Chart Industries, Inc.

Good morning and welcome to the Chart Industries, Inc. 2020 third quarter conference call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer session. The company's supplemental presentation was issued earlier this morning. If you have not received the release, you may access it by visiting Chart's website at www.chartindustries.com. A telephone replay of today's broadcast will be available following the conclusion of today's call until Thursday, October 29, 2020. The replay information is contained in the company's press release. Before we begin, the company would like to remind you that statements made during this call that are not historical, in fact, are forward-looking statements. Please refer to the information regarding forward-looking statements and risk factors included in the company's earnings release and latest filings with the SEC. The company undertakes no obligation to update publicly or revise any forward-looking statement. I would now like to turn the conference call over to Jill Ivanko, Chart Industries CEO.

Thanks, Andrew. Good morning, and thank you, everyone, for joining our call today. Here with me is Scott Merkel, our Chief Accounting Officer, and we'll talk through our third quarter results, how our recent announcements are already benefiting us, and how our strong order book and backlog is setting 2021 up to be a great year. I'm very pleased with the performance in the third quarter, in particular our order and bottom-line execution amidst active deals both buy and sell side. It's surprising to me, as I read the initial takes from the morning, that people who consider themselves to be interested in the clean energy transition and are long-term strategists have a mixed reaction to the quarter, a timing miss on revenue but not loss to competition, a beat on EPS, and multiple record orders in a variety of diverse applications, coupled with a very strong start to October, seems inconsistent. But hey, let's see if what I share on the call helps you better understand why we are extremely pleased with our current position. As you know, we have spent the last two and a half years executing on various steps to set up the position we are in today. The focus on our core cryogenic engineering and product offering that is a very unique play in the high-growth spaces of clean energy, specialty products, and repair service and leasing is while getting stickier with our customers through broader long-term agreements. We'll walk through the supplemental deck released this morning as we typically do. All figures in the deck and press release are continuing operations. For those who have asked for year-to-date results for the discontinued operations of the cryobio sale, that's included on the last slide of the appendix of the presentation. Starting on the right-hand side of slide three, the blue power sources are where our current equipment offering directly is used. The orange, or letters K and L, solar and wind, are being utilized in conjunction with many of the other fuels. Through our recent partnerships, in particular with green hydrogen provider McPhee, we will be able to participate on more projects that involve a coupling of these types of power sources. I'd like to take a moment to step back on slide four to a few key steps in our transformation over the past couple of years and why they are important in conjunction with our recent announcements that further set us up to be a pivotal player at this inflection point in the ESG and clean energy transition. This is also fundamental to understand our strategy, themes you will continue to hear, and a good way to understand potential upcoming investments and how they will build upon this foundation. So what's different from three years ago? First, we have a lower customer concentration with higher end market and geographic diversity. This came in part as a result of our geographic footprint expansion through acquisitions such as VRV, as well as through the formation of our global commercial team. Year-to-date 2020, we have booked orders with 407 new customers, including 115 related to specialty markets, and 55% of these customers are outside of North America. Second, expanding our stickiness with our customers through long-term agreements that encompass our entire set of products, as well as repair and service. This year to date alone, we have completed 15 agreements, four LOIs, and three MOUs, ranging from the virtual pipeline in India with ExxonMobil, LNG, and IOCL, to equipment for Molson Brewery's new production lines. Historically, we would typically have had no more than five agreements at any one point in time. In conjunction with these expanded LTAs, we have expanded our repair and service footprint, as well as our leasing fleet. offering our customers a one-stop shop inclusive of installation and refurbishment while giving flexibility to our customer and project leads that we would not have had access to without our rental program. And finally, through our acquisitions that have helped us accomplish these strategic building blocks, we have been able to expand our talent, including keeping strategic industry leaders such as the Spada brothers, the former VRV owners, and expanding our skilled workforce in the case of our recently acquired Alabama location. are recently announced by vestiture of the cryo-bio business for $320 million in cash, not only with our final step in selling non-core product lines from our portfolio, it also opened up opportunities for further investments in our high-growth, high-margin businesses, including giving us access to acquire Worthington's cryogenic trailer and hydrogen trailer business, which was completed on October 13th. We have long desired their transport business, based in Theodore, Alabama, we call them Teddy Trailers, not only to expand our hydrogen equipment product line to larger size transports, but also for the key location and manufacturing capacity. The challenge previously was that we competed head-to-head on cryobiological with them, and therefore we were unable to get this deal completed. Once we were no longer competing on those products, it became easier to acquire the business. This past week, which was our first week of owning the business, we have already received commitments for $9 million of hydrogen trailer orders. We continue to generate strong free cash flow, which has been used to pay down debt, as you can see on slide five. We expect the fourth quarter free cash flow generation to be the highest cash generation 2020, with full year expected free cash flow to be between $120 and $140 million, again on a continuing basis. The third quarter free cash flow was lower than the second quarter due to AR collections from the timing of sales, in particular with September being considerably higher than July and August, as well as noticeable customers holding payments at the end of their quarters or fiscal year-ends. For example, we collected over $12 million from one customer the first week of October, $6 million from another, and $5 million from a third. We closed the sale of the CryoBio business on October 1st. The proceeds were used to pay down debt, and as you can see in the bottom left-hand table, the September 30th pro forma net leverage ratio was 1.75%. After the investments we've made in mid-October, pro forma would be 1.98. It's also worth noting that we have $120 million of cash on our balance sheet. This strategic step has also opened up the ability to invest in our target markets, products, and technologies. In addition to debt paydown and the Worthington trailer acquisition, we invested in McPhee, a specialized company in zero-carbon hydrogen production and distribution equipment. Through this, we also executed a commercial MOU, which will give us access to multiple new projects and customers. It has been one week since the transaction closed, and already we have identified and been pulled into discussions on five new projects that we previously would not have had involvement. Many have asked if there are other investments or acquisitions on the horizon. There are three nearer-term potential acquisitions, with nearer-term meaning sometime in the next two to six months if we can get to agreement. All are related to our specialty products or markets, and each would be less than $30 million headline prices. Not to be overlooked are our organic investments. Two that I would like to point out are the hiring of hydrogen engineers and commercial resources globally and the expansion of our leasing fleet. In the third quarter, we hired nine hydrogen external resources to our commercial and engineering teams, enhancing our already meaningful team focused on this growing area. Additionally, we have added 20 standard transports to our leasing fleet with 20 more in process, and we'll expand the leasing fleet to hydrogen trailers. We are already seeing the benefits in our order book from these investments. For example, we booked record repair service and leasing orders of over $35 million in the third quarter compared to the prior record of $13 million. We're continuing to see traction on leasing with eight new sales leases and 18 new operating leases signed in the third quarter alone. Keep in mind as well that we receive interest monies on these leases which is not booked as part of an order. Another immediate impact from these investments has been in hydrogen, as shown on slide six. We've received commitments on orders for $6.4 million and $2.4 million this past week for the Teddy trailer business, and also received a PO earlier this week for $2 million for gaseous hydrogen trailers out of our Germany location. It's worth pointing out that the additional customer discussions from the hydrogen investments have brought attention to our European hydrogen capabilities, including both gaseous and liquid equipment. We currently have discussions underway with 74 different hydrogen customers and have 29 NDAs in place with a subset of those. If we remember, we ended the first quarter with four hydrated NDAs. This morning, we put out a separate press release describing our participation in the U.S. Department of Energy's H2 at Scale Texas project, which intends to show that renewable hydrogen can be a cost-effective fuel for multiple end-use applications, including fuel cell electric vehicles, when coupled with large baseload consumers that use hydrogen for clean, reliable stationary power. We're partnering with companies throughout the hydrogen value chain, including Frontier Energy, Toyota Motor North America, Shell, Mitsubishi Heavy Industries, and Air Liquide on two related projects. All of our recent hydrogen announcements further our commercial reach, as well as collaboration to bring our equipment to this accelerating market. We take every opportunity to expand our agreements to more customers and, again, to be inclusive of our very unique product offering as well as repair and service. This quarter's 10 new agreements, two LOIs, and one MOU show the differentiation and diversity of our product offering. For example, the MOU was for a significant new hydrogen project in Asia, one LOI related to LNG mobile and storage equipment in Africa, while another was for Mocum Brewery's new production line. We've always stated that it's important not to our major industrial gas customers, and in this vein, we completed a first-time LTA with an industrial gas major in the United States, inclusive of bulk original equipment and repair and service capabilities. Five new long-term agreements in Europe were completed, including two for multi-year LNG fueling station build-outs and repair and service. And while our air-cooled heat exchanger business has been the hardest hit this year, we continue to execute on our strategy to be the global supplier of air coolers, manufacturing as close to our customers as possible, and for a variety of applications. In Q3, we built on this by signing an agreement for air-cooled heat exchanger global supply with Flint Hills. We have already discussed our hottest specialty products for our hottest specialty market, which is hydrogen. The great thing, though, about our products is that they are used in a variety of end markets and applications and are molecule agnostic. Other high-growth areas, including water treatment and space exploration, are worth watching, too. Slide 8 spotlights the water treatment aspect of our business. On the last earnings call, we discussed the demand growth in the United States. Since then, we have seen further demand for desalination as a solution for water scarcity in places such as the Middle East. This is the result of further regulation, increasing environmental concerns, and perhaps what is most interesting to me is the desire for there to be power terminals and water treatment facilities built near and in conjunction with each other. This offers us a very unique opportunity. We are currently working with customers in locations such as Africa on their in a network style fashion. Year to date through September, water treatment orders were $10.3 million compared to $6 million for the entire year of 2019. In the third quarter of 2020, we both record orders for six facilities. This is meaningful, as in all prior years, our average for a full year would be equipment for five facilities. Included in Q3 was a contract for $3.7 million with Archer Western for designing and fabricating a liquid oxygen system for the Dallas, Texas water utility ozone improvement project, as well as a $1 million order for equipment for the world's largest wastewater treatment plant being constructed in Egypt. And while we have not yet seen full return to the field from the major industrial gas players, we have seen a considerable ramp in carbon dioxide-related product demand in the last quarter. Specialty products for beverage carbonation, cannabis, concrete curing, and craft breweries are in high demand. Couple this end-use demand with recent CO2 supply disruptions, driving end-users to minimize supply risk with larger volume onsite storage systems, and we have significant order increases for our small, bulk liquid CO2 tanks. 2019 full year for these tanks averaged 137 units per month. Year-to-date September of this year has averaged 155 per month Even more meaningful, though, has been the third quarter 2020 average of 228 per month, compared to January and February pre-COVID levels of 140 per month. And telling you also about first-of-a-kind orders and activities in the first quarter, mainly due to more of them arising around the transition to clean energy. Since then, we have noted a broader set of folk opportunities, or as our team calls them, folking orders, including 23 in the third quarter. From left to right on slide 9, We have executed a three-year inclusive design and supply agreement for liquefaction, truck loading, and pipe for iStore's proprietary liquid air energy system. iStore stores energy using an off-site, electric-driven cryogenic process during off-peak hours, returning that stored energy to the system during on-peak hours. This is targeted for various locations around the United States. The middle first of kind is for the engineering of Straddle Launch's liquid oxygen tank for use on a carrier plane. The picture you see there is their actual rendition. This will also give us a jumping-off point for cryogenic tanks that can be used for other molecules that will fit in smaller onboard aircraft spaces. Just this past month, research showed that the space industry is expected to grow by over $1 trillion in the next decade. Recent NASA grants to companies such as ULA, SpaceX, and Lockheed will further progress commercial spaceflight, which in turn means more equipment for us to supply to various sites back here on Earth. A few recent examples include three tanks for SpaceX's Starship program Raptor engine development, our supply of ULA's Vulcan launch site ground support systems in Cape Canaveral, and for Lockheed, our liquid nitrogen system, they use their acoustic chambers and test their equipment before sending it to space. And finally, our always underappreciated piece of equipment, the doser, as shown on the far right-hand side of the slide. The doser is amazing. It helps customers cut down on plastic in their bottles. It makes nitro coffee. It cans beer and wine. It puts the right amount of molecule into eyelash serum. And now it's being used in household disinfectant packaging of Pinol and Fabuloso in Mexico and South America. To give you a sense of the need for our product and technology in this region for plastic bottle package disinfectants, take Mexico City, where the packaging is done, a high elevation location. The product is then distributed into lower elevated cities, such as Cancun or Guadalajara. Without the counterpressure from liquid nitrogen dosing, the product package will collapse with the change in elevation. The label won't adhere correctly, and in turn, consumers will not pick the product up from grocery store shelves, making these scratch products. I would not have thought I would be telling you that even with the COVID situation unresolved and the election weeks away, that we would have record backlog levels in both of the distribution and storage businesses, as well as an increase of 19% versus the same quarter of 2019 in the base E&C cryobacklog, excluding Calcasieu Pass. Much of this is the result of the organic investments we discussed already and is also driven by record orders in the third quarter, including water treatment and hydrogen, as described earlier, repair service and leasing, driven by our expanded leasing fleet, LNG regas, ISO containers for LNG applications. Demand for these ISO containers, which are intermodal shipping containers capable of transporting cryogenic liquids by ship, rail, and truck, has significantly increased with more movement to small-scale LNG. We had our second-ever HLNG vehicle tank order quarter above $20 million in the third quarter. As a reminder, the second quarter of this year was the only other HLNG vehicle tank quarter with orders above $20 million. We're also seeing activity from geographies besides Europe, including an order from a large Japanese auto company for their on-road trials. And as we mentioned in the release, many of these same customers are working on the possibility of liquid hydrogen onboard vehicles for the future, and we will have a prototype of this design completed before year-end. Finally, we continue to see record order levels for fueling stations, with year-to-date station orders totaling 56. a 37% increase over year-to-date 2019 levels. As we have commented previously, the LNG infrastructure activity is continuing to gain strength, and we expect that to continue over the next several years. We received a meaningful order in the third quarter from a leading LNG logistics company in South China. This order for trailers is strategically significant for us, as this is the first time we've been able to enter the southern region of China for LNG. Governments such as India are taking actions for L&D to continue to play a significant part in their energy transition plans, including plans to increase the share of gas from 6.3% to 15% of the country's energy by 2030. And on September 10th of this year, Minister Pradhan announced that the 11th city gas distribution authorization would launch very soon, extending the coverage of the network to 500 cities. The 11th round will include 50 to 100 districts, and our made-and-make-in-India offering is well-positioned to serve this expanding LNG infrastructure market. Finally, related to LNG, while we only have the remaining $46 million of Calcasieu Pass orders included in our revenue outlook and no additional Big LNG projects, we do continue to expect Big LNG to be upside to our outlook. We received an early engineering release for a Big LNG terminal for brazed aluminum heat exchangers and cold boxes to be used on the natural gas pretreatment train. This is not related to Venture Gold's Plaquemines Project, Chenier's Corpus Christi Stage 3, or Tellurian's Driftwood Project. While we haven't talked as much about COVID-related demand, it's still relevant. Medical oxygen-related orders increased 7.6% in the third quarter compared to the second quarter, making the third quarter the highest medical oxygen-related order quarter of 2020. We had expected to see a reduction to more typical pre-COVID-19 order levels for these applications, but the heightened need for oxygen equipment in India was the primary driver of the increase of this demand. And just early this morning, we received notification of a purchase order for $4 million for oxygen tanks for a customer supplying Egyptian hospitals fighting COVID. Finally, the EMC FinFans business, in particular air-cooled heat exchangers, has not dropped off further than what we saw in the second quarter, but we have not seen a recovery either. October order activity has started very strong in the first 21 days. Let me share a few key wins so far. We've had eight orders already over $1 million, a record hydrogen order quarter, and we're only 21 days in, a strong service order in our ENC lifecycle business for over $1.5 million in Algeria. We received verbal notification that we want an order for multiple LNG semi-trailers in Russia for a small-scale network. we expect that to be booked within the fourth quarter of 2020. And while beverage ended the third quarter strong, with the highest number of units ordered in September in any month since February, October month to date, we have already booked 80% of our September beverage orders. And those are just some examples. Now Merck can give you the cold hard facts of the quarter.

Thanks, Jill. Sales of $273 million were down 19.2% when compared to the third quarter of 2019. entirely driven by E&C FinFans. Excluding FinFans, the rest of the businesses' sales were up 11.1% year-over-year, with DNS East up 20.9%. Year-to-date 2020 sales are down only 3.3% from 2019 year-to-date, or down 4.9% organically, which reflects the diversification of our business. As we frequently discuss, most of our changes on sales are movements between quarters versus lost volume, We had over $22 million of expected sales in the third quarter related to specific projects shift due to customer delivery timing, with the majority of that shifting into the first half of 2021. The breakdown is $12 million in ENC cryo, $4 million in ENC FinFans, and $6.5 million in DNS East. The rest of the shortfall was around the recovery related to beverage equipment, where it occurred later in the third quarter than we had expected that But when it did, it recovered in a bigger bang-for-the-buck way than we expected, and in turn will have a positive impact on the fourth quarter of 2020. Even with certain shipments being pushed out, we were able to deliver reported gross margin as a percent of sales of 28.8%, and when normalized for restructuring cost was 29.7%, bringing our year-to-date normalized gross margin as a percent of sales to 29.2%. We expect the four-quarter gross margin as a percent of sales to be the highest of the year. Gross margin combined with our continued cost improvements in SG&A resulted in reported diluted earnings per share of $0.43 and adjusted diluted earnings per share of $0.63, with the adjustments related to the restructuring for our Tulsa to Texas facility consolidation in E&C FinFans and deal-related costs. Reported and adjusted diluted EPS were both the highest of 2020. SG&A of $41.1 million in the third quarter of 2020 was $38.4 million when normalized for one-time expenses. Year-to-date, we have taken out over $66 million of annualized costs with associated restructuring charges of just over $12 million. This cost out is reflected in our positive trends in both gross margin and SG&A and has resulted in our year-to-date record low normalized SG&A as a percent of sales of 14.8%. Full-year 2020 sales are expected to be approximately $1.18 billion, inclusive of $23 million of venture global Calcasieu Pass revenue in the fourth quarter. We anticipate full-year diluted adjusted earnings per share to be approximately 2.25 cents on 35.3 million weighted average shares outstanding. Our assumed effective tax rate is 19% for the full-year 2020 sales. On to slide 13, our sales range for 2021 is unchanged from prior at $1.25 to $1.325 billion. In keeping with our new tradition of giving an approximate number, we would share approximately $1.28 billion for revenue with associated adjusted diluted earnings per share of $3 to $3.40 on 35.3 million weighted average shares outstanding. Adjusted EPS is increased from our previous estimate, $2.90 to $3.25 per share. You can see the puts and takes on the bridge on this slide, and I'm excited to continue to see the year unfold with many upside opportunities that are not included in our 2021 outlook. We also continue to expect strong free cash flow in the 14% to 15% of sales range. With that, I'll now turn it over to the operator to open up for questions.