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.