Chart Industries, Inc.

Good morning and welcome to the Chart Industries, Inc. 2021 fourth quarter and full year 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 and can be accessed 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, March 3, 2022. 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 filings with the SEC. The company undertakes no obligation to update publicly or revise any forward-looking statement. I would now like to turn the conference call over to Jill Levanco, Chart Industries CEO.

Thank you, May. Good morning, everyone, and thanks for joining Joe Brinkman and me today for our fourth quarter and full year 2021 earnings call. As usual, I will refer to the supplemental presentation, which can be found on our website. Starting on slide three, I'm going to give you our punchline takeaways for those who want the summary version in one or two minutes here. We're extraordinarily pleased to share that our fourth quarter of 2021 set new quarterly records and orders backlog and sales, resulting in full year records for each of those as well. The fourth quarter was in line and for some metrics above our expectations that we had heading into the quarter, and we were able to accelerate some projects and burn some lower margin backlog off as well. Additionally, fourth quarter reported non-diluted earnings per share of 34 cents or adjusted non-diluted EPS of 73 cents was in line with our expectations and contributed to our record adjusted non-diluted full year EPS of $2.84. For 2022, as well as the coming years, I would describe our perspective as very excited about our positioning in the markets we play, our complete portfolio of molecule agnostic technology and equipment, And for the first time seeing all elements of LNG progressing quickly. I'm more confident in our baseline reiterated 2022 guidance given the commercial activity and our pricing and cost actions. And I'm also more confident than I have ever been previously that there will be upside to it given the pending big LNG potential work. Given the escalating fighting in Ukraine in the past day and what we know right now, our comments today remain intact. I'd also remind everyone that we're not a pure-play company in any end market or molecule. We are molecule agnostic and serve a variety of applications ranging from LNG to hydrogen to traditional oil and gas, which is one of the greatest aspects of our business. So if one or more of these end markets or applications is positively or negatively impacted from macro circumstances, others are likely to be oppositely impacted. Now let's get into detail on each of these and our outlook. On slide four, you can see that not only did we set records for the total company in orders, sales, and backlog, both in the fourth quarter and the full year, but that it was driven by very broad-based demand across our product categories and geographies. Additionally, the fourth quarter of 2021 marked the third time in 2021 that we set a new order record. Orders for the year were $1.68 billion, over 26% higher than the former full-year record orders. This resulted in record backlog of $1.19 billion, of which 80% approximately is forecasted to ship in 2022. Every application within our specialty product segment set a record for orders and sales in 2021, and each application had full year order growth above 15% compared to 2020. Total specialty products full year orders of $649 million were a 132% increase over 2020. Food and beverage full year orders were 49% higher than the full year 2020 and fourth quarter 2021 food and beverage sales also hit record highs. We anticipate continuing record order levels in food and beverage in 2022 with ongoing restaurant footprint growth and specific projects such as our national account Chick-fil-A doing refurbishment work to upgrade over 100 stores with our tanks beginning this month. Every product category within our cryo tank solution segment had record sales and record backlog for the year. For the full year 2021, we sold a total of 594 trailers, a nearly 65% increase over 2020. Additionally, orders for fueling stations set new records both in the fourth quarter as well as the full year, with 48 stations sold alone in the fourth quarter. Both broad-based demand as well as these trailer and station trends continued into 2022 so far, with an additional 13 stations booked in the first six weeks of this year, as well as an additional 109 trailer orders booked in that same 45-day period. These orders contributed to January 2022 being our highest order January in our history. Also, we have seen very strong demand for rail cars recently from multiple customers, including one order in February 2022 for $6 million. Rail is another differentiated specialty product category for us. The fourth quarter and full year 2021 were also our highest sales quarter and year in our history, with $378.9 million in sales for the quarter and $1.318 billion in sales for the year. Fourth quarter sales increased 21% when compared to the fourth quarter of 2020 and an increase of 32% when you exclude big LNG revenue, which was $25 million in the fourth quarter of 2020. Generally, we were able to meet customer delivery expectations in the fourth quarter of 21, despite the supply chain, logistics, inflation, and labor challenges I will speak to in a moment. Much of the ability to keep up with shipments was the result of our strategic inventory build throughout the year. We purchased just under $100 million of additional material in 2021 than in a typical year. With our remaining safety stock, we feel confident in our ability to execute against our backlog. The sales progression throughout 2021 is shown on slide five, as well as adjusted operating income as percent of sales. You can see that both the third and fourth quarter of 2021 had adjusted op-inc margin of approximately 8.7%. Pointing to the far right-hand side of the slide, you can also see that there was approximately $16.8 million that was a drag to operating income in Q4. These were costs which were not adjustments to either our adjusted operating margin or our adjusted EPS figures. Without these items, adjusted operating margin would have been just over 13%. These items included logistics, transport, freight costs, inefficiencies from labor disruptions, and specific increases in material costs and expedite fees. With respect to labor, our COVID-19 absences were still meaningful in the fourth quarter, yet better than the third. And these absences did not meaningfully impact our sales in the fourth quarter of 2021. Eight of our global manufacturing sites had 100% on-time delivery in the fourth quarter, which was worth noting given all of the well-advertised challenges across all industries. I'd point out that we have had continued absence early in the first quarter due to COVID globally, and we have contemplated that into our guidance. We have taken specific actions to date to address each of these, some of which you heard on our third quarter earnings call, and the next pages in the supplemental deck address additional steps taken to which will positively offset these challenges incrementally throughout 2022. This can't be accomplished with pricing alone, and so using our groupings of three that we like to do, we've taken pricing, cost reduction, and automation actions. While we did not adjust for the cost that I just described, there were certain one-time or specific costs and gains that we do add back or reduce from our adjusted EPS, and you can see those on slide six. We added back restructuring and severance costs, the write-off of bank fees resulting from our October 2021 refinance of our revolving credit facility, deal and acquisition-related costs, and organic capacity and startup costs. We reduced EPS, adjusted EPS in particular, by the gain booked in Q4 related to our original minority investment in Earthly Labs upon the completion of the full acquisition of that business in December of 2021, as well as the mark-to-market gains within the quarter on our equity investments. As previously indicated on the third quarter 2021 earnings call, we anticipate add-back amounts to reduce as we head into 2022, given timing of acquisition integrations, in-flight capacity startup expenses, as well as not anticipating any further banking or financing charges or changes. Details of the reported non-diluted EPS of $1.66 for the full year and the record adjusted non-diluted EPS of $2.84 is shown on slide seven. A detailed reconciliation to these is included in the press release financials. So let's talk about why we have confidence in our 2022 outlook and also our confidence in pricing covering costs on new orders since the end of the third quarter of 21. Slide 8 shows our three main material categories on the left side of the page, all increasingly above last year, so same point in time this year versus same point in time last year, of roughly 50% or more. between those two periods. Therefore, pricing actions were and continue to be absolutely necessary in combination with these cost reduction activities that we're about to speak to. We price in three categories as well, shown on the right-hand side of slide eight. Standard pricing for book and ship products, which we adjusted prices as we have seen costs change. Project-based pricing, for which we have meaningfully shortened bid validity timing to capture the most current material costs. And finally, the long-term agreement category, where, when possible, we have worked with our customers to adjust pricing mechanisms to more accurately reflect the current state versus the typical lagging mechanism, which works fine in environments that are not hyperinflationary. As I reflect on the fourth quarter and the first month of 2022, material costs and availability behaved materially, pun intended, as we had expected heading into each quarter, and we took additional actions that I'll go into on slide nine. Before turning the page, nearly all of what you hear are challenges on this topic. Just let me take one moment and point out a piece of positive news, which is that we are seeing better availability in carbon and stainless steel recently, and carbon steel pricing has been trending down over the last 60 days. Additionally, availability of containers and trucks has been improving, and container cost was down 13% from the end of Q3 to the end of Q4 2021. If there's one slide in this presentation that should provide you with a level of detail that we're comfortable with coming out of the cost price drag as we burn off lagging backlog, it is slide nine. In addition to the pricing actions you heard about in October, we implemented two additional price increases in the fourth quarter of 2021 and increased our temporary surcharges, which are expected to cover our additional costs on new orders. To open 2022, we took further price increases on specific product categories and LTA mechanisms adjusted up for certain agreements. Given the increases in transport and freight costs that are well documented, we have eliminated free freight on volume discounts, and in order to keep product moving through our shops, we have implemented storage fees for customers delaying picking up product. As I said earlier, staying ahead of the inflationary environment and other cost challenges cannot be accomplished with pricing alone. The second leg of this is organic cost-out actions, and you can see specifics on slide 10. We have approximately $29 million of cost-out actions underway, with $14.5 million of it related to sourcing, $10 million operational, whether bringing outside work in, automating processes, robotic welding, just to name a few, and about $2.5 million by leveraging our Hyderabad India Center of Excellence for certain functions and open roles. Some of the automation, productivity, and optimization projects in flight require organic capital expenditure investment, and you can see specifics of that on slide 11. In addition to our investments in augmented reality for welding training, robotics on certain product lines in our facilities globally, and 3D printing for jigs and fixtures, we are also investing in expanding capacity for high-demand products. The capacity expansion couples with our flex manufacturing approach, which has been underway for about two years now. with the intent to have each of our products being capable of being made in more than one location, as well as focusing certain facilities with specific skill sets on higher value-add products. There are numerous of these types of projects underway, so let me just speak to a few of them briefly. We're well underway on adding a 98-inch brazing furnace and associated brazed aluminum heat exchanger line to our Tulsa, Oklahoma manufacturing location. This will allow brazed cores to be manufactured both in Wisconsin and Oklahoma, and provide flexibility for specialty products as well as big LNG. This line is expected to be complete around the end of the year. This is located at the same site as our expanded TulsaFlex manufacturing, where we're doing higher volume, larger components such as skids for a variety of our product lines. And not to just be a volume facility, we have our 3D printing capabilities at this site as well. Our Germany trailer facility is very busy, as you heard with the numbers that I shared earlier, and we're expanding it onto the adjacent land that we own. This expansion not only allows for expanded industrial trailer and gaseous hydrogen trailer manufacturing that we currently do at that site, but also will give us production capacity for liquid hydrogen trailers in the EU. Once the expansion is complete, this location will offer service and refurbishment of stationary equipment. Our Sri City, India expansion is underway, also at our own land at our existing site. Our India business posted record orders and sales in 2021, and demand is expected to continue to increase. And you've heard us talk about our love of the Teddy trailer and tank location in Theodore, Alabama, which came to us through our acquisition of the business in October of 2020. The location set numerous records for production, order intake, sales, and margin in 2021, and we are leveraging a talented workforce and local pool of talent as well as the 300,000 square foot facility for additional product manufacturing. freeing up space in other locations. We accelerated certain capital investments into the fourth quarter of 21, as shown on slide 12, which resulted in full year 2021 capital spend of $52.7 million. Fourth quarter 2021 capital spend of $16 million included certain activity in our capacity expansions just described, as well as robotics. Consistent with our expectations, we generated cash from operations of $20 million in the fourth quarter, When adjusted for one-time impacts, adjusted free cash flow was 34 million net of capital expenditures. Throughout 2021, we strategically decided to increase our on-hand inventory balance as a result of the significant increases in material costs and the already frequently discussed availability challenges. This decision resulted in lower than typical free cash flow for the year. We are pleased with the decision as we were and are able to meet our broad-based demand. And while we continue to carry higher than typical inventory levels into this year, 2022, to meet this demand in an ongoing difficult supply chain environment, we still anticipate that free cash flow for 2022 will reflect the tempering of these challenges as the year progresses, as well as the timing of sales out of our backlog. Our outlook for 2022 free cash flow is approximately $175 million to $225 million, excluding any free cash flow impacts from big LNG work that is anticipated to be booked in the year but is not yet in backlog. So now let's turn our attention to innovation that is underway, segment specifics in our 2022 outlook. Slide 13 shows our nexus of clean menu, full solutions including process technology and equipment for clean power, water, food, and industrials. The neat part of this menu is that customers can choose the total solution or treat it as an a la carte menu, picking what piece or part they need. As I said earlier, our equipment is molecule and technology agnostic, so it can work for a variety of needs. Furthering this full solution set and expanding our carbon capture and food, beverage, and cannabis applications and specialty products was the completion of our acquisition of Earthly Labs in December of 2021, the world leader in installations of small-scale carbon capture. Through Earthly Labs, we booked our first winery install at Trefethen Winery, our first distillery at our first New Zealand installation, and our first UK customer. Not to be outdone, though, was our chart water platform, which consists of ad-edge and blue and green process technologies with chart equipment, which posted record orders, backlog, and sales in both the fourth quarter as well as the full year. We're beginning to see multiple water treatment opportunities in non-North American locations, such as India, including a $6 million win yesterday. Specialty products tends to be the segment also with the most first-of-a-kind, and you can see that on slide 14. There were 22 of these folks in the fourth quarter 2021, contributing 79 in the full year. On the right-hand side of slide 14, you can see our 402 new customers for the full year 2021, with 37 percent in EMEA in India, 29 percent in North America, 24 percent in China, and 10 percent in the rest of the world. Another way of looking at how broad-based the demand that we're seeing really is. One of the things we pride ourselves on as well is our leading innovation mindset and being the first to translate that innovation into actual products and orders. We're very privileged to have, as a result of our acquisitions in the nexus of clean, all of the founders and CEOs of those businesses decide to stay in the chart family. In order to harness their amazing intellect, entrepreneurial spirit, and start to leverage the interlinkages among clean power, water, food, and industrials, we've created our Founders Innovation Team, as seen on slide 15. And internally, we call that the Ocean's Eleven Team, but our lawyer said I can't really use that for copyright purposes, so we'll go with Founders Innovation Team. These founders continue to run their businesses, but have joined forces to come up with innovative ideas on bringing their individual products or technologies together and we've already seen immediate impacts to the business as shown on slide 16, and that's just a subset of what's happening. For example, AdEdge is utilizing our Tulsa Flex manufacturing facility and our repair service and leasing 24-hour service capabilities, which resulted in a win of $1.4 million reverse osmosis contracts just in January. Both AdEdge and Earthly Labs are selling water treatment to Earthly's brewery customers. That's less than two months in. And also pretty neat is that we have a new addition to our emerging leader program from the ad-edge team, bringing additional high-potential talent into the broader business. Our founders innovation team is also coming up with the next generation of technologies. Slide 17 shows one that the ad-edge team is working with hydrogen companies to design and implement into electrolyzer offerings. This is a containerized water treatment solution for ultra-pure water for green hydrogen electrolysis. All right, so that's pretty cool. but nobody can ask me a technical question in Q&A on that particular application. For the technical stuff, I'm going to turn it over to Brinkman.

Thanks, Jill. Now let's turn to a few data points for the four segments. Starting on slide 18, you can see our hottest specialty products area, hydrogen. Fourth quarter 2021 specialty products orders of $182.3 million included hydrogen and helium orders of $85.4 million, including a 15-ton per day hydrogen liquefier, 19 hydrogen trailers with five of these sold for use in south korea for the full year 2021 we received orders for 62 hydrogen trailers compared to a prior record of 26 ordered in 2020. this activity contributed to full year hydrogen and helium orders of 282 million dollars a record year and a 640 percent increase over 2020. also we recently announced the first ever successful test of a fuel cell operating with liquid hydrogen utilizing Ballard's fuel cell and Chart's hydrogen vehicle fuel system. We supported students at the University of Delft with their development of a Le Mans-style hydrogen race car, and in the fourth quarter, we completed an MOU with Howden for the development of more standardized and integrated hydrogen solutions. It is also noteworthy that the geographic spread of hydrogen customers is expanding. and we are in the various stages of discussions with over 300 potential customers globally. We included slide 19 for information on some of the countries that are becoming more active commercially in hydrogen over the past three to six months. Also, a differentiator for our hydrogen product offering is our ability to have certifications in these regions, as there are currently no global hydrogen certifications. The China Group Code is a great example for the liquid hydrogen storage tanks. As a reminder, And as a result of this, we booked a $9 million hydrogen order in the third quarter of 2021 for a customer's project in China. What isn't shown on the slide in the deck, but worth quickly touching on, is carbon capture. Our large industrial carbon capture offering, Sustainable Energy Solutions Cryogenic Carbon Capture, has recently had wider commercial acceptance. We are currently working with 199 potential and current customers for the SES offering. In the fourth quarter, we booked an order for a feasibility study using our CCC technology with international flavors and fragrances. Also, the National Oil and Gas Company in Columbia signed a contract with us to conduct a feasibility study in a flue gas stream for one of EcoPetrol's refineries. The result of the evaluation will be used by EcoPetrol to estimate the feasibility of this technology in reducing its CO2 emissions. We continue to believe that carbon capture needs to be a key part of this decade's plan to achieve both public and private sector 2030 carbon emission reduction targets. Moving to cryotank solutions, slide 20 focuses on ChartChina. I mentioned the group code and liquid hydrogen tank order on the last slide, which is one of many examples that our China business is evolving into a key supplier both to our sites as well as our external customers. This location is by far our largest intercompany supplier, which allows us to leverage our flex manufacturing capabilities that Jill described earlier. And note the numerous records set by the team on the left-hand side of the slide, including full year 2021 record orders, sales, operating income dollars, and operating income as a percent of sales. Lastly, on the right-hand side of slide 20, you can see some of the recent Chinese policies which indicates support for cleaner power. We are well positioned in the country to be a key participant in fulfilling equipment needs for these upcoming national policies. We continue to target 20 percent of total revenue in the coming few years for our repair, service, and leasing segment. There are numerous drivers of that growth, including the additional footprint we have in place, 2021 being our first full year of having more fulsome repair and service capabilities and customers in Europe, additional long-term agreements, and increasing level of onsite startup work. One of the larger drivers of this growth is the leasing business. You can see on slide 21 the significant progress made in a short period of time on increasing our assets available in our leasing fleet, as well as more than doubling the number of customers with active leases in one year. And perhaps the most impactful is the revenue from leasing of $49 million in 2021, expected to grow in 2022. It is finally a very exciting time for LNG, whether big LNG, small LNG, LNG infrastructure, all of which are positives to us. We were actively involved in the startup processes at Venture Global's Calcasieu Pass export terminal this past month. And in the fourth quarter 2021, we were issued another patent for our IPSMR process technologies covering the process system itself. Additionally, IPSMR and IPSMR Plus have been qualified by another major international energy company, Total Energies. We continue to expect Venture Global Plaquemines Pass Phase 1 to proceed to FID in the first half of 2022. This project is anticipated to include approximately 136 million of chart content. In the fourth quarter of 2021, we received a $1 million first release on engineering work on this project, and yesterday, a second release of $9 million. Chenier, whose Corpus Christi Stage 3 project we anticipate will include approximately $375 million of our content, also released us on engineering work in December 2021, and we expect a full notice to proceed in 2022. The Lurie and Driftwood Project Phase 1 continues to progress toward their intent to proceed to construction in early 2022. We anticipate this will include over 350 million of chart content, none of which is in our backlog. We were awarded approximately $80 million of orders for three small and utility scale LNG liquefaction projects with three different customers during the last week of 2021. Contributing to our total of seven liquefier orders in 2021, our record number OF LIQUIFIER'S BOOK IN OUR HISTORY. AND WE BELIEVE THIS IS JUST THE BEGINNING OF THE SMALL-SCALE TREND. OUR COMMERCIAL PIPELINE OF SMALL UTILITY SCALE AND REGAS POTENTIAL PROJECTS TOTAL OVER $1.5 BILLION. THERE WAS A LINE IN OUR PRESS RELEASE RELATED TO WHAT WE EXPECT TO BE A CONSTRUCTIVE OIL AND GAS SPENDING ENVIRONMENT THIS YEAR. IN THE PAST FEW MONTHS, WE HAVE SEEN AN UPTICK IN PROCESS AND UPSTREAM INQUIRIES AND IN TRADITIONAL APPLICATIONS, AS WELL AS NEW ENERGY-FOCUSED INFRASTRUCTURE PROJECTS. Additionally, biogas projects are gaining traction as their production cost is not impacted by direct market pricing. Back to you, Jill, for slide 23.