Chart Industries, Inc.

Good morning, and welcome to the Chart Industries Incorporated 2021 Second Quarter 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 was issued earlier this morning. If you have not received the release, you may access it by visiting Chart's website at www.dart.com. chartindustries.com. A telephone replay of today's broadcast will be available following the conclusion of the call until Thursday, July 29, 2021. 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 earning release and latest fill-out filings with the SEC. The company undertakes no obligation to update publicly or revise any forward-looking statements. I would now like to turn the conference over to Jill Ivanko, Chart Industries CEO. Thank you. Please go ahead.

Thanks, Stacey, and good morning, everyone. Thanks for joining us today for our second quarter 2021 earnings call. Today I'm going to start by providing a picture of why we believe this decade is going to be the roaring 2020s for chart, and also why I continue to say that the metric to look at is orders, as this profitable growth story is not about 2021. It's about the coming years, which we believe are going to be the perfect storm of industrial gas, LNG, clean energy, all happening at once. We're strategically positioned with an extremely differentiated product offering for this broad-based growth for the processes and equipment that we provide to a variety of different end markets. One of the beautiful parts of our business is that we aren't reliant on picking one winner in the clean energy transition. We benefit from all of them having a place. That's also the benefit of being molecule agnostic. So let me set the stage with the three key reasons or fundamentals as to why our business will experience significant or significant explosive growth. First, there are numerous macro tailwinds across the clean energy and industrial gas applications and markets. Second, we are experiencing broad-based demand with record orders in Q2, our third consecutive quarter of record order activity. And third, our recent strategic inorganic and organic investments set us up with the right geographic footprint, the right partners, and access to significant commercial penetration globally in the nexus of clean. whether we're talking about hydrogen, biogas, carbon capture, water treatment, or clean food and beverages. The first driver that supports this growth are the global macro tailwinds as shown on slide four of the supplemental presentation released this morning. There are four main areas that continue to drive our demand, increasing global economic activity, clean energy transition, government support for that transition, and finally LNG activity. Let me take a moment to talk about broad-based global economic activity that is happening. whether CO2, food and beverage, even pockets of legacy oil and gas. I will pick one of these macro trends to go into, which is food and beverage, but there are similar data points for each market and application that we can share with you if desired. Restaurants reopened, and this resulted in eating and drinking locations reaching $70 billion in sales in June alone globally. June represented the fifth solid increase in restaurant sales in the past six months, and as a result, chart beverage sales continued to increase. In June, McDonald's, Chick-fil-A, Yum!, In-N-Out, Jack in the Box, Quick Trip, Target, Jimmy John's, and theater groups Cinemark and Regal ordered for new construction as well as retrofit from us. While clean energy transition, what can I say about this? This could take a day to walk through all the happenings in the market around the focus on clean power. Let me point out a few macro updates here. 90 countries representing 80% of the world's GDP are now committed to net zero targets. More than 30 countries have national hydrogen strategies and have allocated $76 billion of government funding. In June and July alone, the U.S. Department of Energy announced funding and policy to enhance the energy transition. British Columbia and Ottawa in Canada announced involvement in clean fuel funds, and the EU launched their Fit for 55 plan. Even Greece announced 44 billion euros of green funding. And a lot of times, the clean energy discussion centers around North America and Europe, China is emerging as a hydrogen leader and expects hydrogen to comprise 10% of its energy share in the coming three decades. And we're further differentiated in our global hydrogen offering with our group code China certification on our liquid hydrogen storage tank, which is really not easy to get. Additionally, India is surfacing with numerous actions around green hydrogen planning and we're well positioned as a founding member of the India Hydrogen Alliance with partners such as Reliance Industries and JSW. Don't forget that pressure is mounting on the private sector as well for sustainability and ESG. This is taking on many shapes and forms, and one kind of little neat one is Tokyo Hotels that announced the launch of their first hydrogen hotel. We'll come back around to LNG later in today's discussion. So how are all of these tailwinds translating to us? We booked $447.9 million of orders in the second quarter, a record high. This translates to all-time record high backlog of nearly $1.1 billion and sets up 2022 very well, including very strong second quarter industrial gas orders, which in significant part is an indicator of our customers' confidence in 2022. I won't run through all of these as you can see them on slide five, but to point out a few. Our specialty segment had record orders backlog in sales in the second quarter. We had 16 first-of-a-kind orders, contributing to our record water treatment orders was a first-of-a-kind for an odor treatment system for a significant brewery in the U.S. We also received our first order for a complete LNG station in the Czech Republic, and apparently a heck of a lot of people are brewing beer and making wine these days as we booked first-time orders for nitrogen dosers with 13 different customers. 133 new customers placed orders, 63% of whom are outside of North America. another great growing trend that we're well positioned for outside of North America. Another way to think about this widespread growth is how many individual orders greater than $1 million in any given period, and in the second quarter we had 60 of them. Hydrogen orders of 81.9 million were our third consecutive record and included a helium liquefaction plant for a company in Russia, as well as 22 liquid hydrogen trailers. We booked more overall trailer orders, so this is total mobiles, in the first half of 2021 than in the full year of 2020. 338 trailers this year today compared to 335 for the full year of 2020 and 355 for the full year of 2019. And China continued its streak of records, including record orders as well as shipping the largest bulk tank in our chart China history. With our portfolio structured in a way that we can pull on multiple levers for this decade's anticipated growth, I thought now would be a good time to address many questions that I've received about what a 2030 total addressable market could look like for our business based solely on what is in our portfolio today and excluding new product introductions that we anticipate to have across the coming years. Note that this is a product and market level, bottoms-up build from our team, and we have specific assumptions for each specialty area. As you can see, at $36.5 billion of addressable market in 2030, we have considerable runway for growth. In a market like hydrogen, which is one with very fast evolution, where over the next two to five years, options in the value chain will be assessed and chosen, we're well positioned. I would note that Hydrogen Council just released updated data that indicates announced hydrogen projects increased by $200 billion since February of this year, bringing the total amount of investment in this decade to $500 billion. This is a 67% increase in six months on these announced projects. Additionally, we're currently in various commercial discussions with over 300 potential and current hydrogen customers globally. And if you remember, when we started sharing number of customers in April of last year, we were at 30. Slide 7 is a familiar slide and shows you our evolution of adding partnerships and capabilities inorganically over the past 12 months. These investments and acquisitions have already returned to us in many cases, even though they're all recent additions. So turning to slide 8, you can see some of the impacts each has already had to charts. To point out a few, our cryogenic and hydrogen trailer acquisition for $10 million from Worthington in the fourth quarter of 2020 has resulted in record orders for hydrogen trailers and record backlog levels. In the second quarter, as I mentioned already, we booked 22 liquid hydrogen trailers. To give you a sense of this in relation to history, in any given year, the most trailers sold prior to now was nine in a year. We're tracking to over one per week this year. We certainly wouldn't have booked the helium liquefaction order without Cryo Technologies in-house, and through this acquisition, we have increased our probability of winning our hydrogen and helium liquefier orders, of which we are quoting on over 30 now. McPhee and HTEC have brought us numerous commercial opportunities that are currently being worked, many of which are under NDA, so we can't go into detail there, but I would also point out that each has relationships with their respective and French and Canadian governments that have positioned Chartwell on regional hydrogen projects. I also wanted to take a moment and congratulate Savante on their $25 million investment from the Canadian government. Together, Savante, SES, and Charter have been working on numerous carbon capture projects. In this quarter, we signed an MOU with TECO 2030 on developing a technology solution for carbon capture for the marine industry. I would be remiss not to comment on the incredible synergies we have seen in our first eight months of Bloom Green ownership, including second quarter 2021 record water treatment orders. We booked over $7 million of water orders, and 70 percent of these orders had both chart and blue and green content. And our latest full acquisition, LA Turbine, closed on July 1st. LAT is a global leader in turbo expander design engineering, manufacturing assembly, and testing process for new and aftermarket equipment, and most importantly, with significant in-house engineering expertise. As I commented on the LAT acquisition call, there is a very unique expander required for hydrogen and helium liquefaction, which is difficult to obtain in the market due to a limited number of companies like LAT that are capable of designing and producing it. These are very specialized expanders, and as I said, they're difficult to design and produce, as they require a very high efficiency, in some cases, oil-free machines. And this is part of a liquefier that's one of the longest lead times at one to two years, depending on the configuration. We're very excited to have the LAT capabilities in-house and gives us a very expansive position in the expanding liquefaction market. But perhaps most meaningful is the number of customer inbounds we've received in our first weeks of ownership about access to LA Turbine's expanders. Usually I discount revenue synergies, but based on the quality customers asking us for quotes, I'm very confident in the outlook we have for this business in 2022 and beyond. So I won't comment on all of them on this slide, but certainly each on its own, and many of them working together have already proven to be beneficial to have as partners. So now turning to the second quarter results on slide 10, Merck.

Our second quarter orders were significantly above our expectations, and Jill has already described this broad-based demand. Sales and adjusted EPS were slightly above consensus, driven by our team's continued execution. We reported gross margin as a percent of sales of 25.8%, reflected one-time restructuring and startup costs, as well as material costs headwinds, which I will talk about on the next slide. The one-time costs were primarily related to our startup activities in our manufacturing locations where we are adding capacity, such as Teddy Trailer and Tanks in Beasley, Texas, opening our repair and service greenfield facility in South Carolina, and creating flexible manufacturing in Tulsa, Oklahoma. When normalized for those, gross margin as a percent of sales was 29%, and we expect that sequentially between now and year-end, gross margin as percent of sales will increase. RSL had a sequential negative swing in gross margin as a percent of sales, driven by less quick-turn service projects and specific product mix. As you can see on slide 11, we faced significant material cost pressure in the second quarter. And as I'm certain you have read or heard from others, material and supply chain disruptions have plagued the global sourcing world. Given already stressed mills for stainless steel, carbon, steel, and aluminum, we made the strategic decision to secure raw material through the end of 2021 by a contract, which in part impacted first half 2021 inventory levels and free cash flow. Additionally, We built inventory for the second half of 2021 anticipated shipment levels, consciously understanding that we expect the broad-based demand we have seen year-to-date to, while not continue at record levels, continue significantly above historical and typical demand rates. This is a good problem to have, but coupling the global and macro supply chain challenges with customer expectations for on-time delivery, we needed to make sure we didn't run into a shortage. With that said, and our anticipated higher sales in the second half, we expect inventory levels to decline in both Q3 and Q4 2021.

So let me chime in here. We're very pleased with our strategic and, I'd call out specifically, temporary decision to increase inventory. And I can tell you that many of my counterparts have indicated they've chosen chart because we can hit their much-needed deadlines, and in some cases our normal competition could not because of material supply. And also, if you take a look at free cash flow and you add back in one-time adjustments, divestiture tax payment, and temporary inventory build, year-to-date, we would have been right in line on our progress to our original $200 million free cash flow target.

So on to the cost side. Second quarter 2021 costs of materials were negatively impacted, and although our agreements allow for surcharge of material escalation, this is typically three months delayed for pass-through. For other products and customers that do not have surcharge mechanisms, we needed to increase price. Price increases went into effect July 1st, averaging 8% to 12% depending on product category. We do think there was a portion of our end-of-June order book that reflected certain customers ordering ahead of the price increase, so take that into account if you're forecasting Q3 order levels. Back to you, Jill, for segment specifics.

So we'll hit the segment results briefly since you can read the slides on your own and spend a little time on each segment's areas of significant growth or key points as we head into the second half of the year. Starting on slide 12, specialty, I'd summarize this with a simple statement of just widespread demand for all specialty products as evidenced by record orders, backlog, and sales in the second quarter. Both sales and orders increased over 100% compared to the second quarter of 2020, and both increased sequentially compared to the first quarter of this year by over 30%. Additionally, gross margin as a percent of sales was consistent with prior quarter and will continue to be in the mid to high 30% range, depending on the mix within the product category sales. Slide 13 shows you our hydrogen activity, which has been off the charts. In the second quarter, we booked nearly $82 million of hydrogen-related orders, our third consecutive quarter of increasing and record hydrogen orders. The primary areas of current demand are for liquefaction, hydrogen trailers, and hydrogen storage tanks and vaporizers. Said differently, in the last six months alone, we have booked $153 million of orders for hydrogen processor equipment. Also noteworthy is the fact that in addition to our trailers and backlogs, we currently have formal proposals to our customers for over 100 additional liquid hydrogen trailers and are quoting, as I commented earlier, on 30 hydrogen liquefaction projects. I was with some business colleagues last week, and we got started on a random conversation on unique places to go in the world, and one guy says Oregon. because it claims to have the second highest mountain and the second highest waterfall and the second this and the second that. And that's brilliant because no one can ever take the time, nor do they want to, to prove whether the second is actually true. I tell this story because we at Chart don't want to be second. We want to be first and with the most offering, which is why I'm excited to share more of our inorganic and organic activities that further differentiate our hydrogen offering. We received our first liquid hydrogen iso-container order in the first week of July, and the liquid hydrogen ISO is now commercially available. Our organically developed hydrogen onboard vehicle tank will be commercially available in August and introduced in conjunction with our recently announced partners, Hyzon Motors, for which we executed a joint agreement for heavy-duty long-haul trucking this past quarter. And finally, our hydrogen test facility received its first fill of hydrogen and is actively being utilized by our customers for their hydrogen testing needs. So now moving to slide 14, repair service and leasing. RSL posted record sales in the second quarter, driven in part by significant shipments from China, which were lower than typical margin. Also, while we saw less quick turn in field work, which tends to be a higher margin, we do expect that gross margin of the percent of sales returns in both the third and fourth quarter into the 30%. Cryo lease revenue in May was $5.4 million and June was $8.6 million, which compares to historically doing a million per year. And while there will be variability month-to-month and quarter-to-quarter in RSL, you get the idea that the leasing business is doing very well. In June, we officially opened our RSL site in strategically located South Carolina, a location that our industrial gas customers have been requesting. We've already received numerous customer tanks onsite, another step to our over 20 percent of chart revenue being in the repair service and leasing segment within the next two years. The building blocks for this increase are shown on slide 15. RSL was 17% of our total revenue in the second quarter of 2021, driven in part by an increase in leasing revenue and in part by the fact that we now have 80 customers with repair and service agreements globally, including half of those outside of North America. And after only one year of offering these capabilities in Europe, we already have 56 fueling stations in that region on long-term service agreements. Our investment in a broader yet disciplined standard leasing fleet continues to return to us with 94 new leases signed already year-to-date. Moving on to slide 16, which shows our cryotank solution segment results for Q2. There's numerous noteworthy data points from Q2 that contribute to our confidence both in the second half of this year as well as the full year of 2022 outlook. Market consumption of bulk tanks continues to be strong with shipments of over 200 tanks each quarter over the last four quarters. And to provide a reference point on that, two years ago it would have been about 160 bulk tank shipments per quarter. Normalized gross margin as a percent of sales in CPS of 25.9% is a historical record, even when considering the material cost challenges Merck described. And perhaps most important is on slide 17, where we were talking earlier about the strong industrial gas order activity being one leading indicator of confidence in 9- to 12-month-out demand across gas applications. We've included slide 17 to go one step deeper, which I thought was important to include, because it demonstrates that the record orders weren't simply in one area of cryotank solutions, but also products across standard tanks, packaged gas equipment, engineered systems, and mobiles. Also very strong were ISO containers, for which demand continues globally. We manufacture ISOs in various locations, although our lowest cost location for this product is China. A big thank you to our team in China that has worked through expanding our ISO container manufacturing capacity there by 50%, for our 40-foot ISOs and 67 percent for our 20-foot ISOs, so we're able to bring in more of this growing market. Seat transfer gets the brunt of being our most cyclical segment, and that remains true, as you can see on slide 18. The story of HTS in the second quarter was mainly its comps. Specifically, sales show a decline due to the comparison both in Q1 2021 and Q2 2020, with Venture Global's CalcSoup Pass Big LNG respectively being included. whereas the second quarter that we just completed only had $5 million. As we shipped our final cold boxes and heat exchangers, I had to point out on time and in budget. On the order side, our first quarter of 2021 included the booking for New Fortress' Fast LNG project. So with that, replacement activity is high with plants running at higher capacity factors with changing capture and rejection modes, and we expect that to benefit both HTS and RSL in the second half. So let's not forget about LNG on slide 19.

Wade? Won't you come liquefy, please? You're not alone. Charting, you know it, baby. Tell me your troubles and doubts. We're cooling everything inside and out. Long range, we're right on the mark. Think of the fucking things that we've been working on. A cold box may chill us apart. Load a boat and send it afar, baby. Don't you forget LNG. Don't, don't, don't, don't, don't you forget LNG.

That was awesome.

I think I could probably close the call out at that, but we thought we'd give you guys a little humor in the middle of earnings season, and the message is there. When we think about our LNG business, we think of it in three categories, big LNG export projects, small-scale and utility-scale LNG, and LNG infrastructure. Remember that additional big LNG is not included in our 2021 guide or our 2022 outlook. But I am very bullish on one to four U.S. Gulf Coast export projects that already have FERC approval moving ahead to FID in the first half of 2022. There was considerable second quarter 2021 activity announced in this space, and there also has generally been more market and government acceptance of LNG in recent months, a far different attitude than was in 2020. As I commented, NFE's fast LNG project progressed to full notice to proceed within the second quarter of 2021. and we received a letter of intent for a small-scale LNG plant in the northeastern United States, which has not yet been booked, but we expect it will go to notice to proceed around year end of this year. There continues to be widespread and strong demand for LNG vehicle tanks, fueling stations, and trailers. Not only did we have record orders again in the second quarter for LNG vehicle tanks, including our largest LNG bus order in our history, it was also record for our operations in India, where we booked the largest number of LCNG stations with our partner AGNP India, trusting us with an additional 13 stations booked at the end of Q2. I'd reiterate that we're positioned as the leader in this segment in India, and I do believe India is an underappreciated region in the energy transition.

On slide 20, you can see our adjusted non-diluted earnings per share of 80 cents for the second quarter of 2021, which excludes the negative impact of our mark-to-market on our minority investments, in particular this quarter, driven by the share price swing in McPhee. You will note that we have included both adjusted non-diluted EPS and adjusted diluted EPS. On a year-to-date basis, through the first half of 2021, our adjusted non-diluted EPS increased 88% when compared to the first half of 2020, and adjusted diluted EPS increased 76% compared to that same period.

Slides 22 and 23 show a few different ways we triangulated and compared our full year 2021 sales guidance. On slide 22, you can see the major product categories and the growth from the first half to the second half. We are increasing our full year 2021 sales guidance to $1.385 billion to $1.435 billion, which, as always, does not include any additional big LNG revenue. This increased outlook is driven by a few factors that you can see on slide 23. So, slide 23 shows the comparison to our last full-year guide. I pointed out the three key drivers of our increased guide. First, the addition of LAT. Second, the shift of specific small-scale LNG projects timing into 2022, simply based on their project schedules and less second-half anticipated growth in heat transfer systems based on the legacy oil applications not recovering to their full historical $70 oil price levels. I'd also reiterate that in the prioritizing of reporting, if heat transfer products are used in either specialty or RSL, they're reported there, so those shots are still very active. It's simply geography on reporting. And finally, more than offsetting the timing shifts in HTS is the amazing demand in specialty. As you can see, every category within specialty has an increase in our forecast from the last guide. It's very important that you understand the largest sequential ramp in sales in the second half is expected to be from Q3 to Q4 this year. There will be an increase from Q2 to Q3, but a very significant step up from Q3 into Q4 due to the timing of our REVRAC on the already announced liquefaction projects.

So that brings us to the rest of our 2021 full-year guidance. We anticipate full-year non-diluted adjusted earnings per share to be approximately $3.80 to $4.25 on 35.5 million weighted average shares outstanding, up from our previous estimate of $3.65 to $4.15 per share. Our assumed effective tax rate is 18% for the full year of 2021. Our expected capital expenditure outlook is unchanged from our prior guidance and expected to be in the $40 million to $50 million range, although we have lowered our free cash flow outlook to approximately $150 million due to the need for on-hand inventory, as explained earlier.

Given our record backlog as of June 30th, as well as visibility to anticipated broad-based demand, we're sharing our first look for revenue for 2022 on slide 25. Our 2022 sales outlook is expected to be in the range of $1.6 to $1.7 billion and does not include any additional or new big LNG projects, although we bullishly expect between one and four of these big LNG projects to move ahead to FID. You can see the walk from our existing nearly $460 million of 2022 backlog in the green box on row one to the $1.6 to $1.7 billion initial look on row eight. Additionally, note that rows nine and 10 are not included in this initial outlook. We always like to provide an update either on how we're helping our customers achieve their ESG targets or progress on our own. Today we share our diversity and inclusion contest winning tagline, which can be used in conjunction with Cooler by design or on its own. So we're very proud to be chart Cooler together. Congratulations to our winning members for our D&I tagline, and thank you to all of our team members who submitted entries. Just another great example of the incredible one chart team and culture that we have. With that, I'll now turn it over to Stacey to open it up for questions.

Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. In order to allow as many callers as possible to ask a question, we request that you limit yourself to one question plus one follow-up question. Thank you. Our first question comes from Rob Brown of Lake Street Capital.

Good morning, Jill and Mark. Good morning. First of all, on the hydrogen trailer demand, could you give us a sense of sort of what's driving all those orders at this point, how sustainable that is, and maybe kind of the price per unit on those?

Sure. I think that I'll take your middle question first. The sustainability around the increase in demand is going to continue throughout this decade, and I think we'll continue to see that tick up as, instead of siloed projects happening, there's now more of a network of production locations and end users. So consider the hydrogen transports kind of in the middle of the value chain and connecting the production locations to the end use locations. So that's really the market driver of that. I'd also say we're seeing a significant shift from what previously was focused on gaseous transport into liquid transport. for all of the density, pressure, and pumping capabilities that liquid brings. But really, more than anything, the longer haul distances that liquid gives to these heavy-duty trucks. In terms of what we're quoting on right now, I commented that we are quoting on over 100 additional trailers to the record backlog, in addition to the record backlog that we have already as of the end of June. And these are a really wide range of customers, which is something that I like, so not heavily reliant on any one particular customer that's requesting these. We're working to have at a minimum production of one trailer per week as we head into the second half, but we anticipate that we're going to need multiple trailer per week manufacturing capability to hit the increasing demand as we head into 2022 and 2023. These typically range from kind of $1.25 million to $1.7 million for a liquid hydrogen transport. It just depends on the size and the structure. I mean, there's 28-footers or 53-footers. There's tandems. But that's kind of a good, if you just wanted to pick off the middle for an average selling price, that would work pretty well.

Okay, great. Thanks for the color. And then on the margin improvement expected in the guidance, could you just kind of walk through how you expect across margins to improve, and I guess how quickly can they improve? Because I think there's a pretty meaningful step up implied in guidance, and maybe just expand on how you can kind of get there.

Yes. And, you know, we had a as anticipated, negative swing in RSL's gross margin as a percent of sales in the second quarter, knowing that some of those shipments were around product mix that were at much lower margin than our typical RSL products. So that's going to be a key step up from Q2 to Q3. Additionally, I was very pleased with our continued heat transfer systems gross margin as a percent of sales in the second quarter, especially given only having about $5 million of venture global Calcissue Pass revenue. So that's a good indicator to us around the product mix that we have in HTS and not having that step down, which I think was assumed in some of these other folks' outlooks. And then CTS, we expect to continue at the record levels that they showed in the second quarter and specialty step up a little bit from Q3 to Q4 against A big part of that step up is Q3 to Q4 on the specialty side, given the liquefaction projects that we've announced and the timing of the rev rec being very, very heavily weighted into Q4.

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

Your next question comes from JB Lowe from Citi.

Hey, good morning, everyone. Hey, JB. Good morning. Wade, first, that was incredible. Just had to throw that out there. Thank you. My first question is just on – so the outlook for 22, that includes, you know, obviously the acquisitions you've made. At the midpoint, it's about a 17% year-over-year revenue increase. I was just curious, because if you look at the order numbers for 2Q, we're obviously – you know, very strong, even if you assume that orders come down in the back half, you know, 20%, quarter of a quarter or something like that, we're still we're still looking at order growth year over year 21, over 20, upwards of 30 plus percent, right? So I'm just wondering, like, why do you think that if orders were to do that, wouldn't wouldn't you think that 2022 could have a stronger revenue growth and what's implied in your guidance?

Yeah, so let me pluck off. There's two pieces of your question. The one is how do we think about order activity in the second half of 2021? We don't expect that it will look like Q2 for a couple of reasons. I don't think we're going to run it records just every single quarter, although I did say that last quarter too, so shame on me. But I do think you're looking at kind of somewhere in – What used to be a $250 million a quarter run rate for orders, I think you can safely say is above $320 million on a run rate type of thing with nothing that's really unique in that. So take that at face value and figure out how you want to model that. And then the second part of your question is the 1.6 to 1.7 conservative based on the demand that we're seeing. I think it is, you know, but pretty early here coming out with a 2022 look, and I just wanted to ensure that those who are looking at 2022 understand that we don't think that the street is incorrect in, you know, being kind of at that one-sixth, at that low end of the guide, and we fully anticipate that we're, you know, we're updating this. I think you, well, you know us pretty well, JB. We're a we don't put something out there that we don't think is very, very achievable. So I think you, I think you call us out right on that. It's just pretty early to, to go to the high end aggressive, you know, one seven to one eight type of side.

Okay. Second question was just on free cash, you know, bringing guidance down to one 50. I understand that the puts and takes a little bit, but, but just, if you're talking, if you're backing out the tax payment, on the sale of the cryo bio and you're backing out, um, what I believe was like seven. I mean, are you backing up a full 70 million of inventory investment, like kind of bridging the gap between the one 50 to 200 to, I think it was two 20 guidance you would put out just, just, I guess what are the moving parts of that? And, um, you know, looking into next year, assuming that, you know, some of these raw material shortages and whatnot kind of are alleviated, um, target for next year, I would imagine, remains in that kind of mid-teens free cash to revenue range. Is that fair?

That's absolutely fair. And, yeah, I wanted to try to use the word temporary on this inventory build because that's exactly how we think about it. And I would stress that I can't tell you how many customers have told us they've placed orders with us because we said we can hit their delivery schedule. So, I feel really good about that. I hate missing the free cash side of things, but it is temporary. So it's very safe to continue to assume that our normal year is in that mid-teens as a percent of revenue from free cash flow generation. And then the first half of the question, what we originally looked at, let's just take the $200 million point because it's a nice round number, was like a $50 million free cash flow generation in the first half of this year and then a heavy $150 in the back half. which again relates to milestone payments around some of these projects and the timing on those, as well as that heavy and atypical historically second half shipment forecast versus first half shipment outlook. So those were kind of the two big drivers. So maybe that we wouldn't have gotten exactly to the 50, but somewhere in that range, we feel like if you normalized all this inventory build we had, we'd be somewhere around there.

Okay, fair enough. Thanks, Jill. Thanks, Mark. Thanks, Eddie. Thank you.

Your next question comes from Andres Monaco from Evercore ISI.

Hey, good morning, Jill. Good morning, guys. Hey, Andres. Good morning. I really appreciate the presentation you provided and the helpful details. I think that highlights Wade's skill set, although I'm unsure about his career in karaoke and singing, but I do applaud his courage in putting himself out there. No offense, Wade. My first question pertains to the outlook for 2022, and I guess beyond in some sense, and this is just trying to get a sense of any escalations to cost or SCNA as you achieve the $1.6 billion of throughput and volumes and beyond or greater for next year. And I just remember a comment from last year following one of your costs out programs that the majority of those costs would remain removed even as volumes return to or surpass 2019 levels. So is that still a fair assumption in terms of run rate SG&A, or would the business need to invest or expand certain teams or facilities in order to meet those higher anticipated volumes?

It's still a fair assumption. So we'd stand by that comment. I remember that was actually around we could get up to about $2 billion in revenue around kind of the consistent cost structure. Now, we still have to have cost of living adjustments and those types of things, so you've got to build that in, but it's not a we need to meaningfully add – thousands of people in order to achieve this. Where I would clarify and make sure I'm very transparent on this, where we're spending the investment in order to be able to hit these levels is around the CapEx side. So as Merck commented, the capacity and the flex manufacturing in Tulsa, the expansion in Beasley, Texas, our Teddy trailer line, making sure that we have every single product line we have will have more than one location where it can be manufactured. That is a key part of our strategy. So those investments that are happening in 2021 relate to ensuring that we can hit those demand levels, but it's not about SG&A.

Okay, great. Thank you for clarifying that. And then my second question pertains to the comment you made around your industrial gas customers. So there definitely seems like there's a number of bright spots among the industrial gas majors right now, and it seems like the sector is experiencing some secular growth tailwinds in terms of electronics and healthcare. Maybe just one example is potentially providing third-party gas supply for semiconductor chip fabrication plants or what have you. So I guess my question is, what end markets are you seeing strengthening with this customer cohort? And do you expect an uptick in air separation demand? And kind of related to that, just how much of your market share do you think you'll be able to keep here versus prior cycles?

Yeah, I mean, I think the industrial gas business is showing what it was always considered, I think, just kind of a normal business and a steady-eddy type of business. And it's really proving to be a very unique and differentiated part of our offering. As you point out, Andres, around the semiconductors and what we're seeing a lot of is, this build of new manufacturing facilities. So take some of the relocations of companies that you've seen from California to Texas, and as they build their facilities, these are opportunities that certainly we have access to and in many cases already have booked. So that's an area that we're seeing increase in activity. We're also seeing an increase around what I call regional industrial gas players or independents that through COVID, kind of found their niche with providing a molecule or two. And so they're expanding their fleet, not at the levels that the majors do, but certainly in their respective regions. And then I think RCEP demand is going to continue to tick up. And I don't think that's, you know, I don't think that's a six to nine month thing. I think that's going to happen for a few years here. And I think on the semiconductor front, that's the same thing. I don't think that's a correction that happens in a quarter. And then market share-wise, you really got to get down into the geography level, so U.S., Europe, and Asia or China specifically. And we're certainly – we have over, I'd say, 60-plus percent, maybe even close to 70 percent in the U.S. in this particular space for our product offering, around 40-ish, 45 in Europe, and then more, about 15 percent in Europe. China and Southeast Asia, which is by choice, just given the margin profile.

Great. Thanks very much, and I'll turn it back to you.

Your next question is from Eric Stein from Craig Hallam.

Hi, Jill. Hi, Scott. Hey, Eric. Hi, Eric. Good morning. So it's been quite some time since you've been this bullish on big LNG. It would be helpful for me if you could maybe Just give an update, you know, whether things have changed in terms of size with the main three that you've talked about in the past.

Sure. So each one – and you're right. I mean, we kind of – I almost even didn't talk about it for a period of time there because the customers weren't really doing anything. And I think May and June has been – as active as I've seen in four to five years of what they've done, what these bigger LNG export guys have done in progressing toward construction and FID. Tellurian, their driftwood project, which if you recall has IPSMR as well as our equipment on it, they're going to start with the two trains, so the 10.4 million tons project, and that for us would be around $300 million-ish for that first phase. If you look at Chenier-Corpus Christi Stage 3, so that's a seven-train project. And we can't speak on their behalf on how many trains they're going to do, but a seven-train project for Stage 3 for us would be about somewhere between 250 and 275. Just, again, depends on the material pass-through and that type of thing. And then Venture Global Plaquemines, they're intending to start phase one is 10 million tons instead of the full 20. And that one is essentially a replica of Calcasieu. And I would anticipate our content is about 130 million on that project.

Got it. And then maybe just following up on that, you know, those are the three that, I mean, correct me if I'm wrong, but those are the three you've talked about in the past and in the release today. You talked about four. that you think potentially go to positive FID in the first half of next year? Anything you can disclose on that fourth project, what that is? Does it use IPSMR, that sort of thing?

Sure. And maybe I should say how I said one to four. I think that after COVID, what you really see in big LNG land is kind of eight or nine around the world that have strong viability to continue on. And so I'd say, you know, four, I kind of said, all right, a half of the subset of these moves pretty quickly here. So that's one way to think about it. But there is, I was talking about Port Arthur as the fourth.

You were. You were.

Yes.

Okay. Thank you.

And we would have content. That's all I can say, Eric.

No, that's helpful. Thanks. Okay. Thanks, Eric.

Your next question comes from Chase Nevhill from Bank of America.

Hey, good morning, everyone. It's Michael Bell on Interchase. Hey, Mike. How are you doing? I was just kind of wondering, you know, I think, Jill, you had mentioned 30 hydrogen liquefaction plants that you all are bidding on right now in the prepared remarks. Can you, I guess, just walk us through what timing looks like on those kind of average order size, what you think, you know, market share looks like? And then, you know, is that a good run rate going forward?

Jennifer Marietta- Sure. And, yes, 30, you're right, Mike, was our comment there. These are 25 to 55 million each type of sizes, and it really depends. Is it 10, 15, 30, 100 tons per day? So, that's why it's a pretty broad range, but 25 gets a very low end on one of these. They're less easy to predict, as you can imagine, like in terms of consistent order flow, just because they're pretty big capital decisions by the operators. But I would say that it's a nice spread of customers within there. So my similar comments to the trailer side where you're not heavily dependent on, like, okay, one customer has to make a decision for 10 of these. So that's a good trend that we're seeing. We're also seeing them very globally. So this is spread U.S., Australia, Korea, and the EU are kind of the main areas that we're quoting on liquefiers. I would say, so we've booked three year-to-date so far. I think that there's the potential to book two to three in the second half. Again, I stress for the listeners that in our world, a quarter shift means nothing. And so it's important that you understand how that works. And then lastly, I'd say in liquefaction in general, in particular for the actual liquefaction process, there are very few competitors in the world and essentially three. And with that, it puts us in a really good spot. And in liquid hydrogen overall, we would estimate our market shares probably upward of 60 plus percent.

Got it. That was all super helpful. And then Just lastly, you know, how comfortable are you guys with the price increases that you've, you know, talked about pushing through that, you know, can those, you know, fully offset cost inflation pressures you're seeing? And then, you know, if you need to, do you think there's more room to push another round of pricing through this year if necessary?

That's a loaded question, Mike. I can't say that. I can predict what's going to happen on the material cost side in the second half. We've seen some tempering of that. The average pricing is kind of a generic overall average. The pieces and parts of how we price range much more dramatic than the 8% to 12% average we shared. And so I guess I would say I'm pretty confident the team has done a good job in this as it's not an unusual activity for us because nearly all of our agreements have in place a form of a mechanism to either surcharge or pass this through. But, you know, the volatility of material cost in the first half was far more dramatic than I could have anticipated, so I'm a little hesitant to say that we've got it covered for sure. But I do think that there's tempering in the market, there's becoming more availability, and if that is the case and continues that way, we're well covered. If it's not, then just like, listen, everything supplier we have is saying, hey, I've got to increase my price, and I have to have that same conversation with our customers if that is the case. But we would only do that if we truly felt like it was penalizing us and we really needed to pass that through. So that will be a wait-and-see game-time decision as we see the second half play out.

That's perfect. Thanks, everyone.

Thank you. Your next question is from John Walsh from Credit Suisse.

Good morning, and if you don't have a karaoke team, I think Wade should be up for captain.

We actually have a karaoke machine in our corporate headquarters along with a slushie machine, and that's our onboarding activity, John.

There you go. Fantastic. A lot of ground cover. Just maybe one quick one and then another question on pricing. I think you talked in the prepared remarks kind of expectations back half for gross profit margin around RSL. But I'm wondering if you could give us some commentary on the back half margins for specialty products and how we should think about that ramp.

Yeah. So specialty is in the second half, I believe is going to prove out what, our thesis here is which is our higher growth products are also our higher margin products and so that's going to be a nice influencer on the overall margin and so we expect that to be the case in specialty in particular as you see some of these more unique projects moving forward that are on the hydrogen side and also even on some of the water side. These are capabilities that are pretty differentiated and customers need them and we can charge for them. So I'd step up specialty sequentially with the biggest step up being Q3 to Q4. So my same commentary around sales being we expect Q3 to be higher than Q2, but not nearly the significance of step up from Q3 to Q4, and the same I would play into the margin profile, and that's driven in part by these larger projects that have been announced.

Great. Thanks. And then, you know, circling back on pricing, obviously thank you for that detail on the slide. You know, I would assume that on the larger stuff, you know, you talk about the pass-through via surcharges, but is there a way to think about how much of the portfolio, you know, if you push through price because you have something unique, even in a deflationary environment, if we get to the other side of this, you'd actually be able to keep that price? Is there a, I don't know, percent of revenue where you think you have that capability or, or maybe even just thinking about how much of the pricing is surcharge versus, you know, real pricing that you would expect to hopefully stick.

Yeah, I would say just off the cuff answer, 85% of that pricing will stick and 15% is surcharge related. So, yeah, That's a – definitely has the potential to be an additional margin booster that we don't have in 2022 or 2023 thinking right now. So, yes, I think it's a very, very valid point, John.

Great. Appreciate it, and I'll pass the baton.

Thank you. Your next question comes from Ben Nolan from Staple.

Thank you. So – Well, I guess for my first one, I wanted to hit the 2030 TAM a little bit, just to clarify a little bit. I mean, when did that start? So it was sort of what's the beginning point of the timeframe there? And then the second part of that question is, I know that, Jill, in the past you've told me at least that On the previous TAM, you thought 50% – you guys could win perhaps 50% of sort of that total addressable amount. Does that hold for, let's say, through 2030, or would you maybe change that percentage at all?

Yes, so we – You have the kind of near term, the next few years at that $6.6 billion, and we really went bottoms up on this 2030 based on what we're seeing in the market and what we think is going to happen across the 10 years. So it steps up pretty quickly, 24, 25 in that timeframe. and the biggest chunk of that being hydrogen. And the way that we looked at the hydrogen market was really across the expected 500 billion of announced projects and their timing and how they ramp, which the biggest ramp around that is 25 and 26. And then we looked at the hydrogen for transportation markets around how does that play with the expected production of additional 11 million tons per annum of hydrogen production expected to be in place by 2025. 2030, all of this kind of played into our thinking. So I'd say mid-decade is really when you see the more significant ramp toward our total $36.5 billion, with hydrogen being the biggest part of that. The other thing I'd say around the 50% – I was talking to our guys this morning, just because that's the exact question that we've been bantering internally – My most conservative team member said 50, and my most aggressive said 65. So if you just said, Jill, you pick it, I'd probably go with 60 in terms of the market share on this stuff, just simply because we don't have a lot of competition, and even competition that's going to come in is going to have to prove themselves in difficult molecule handling.

Okay. I appreciate it. It's a great color. And then for my follow-up, something that we've been hearing a lot about is companies that are having difficulty finding people and hiring and retaining people and certainly seeing some wage inflation. Can you maybe talk through that? Is that something that you guys are seeing or experiencing or is sort of the fact that a lot of your folks are engineers and technical sort of insulate you at all from that?

Yeah, I'd say it's more the latter. We aren't immune to it by any stretch, in particular pockets of trying to, for example, find welders in particular geographic locations. But the other side of that coin is we do have our own welding team. We have our own welding training program. We have a weld council that's comprised of all of our key welders from all of our global locations and led by John Daubert, who's doing just a great job. So there's a lot of programs that are internal to retaining folks and developing folks. The other thing I'd say on this is the thinking around how to be flexible for key talent is really important. And that's been an area that we've tried to embrace where if we find a talented individual, let's just pick an engineer as an example, and they want to live in Alaska, that's cool if they can do their job from Alaska type of thing. And so thinking about that appropriately, but ultimately I'd say our compensation philosophy is to pay people as well as we can and still return the way we commit to our shareholders, and I think that's serving us well. Wage inflation specifically, I think that we'll – continued to see wage inflation at normal levels as we head into 2022. We're not seeing anything that's kind of driving an unusual spike in our labor spend in the mid-year of this year.

Well, one area where you might want to consider paying a little bit more is weight after that. But I appreciate the answers there.

Thanks, John. Thanks, Ben. Your next question comes from Ian MacArthur from Piper Sandler.

Thanks. The first one has really been beaten to death, but I need to repeat it. Wade, I'm so sorry that she made you do that.

No, the best Ian was Wade saying, are you kidding me, Joe? And I'm like, no, no, really not. Don't you know that song? Oh, yeah, I know that song. Merck's going to do it with me. No, he's not.

Good job, anyway. Again, just a detailed follow-up on that, the specialties, Tam, for 2030. So let's take 60% of it for grants for now, and that is a cumulative number, A, through 2030, or that is the year 2030, just to clarify that?

That is a cumulative number. Yeah.

Okay. So you've said, I think, with appropriate prudence, that you're seeing some tempering on the inflationary and supply chain pressures, but you wouldn't stake too much confidence that it goes away completely in the second half. So let's say it doesn't and we're still running pretty hot through the second half and into next year. Which parts of your business do you think would be the most elastic and inelastic? Would big LNG slow down if those project costs went up another 10%? I imagine specialty would be the least elastic. sensitive, maybe you could just maybe walk through those cuts and takes.

Yeah, so I'd say specialty and CTS would be the least sensitive to that, just given the variety of applications, but also the customer sentiment for their schedules and their timing is really the driver on that. We have, I'd say in specialty in particular, We have fewer conversations about price than we do about you better damn not be a day late on this thing. So definitely that would be my number one pick there. On the opposite side, I would say heat transfers probably, out of all the segments, the most impacted if that trend continues. Not necessarily big LNG, and I'll comment on that in a moment, but more of your kind of air cooler side of the business where you can – unless you absolutely need to retrofit something or fix it at that point in time, you could probably kick the can on a CapEx decision and wait for a few months type of timeframe. But on the big LNG side, I would say I don't think it's as cost-sensitive as it would have been 12 months ago, 18 months ago, 24 months ago, because these are projects that have survived and gotten to this point. They have regulatory approval. And they also know that there's a period of time that they've got to get going in order to construct this if they're going to have a part in the global LNG molecule party. So that's my view on it is they've reconciled themselves to, I'm not going to make adjustments to what's been approved regulatory-wise, and I've got to move something ahead to construction here. And so that's why I think it's less sensitive to that, whereas I think the smaller-scale LNG projects are more sensitive to it. A little bit of anecdotal there, so sorry about that, Ian, but you'd have to get into product-specific if you wanted to go deeper.

No, that's great. Thanks, Jill.

Thank you. Your next question is from Connor Wanai from Morgan Stanley.

Yeah, thanks. Just a question, high level on these 2030 TAMs. So, you know, there's obviously a lot of divergence in market opinions about the opportunity set in hydrogen versus carbon capture. But if I look at, say, the IEA's net zero report, hydrogen carbon capture, honestly, pretty similar order of magnitude through 2030 in terms of the investment that's expected and I'm just curious, you know, why in your mind is hydrogen such a more significant opportunity? Is it more related to where your content opportunity is best, or is it more related to customer conversations and market sentiment?

Yeah, from our perspective, it's more related to the customer conversations and market sentiment in terms of how – I think it's going to be there. And I don't disagree with the IEA's perspective. I think it's – It's more on how does it ramp through the next 10 years. So around hydrogen, like these projects are happening and they're spending, and I think that ramp, that more significant ramp happens mid-decade, whereas the CCUS side, the carbon capture side, is still piddling around, I think. That's not a technical term, but figuring out kind of what we want to do where, Do we want to do amine or cryogenic capture? How does this fit with what industries really work? So we built that ramp later into the decade in our addressable market size. If you kind of took it out into the 2030 to 2040 decade, you'd probably see a little more parity between those two in our thinking. And the biggest two chunks of our over $5 billion for 2030 TAM in carbon capture are are the large industrial post-combustion CO2 systems and the large utility post-combustion. So very little on direct air capture included in our thinking there.

Got it. Sort of unrelated question here, but I was wondering, given that it's becoming a more important part of the portfolio and certainly seems like there's a fair bit of volatility at the moment in the margins, Can you help us understand the sort of big product or service categories within RSL and just how we should think about why margins move so significantly one quarter of the other, what the big drivers in mix actually are?

Yeah, so the way I think about it is three big buckets. Cryo lease is one, so that's the leasing business, and that's had a little volatility in the last couple of quarters, but it will very much kind of steady itself out now that we have the leases in place at a more material, it's still an immaterial to this whole business, but kind of at more of that $5 million a month type of run rate. So I think that's That one's pretty steady. The second bucket is around aftermarket for the heat transfer side. So that's both air coolers as well as brazed aluminum, quick turn field work. That one always will be volatile. Quick turn field work and heat transfer is highly, highly profitable. And we always try to be really fair to the customers. But at the end of the day, if this is something that they need in a week, it it costs money to get it there and they're spending that money so that their downtime doesn't go out of control. It's a good trade off for them in that sense. So that's something that you will see volatility in. Um, and then the last bucket is what we call PRS or parts repair and service. And that's your typical kind of refurb. Very, very steady. The most unique part of the second quarter driving that, uh, gross profit margin as percent of sales down in RSL was there was a one time, um, shipment of a product that we had agreed to take last year as we were taking a defensive position in a certain product that we wanted to get us other business. And that's kind of flushed through now. So I would say you won't see that. It shouldn't be in the 20s. I don't want to say ever again, right? But that is really a fluke this past quarter.

Got it. That's helpful. Thank you.

Thank you. Your next question is from Pavel Malkinov from Raymond James.

Thank you very much. Kind of a short-term question first. We're watching cities like Mumbai, Delhi, Jakarta literally running out of oxygen, and you guys, of course, have a set of solutions for that. oxygen storage and shipping. So in the context of COVID, how have you been dealing with this burst of demand?

Yeah, we love your tracker too, Pavel. So keep sending that our way. It's helpful as we think about that question. And the good news is we have, we've continued to see that demand, as you point out, in particular in those locations that you just described. What we had done in November, December of 2020 was build additional inventory for medical oxygen related applications in anticipation, unfortunately, of another go around of kind of the height or peak of COVID. So having that inventory on hand has been super beneficial of not having to change our manufacturing processes or lines or shifts. And we also have the capability in our global locations, in particular in India, where the government has worked with us to have access to our ISO containers for oxygen. So it's continued, the demand has continued similar to as it has since the beginning of COVID, and the good news is we haven't had to shift manufacturing capacity to accommodate it.

Appreciate that. And I'll follow up by asking kind of a bigger picture question on the large LNG opportunity, let's suppose that you're right and we get one or two big projects moving forward sometime next year. Do you think that will be the final round of LNG new-build construction globally, forever, essentially?

You always hit us with the hard questions, Ravel. I think it's a very valid question. I would say that I think there's probably one more round after this kind of 2022 starting FIDs, but I think it's much smaller and it's probably a one-off or a two-off on those larger scale projects. I think you see this move toward the mid-scale and the small scale, the modularity. You're seeing a movement toward this hybrid concept, you know, multi-molecule concept. So, you know, one or two cycles would be my speculation.

Understood. Thank you very much.

Thank you. Your next question is from Walter Liptack from Seaport.

Hi. Thanks, guys. Hi, Walt. Most of the questions that I have have been asked, but I would do want to ask a clarifier on the karaoke question. Wade, was that taped previously or was that live for the call? That was live, Walt. All right. Okay. That's for you.

Sat right here at the conference table. And he managed to do it while the rest of us in the room were doubled over in laughter.

Yeah. All right. I wanted to ask a clarifier on the Teddy trailers. And if you could just go over those numbers again on, you know, what your production rates are right now. And you said you hope to get to a production level sometime in the future. If you could just clarify that.

Yeah, you got it. So I'll just run through a few of the stats. Some may be throwaway stats. In the second quarter, we booked 22 liquid hydrogen trailers, which will be produced in Teddy. We are tracking to, in the second half, be on a run rate of making one trailer per week. So 52 a year would be kind of our exit rate coming out of 2021. And what we're working toward is doubling that in 2022 because we're already seeing demand for booking slots in the second half of 22 and multiple customers looking for those same week deliveries. So significant ramp up. The good news is we have the space. We have the talent. We have the machinery. And so this is, again, just ensuring that we know we can hit the schedules, we have the material, we have the right suppliers. So I'm feeling really confident. And we have an ops guy, Shane, out of our Georgia facility that just got promoted, and he's running that facility now and very process-driven. So the ramp-up has been just amazing in the last couple of months under his watch.

Okay, great. All right. Thanks for that. And then just the last one, can you go over the M&A pipeline and expectations for, you know, any deals in the back half or as you look out into 2022?

Yeah, it's a good question. So, you know, we constantly see new deals, especially as we've been fairly active over the last 12 months. So we get quite a few inbounds. We certainly have pass on the majority of those after we evaluate them. They give us a good sense of what's happening in terms of potentially disruptive technologies. So we do take a look at them. But in terms of the real active pipeline, there isn't anything that's out there that you'd say, Jill, do you absolutely need to get in order to achieve anything you've talked about going forward in this next year or these next years or this decade? And The answer in short is no. We needed cryo technologies. We needed LAT. And we got those. And so we're feeling pretty good about it. So now we've kind of entered this opportunistic area. And one of the things that you see us kind of look at and we commented on previously is there are certain minority investments that we have that might make sense to own in full. Not all of them by any stretch, but some of them. And we pursue those when the founders and owners are ready. and anything that would come up that we would want but is valued appropriately, because I can tell you valuations are starting to get just out of our league, things we don't want to even do, and it just doesn't jive with our balance sheet philosophy and theory of trying to stay sub 3x on net leverage even when we're most levered at any given point in time.

Okay, great. Thank you.

Thank you. Your next question is from Veb Sebastianab from Coker and Palmer.

Hey, guys. Thank you for taking my questions. Maybe in the interest of time, just two quick ones. We talked about gross margins increasing in the second half. Probably my thinking is maybe it couldn't go to 30% or something, but maybe if you can just help us think about where it could be by the end of the year, and more importantly, as we think over the next few years as the revenues grow, Where can we go in terms of growth?

Yeah, I think your assumption is spot on as we go into the second half, that you could get to the 30%. In our high-end scenario, we got Q4 over 31%, but that's our high-end scenario. So somewhere in that 29.5%, 30% in the second half is very, very – safe assumption. Kind of full year, we look at that gross margin as a percent of sales normalized for one-time items, you know, at that 29.5 to 30 percent on the full year. So, you'd have to step up Q4 a little bit to get there. And as revenues ramp, we anticipate that total chart gross margin as a percent of sales increases into the low 30 percent, which is really driven by the margin mix from increasing revenue on the specialty side in particular.

And maybe I missed if you said like you talked about like second half orders or maybe could be like modestly below 2Q, but I didn't know if you threw out like a number. If you didn't miss it, sorry.

No, that's okay. I didn't specifically give a number. You know, the way that we think about it is if you looked back, you know, pre-COVID, our regular quarter order activity would have been somewhere between kind of 225 and 275 million per quarter. And now I am very, very comfortable saying that a regular order quarter is over $300 million. And I expect my commercial team is listening, and that means $400 million a quarter commercial team. So I think you could say in the back half, you know, but what we've assumed 2022 off of is, you know, in that $300 to $350 a quarter. And so if it's above that, then you definitely step up 2022 shipments but that's a safe assumption.

Okay, that's helpful. Thank you for taking my questions. Thank you.

Your next question is from Craig Shear from Tui Brothers.

Morning.

Morning, Craig.

Jill, and Ting, congratulations on another great quarter. You know, discussion about the TAM. Just wondering in terms of annual specialty market revenues, if you could envision that segment by mid-decade, call it 2024 or 2025, exceeding this year's total company revenue, and given you see carbon capture hitting more in the 2030s, do you anticipate when you get to $1 billion to $2 billion a year for specialty market sales, that that could have very long legs? I mean, on the order of 10 to 20-plus years, of stable, if not growing, order flow?

I'd answer that with two words, and it would be hell yeah. I think the middle of this decade, the specialty business is in line with what you just made your assumption on. If it's ticking to over $400 million this year, it's certainly at the growth rate we're seeing in demand that is not – it's not an assumption I'd balk at. And I think most people know that I tend to err on the side of less than the 50% mark of practicality. And I'm a conservative when I come to putting numbers like that out. But these macroeconomic tailwinds that are out there across the specialty area are just phenomenal and broad-based. And I'm frequently... What I think is underappreciated about our business is that we aren't a pure play, and that's a really good thing when you're looking at the hybrid that's happening in the world today. I won't bite on your second half of your question of could it be, you know, 10 to 20 fold. But, you know, listen, these next couple of decades, I just – I can't imagine that suddenly the skids get hit, that there's this much build in the next 5, 7, 10 years and then magically everything's built and it stops. And so I'm at a very 50,000 foot level bullish on how that growth unfolds. It just would be out of my realm of speculating to try to give a multiple.

Understood, Joel. It's very helpful. And to your point about not being a pure play, we kind of talked about this before, but I wonder if you have any additional color you might wish to share. When we get to the point that specialty markets is bigger than the whole current company, obviously it doesn't make sense to call it just specialty markets. And then resegmentation becomes a possibility, but then also splitting things off entirely and letting things be a standalone subsidiary or company becomes a possibility. Any thoughts on how to deal with this fast-moving, disparate division?

Number one is We want to exploit and take advantage of the market opportunities that are out there, and we want to be the global leader in these areas and own the most market share that we can, which equates to, in one word for the chart team, and they know this, is execution. And so that's our priority around all of these areas so that we can be having this exact conversation around, hey, these things are too big to be lumped together, but let's go execute on that first and foremost. What you will see us do, and we've already started doing internally in how we go about capturing this market share, is when we have a piece of specialty that is – I'm hung up on the word explosive. I keep using the word explosive, and I keep being told that's probably not good to use in cryogenics, but explosive growth. So, for example, we have a specialty group in the commercial team that reports to our chief commercial officer. We saw hydrogen was getting so active that we split that off, and it's its own commercial team that reports to the chief commercial officer. And so that's brought us numerous more activities because we've been able to have a hyper-focused group on that. So I think you'll see a stair step our way to that conversation that you're pressure testing around could these things be more valuable on their own. We need a few years to just bring it on home and then look at that as options.

Thank you. Thank you.

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.