Chart Industries, Inc.

Good morning and welcome to the CHART Industries Incorporated 2021 First Quarter Conference Call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer session. The company's supplemental presentation was issued earlier this morning. If you have not received the release, you may access it by visiting CHART's website at www.chartindustries.com. A telephone replay of today's broadcast will be available following the conclusion of the call until Thursday, April 29, 2021. The replay information is contained in the company's press release. Before we begin, the company would like to remind you that the 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 or 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, Nora, and good morning, everyone. I think it's apropos that we're sharing our results here on Earth Day and the first day of the Global Climate Summit. In particular, as we see heightened demand for our products for the clean energy revolution. We're pleased to share with you our strong start to 2021. On slide three of the presentation that was released this morning, you can see our results compared to the first quarter of 2020 and 2019. In all metrics except sales, results were above our first quarter expectations. And while I think slide three speaks for itself, let me point out a few things. First, if someone asked me to pick one metric that I think is the most indicative of our success to come in the next few years, I would select orders. While the drivers for 2021 indicate we are trending toward a great financial year, this is just the beginning of this decade, which I believe will show expansive growth. That being from the combination of booming hydrogen growth, LNG's cost competitiveness, and an effective energy transition tool, the kick-starting of carbon capture, and the underlying premise of the increasing need for a hybrid of molecules as industry recovers and investment is made in infrastructure. Orders of $417.2 million in Q1 were the highest in our history, excluding big LNG, driven by broad-based demand, including a recovery in certain end markets, continued demand for our clean products, supporting the macro trend of sustainability, and a combination of larger liquefaction orders for both LNG and hydrogen. Additionally, we had 32 orders over $1 million each in the quarter. This continued record-level order activity contributed to record backlog with or without Big LNG of $934 million. This is the second quarter in a row of record orders and backlog, further setting up a very strong remainder of 2021. Both reported and adjusted gross margin as a percent of sales were the highest in four years with or without Big LNG. Growth margin is sequentially increasing in both dollars and percent of sales, with reported growth margin as a percent of sales of 29.1%, and when adjusted for one-time cost, 29.9%, up 140 basis points from a year ago and over 500 basis points from two years ago. This demonstrates the increasing mix of our higher-margined specialty and repair service and leasing businesses, which comprise 41.1% of our total first quarter revenue, the highest it has ever been. As a point of reference, RSL and specialty as a percent of revenue for the full year 2020 was 34.1%. Gross margin was a key contributor to our adjusted diluted earnings per share of 80 cents, even on lower than anticipated sales. This includes six cents from our investments. This is a nearly 200% increase compared to the first quarter of 2020, reflecting continued operational execution across the segment. Sales were slightly lower than expected in the first quarter, Two specific timing shifts to the second quarter, and therefore are still within the year. Specifically, sales of $288.5 million were impacted by revenue recognition being in April for shipped ISO containers and other products that were in transit at March 31st, and $5 million of Venture Global's Calcasieu Pass project that shifted to the second quarter based on updated schedule alignment with the customer. Also included on this slide are the comparisons to the first quarter of 2019, which had no COVID-19 challenges, and also shows the positive financial impacts the strategic changes to our portfolio have had on our order book, top line, and margin. Back to that one metric to look at for the explosive growth of the business that's on the horizon, orders. When you remove big LNG, orders increased over 34% since the first quarter of 2019. Now moving to segment specifics, starting with specialty on slide four, Our specialty segment had record backlog orders and gross profit in the first quarter, along with record sales in HLNG vehicle tanks, food and beverage, and water treatment. Gross margin improved sequentially from the fourth quarter with favorable margin mix from cannabis and space-related sales, as well as improving operational execution in certain locations of our factories. Everyone wants to talk hydrogen, which had record orders and gross profit in the first quarter. We will get into details on a coming slide, but to get you excited about that market, if you're not already, let me give you an astounding data point. In addition to our hydrogen orders already in backlog, we are working with 214 hydrogen customers and potential customers under 54 nondisclosure agreements. That's a significant increase when you compare to one year ago when we were in conversations with just over 30 customers and potential customers about hydrogen equipment and under four NDAs at that point in time. You're all familiar with slide five, and in the first quarter, we continued to expand our investments, our own portfolio, and our commercial agreements to pull chart products through to more customers, projects, and geographies specifically related to specialty. The bottom row shows our year-to-date activity, and you've heard a lot about each of these throughout the quarter. I'd point out that already each has brought us commercial opportunities and orders. So moving to slide six, let's discuss how each of these has increased our specialty products addressable market. As a reminder, the addressable market shown on slide six reflects our best internal estimates on our relatively near-term next three to four year overall market opportunity with our existing processing equipment. It does not include new products in development unless indicated, nor additional benefits from other potential commercial partnerships. The acquisition of Cryo Technologies increased our hydrogen addressable market in the near term by $800 million. and added a $250 million helium liquefaction element to the market opportunity. This great combination of cryo technologies and chart offers combined content for the very broad liquefaction process market. Our content on these projects ranges from $15 to $100 million each. Similarly, the Transform Materials investment in commercial MOU brings chart content to their unique hydrogen and acetylene process and expanded our total addressable market by $150 million. We'll talk more about hydrogen details on the next slide. But first, don't forget the burgeoning carbon capture market for our carbon and direct air capture process, our extensive heat exchanger offering, and our February 2021 investment in Savante offers the most unique combination in the market of process technology and equipment with low CapEx and high purity. Our $15 million investment in Savante was for just under 10%. brings with it a commercial MOU as well as being alongside key ESG investors such as Temasek, OGCI, Chevron, Mitsui, Suncor, and others. The proposed U.S. infrastructure plan also includes a focus on building CCUS facilities and expanding the 45Q tax credit, which further supports our view that carbon capture is a high-potential breakout market for our products and technologies. It's not only driven by the U.S. and Canada, who also recently upheld the national carbon tax, but also our global pipeline of various stage quoting activity for carbon and direct air capture, ranging from the Middle East to Norway to Mexico. With over 80 projects in various stages of our commercial quotation pipeline, compared to 20 only six months ago, we see this as a key market to the next decade. Another strategic synergistic acquisition that touches on the clean revolution, this time clean water, with Blue and Green, which brought us water treatment technology, and when combined with our tanks, offers a full dissolution water treatment package. Since we completed the big acquisition in November of 2020, $5.5 million of orders where we sold both blue and green technology and chart equipment together. With President Biden's American Jobs Plan anticipated to include spending of over $100 billion toward the United States aging water systems, we anticipate the demand for this part of our nexus of clean products and technologies to significantly accelerate. Three of our specialty areas that have not received the same amount of attention as the world of cleaner and greener are cannabis, gas by rail, and food and beverage. Each of these three have growing demand, pun intended, driven by a combination of macro and specific product tailwinds. Just under a month ago, legislation was passed to legalize recreational marijuana in New York State. New York is the 15th state, along with the District of Columbia, to have legalized cannabis for recreational use. and 43% of the U.S. population now live in states where recreational marijuana is legal. We expect continued increasing demand as public policy in the United States directionally supports the botanical market and as cannabis producers and packagers add scale to their manufacturing. We supply this market through the same distributors that service restaurants and convenience stores, and many of these distributors are expanding their businesses to meet the increasing demand. In the first quarter, we saw an increase in orders for our ORCA CO2 delivery trucks, which is a leading indicator of the growth our customers expect in this particular market. The gas by rail market is one that we've been prepared for since 2014 with a very unique offering. And while it has definitely had fits and starts, we're seeing this market gain traction both in the U.S. and Europe. In the first quarter, we booked a 10 Argonne rail car order. Our equipment was used in an LNG in Europe. and we shipped the first LNG by rail tender car for the $22 million order that's in our backlog from December 31st, 2019. Our customers have indicated that rail is going to continue to gain traction, and we expect to make a dent in our $200 million addressable market, as these are typically ordered in groups versus individual orders, making each multi-million dollar order levels. Food and beverage is one of our more consistent markets within specialty, but also was one of the hardest hit by COVID last year. We saw a recovery in the fourth quarter of 2020, and that recovery continued into the first part of 2021 with new restaurant openings picking up. For example, we received food and bev orders from national accounts including Chick-fil-A, Yum Brands, Jack in the Box, Quick Trip, The Other Quick Trip, Buffalo Wild Wings, Jimmy John's, Regal Cinemas, and Cinemark all in the first quarter. Also, month to date in April, our beverage daily order rate is tracking higher than any month since February of 2020. One of the questions I regularly get asked is whether our hydrogen addressable market, as shown on slide seven, could be significantly or considerably larger in the next five to ten years. The answer is yes, and each day there's more and more confidence that hydrogen will be a key part of the clean energy destination. So what will drive us to increase our market size? There's two broad buckets. The first is continued public sector investment, and let me give you some recent anecdotes that support this. in addition to all the stats we shared a couple months back on our year-end earnings call. Last month, the Tokyo Olympic torch started its 121-day relay, and many of the legs will be hydrogen-powered. Japan is using this opportunity to raise awareness about hydrogen as a cleaner power fuel, as well as Japan's initiative to use it as its future green energy source. Industry coalitions will continue to accelerate hydrogen. In this past quarter, we were one of 11 founding member companies of Hydrogen Forward, as well as co-leading with Reliance Industries the India Hydrogen Alliance to promote hydrogen as a fuel and complement renewables in that geography. On April 9th, the White House released its fiscal year 2022 budget preview. This supports increased funding to advance carbon reduction and mitigation in sectors and applications that are difficult to decarbonize, including the industrial sector, with technologies and methods such as carbon capture and storage, hydrogen, and direct air capture. These were all specifically called out in that preview. A recent market analysis was completed by Emergen Research. They concluded that the global liquid hydrogen market is forecasted to be worth over $50 billion by 2027, driven by exponential growth in demand for electric vehicles to reduce emission levels, as well as the rising use of liquid hydrogen in manufacturing such as LED display and semiconductor manufacturing. Just to remind you, we're the only company that has been designing and manufacturing liquid hydrogen products that we offer for over 50 years. So the second driver of a potential increase to our total addressable market is our own organic and inorganic investment. We're well into the testing and near commercial readiness for our liquid hydrogen onboard vehicle tank, which we intend to release to market in the third quarter of this year at the ACT Expo. We haven't included in the current $2.3 billion TAM any expanded scope for our in-development hydrogen pump, nor any potential process or equipment content on projects that may be opportunities through our cornerstone investment in the 5T hydrogen fund, which is expected to launch in early 2022. And as you know, we've been an active participant in the Chinese group code for liquid hydrogen storage tanks, a lengthy process. We expect the final code and approval this quarter. Just last week, the Secretary General initiated the group code work for liquid hydrogen mobile equipment in China and invited us to participate in the code preparation led by the China Standards Committee. We're excited to be a part of this and add the certifications and capabilities for hydrogen mobile equipment to our Chinese manufacturing offering. But before we increase the hydrogen market size per chart, we want to show you the progress against our current TAM, which you can see on the right-hand side of slide seven. Not even a year into the hydrogen mania, we have already booked over $100 million of orders. And perhaps the two most meaningful things on this page are the orders by quarter table in the bottom right-hand corner. From Q3 2020 to Q4 2020, the orders more than doubled. And from Q4 2020 to Q1 2021, hydrogen orders more than tripled. And each of these is off a sequentially higher base than the last. The second meaningful thing is the breadth of the types of orders to date, ranging from hydrogen storage tanks to fueling station equipment, to liquid and gaseous hydrogen trailers, to liquefiers, to marine fuel applications. All right, so slide eight. Slide eight is one of my favorite ones that we do each quarter, in part because saying folking orders makes me smile, and more importantly because it shows the continued evolution of the business in penetrating the variety of applications that our existing product offering is used in. We continue to see strong demand for new and unique first-of-a-kind projects, not just from our existing customers, but also from our new customers, of which we had 105 in the first quarter. 72 of those new customers were customers outside of North America. We have also included meaningful existing customers and products in the middle column of the slide, because these show the stickiness of our existing customers coming to us for new innovative solutions, like Chick-fil-A switching to a larger tank to accommodate their growing CO2 needs, or one of our industrial gas major customers ordering 10 Argonne rail cars that I referenced earlier. Bango is a good example of how we're beginning to see the further penetration and growth in the cannabis market, and CalSTART is an exciting win for us. In March, CalSTART received a grant award from the California Energy Commission to develop an actionable hydrogen fuel cell-powered tugboat design that will be ready for construction and implementation at the Port of Los Angeles. This project, which is called HiZET, involves us and other consortium partners, including Ballard Power. Together, our teams will develop a pathway to decarbonize the marine sector by identifying and addressing challenges related to producing, delivering, transferring, and storing liquid hydrogen to power a zero-emission tugboat. I won't run through the others, as you can read about them on this slide. Slide nine is our second high-growth segment, repair service and leasing, or RSL. We continue to organically grow our RSL business, both through capital investments in a larger leasing fleet and strategic repair locations. This is returning to us immediately. With 44 new leases signed in the first quarter of 2021, compared to five new leases signed in the first quarter of 2020. Additionally, February was our first month with leasing revenue greater than $1 million, and this grew an additional 250% sequentially from February to March. RSL is set to have an extraordinary and record second quarter of 2021 due to the timing of some of the shipments that I mentioned around sales moving from first quarter to second quarter. Beyond leasing, the repair and service business continues to gain traction in Europe with a service and maintenance long-term agreement with Gatham for their LNG fueling station network in Finland and Sweden. The first quarter of 2021 more accurately represents a typical quarter for RSL from an order and gross margin as a percent of sales when you compare to the fourth quarter of 2020, which had an unusually high level of quick turn repairs and installations. We're currently accepting customer equipment at our new Greenfield Repair and Service Shop in South Carolina. and we anticipate beginning repairs in June at that site. Slide 10 moves into our more traditional business, Cryotank Solutions, or CTS. Record Cryotank Solutions backlog of $245.8 million as of the end of March is up just under 11% over the fourth quarter. Record orders and sales in CTS mobile equipment in the first quarter of 2021 supported this increasing backlog, and with record trailer orders in the quarter, both in units and dollars, We are increasing our CTS sales outlook for the full year 2021. Strong first quarter 2021 ORCA unit orders are a leading indicator for continued strong perma sales throughout the remainder of the year. And we have other activity, which we consider a bellwether sign of manufacturing recovery, that's directly linked to laser cutting for production. Industrial gas major customer activity, as well as independent distributor activity, was the strongest it has been since pre-COVID levels this past quarter. One of our top five industrial gas major customers ordered the most in any month in their history with us in March 2021. And we expect as more COVID-19 restrictions are lifted that our industrial gas customers' activity increases. Q1 was a very strong quarter for our independent industrial gas customers as well. For example, one of the independents placed more orders with us in the first quarter of 2021 than in all of last year. Our China business, also contributed to our strong first quarter with record backlog and record sales, as well as continuing to improve positive operating profit. You can see some of the accomplishments at the top of slide 11. I used to say cautiously optimistic about the China business and characterize earnings as a few thousand dollars. Well, based on current developments, Sherry and her team have put me in a position that I would say optimistic about continued and increasing strength in the China business, coupled with much higher than thousands of operating income. Additionally, global ISO container demand continued at heightened levels as the new year started. We booked orders for 121 ISO containers in the quarter and shipped 99 units. We expect demand to further increase in the remainder of the year. Slide 12 shows heat transfers first quarter metrics with the year-over-year order increase of 15% driven by the start of air-cooled heat exchanger and PET-CHEM market recovery. More impactful was our first LNG liquefaction order this year for New Fortress Energy's FAST LNG project. There are numerous small-scale LNG potential orders on the horizon. The chart on the bottom right-hand side of slide 12 shows 10 of these potential projects that are currently not in our backlog. We anticipate a subset of these to move forward to orders with either FID or notices to proceed in the remainder of 2021. Note that these are geographically diverse, and that is another indicator that LNG remains a part of this global energy transition. This is especially true in countries and regions working to move from coal and diesel to a cost-effective available and ready-now answer, which LNG is. Also, many LNG operators are implementing various carbon monitoring and reduction actions, which we're working with them to design flexibility into their facilities and to address cleaner options over the coming decades. Our HTS equipment is being sought after for applications ranging from carbon capture solutions to biogas. Even the traditionalists are exploring going green with upgrades and retrofits trending toward heat recovery, geothermal applications, and green diesel projects. We booked two green diesel projects with traditional hydrocarbon customers in the first quarter. And while we have not included the big LNG chart on this slide, Really, guys, it's only due to the space constraints of the slide. Like, don't read anything into that because we still aren't changing our perspective that we expect at least one big LNG order in the coming nine months. As you're well aware, the phase ones of projects we have already been named on, specifically Venture Global's Plaquemines, Chenier's Corpus Christi Stage 3, and Tellurian's Driftwood Project total over $750 million of potential pending chart orders. And speaking of big LNG, The decline in Venture Global Pass revenue, as expected, from Q4 to Q1, was the driver of lower heat transfer systems gross margin as a percent of sales. When you exclude that big LNG, gross margin as a percent of sales was up sequentially from Q4 to Q1. To reiterate, we are no longer relying on one or two big projects happening. Our margin profile and growth are dependent of that. So Merck's going to tell us about that now on slide 13.

Thanks, Jill. The strength in gross margin coupled with our SG&A cost control resulted in reported diluted earnings per share of $0.63, 10.5 times higher than the first quarter of 2020. When adjusted for one-time cost, primarily related to inorganic transactions and new facility startup costs as shown on line one, adjusted EPS was $0.80, up 196% when compared to one year ago. The 80 cents includes six cents of earnings from the mark-to-market this quarter of our strategic investments.