to continue to see in that region. And it is certainly a much more pricing competitive region. Where the opportunity resides for us is in Europe and not only from a self-help perspective, but also from additional volume that's going to come through our facilities. We do have more opportunity in terms of where we strategically manufacture given the addition of VRV and with the addition of India manufacturing to our portfolio through VRV, the cost of manufacturing there is somewhere in the $8 an hour range for a direct labor person. So we have opportunity to manufacture and be more strategic on that. I would point out that the delta in gross margin as a percent of sales in the East between the second quarter and the third quarter was approximately a 300 basis points decline. The driver of that was in the second quarter, we completed a mechanical evaluation on a large project in the East and we were able to release a contingency reserve that was associated with that large project, and that was a big driver of the sequential decline.

Tom Hayes -- Northcoast Research -- Analyst

Maybe just talk about the service revenue component in the quarter and your thoughts for contribution in 2019.

Jill Evanko -- Chief Executive Officer

Absolutely. And Tom let me just ask a clarifying question. You're talking about on the D&S side of the business?

Tom Hayes -- Northcoast Research -- Analyst

Yes.

Jill Evanko -- Chief Executive Officer

Okay. So the parts, repair service business in D&S increased 17% year-over-year from a revenue perspective and gross margin increased just under 200 basis points sequentially. So we're seeing good movement there. With the kind of total view for the year on the D&S PRS side is somewhere between $50 million and $60 million of sales. And the gross margin in that business will continue to rise kind of in that. Right now, it runs in the 30% gross margin as a percent of sales. We expect that to grow considerably in 2018 given some of the internal actions that we are undertaking to structure and repair in the right locations geographically.

Tom Hayes -- Northcoast Research -- Analyst

Great. Thank you.

Operator

Our next question is from Walter Liptak from Seaport Global. Your line is now open.

Walter Liptak -- Seaport Global -- Analyst

Hi, thanks. Good morning, Jill.

Jill Evanko -- Chief Executive Officer

Good morning, Walt.

Walter Liptak -- Seaport Global -- Analyst

Congratulations on getting a lot of work done this quarter.

Jill Evanko -- Chief Executive Officer

Thank you.

And my two questions are follow ups. Just wanted to clarify on the IPSMR technology with large integrated, so the customer that did that technology review is not listed on Slide 52. Is that correct? So this would be a new customer opportunity for you in the future?

Correct.

Walter Liptak -- Seaport Global -- Analyst

Okay, great. And then the follow-up on 80/20. I know you're in the early stages of doing 80/20. But can you give us an idea of like, just a framework of what to expect in terms of maybe margin improvement in D&S East and D&S West over what time period and what kind of contribution do you think you would get from it early on, like in 2019?

Jill Evanko -- Chief Executive Officer

Yes. So on the D&S West side, we have an internal target that's greater than what I'm going to share with you, but from a commitment standpoint, we're committed to 150 basis point margin improvement from 80/20 in D&S West by the end of 2019. On the D&S East side, we're very, very early days in terms of understanding information and data but I would put an early number out that's very similar to D&S West and expect that to turn into more, but part of this evaluation is both our current business and then once we close on the VRV acquisition involving them in the 80/20 process as well.

Walter Liptak -- Seaport Global -- Analyst

Okay, understood. And then ultimately with 80/20, that usually gains momentum beyond first year, three to five years. Do you have an idea of what our expectation should be three or five years out for margin improvement?

Jill Evanko -- Chief Executive Officer

I have an idea, but we're not yet prepared to share that with respect to the 80/20. But certainly agree with the comment that we expect three to five years, as a result of this process to grow considerably.

Walter Liptak -- Seaport Global -- Analyst

Okay, great. All right, thank you.

Operator

Thank you. Our next question is from Matt Trusz from G. Research. Your line is now open.

Matthew Trusz -- G. Research, LLC -- Analyst

Good morning, Jill. Thank you for taking the question. To follow-up on revenue recognition protocol for the LNG projects that take off next year. How do you account for the equipment component? How do you account for the technology license? And then can you just elaborate further on the cash flow profile as far as prepayments and progress payments you might receive?

Jill Evanko -- Chief Executive Officer

Absolutely. So the technology fee is recognized across the equipment order. So the way that works is it's spread -- if it's in order, that's going to take us three years to fulfill the equipment side. The technology fee is across the equipment order life, so generally two to three years. The way that these tend to roll out and, obviously, depends on the way that the orders are placed. But if we were to get a $500 million order in mid-2019, we would expect kind of $100 million and then $200 million, $200 million. So fairly evenly spread. It's really based around the delivery on the brazed as well as the cold boxes. With respect to the cash, the technology fee is dependent upon the negotiation respectively to each project, but we anticipate that for certain projects that we've spoken about, we would receive a technology fee cash upfront whereas the margins are recognized across the equipment cycle. And then with respect to the rest of the equipment team and from a cash standpoint, we expect to receive the material cash, so payment cost-for-cost on material for the projects at the point with which we order the material. And that was my earlier comment with respect to working capital, further improvement around the timing of these projects. And then the rest of the cash unrelated to material comes on regular terms and those are negotiated project-by-project and range between 30 and 60 days.

Matthew Trusz -- G. Research, LLC -- Analyst

Great. Thank you. And then to follow up, there was a question asked about the D&S aftermarket business. Can you provide the same level of detail for E&C as far as sizing and growth opportunity next year?

Jill Evanko -- Chief Executive Officer

Yes, absolutely. So E&C just for clarifying purposes, we call that lifecycle in the service and repair side of the business. With the inclusion of Hudson aftermarket and the Hetsco deal that we did in 2017, we'd be looking around $70 million to $80 million in terms of annual revenue next year. On a margin profile standpoint, that's more in the 45% to 50% gross margin as a percent of sales.

Matthew Trusz -- G. Research, LLC -- Analyst

Great. Thank you.

Operator

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

Pavel Molchanov -- Raymond James & Associates, Inc. -- Analyst

Thanks for taking my question. I wanted to ask about one of the facets of small scale opportunities. This is onshore US in places like the Niobrara and perhaps Permian as well. I think the last time you guys talked a lot about this was probably back in 2014, back in the days of $100 oil. Now that we're seeing more and more associated gas supply as drilling activity recovers, are you seeing any inbound interest from E&P companies to essentially liquefy gas for transportation fuel or other purposes?

Jill Evanko -- Chief Executive Officer

We're seeing very little of that. Periodically, we get an inbound on that but it's not by any stretch consistent.

Pavel Molchanov -- Raymond James & Associates, Inc. -- Analyst

Okay. And along those lines, are you currently deriving any revenue from LNG or any other opportunities tied to drilling in Colorado? And I ask this, of course, in the context of the drilling referendum on November the 6th.

Jill Evanko -- Chief Executive Officer

Yes, we have some revenue associated with that but very little. The majority of our revenue from a natural gas processing and drilling perspective is in the Permian, a little bit in SCOOP and STACK and a little bit in Marcellus.

Pavel Molchanov -- Raymond James & Associates, Inc. -- Analyst

Okay, clear enough. Appreciate it.

Jill Evanko -- Chief Executive Officer

Thanks, Pavel.

Operator

At this time, I'm showing no further question. I would like to turn the call back over to Jill Evanko for closing remarks.

Jill Evanko -- Chief Executive Officer

Thank you all for joining us today. Our strategic actions in the third quarter to refocus on our core cryogenic expertise and products, coupled with our execution on margin expansion, support the steadily growing base businesses of D&S and E&C. Additionally, the segment realignment and operational focus will support the upcoming large LNG cycle and margin expansion. I also want to thank all of our Chart team members for their continued efforts to execute and continue to build our culture. We look forward to sharing updates on the closing of both the divestiture of CAIRE and acquisition of VRV in the fourth quarter. Thanks again for joining us today. Goodbye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.

Duration: 39 minutes

Call participants:

Jill Evanko -- Chief Executive Officer

Eric Stine -- Craig-Hallum -- Analyst

Rob Brown -- Lake Street Capital -- Analyst

Martin Malloy -- Johnson Rice -- Analyst

Tom Hayes -- Northcoast Research -- Analyst

Walter Liptak -- Seaport Global -- Analyst

Matthew Trusz -- G. Research, LLC -- Analyst

Pavel Molchanov -- Raymond James & Associates, Inc. -- Analyst

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