Chart Industries, Inc.

Continue to stand by. Thank you for your patience. © transcript Emily Beynon Thank you. Thank you. Oh, my God. Thank you. Thank you. Good morning, and welcome to the Chart Industries Inc. 2022 First 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 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 Friday, May 6, 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 earnings release and latest filings with the SEC. The company undertakes no obligation to update publicly or revise any forward-looking statement. I would now like to turn the conference call over to Jill Ivanko, Chart Industries CEO.

Thank you, Liz. Good morning, everyone, and thanks for joining us today for our first quarter of 2022 earnings call. With me today is our CFO, Joe Brinkman, but you won't hear from him verbally as he has a cold, so his voice is pretty rough. We're going to try to save it for next week's Investor Day, which is next Thursday, May 5th. So you're stuck with me today, but as usual, I will refer to the supplemental presentation, which can be found on our website. Starting on slide three, the quarter included our sixth consecutive record quarter of backlogs, our highest-ever quarter of orders, and our continued progress of closing the gap of pricing and cost, which is demonstrated through our sequentially improving margin profile, as well as our continued completion of various acquisition integrations and capacity expansion projects. You will see this reflected in our add-backs to earnings per share, excluding the mark-to-market gains and losses of our inorganic investments net of effects, are down 42% when compared to Q4 2021. But first, let's walk through what's happening in our markets. Demand for our products, in particular LNG and other energy solutions and equipment, accelerated as a result of the Russia-Ukraine conflict that began February 24th, our last earnings call. We have seen an increase in actual orders as well as inquiries from both public and private sector entities surrounding the need for infrastructure to access molecules to support energy security, independence, and resiliency, all with the backdrop of the requirement for alternative sources of supply and can focus on sustainability. We continue to hear from various entities that the conflict has spotlighted the need for construction and action now to address these themes. Slide three provides some examples from the past 45 days of actions taken by governments and private industry to support this energy independence, resiliency, security, and sustainability. These themes were in part reflected in our record orders of $636.8 million and record backlog of just about $1.5 billion. but perhaps more meaningfully reflected in our growing pipeline of commercial opportunities, the largest pipeline we have ever had. On slide four, you can see that these records were not just driven by one segment or product category on the left-hand side of the chart. Two of our four segments, as well as the total company, posted all-time record backlog in the first quarter, while seven product groupings within those segments also ended with record backlogs. Total company backlog increased over 58% when compared to the same quarter in 2021, and cryotank solutions, specialty products, and heat transfer systems backlogs were each up 49%, 55%, and 77% respectively. We'll talk through orders and sales in the next few slides, but before we get into those specifics, let me take a moment to share a few other noteworthy highlights from our first quarter, some of which are shown on the right-hand side of the slide, a few to point out specifically around the hydrogen side of the business. While much of the past two months has been around immediacy of natural gas and LNG, there has not been a slowdown in the focus and action surrounding more sustainable and ESG-oriented answers. For example, we completed a memorandum of understanding with a major industrial gas customer for liquid hydrogen equipment globally, which adds to the continued expansion of our hydrogen install base in a variety of different geographic regions. Additionally, we see China as a meaningful future hydrogen region, with an announcement in March from their National Development and Reform Commission that China aims to produce 100,000 to 200,000 tons of green hydrogen a year and have 50,000 hydrogen-fueled vehicles by 2025. We executed an LOI with Greenstone Renewables to be their exclusive liquefaction technology and equipment supplier for their 100% renewable solar hydrogen production project. We have not yet booked an order associated with this, but expect to do so later this year. We became the first founding member of Semvita Factory's gold hydrogen synthetic biology process. You can see some of Semvita Factory's early successes through their collaboration with United Airlines and Oxilo Carbon Ventures for commercialization of sustainable aviation fuel. As an aside, we are hearing more about SAF, which is another opportunity for us. While the end product is an alternative liquid fuel, there are situations where the hydrogen needs to be stored and transported from the production site to the SAF producer's plants. We're currently quoting on 30 different hydrogen liquefaction projects with 30 different potential customers. And these 30 are part of the 419 potential customers we are currently working with for liquefaction, storage, transport, and end-use hydrogen solutions. Just as a point of reference, two years ago this month, we were talking with approximately 30 potential hydrogen customers. And one year ago this month, we were talking with 214 of them. We've increased the number of individual customers that we have sold hydrogen technology or equipment to by 70% in the past six months, further evidence that there continues to be ongoing support of hydrogen as a key part of the energy transition. Now, turning to slide five, you can see our $636.8 million of all-time record orders. When backing out the $228 million of big LNG orders received in the first quarter, we booked over $400 million of non-big LNG orders, which included New Fortress Energy's order for fast LNG, too. We're very excited and proud to continue our work with NFV on their FAST LNG unique, expeditious, and creative solution, and we kicked off April with a letter of intent for FAST. EMEA in India first quarter 2022 orders were a 9% sequential increase over the fourth quarter 2021, and the strongest first quarter of the year in the history of the region. It is rare in our cryotank solution segment to have sequential Q4 to Q1 increase in orders, but that is the case this year. and we do expect additional success in the later quarters this year. We also booked 65 individual orders, each greater than $1 million in magnitude, twice as many of those as we booked in Q1 of 2021, and making this our fourth consecutive quarter with this metric being over 60 individual orders per quarter. All of this contributed to our book-to-bill ratio of 1.8, or excluding the big LNG orders, of 1.15 in the quarter. I just shared our record orders and backlog, which are included on slide 6, Sales of $354 million was our highest first quarter sales in our history, an increase of 22.7% when compared to the first quarter of 2021. All four segment sales increased more than 14% over that same period, with specialty products leading the way on a year-over-year increase of 39%. Slide 7 visually shows our continued progress on pricing and cost actions. Reflected in our first quarter, 2022 reported gross margin as a percent of sales of 23.6%, and adjusted gross margin as a percent of sales of 26.1% when excluding restructuring and organic startup capacity costs. This demonstrates our progress in incremental and sequential quarterly improvement in our margin profile. I would also note that we continue to face in the first quarter additional headwinds that we do not adjust for in either gross or operating margin. Some of these we anticipate to continue throughout the remainder of the year, such as additional logistics, transport, and freight costs. Others we anticipate will improve in the second half, including China COVID impacts, electricity and gas costs in our European shops as weather improves, and manufacturing inefficiencies of previously outsourced products brought in-house as we leverage the synergies from our recent acquisitions. And still others were truly one-time in Q1, such as inefficiencies from robotic cell repair, which is now completed, and the repair of our collapsed storm sewer in Minnesota. You can review slide 8 specifics on your own, but the takeaway is that our add-backs, excluding mark-to-market net of effects, were sequentially 42% lower in the first quarter than they were in the fourth quarter of 2021. We continue to complete acquisition integrations. We do not anticipate refinancing costs this year, and some of our organic capacity comes online throughout 2022. Note that we will continue to have mark-to-market adjustments each quarter. Our first quarter of 2022 reported non-diluted EPS of $0.28 included a negative impact of $0.11 from the quarter's marked market of our inorganic investments net of tax, as well as operational one-time costs related to restructuring, startup capacity, and deal and integration, totaling $0.26. When adjusting for these items, adjusted non-diluted EPS was $0.65, as shown on slide 9. Our analysts were debuting our first slide in the appendix, which we thought was a great recommendation from one of our analysts and is intended to make the walk from reported to adjusted with dollars much easier. So moving to slide 10, this is the first of two slides that you have seen for the past few quarters providing our perspective on direct business impacts from the six biggest challenges in our current operating environment. Material cost and availability is by far our highest ongoing concern, and we focus our discussion on the three main material inputs in our business. aluminum, stainless, and carbon steel. Throughout 2021, we strategically decided to increase our on-hand inventory balance as a result of increases in material costs and the frequently discussed availability challenges of materials. Given the uncertain supply chain and material cost environment that worsened as a result of the Russia-Ukraine conflict, we've chosen to continue to strategically build safety stock of key raw material inputs, especially given our ability to source these globally while attempting to procure them at lower cost points in the market. Because we did build safety stock last year, we are able to monitor pricing and purchase at better entry points based on the material price indices. Cost per ton does vary by the hour, so we've taken advantage of those entry points the past six weeks to buy at non-peak levels. In some cases, we had put in place the option to forward buy and pay at current month fixed costs. We did this in the United States for stainless steel in early February at the prior month fixed cost, which has proven to be a near-term success. Considering the surcharge on this particular supplier, stainless is up 57% now compared to February. We, like most companies, are not immune to the well-documented supply chain disruptions, yet there is nothing meaningfully new to discuss on this topic shown on row two. Row three is the continued force majeure we are under from our United States gas suppliers to our manufacturing plants. This started with nitrogen in the southeast in August of 2021, and now helium is the challenge across the U.S. We have not had a month without being under force majeure from the supply base since August of 2021. And while we have a variety of alternatives that are in play and underway, it still creates inefficiencies for us. We expect that the situation will improve in the summer, yet we are planning for the worst case of continuation throughout the remainder of the year, which is included in our current outlook. On slide 11, I'm going to skip to row six, as rows four and five are currently in decent shape. ChartChina exceeded their first quarter 2022 forecast, even when faced with a week of COVID-related lockdown where no production could be done. The team gathered a small group of our assemblers and was given clearance to ship, yet the team had to stay 24 hours on site for that time period. So congratulations and thank you to our ChartChina team. Also, we anticipate the second quarter to have some logistics headwinds in our China facility. Less specific to our shop, but more so as a result of port congestion, the worst it has been in six months in the South China hubs, as well as a growing backlog at Shanghai. We're watching COVID restrictions and the risk of additional sourcing challenges given the situations in particular in Q2. It is worth noting, though, that we do have other options globally on sourcing and shipping. Slide 12 is the same information that was shown on our last earnings call, 2021 pricing actions taken. We've included it here just for sequential reference. So now moving on to slide 13, what actions we've taken year-to-date 2022. As you've heard, material costs and other hyperinflationary trends continued throughout the first quarter. We continue to update pricing based on market conditions in our three main categories of pricing mechanisms, as shown on the right-hand side of slide 13. In the first quarter, we had our long-term agreement index adjusted price updates. All standard price lists had pricing adjustments, Specific regions had increases based on material cost in that region. Our 15% market condition surcharge was in effect the entire first quarter 2022 for non-contract customers, and we increased the surcharge after the material cost changes did not temper but rather increased. An example of one of the variety of macro headwinds that we have been improving through specific actions is shown on slide 14, is the delta between freight costs and our ability to pass that through to our customers. The left-hand graph on the slide shows the global container freight index for the past three years. From January of 2021 to January of 2022, you can see the dramatic increase in freight cost of over 300%. And that comes on the heels of the prior 12-month cost increase of over 200%. Now, turn your attention to the right-hand graph, which is our delta between freight cost and freight we pass to our customers. You can see that the first quarter of 2022 was the smallest gap, or said differently, the best quarter we've had in the past six quarters of closing this gap. This comes as a result of standardizing our approaches to free cost pass-through and eliminating free freight on volume discounts. So coupling the cost-out activities and pricing actions with our capacity expansions will allow us to continue to profitably grow. On slide 15, you can see our anticipated CapEx for 2022, which is unchanged from our prior guidance in the range of $50 to $55 million for the full year. The green boxes are updates today. The first is that we have completed our vacuum-insulated pipe manufacturing line in our European shop. The second is our first quarter 2022 CAPEX spend of $12.6 million. And finally, we plan to share our next series of CAPEX projects for 2023 through 2025 at our investor day next week. Now, we don't always time our capacity expansion perfectly, but we came pretty close with the timing of our newest brazed aluminum heat exchanger furnace and line. An update is shown on slide 16, and this line is scheduled to be fully operational in the first quarter of 2023. This adds flexibility for a variety of core sizes, as well as adding a location that's close to New Iberia, Louisiana, for ease of transport of the brazed cores to our water-adjacent cold box facility. Also making great progress is our Shree City, India expansion on slide 17, primarily for tanks and potentially trailers. Already partially in use as of this month, expected to be 100% operating in July of this year. It adds another level of flexibility for us in the region, for India for India manufacturing, as well as for export. And we'll utilize it as we expand our water treatment business in India. As a reminder, we booked record orders in India as a whole last year. Now let's look at the progress by segment, as well as some specific wins in our nexus of clean, starting on slide 18. As I mentioned previously, each segment sales were up 14% or more when compared to the first quarter of 2021. and the record specialty orders from 2021 are starting to convert to sales as well. Both reported and adjusted gross margin as a percent of sales sequentially increased, not just for chart as a whole, but in each of our four segments compared to the fourth quarter of 21. So slide 19 is our menu of clean solutions that you've seen on numerous occasions for the nexus of clean, clean power, clean water, clean food, and clean industrials. While much of the past two months has been around immediacy of natural gas and LNG, There has not been a slowdown in the focus on actions surrounding more sustainable and ESG-oriented answers. That's the second time that I've said that exact sentence in this call to date, and that's really important because we're seeing multiple different in-flight types of focus on ways to solve for the energy discussion that we've been having in the macro environment. So we're pleased that we inorganically completed the acquisitions and investments that we did in late 2020 and throughout 2021, as we're seeing numerous... opportunities across these interlinkages of clean options. And you can see some of those examples on slide 20. LA Turbine had their highest order quarter in five years, while Earthly Labs had historical record high orders, including orders with 12 new customers. These 12 new customers contributed to our total 84 new customers in the first quarter. Water treatment sales grew over 500% from Q1 21 to Q1 22, and sequentially grew 21% over the fourth quarter. despite the water treatment shop team members being hit hard by COVID the first part of this quarter. One of the very exciting parts of the chart water business, from my perspective, is seeing the cross-selling between our core food and beverage customers, Blue and Green and AdEdge's water customers, Earthly Labs' small-scale carbon capture breweries, wineries, and distilleries, and our larger-scale carbon capture business, SES. One example is Blue and Green sold the largest industrial sale in our history for a containerized S-DOX unit, to International Flavors and Fragrances, or IFF. Blue and Green introduced IFF to SES, and they did a paid engineering study for our cryogenic carbon capture technology for large-scale industrial manufacturing. Since Earthly Labs joined us in December of 2022, in coupling up food and beverage, water solutions, and small-scale carbon capture, we've had 28 cross-selling opportunities between these businesses already, with total order potential greater than $40 million if each comes to fruition. And this month, we launched our sustainable brewery solutions package, an all-encompassing approach to beer breweries. That includes rain harvesting, water treatment and reuse, CCUS, and dosing. This is a perfect example of the nexus of clean. Industrial carbon capture opportunities continue to increase. In January of this year, we had 199 potential CCC or SES cryogenic carbon capture customers. As of the first week of April 2022, we had 252 and have sent 148 proposals out. We're under 81 NDAs for our SES large scale carbon capture technology. This past quarter, there's also been an all at once interest in our gas by rail offering as seen on slide 21. We saw orders come in for Argonne rail cars with a pipeline of more to potentially follow and a large commercial pipeline of LNG rail cars on the horizon. with commercialization taking hold in other geographies. We're uniquely positioned to serve the gas by rail industry. We expect to increase the size of our addressable market for this offering in the coming months if the commercial pipeline continues as it has this past quarter. Slide 22 addresses why we are seeing more LNG opportunities. We shared last quarter that was the first time in our history where the three facets of our LNG offering were all increasing at the same time, those three being big LNG, small and utility-scale LNG, and LNG equipment. This quarter's macro environment, as I laid out at the outset of the call, coupled with a few chart-specific wins, is driving the opportunity even higher. You can read the macro bullets on your own, but let me add a little bit of color to the right-hand side of the slide. Modular mid-scale approach to export terminals is gaining traction beyond the U.S. Gulf Coast, including in regions such as South Africa, which is different than before when our larger IPSMR process opportunities were typically solely North American. IPSMR and IPSMR Plus continue to receive qualification by LNG operators, including international companies, most recently qualified by Total Energies for their upcoming projects. Couple this with our ongoing differentiation via many international patents and our latest process patent, which we had announced on our last call. Our process lends itself to retrofitting for increased gas output in brownfield locations, And IPSMR efficiency leads to lower CO2 per ton of LNG. So our heavy hydrocarbon removal process handles the extreme gas compositions while maximizing LNG production. And finally, IPSMR is proving to be an ideal solution for floating LNG. So now turn to slide 23, and you can see the increase in our real commercial opportunity pipeline. Three main contributors. First, the resurrection of more big LNG projects. Second, the addition of specific international liquefaction opportunities. And third, the increase in potential floating projects. Export terminal projects that were either considered dead or at a minimum a long shot are now back with fervor. For example, just yesterday, the Magnolia LNG project, for which we will have content, this is a project that's already FERC and DOE permitted, received DOE approval for an increase to Magnolia LNG's authorization to export additional 0.8 million tons per annum. This trend in general is reflected in the doubling of the number of reasonably possible projects to move to order stage in the next two years. I'd also point you to the second from the bottom row on the lower chart, showing the doubling of floating LNG projects in our bid pipeline. And while the order potential size of small-scale LNG hasn't dramatically increased, the number of and dollar amount of projects that we think move ahead this year certainly has. Booking some of these opportunities in the coming few months could drive the potential to reach the higher end of our guidance range, as shown on slide 24. Our anticipated 2022 full-year sales outlook is in the range of $1.725 to $1.85 billion with associated non-diluted adjusted EPS of $5.35 to $6.50 on approximately 35.83 million weighted shares outstanding. The weighted shares outstanding number is an increase from our prior guidance, which was 35.6 million shares. all of this assumes a 19% tax rate. Our current sales outlook includes approximately $25 to $40 million of big LNG-related revenue in the year. We want to reiterate again that our sales timing is expected to sequentially increase throughout the year with the big LNG revenue, primarily in the latter part of 2022. And I say latter half, latter part. We debated semantics on that, but Suffice it to say that there's nothing meaningful from big LNG revenue in Q2, but the range we're providing here today is in the second half. Recently, key customers from our HLNG vehicle tank products lowered their 2022 purchasing forecast as a result of the macroeconomic challenges in the vehicle industry, citing specifically the second quarter 2022 impacts. We do anticipate that this is timing into 2023 as the vehicle industry works through their supply challenges. There are specific opportunities that I mentioned on the last slide in our commercial pipeline that if booked as orders in the coming few months could drive our outlook toward the higher end of the range. As we said previously, we do anticipate the first half of 2022 will continue to have a margin drag from historical levels from the ongoing macro challenges, but increasingly the offset as the year progresses by the positive impact from the actions that I've laid out today. Now, with big LNG orders booked, and anticipating additional big LNG orders later this year, our 2023 through 2025 outlooks all increased meaningfully. And perhaps this is the biggest modeling takeaway of the call. As I mentioned earlier in the call, we made the decision to continue our strategic safety stock inventory build, and in turn, this resulted in lower free cash flow for the first quarter of 2022. It allows us to meet our customers' ongoing delivery timeliness and record demand levels, thereby continuing to secure additional business. Even with these challenges and this strategic decision, our net cash used by operating activities was only negative $22 million, and when adjusted for unusual items was positive $8 million. This included an increase in inventory in the first quarter of 2022, driven by the strategic sourcing decisions we made to add the safety stock, the increases in material costs, and the purchasing of material for our larger projects that were booked in the fourth quarter of 2021 and the first quarter of 2022. So even considering the inventory headwinds, we do continue to anticipate that with the payment schedules for big LNG projects work in backlog and some of the other working capital activities on the horizon, that our full year 2022 adjusted free cash flow will be in the range of $175 to $225 million. This month, we did release our third annual sustainability report, which we're very proud of, highlighting the meaningful progress we have made toward our 30% carbon emission reduction target by 2030, as well as all progress on all of the elements of our ESG activities. I encourage you to read the entire report, as I obviously can't cover it all on this call, but I'm going to point out just a couple of notable items. Last year, we reduced our GHG intensity metric by about 14%. Last year, we instituted an ESG component to our short-term incentive awards, and we've maintained that metric-driven target for this year's awards, too. And in summary, we contributed five of the United Nations Sustainable Development Goals. Part of ESG is safety as our number one priority, including as of the end of March 2022, having our lowest ever 12-month total recordable incident rate. Many of you ask, how easy is it for competition to enter these very attractive applications and markets that we play in? I've shared on numerous occasions that cryogenics is not easy, not the process, not the technology, design, or manufacturing of these types of solutions. One such reason is that it has to be done with safety as the number one priority given the high pressures, flammability, and other varying characteristics of handling these molecules. Our biggest safety-advocated chart, and I would go so far as to say in the cryogenic industry, is Tom Druby, one of our very own engineering fellows and vice president of engineering. This month, Tom received the distinguished Charles H. Glazer Safety Award for 2022, which is presented annually by the Compressed Gas Association, or CGA, to an individual in recognition of their safety leadership in the industrial gas industry. We are very proud to be on the same team as you, Tom. Thanks for all of your safety work. And now, Liz, please open it up for Q&A.

If you'd like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. To withdraw your question, press the pound key. Our first question comes from John Walsh with Credit Suisse.