Chart Industries - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to the Chart Industries Inc. 2023 Q2 results 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 release and supplemental presentation were issued earlier this morning. If you have not received the release, you may access it by visiting Chart's website at www.chartindustries.com. A company replay of today's broadcast will be available following the conclusion of the call until Monday, August 28th, 2023. 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 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, earnings release and latest filings with the SEC.

The company undertakes no obligation to update publicly or revise any forward-looking statement. I would now like to turn the conference over to Jill Evanko, Chart Industries President and CEO. Please go ahead.

Jill Evanko (President and CEO)

Thank you, Michelle, and thank you all for joining us this morning. With me today is Joe Brinkman, our CFO. We're pleased to share our record Q2 2023 results after closing our first full quarter of Howden ownership stronger than ever, including considerable progress on cost and commercial synergies, operational cash generation, and other key deleveraging activities, which we anticipate puts us in a position to meet our 2.5-2.9 net leverage ratio goal earlier than originally anticipated, now the middle of 2024, as compared to our prior expectation of year-end 2024. Before we get into these details, please refer to Slide 4 of the presentation we released this morning. First, all results discussed relate to continuing operations.

They exclude the Roots financial results for our entire ownership period, following the completion of our Howden acquisition on March 17th, 2023, as the result of our executing a definitive agreement to sell the Roots business to Ingersoll Rand. We're excited to share that earlier this week, we received regulatory clearance for the Roots divestiture, and it is expected to close no later than August 18th. We intend to use the proceeds for debt paydown. Slide 5 summarizes key takeaways. Our Q2 2023 book-to-bill was 1.17, which contributed to record-ending backlog for the combined business, as well as record backlog for both Chart and Howden. We have realized over $96 million of annualized cost synergies and over $94 million of commercial synergies. Our commercial synergy pipeline increased to over $1 billion from approximately $800 million in mid-June.

By way of example, this month, we booked a commercial synergy win for $41.5 million with a key customer in the Middle East for brazed aluminum heat exchangers and cold boxes, which came as a result of Howden's operation, physical presence, and team in the region. Just yesterday, we received a large award for compressors for a Chart customer's ammonia project, as well as a separate customer's carbon capture synergy order for an engineering study funded by the Walloon Government and the European Union. We posted a record reported gross profit margin of 30.9% and adjusted gross margin of 32.5%, record adjusted EBITDA of $195.3 million, and adjusted EBITDA margin of 21.5%.

Our Q2 reported free cash flow was $76.2 million and helped drive net leverage of 3.86 or 3.72 when pro forma'd for the 2 announced divestitures. When adjusted for net income only related adjustments, Q2 free cash flow was $86.6 million. Also in the Q2, Howden, on a standalone basis, had record reported backlog, orders, gross profit, and EBITDA. On Wednesday, we executed a definitive agreement to sell our Cofimco Fan business for $80 million to PX3 Partners, which is expected to close in the second half 2023. I already mentioned that earlier this week, we received clearance for the Roots divestiture. Note that neither the Roots nor Cofimco divestitures impacts our synergy targets, and the purchase prices for each were in line with prior deal multiples that we've done.

These are two steps in executing the defined perimeter of potential asset divestitures that we continue to anticipate to total approximately $500 million when complete. As we have shared previously, we adapt how we structure the potential divestitures to optimize the sales prices and multiples for maximum cash opportunity. A little more information on why we are selling Cofimco. Cofimco is one part of our fans' product offering, specifically, axial flow fans manufactured in a dedicated standalone building with a dedicated team in Italy. Cofimco sells original equipment only, primarily to traditional energy markets, and is part of the Chart legacy portfolio. With the addition of Howden's cooling fans that are differentiated with low-noise operating capabilities and highly complement our Chart Tuf-Lite fans, which operate in extreme environments, we see numerous synergies there.

Additionally, Howden cooling fans and Tuf-Lite are both primarily serving the energy transition end markets, in which customers are focusing on optimizing their facilities and purchasing more full solution offerings. Finally, we're reiterating our 2023 outlook and 2024 adjusted EBITDA of approximately $1.3 billion. We include Slides 6 and 7 because they align with our ongoing mantra of executing on time or early against our laid out targets. To date, we have executed each step of our plan either on schedule or ahead of schedule, and we look forward to continuing to add green check marks in the coming months. Brinkman will now talk about the macro background for our expected continuing demand.

Joe Brinkman (CFO)

What stands out on Slide 9 is the breadth of our end markets and the variety of ways our full nexus of clean solutions and molecule-agnostic approach play across these markets. This adds consistency in our order book and ability to grow. Slide 9 is what we are seeing at a macro level, which continues to be positive, supported by both the public and private sectors. Globally, numerous direct subsidies for low-carbon applications have been announced, in addition to tax incentives. We expect more mandates for low carbon emissions across many industries, which in turn is anticipated to drive demand for our full renewable solutions. In the past few months alone, here are some examples of activities that are anticipated to drive additional growth in our business in the coming years. The U.S. National Clean Hydrogen Strategy and Roadmap was released.

South Africa and Germany signed an agreement to form a pact to grow the hydrogen market in Africa. The EPA's proposed rule requiring businesses to disclose PFAS in any product from 2011 is expected to go into effect in the coming months. Lithium output is expected to triple this decade. NASA and the Indian Space Research Organisation plan to have a framework for human space exploration by the end of the year. We are seeing some of this reflected in our end markets today and believe more is still to come in the second half of 2023 and beyond, as specifics of certain funding programs are determined, such as the United States IRA and the U.S. Department of Energy's Hydrogen Hub selections expected later this year.

On Slide 10, starting on the top row, we are seeing very strong aftermarket service and repair activity, both impacting the Q2 in a positive way, as well as expected to impact future years through multiple multi-year long-term service agreements being executed, in particular, in the markets of mine safety and LNG infrastructure and across all geographies. Yesterday was busy. As you heard, Jill mention some synergy wins. Another one we received was a synergy 5-year service agreement with the Chart legacy hydrogen customer for Howden Compression Service. As a reminder, aftermarket service and repair comprises over 30% of our revenues.

We have received 2 big LNG-related awards so far this year to date, and we expect to book an additional big LNG order in the second half of 2023, as global LNG needs continue with the energy transition in various stages of evolution, depending upon market and application. The energy transition is driving demand for critical minerals, and there is an increasing spend in intelligent and responsible mining, which fits well with our cooling fans and Ventsim offerings. Additionally, we are seeing helium activity increasing, with more traditional energy customers purchasing engineering studies to potentially capture the helium at their existing locations. As next-generation rockets near commercial readiness, the space exploration companies developing these heavy lift vehicles are investing in vital launch infrastructure. Our Theodore, Alabama, facility expansion, also known as Teddy Two, is ideally positioned to seize the consequent increased demand for cryogenic molecule storage.

Its strategic location, with both water access and proximity to client launch sites, reduces transportation costs and risks associated with moving tanks of such considerable dimensions, with tanks with a capacity of 70% larger than any shop-built tank globally. We look forward to our ribbon-cutting ceremony this coming Monday at the site, where we already have approximately $50 million in backlog for the expansion. We should not forget about water treatment, as this is an end market where the increasing regulations, such as EPA PFAS is generating more interest in our water treatment solutions. There are other factors also driving increased activity, such as higher temperatures, resulting in more treatment as a service win and the need for global desalination, creating new global opportunities.

Just this month, we won a $2.3 million order via our AdEdge Water Technologies for a full-scale treatment plant project upgrade for a groundwater remediation site near Chicago. We also expect large water treatment tenders in the second half of 2023 in India, a market where we are well-positioned. With customers buying multiple solutions from us, our commercial opportunity pipeline has broadened, which Jill will talk about on Slide 11.

Jill Evanko (President and CEO)

Our total commercial pipeline of opportunities currently is over $20 billion. Includes over $1 million of potential synergy orders. Worth noting on Slide 11 is that in just Q1, so since the end of Q1 2023, we have increased the number of customers and potential customers in hydrogen, carbon capture, and water treatment by over 7%, 18%, and 23%. That is a good demonstration of our One Chart sales force, as well as the breadth of our global customer base. LNG continues to be a market that we view numerous opportunities ahead. Early this morning, we received notification of a $28.75 million order from Wison Heavy Industry for a small-scale LNG project in the Eastern Hemisphere.

You can see an increase in potential international customers contemplating using Chart's IPSMR technology for their upcoming big LNG projects outside of the United States in the first row of the table. International customers are looking to move to modular LNG trains to improve time to market, minimize site work, and reduce costs, which our IPSMR technology lends itself to. While we can't address the who these customers are, as we're under NDAs, we can share that the project locations include Africa, Middle East, South America, Southeast Asia, and Oceania. We speak regularly about the importance of partnerships, development agreements, and commercial agreements as a key part of our commercial penetration strategy.

We saw an increase in execution of these partnerships, which I attribute to the combination of Chart and Howden together, a synergy that we will see through the commercial synergy order book, as we expect at least 70% of these partners to place orders with us before year-end, many of which have already. Examples of our newer partners are shown on Slide 12. Just a couple I'd like to point out: Veolia, with whom we signed a frame agreement for our turbofans for Mechanical Vapor Recompression solutions, placed more than $8 million of related orders in the quarter. Siemens Mobility executed a master framework agreement with us for both Chart and Howden content and applications globally. An aerospace company executed an MOU for our hydrogen offerings and clean energy technical development.

The 43 agreements we have executed or expanded since we closed on the Howden acquisition span such a variety of applications. Over 20% of these agreements cover multiple decarbonization end markets. Q2 2023 orders were $1.063 billion. It is the first time in our history that we have booked over 100 individual orders, each greater than $1 million, as shown on Slide 13, and we had eight over $10 million individual orders across multiple applications. This resulted in a book-to-bill of 1.17, as I mentioned earlier, supporting our 2023 and 2024 outlooks. This steady, broad-based demand has continued into July.

I'm pleased to see the frequency of synergy wins increasing and share with you today, on the right-hand side of the Slide, the breadth of this month's larger orders, ranging from wastewater in Africa to over $8 million of additional scope for an Australian customer for mine ventilation to EGR blowers for marine. Slide 14 shows areas that we see more and more growth opportunity ahead. With 22 first of a kind and 86 orders booked with new customers, we continue to expand and differentiate ourselves. One example of a Q2 first of a kind order was for the world's largest cryogenic tanks at 1,700 cubic meters for space exploration. Some of you may remember the picture of the huge tank being transported from our Chart China facility in a prior investor deck. That's definitely huge, and that was only 1,000 cubic meters.

I want to emphasize the performance of aftermarket service and repair and the growth opportunities that that brings to us. Already over 30% of our sales, RSL had a record Q2. RSL segment had records in sales, gross profit, operating income, and orders increased by 32.9% in the Q2 of 2023 when compared to the Q2 of 2022 pro forma for the combined business. We continue to expand the customer base and scope for our long-term service agreements, which you can see some of those examples executed in the Q2 in July on the bottom of Slide 14. Howden specifically was a key driver in the RSL segment performance, with Howden standalone aftermarket posting record sales and growing sequentially 21%.

Leveraging the Howden digital tools and install base management team, we have added approximately 46,500 Chart legacy installed assets into the tool, which has identified over 500 customer sites where there are both Chart and Howden assets. This only represents approximately 20% of our Chart legacy install base loaded in the system to date. We plan to go ahead in the Q3, continue that process, as well as taking Howden's aftermarket global pricing tool across the segment, further cross-train our field service teams, and continue to incorporate Howden's digital Uptime solution into Chart's products. The key takeaway of Slide 15 is that generally our supply chain is improving, although there are still lead time delays up the tiers of our supply chain. Carbon steel has declined the last 3 months, and cost is now below 23 of our 30 prior month costs.

While Stainless Steel 304 continues at higher than typical cost, availability has improved, and LME aluminum is back to early 2021 levels. Year to date, aluminum has been more consistent and less volatile in cost than had been the case in the last 2 years. Finally, freight has returned to pre-COVID levels, and we've seen far fewer challenges in the availability of freight and drivers. Slide 17 shows the results of the business, and as a reminder, this is excluding Roots. The Q2 2022 period shown is pro forma for Chart and Howden in total, ex Roots, so it's on an apples-to-apples basis. We are extremely pleased with all the financial records as shown on the right-hand side of the page. Let me point out a few of the specifics that really show the strength of the combined business.

Record backlog and the backlog visibility that we have supports our 2023 and 2024 confidence in our outlook. 32.5% adjusted record gross margin. It contributed to adjusted EBITDA margin of 21.5%. Really, I think this gross margin is one of the key takeaways from our Q2 performance, you know, both reported and adjusted above 30.9%. Some of you may recall a year ago when we were in the mid-twenties and predicting to get to over 30%. That's where we are now, and obviously, we plan to stay north of that number going forward. Additionally, both reported gross margin and reported EBITDA margin grew 300 basis points compared to Q2 2022, also pro forma.

I want to take a moment to congratulate and share some of the Q2 2023 regional performance, where our Middle East and Africa Region posted stellar results and multiple records, with Q2 bookings up 92%, sales up 16%, and EBITDA up 52% compared to the Q2 of last year. Our Chart China Region posted record operating income as a percent of sales, and our APAC and India Region had record orders in the quarter. Q2 2023 sales of $908.1 million grew 10.3% reported and 11.5% excluding foreign exchange impacts when compared to the Q2 of 2022, also on a pro forma basis.

Inclusive of Roots and excluding negative FX, Q2 2023 sales were approximately $959 million, and we had timing shifts of approximately $70 million based on customer needs and supply chain that moved to the second half. If you had all of those together, we would have been above $1 billion in sales for the Q2 of 2023. Joe is going to talk in a few minutes about our expected second half sequential sales growth. I would note as well, that as we've moved from the individual component sales to our full solution offering, it gives us more project-based business, and while we say every quarter we have quarterly shifts in sales, this also gives us more visibility into the backlog for the coming years ahead.

We're very pleased with our net cash provided from operating activities this quarter of $97.1 million. Net of CapEx of $20.9 million, our free cash flow for the Q2 was $76.2 million. The strong Q2 operational cash flow generation contributes to our reiteration of our full year adjusted free cash flow guide of $300 million-$350 million. Slide 18 really shows you the progression on the gross margin, both reported and adjusted in the Q2, gross margin as a % of sales are records. This is really driven by our continued focus on price cost, continuous improvement activities. We're bringing Howden Business Excellence across the combined organization, the full solution projects that I just described, and our early cost synergy achievement, which you can see on Slide 20.

We've achieved approximately 55% of our year one cost synergy target and 63% of our year one commercial synergy target since the close of the acquisition. We've achieved $96.5 million of annualized cost synergies. We also see more cost synergy potential identified as the two teams work together, such as additional footprint consolidation opportunities, more insourcing from existing outsourced activity, and additional streamlining of back-office activities. We're thrilled with the earlier than anticipated achievement of commercial cross-selling. $94 million of synergy orders booked to date. On the bottom of Slide 22, you can see some of our recent synergy commercial wins, which, as I mentioned already, are increasing in frequency. These included Earthly Labs, small-scale carbon capture, largest ever award with Babcock & Wilcox for over $3 million, and will utilize Chart and Howden equipment.

We're excited as well to have more and more engineering contracts related to carbon capture and a $400,000 carbon capture synergy award that's backed by the Walloon Government and the European Union. In July, I already commented that we were awarded a $41.5 million synergy order to provide a large Middle Eastern customer with 8 cold boxes for an ethane recovery project, which you can see on Slide 21. It truly is the result of having Howden's physical operation and team member presence in the region. All of these results in rapid synergy achievement comes from our global One Chart team members. Often, I'm asked to describe our culture, and I thought a long time about how I could try to put into the words, the spirit, the culture of this combined team.

I put a lot of thought into that, and where I landed was an analogy to a TV game show. If you don't know this TV game show, you're going to have to look it up to understand this analogy. My, my just-turned 10-year-old daughter loves this show. It's called, Are You Smarter Than a 5th Grader? Which I can tell you, I'm definitely not. If you haven't seen it, again, watch at least a portion to get the idea of the analogy to our culture. What it is, is surround yourself with a great team, foster and utilize that team's expertise, experience, celebrate wins, and do your best to offer a collaborative and supportive environment, even when faced with challenges. You can see a bit of that in action on Slide 22, which shows the culture in quotes from our global team.

One I'd call out is related to an early synergy win. In order to win an order, our customer needed to rebuild in the Houston area. Howden's Houston Service Center did not have the crane capacity to lift the customer's compressor. Chart's Beasley, Texas, site was glad to help, and together, we were able to say yes to the customer. This spirit of collaboration, accomplishment, and in-house training is embedded in our culture with further examples on Slide 23. Let's move to the last couple of sections here, starting on Slide 25, which shows the meaningful progress we have made toward our deleveraging goals. The updates in green text are since our last investor deck that we issued on June 15th, just six weeks ago.

I've already discussed the additional divestiture activity and approval to close on Roots, so let me touch on a few other noteworthy cash and balance sheet accomplishments. We completed the working capital settlement related to the Howden acquisition, which resulted in cash to us from seller of $17.5 million that was received this week. We've executed two building and property sales agreements totaling about $5.5 million, both anticipated to close in the Q3, and we successfully repatriated approximately $20 million of cash from China and anticipate an incremental $60 million or so of cash globally to repatriate in the second half 2023, and these are amongst many more actions underway.

Our 2Q 2023 net leverage ratio of 3.86, is shown on Slide 26, and given our progress on cash from operating activities, as well as our additional activities that I've already mentioned, we expect to accelerate into our high 2 times net leverage ratio range earlier than originally anticipated. Until we reach our target, we will maintain our financial policy, as previously shared and shown on Slide 26. Joe, bring us home with our outlook here.

Joe Brinkman (CFO)

On Slide 28, we have our guidance table. We are reiterating our ranges for revenue, adjusted EBITDA, and adjusted free cash flow. At the same time, we are raising the lower end of adjusted EPS to reflect the use of Roots proceeds for debt reduction, partially offset by a higher, higher tax rate of 23% in 2023. We have numerous tax planning strategies in place to reduce that rate, stay tuned. Cash available for debt paydown is now $655 million-$705 million and reflects the expected proceeds from the Roots and Cofimco divestitures. Turning to Slide 29, this slide highlights some of the reasons why we expect to have a higher second half of the year versus the first half.

First, in line with our normal seasonality, we expect revenue, earnings, and free cash flow to grow each quarter sequentially as we move through the year. Second, both big LNG and broader, broader small and medium projects are ramping based on earlier orders, including hydrogen. This is based on timing of projects in our backlog, and we are now even starting to see repairs and replacement activity in hydrogen. These projects are mix accretive to overall Chart and help to drive additional absorption in our factories. We also anticipate a ramp in both commercial and cost synergies, which we detailed earlier, including increasing our commercial synergy opportunity pipeline. Last one I will call out is price cost. We remain disciplined on price cost and are still catching up on favorable price given, given the timing of price increases.

Our 2024 EBITDA outlook of $1.3 billion remains unchanged, as shown on Slide 30. With the momentum we described today building at a fast pace, we feel confident in our ability to deliver this result.

Jill Evanko (President and CEO)

We want to close our prepared remarks with a huge thank you to our entire One Chart team. You can see the incredible accomplishments from the Q2 beyond the financial results on Slide 31. We closed with 71% of our sites injury-free, 1 year or more, achieved numerous certifications, including type approval for the first-ever liquid hydrogen ISO container, and we were named a top 10 carbon capture company in the world by Carbon Herald, to name a few. Great job, One Chart team. Now, Michelle, please open it up for Q&A.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to remove yourself from the queue, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. To give everyone a chance to ask a question, we ask that you limit yourself to one question each. Our first question comes from James West, Evercore ISI. Please go ahead.

James West (Senior Equity Research Analyst)

Thanks, Michelle. Good morning. Good morning, Jill and team.

Jill Evanko (President and CEO)

Hey, James. Good morning.

James West (Senior Equity Research Analyst)

Jill, curious about, as you execute on the backlog and the wins here and, and the costs out, how you're thinking about margin expansion for the business going forward over the next several quarters and, and, and maybe even the next couple of years, how you're thinking about, you know, what the incrementals should look like for the business, given there's a lot of moving factors here, a lot, a lot of different things at play with the integration, but how you, how you're thinking about the incrementals of the business?

Jill Evanko (President and CEO)

Yeah. Thanks, James, for the question, and definitely, exciting times for us, you know, now with that record gross margin, both reported and adjusted, is really the start in what we see as continuing to build upon these levers that we have to pull to expand that margin even further. So I'm not going to get specific to the second half of the year, but what I will say is that we certainly anticipate in the coming periods and years that we'll take that 31% reported up to the mid-30s through multiple different actions, taking advantage of the RSL, so the aftermarket service repair. I, I keep banging home on that one because it's, it's truly a great growth opportunity and is mix and margin accretive to us.

The more projects in the backlog really is something that not only I'm pleased with having, you know, it's about 70% project work or so right now, in terms of the mix. I like to have that not only because typically, they're just better margin as a project as a whole when you're offering a full solution, in particular with the technology, but also, you know, also, it does give us that backlog visibility. I, I hit the point that for our business, it's not a quarter, it's really having that visibility across the coming years, and that will be a positive to, to margin expansion as well.

Then, certainly another item that is achieved earlier than we had anticipated is this progress on the cost synergies, and we think we'll start to really see that drop through later this year and certainly in the full year 2024. I'd say, you know, a very reasonable is the mid-30% gross margin consistently ahead of us. We will also share detailed 3-year outlook at our November Investor Day.

James West (Senior Equity Research Analyst)

Right. Okay, got it. I'm looking forward to that. Then, a question on maybe a follow-up, I don't know what a follow-up, but a question on hydrogen, 'cause we're gonna see the DOE's Hydrogen Hubs awards come out here in the next several months. We've also, you know, had the recent announcement of, you know, I think $1 billion for demand for hydrogen from the DOE. Could you maybe talk about kind of how you see the, the, the U.S. market playing out here with respect to, to hydrogen and how Chart intends to capitalize, which I think you'll capitalize significantly, but capitalize on this opportunity?

Jill Evanko (President and CEO)

Yeah, I mean, I definitely think the U.S. has, really in the last couple of years, picked up the pace in terms of being a hydrogen leader, from the public sector perspective. You know, Joe's comment in the prepared remarks around the fact that, I think we're seeing some of this in backlog, but I actually don't think any of the, activity, commercial activity that will result from the DOE Hydrogen Hubs and even from, the IRA activities is reflected in our current backlog right now.

A huge opportunity ahead with, you know, Howden's 100-plus years of hydrogen experience, our 60 or so years, with now we have really stationary and rotating, and these couple of synergy wins that we commented on yesterday, you know, $15-plus million are bringing hydrogen compression into the U.S. here, and that's pre the hub activity. We'll, we'll be beneficiaries of the hub, so while we don't typically apply directly to the DOE because we're suppliers to those that are going to operate the production or storage and transporter end-use equipment, we'll be the beneficiary, you know, those Hub winners. It's, it's really interesting.

Just this week, spent some time with one of the applicants, earlier this week, which is a Canadian company that also has U.S. partners, and that's for a Hub in the West, we think is gonna play out to be liquid. Then, just yesterday with a U.S.-based company that's applying for Hub activity in the Midwest, where not only do you see the, the federal government, providing these opportunities ahead, but also the states are doing so as well. Like, I think Illinois, specifically, why you're seeing so much activity in that state, is because they have a, a state incentive, and I might get this wrong, but it's like $1 a 1 kilogram or something like that, on the production side.

So we really stand to benefit across the hydrogen value chain, and I think we've captured it fairly well in the addressable market ahead. I'm excited to see... You know, we've done pretty darn well in hydrogen the last few years. Again, nobody cared about it before 2020, but I'm excited to see what the U.S. actual awards through the DOE bring to our order book later this year.

James West (Senior Equity Research Analyst)

Got it. Okay. Thanks, Jill.

Jill Evanko (President and CEO)

Thanks, James.

Operator (participant)

Thank you. The next question comes from Ben Nolan of Stifel. Please go ahead.

Ben Nolan (Managing Director and Senior Equity Research Analyst)

Thanks. Hey, Jill, Joe. Yeah...

Jill Evanko (President and CEO)

Hey, Ben.

Ben Nolan (Managing Director and Senior Equity Research Analyst)

We here in Illinois, we're, we're good at spending money, that is for sure. The, I have to fit it into, you guys are in the big leagues now, so I only have one question. I have to bring my A game. The, I guess the thing that comes to mind the most is, Jill, you were talking about $20 billion of orders, that you're, you know, you're currently have line of sight on. I'm curious how you think about a few things in that respect. Like, what's the time frame that you would say that fits into? Then also, what, how do you think about the conversion of sort of that pipeline to the actual, actual orders for you?

Has that changed at all, do you think, with Howden, just in terms of the percentage of things that? You know, I mean, what, what's a realistic number for us to think about? If, if you have 20, how should we think about what that would mean for you?

Jill Evanko (President and CEO)

Yeah. Thanks, Ben, for the question, and, you know, Illinois, definitely good at spending money, but that ground water remediation project in near Chicago is another $2 million-plus for us. We're not complaining about the public and private sector there in the Midwest. With that said, so to your question on the $20 billion, yeah, it's definitely, it's accelerating, and I would say almost daily, when I talk to Belling, our Chief Commercial Officer, you know, the, the amount of potential activity and wins coming into that pipeline grows. What we typically look at is the next 24 months of what's in our sales force or in our CRM system. That gives you a sense of the time frame.

The $1 billion plus-ish, or, of synergy orders, is about a 12-month time frame, so next year. That's the sub, subtext to that 20. When we look at what we're seeing as a result of Howden and being together, we're definitely seeing more project activity and awards more frequently. The comment about 100+ individual, I think it was 133 individual orders in the Q2, greater than $1 million each, you know, that's, that's doubled essentially from what we were on a stand-alone basis. We're getting much better visibility, and I'd say more frequency of wins. We typically would say the way we look at our pipeline and on the commercial side is anything that has a 40%+ probability, which a little bit is subjective, right?

Our teams kind of get a sense of that based on where the project is, based on if a customer needs funding, et cetera. Anything that's 40% probability, and you can kind of pretty easily, you know, apply that to the metric, then historically, we would've had about a 40% win rate on that higher probability group. We're definitely seeing a higher win rate in the combined business. I don't have a specific percent yet to be able to apply. It's only been a quarter or so. If I were kind of back-of-the-enveloping it, I'd say it's probably a 50% win rate on that higher probability business.

we'll see acceleration, we'll see more larger projects, and therefore, we anticipate as we head into 2024, we'll have much greater visibility based on the backlog heading into the year than either business had on a standalone basis ever before. you know, definitely, definitely an accelerant by having Howden with us, and I really attribute that to the breadth of the global team, geographically, expertise-wise, and probably the number one being our ability to sell a bigger package.

Ben Nolan (Managing Director and Senior Equity Research Analyst)

All right. That's helpful. I appreciate it. Thanks, Jill.

Jill Evanko (President and CEO)

Thanks, Ben.

Operator (participant)

Thank you. Next question comes from Marc Bianchi of TD Cowen. Please go ahead.

Marc Bianchi (Managing Director and Senior Equity Research Analyst)

Thanks. I wanted to follow on the order discussion a little bit. You have a big LNG award in Q2 and an expectation for one in the second half. I was hoping you could help quantify those. Then, also related to orders, as we think about the 2024 guidance of $1.3 billion, what sort of book-to-bill do we need to see in the back half, to kind of be comfortable that that's on track?

Jill Evanko (President and CEO)

Thanks, Marc Bianchi, for the question. Let me start with the big LNG side. Obviously, the way we worded it, we were not able to share the specific project, but the 2 we won in the first half were both equipment, so did not have IPSMR technology with them. Typically, those would be between $100 million-$200 million. This one's around the $200 million mark-ish in the Q2. In the second half, we anticipate, we said, I think we said 1. I'm not sure if we said at least 1 or 1, but let's call it 1.

That one would be, would involve IPSMR technology, it's probably between $100 million-$200 million also, because it's, it would be one that we would expect to be starting with a smaller number of trains. To your book-to-bill question, heading into 2024, 1 or above is the book-to-bill that we want to see in the second half, to not only, you know, be comfortable, we'd be really comfortable heading into 2024 if we have 2, the second half at above 1. That kind of goes to the follow-on to the prior question, where we want to head into 2024 based on what we're seeing in combined business with, a higher than typical, typically historically booked backlog. That was a lot of words.

Higher than normal heading into the year, that requires a one or above.

Marc Bianchi (Managing Director and Senior Equity Research Analyst)

Great. Thanks so much.

Jill Evanko (President and CEO)

Thanks, Marc.

Operator (participant)

Thank you. The next question comes from Scott Gruber of Citigroup. Please go ahead.

Scott Gruber (Managing Director and Senior Equity Research Analyst)

Yes, good morning.

Jill Evanko (President and CEO)

Hey, Scott.

Scott Gruber (Managing Director and Senior Equity Research Analyst)

If, if I heard the prepared remarks correct, it sounds like there could be some revenue catch-up in the second half. Is, is that fair, and should we still be thinking about the midpoint of the full-year revenue guidance as the base case?

Jill Evanko (President and CEO)

Yeah, so you did hear that correctly because we had some movements. Yeah, again, it's, it's not atypical in our business, especially on the project side, for things to move between quarters just because these projects are, yeah, 24 months in, in delivery length. Yes, you heard our prepared comments correctly, and there's a wide series of ways you get to the low, the medium, and the high end of our guide, ranging anywhere from additional projects coming into the backlog in the Q3, which would be drivers to the higher end, and, you know, our comfort level at the midpoint is comfortable.

Scott Gruber (Managing Director and Senior Equity Research Analyst)

Got it. Then obviously, 2Q margins were, were strong, and, and the consensus expectation was, has been that you continue to build upon in the margin profile each quarter with cost synergies and, and operating leverage. Yeah, how are you, how are you thinking about the, the, the 3Q and 4Q trajectory now, you know, on the margin side after, you know, posting a very strong 2Q? Were there any one-offs that may not repeat, that could restrain the margins, or should we still be expecting the, the % margin to expand here in 3Q and 4Q?

Jill Evanko (President and CEO)

Yeah, I mean, I think the, the best way to answer that is we continue to say we're gonna be above where we are, where we posted and above that 30% mark. Yeah, there's some mixed things between quarters that, yeah, are you at 30.5% or 31.5% that can, can move quarter margin, but it's not gonna move from 31% this quarter to 28% next. That, that wouldn't, is certainly not what we're seeing. From a general perspective, we expect to continue to grow that gross margin, and operating margin, as well as, the, you know, execute against the EBITDA improvement from where we sit today in the second half, and that's synergy related as well.

Scott Gruber (Managing Director and Senior Equity Research Analyst)

Got it. I appreciate the call. Thank you, Jill.

Operator (participant)

Thank you. The next question comes from Sam Burwell of Jefferies. Please go ahead.

Sam Burwell (Senior Equity Research Analyst)

Hey, good morning, Jill.

Jill Evanko (President and CEO)

Sam.

Sam Burwell (Senior Equity Research Analyst)

I wanted to touch on hydrogen, and I know that James West kind of addressed this already, but I'll ask it in a little bit of a different way. We know we got the, the Treasury guidance on the 45V tax credit looming. Clearly, you guys would benefit from more lenient rules around how you can claim that tax credit. I know you were a signatory of a letter that I think Plug spearheaded that was sent out earlier this week. Just curious if you can give us any color on how those lobbying efforts are going?

Then sort of irrespective of how the, the guidance ends up shaking out, do you think just having clarity on what the rules are, are gonna unlock some demand for, for hydrogen equipment and boost specialty margin orders in the back half of this year and then in 2024?

Jill Evanko (President and CEO)

Yeah, great, great point, Sam, and I'll start with the last part of your, your question there on the clarity and the rules. I, I think, I won't say more than anything else, but certainly a top-tier catalyst in unlocking some of these orders, people understanding the parameters and how the IRA, how the credit systems and the incentive systems work. I hear more than anything with customers who haven't yet booked an order with us or who want to, but we're saying, "Hey, you don't have the funding, so we can't book it," is really around understanding the IRS ramifications for, for the IRA. I definitely think clarity acts as a catalyst.

I think we saw a little bit of that even in the carbon capture clarity or like late last year and early this year, at least to get people moving on the feed and the pre-feed studies for CCUS larger scale. Then, in terms of the lobbying efforts, you know, like anything, this stuff takes time. The folks that are putting this stuff into action hear from a lot of stakeholders, and, you know, I think the ultimate answer here is we will get to a pragmatic and clear answer later this year. Certainly what we're seeing. I mean, heck, we're seeing in the order book, you know, millions of dollars of orders that are not tied to the incentives, or I say incentives loosely, to the policy.

I think that, through our conversations with customers, in these 19 DOE Hydrogen Hubs, you know, we would have content in the super majority of them. Those guys are really the ones that I think the DOE side of this is where, where the number one catalyst to unlocking this activity resides. The other thing I like about the Hydrogen Hub in members, right? Again, we're a supplier to them. We're not actually in those DOE, in the DOE funding. What I like about it is these are, these are blue chip names, right? These are not kind of startup-y names. You have not only their own balance sheets, but you have their, their link to the potential projects going into that hydrogen hub. A long way to answer that.

I think all of the elements of your question, spot on, answer is yes. We, we get feedback, amongst these lobbying efforts that, second half is going to be the time frame.

Sam Burwell (Senior Equity Research Analyst)

All right. Awesome. Thanks, Jill.

Jill Evanko (President and CEO)

Thanks, Sam.

Operator (participant)

Thank you. The next question comes from Pavel Molchanov of Raymond James. Please go ahead.

Pavel Molchanov (Managing Director and Equity Research Analyst)

Thanks for taking the question. I'm gonna try to kind of link up two different themes here. One of the headwinds to green hydrogen projects in plenty of areas has been the availability of fresh water, and I'm curious how Chart's water treatment solutions can facilitate the creation of green hydrogen projects.

Jill Evanko (President and CEO)

Thanks, Pavel. Good to talk to you. Yeah, I, I, and also, I very much appreciate the macro question around these end markets, because I think that, you know, we call it the nexus of clean, but these interlinkages, we're seeing more and more customers that are buying solutions, technology, and equipment from us for more than one end market. The linkage of water to hydrogen or food and beverage to carbon capture is certainly starting to take hold in our business, which is one of the strategic fundamental premises of building out the portfolio the way that we have.

Our water treatment technologies, you heard Joe Bellinger talk about the various different kind of accelerants in that space, whether it's high, high temperatures in the summer for treatment as a service, people trying to get ahead of the PFAS regs, or again, the green hydrogen is certainly one that we hear that regularly. We have a trial containerized water treatment, basically sits in front of an electrolyzer, capability through our AdEdge Water Technologies, which can treat rainwater to make it pure for green hydrogen electrolysis. That's, that's really pilot stage type of answer, but if you're talking about our capabilities, we hit all treatment on all 300+ contaminants that are out there, multiple contaminants at one time.

We see that related to the desal side of things globally to link up to the green hydrogen. We're very well positioned water-wise, treatment-wise, and my view is, the international markets for our water treatment business are, have the highest growth potential, even when contemplating the EPA regulations in the US, because this is, this is truly a problem for getting green hydrogen, but truly a problem is just clean water. Lots of opportunities, not only just pure play water treatment, but also linking up with the green hydrogen play.

Pavel Molchanov (Managing Director and Equity Research Analyst)

Thanks very much.

Jill Evanko (President and CEO)

Thanks, Pavel.

Operator (participant)

Thank you. The next question comes from Martin Malloy of Johnson Rice. Please go ahead.

Martin Malloy (Managing Director and Senior Equity Research Analyst)

Good morning.

Jill Evanko (President and CEO)

Hey, Martin.

Martin Malloy (Managing Director and Senior Equity Research Analyst)

Hi. Great to see the acceleration, the, the timetable to get to your net leverage ratio targets. I was wondering if maybe you could walk us from the EBITDA guidance for next year to a free cash flow range, maybe talk about working capital usage second half of this year and, and for next year?

Jill Evanko (President and CEO)

Sure. Yeah, we haven't specifically given a cash flow or cash available for net pay down, but what I'd say for 2024, I should say, we will do that as the year progresses. What I'd say on the working capital side of things is the second half of this year. We got about, I think we got about $90 million-$100 million total in CapEx for the full year, so you just back out the first half from that, and that should be pretty darn consistent in 2024. If we have any additional organic CapEx projects of note, we will call those out separately. We generally, both Chart and Howden in the combined business, operate as a fairly low CapEx company.

You know, you got to walk from the EBITDA figure that we have, so you've got the working capital component, the interest expense, which you want to make sure that you're including the $380 of the announced divestitures, coming out in the Q3 from interest expense. Yeah, I- we'll get a little more nuanced later this year around the balance sheet optimization, activities. You know, there's, there will be moments ahead here in the coming 12 months where I think we can, even do better on kind of our weighted average cost of debt through multiple different, opportunistic ways. You know, other than that, we've got... I think we captured it, right? What did I miss, Greg? Working capital. Working capital, interest- ... taxes. taxes.

Taxes, you know, taxes, we really need to optimize that tax rate. I'd use a 20% for 2024, and you get in that. $550. $550, $600-ish. Yeah. Walsh doesn't like that I gave that number.

Martin Malloy (Managing Director and Senior Equity Research Analyst)

Okay, thank you.

Jill Evanko (President and CEO)

You good, Martin. Thank you.

Operator (participant)

Thank you. The next question comes from Eric Stine of Craig-Hallum. Please go ahead.

Eric Stine (Senior Equity Research Analyst)

Hi, Jill. Hi, Jill.

Jill Evanko (President and CEO)

Hey, Eric. Good morning.

Eric Stine (Senior Equity Research Analyst)

Good morning. Hey, I just want to come back to the 2024 EBITDA outlook. I mean, this continues to be an area that I do still hear skepticism from, you know, people on. I mean, great first look at the combined business. You spent a lot of time there. I mean, maybe could you break down just between revenues, and you laid out how you get there on an order basis. Then on the margin line, I mean, it, it seems like you, you know, are very confident in that level, despite kind of the view that's out there, with a lot of visibility. I mean, Is there anything that you're worried about or that you feel like more needs to be done to get there?

I mean, is your confidence in that extremely high?

Jill Evanko (President and CEO)

Yeah, thanks for the question, Eric. We will give a, I was smiling on the last question from Marty, we will give detailed outlook for 2024 and the 3 years at our Investor Day. Those metrics will follow. Directionally, we have certainly, again, a year ago, sat here in the mid-20s gross margin and said, "We'll get to 30," and now we're there. We intend to stay north of that number. Obviously, things, you know, you got mix things, things like that, we don't expect to drop below that 30% gross margin as a % of sales. Said differently, you know, as, as I answered, I think, James's question earlier, expect that to continue to increase in the coming years.

More needs to be done. Yeah, you know, listen, I think there's always more to be done, and I think that we can't take our foot off the pedal on cost synergy achievement. That's crucial to getting, getting our year one, but also increasing those margins that we've discussed. I think that there's quite a bit of productivity we can unlock. Productivity is such a loose term, but what I mean by that is, I briefly said we're going to take, well, Howden Business Excellence fundamental premises to Chart business excellence, and we've implemented a dedicated team under Curtis Stubbings, under our SVP of, of Integration and Continuous Improvement, to roll that out across the organization.

What I would like to see happen as we head into 2024, and this is well underway in, in the background, is that we are, we are laser targeted and focused on a reduction to cost of goods sold through those productivity and continuous improvement initiatives. That, those two things, cost synergies and a much more formalized continuous improvement approach that is standardized across the combined organization, I think are two key things that can unlock that, that margin growth. Then my last part, to answer your question, is, we can't get lazy on price cost.

Joe Brinkman mentioned it, I mentioned it in the prepared remarks, and that the fact that we said it 2 or 3 times was purposeful because this is a time where with the supply chain tempering, if we can hold price, we can really take advantage of the that kind of storm that hit us the wrong way 2 years ago, and now let's hold on to it going the right way.

Eric Stine (Senior Equity Research Analyst)

Okay, thank you.

Operator (participant)

Thank you. The next question comes from Ati Modak of Goldman Sachs. Please go ahead.

Ati Modak (Equity Research Analyst)

Hey, good morning, team.

Jill Evanko (President and CEO)

Hi, Ati. Good morning.

Ati Modak (Equity Research Analyst)

Jill, congrats on the. Good morning. Congrats on the additional divestitures that you announced. Sounds like the $500 million target is on track. In the slides, you noted potential for additional divestitures. I was just wondering, what is the nature of that? Could that meaningfully add to the deleveraging plan? Is it small, or any color you can add there? Maybe also touch on the EBITDA impact that we could see or should think about from these divestitures?

Jill Evanko (President and CEO)

Yeah, thanks, Ati. First of all, thank you for the congratulations. We were really pleased to get this second key step in the, in that process done and on the timeframe that we wanted to do it. I think I said it like four times in my remarks, how pleased I am that we know the funding date for the Roots divestiture, too. Ticking along against what we wanted, really on schedule or a little bit early. You know, I try to. I think people focus in on two divestitures, and we're trying to make sure that everybody understands that there's, there's a perimeter that we defined, and we're optimizing how we do these sales in order to maximize the cash.

The potential for additional divestiture comment is, one that, you know, our, our teams, as they've gotten to work day to day and hour to hour together, have really generated an exceptional amount of ideas on the synergy achievement side, and, and I would say more than anything, on the commercial synergy achievement, as they've seen what each portfolio has and how it works in some of these end markets. As part of that, we've kind of seen, okay, does this play or does that not play? There's not a specific, one I have in mind, but we, as an executive team, are constantly looking at the portfolio to see if there's anything else that, we'd consider as a distraction or not synergistic.

I, what I'd say is it's a comment that says we're evaluating this on a regular basis to make sure that we have the most optimized portfolio, and, you know, we're 3 and 4 months in, so there's nothing specific to that bullet, besides the fact that we want to get through the original perimeter, and, we'll always look for more opportunities. Then the last part of your question, EBITDA impact. I think what we have laid out in terms of our outlooks, both for 2023 and for 2024, we didn't take EBITDA impact out for Roots or for Cofimco, and, that, that there's probably the stopping point of what we can take out of our outlooks without having to make, you know, some tweaks, but they wouldn't be material tweaks.

That's kind of the short answer to your question. Actually, I think it was a long answer, but thanks, Ati.

Ati Modak (Equity Research Analyst)

Appreciate the color. Thank you.

Operator (participant)

Thank you. The next question comes from Robert Brown, Lake Street Capital Markets. Please go ahead.

Robert Brown (Senior Equity Research Analyst)

Good morning, Jill and Joe.

Jill Evanko (President and CEO)

Good morning, Rob.

Robert Brown (Senior Equity Research Analyst)

Just wanted to follow, follow back to the aftermarket business and, and just get a little more color on, on what sort of remains there in terms of getting that business going. Is it really getting, Howden's activity back into the legacy Chart or just, just what, what you see there in terms of opportunity to, to grow that further?

Jill Evanko (President and CEO)

Yeah, it, it's definitely. You know, I, I really love that piece of the business, and I, I probably feel like it's maybe been a little underappreciated. I feel like that and water have been underappreciated by the outside world for what's in our portfolio. That, yeah, there's so many levers in aftermarket service repair, that we have to, to go after. You know, Mark Krug and his, his expert team up in Buffalo have done a really good job of corraling that, you know, I said 20% of our Chart legacy install base and getting it through the Howden tool and getting the customer sites over to the commercial team to be able to leverage that LTSA sale. Yeah, 80% more Chart legacy just through that group and that capability that Howden brought to us.

We haven't even touched the, the, the spear or the knife tip, I don't know, whatever.

Joe Brinkman (CFO)

The spear.

Jill Evanko (President and CEO)

Thank you. The tip of the spear on taking digital Uptime to the Chart original build. We're just getting, we really are working through the designs and some prototypes and some pilots on that, so I think there's great opportunity there. Then the, just the footprint itself, of 50-plus locations, gives us many, many more opportunities even that we never had before because we weren't physically anywhere outside of we, Chart Legacy, anywhere outside of the U.S. or just small pockets in Europe. Brinkman, what else you got on that?

Joe Brinkman (CFO)

Yeah, I mean, just, just the different level of focus that Howden brings to the aftermarket versus legacy Chart, you know, with it being such a high percentage of the revenue from, from legacy Howden of, of roughly half the revenue there. As Jill pointed out, the global footprint there, whereas with Chart, we're just, just basically a U.S.-based aftermarket focus for the most part, with a little bit, with a little bit in Europe there. That just the infrastructure and, you know, not only physical, but the human resources with the deep experience targeting aftermarket is really transforming Chart's, legacy Chart's, focus on aftermarket and opportunities here. It, it, it's in progress and, and going nicely.

Robert Brown (Senior Equity Research Analyst)

Okay, great. Thank you. I'll turn it over.

Operator (participant)

Thank you. The last question comes from Craig Shere of Tuohy Brothers. Please go ahead.

Craig Shere (Director of Research and Senior Equity Research Analyst)

Good morning. Thanks for fitting me in.

Jill Evanko (President and CEO)

Good morning. Good morning, Craig.

Craig Shere (Director of Research and Senior Equity Research Analyst)

Just, just a real quick one. Congratulations on executing on everything, but also specifically in big LNG per what you had guided on the Q1 Call. My question is, this having legs and prospects of another 2 or 3 big LNG orders next year?

Jill Evanko (President and CEO)

Yeah, thank you, Craig. And thanks for, thanks for, you really understanding the business all, all throughout the year. The, the, yeah, I mean, listen, we think of big LNG as 4 categories, right? Or LNG as 4 categories. Big LNG, number 2 is small-scale floating, number 3 is LNG infrastructure, and number 4 is what we'd call, you know, the aftermarket, so that's brown fielding and, repair service or add-ons. And, my view is very bullish on this continuing in all 4 of those elements, and some of them shifting, right? So maybe I, I'll take a little bit of time because they're each one of these is nuanced a little bit and looks different than it did a year ago.

Big LNG, you know, a year ago you had everybody and their brother that had even a thought about doing a big LNG export terminal coming into the fray. While that was great, you saw some confusion from the off-takers as well, and now you're really into the key participants and operators that can do it, have proven that they've done it, or have FID and FERC, et cetera. Having a smaller base of operators that are going to build, I think, has also helped move ahead some of these FIDs through off-take because there's less confusion of who's who in the market. Our view is that this continues on. I mean, look on big LNG. Last year, we booked $620 million of big LNG orders, I think, you know, 2 or 3 projects.

Never, never before in the history did you have multiple projects in one year get booked, let alone multiple projects this following consecutive year. Now we're talking about seeing that happen 2022, 2023, 2024, and that gives us a really nice runway through this decade. You go into the second category, small scale floating. You know, I, I threw in that this morning, we got that award for $28.7 million for small scale, which is in, with a customer in APAC, in the Eastern Hemisphere. That is a shift, right? While there's certainly activity in North America continuing to happen, we have seen the uptick in the opportunities outside of North America, is where I think that this future next few years' focus is going to be in that category.

The third on LNG infrastructure, you know, fitness starts there, right? That's where our HLNG vehicle tank, just horrible demand has been, but that's also been great to have in the portfolio because it's been the jumping-off point for our liquid hydrogen onboard tank. That's a, that's actually an interesting play that we wanna keep because we do think heavy-duty LNG trucks still, still play, but liquid hydrogen heavy-duty trucks is another great avenue to have that product line hit. LNG fueling stations and trailers and ISOs, right? You have to have that because if you're exporting LNG, you got to be able to import it.

Then the last category, I think, is one that we haven't seen a ton of activity in to date, but, we're seeing numerous NRU and HCR, nitrogen rejection unit, heavy hydrocarbon removal studies underway, in particular in the United States, where the gas composition is different, and that creates a problem for some of these LNG, for all of these LNG operators. I think that you'll see some NRU and HCR tack on activity in the coming couple of years.

Craig Shere (Director of Research and Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. I will turn the call back to Jill Evanko for closing remarks.

Jill Evanko (President and CEO)

Thank you, Michelle. Thanks, everybody. Have a great Friday and great weekend. Bye-bye.

Operator (participant)

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.