Chart Industries, Inc.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. Your hand during Q&A. You can dial star 1-1.

Good morning and welcome to Chart Industries, Inc. 2022 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 and it can be accessed by visiting Chart's website at www.chartindustries.com. A brief play of today's broadcast will be available following the conclusion of the call. It can also be accessed through the investor relations section of the company's website. 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 statement 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 over to Jill Ivanko, Chart Industries CEO.

Thanks, Catherine, and thanks, everybody, for joining us today for our second quarter 2022 earnings call. As usual, we will reference the supplemental deck that was included with the press release and can be found on our website under the investor relations section. With me today is our CFO, Joe Brinkman. Let's start on slide three, where we are extraordinarily pleased to share our second quarter, 2022, all-time records and orders, a whopping $887 million of them, backlog and sales, which you can see is broad-based, including records for all in hydrogen and water treatment. And not only do we post our third consecutive record order quarter, which is five record quarters out of the last six. This quarter was also our seventh consecutive quarter of record backlog of $1.95 billion. Additionally, we are starting to see the strong backlog and price cost actions take hold through the P&L, with our second quarter also being our all-time record reported gross margin dollars and reported operating income dollars. We continue to see penetration of our full solutions from process technology through to cryogenic equipment. in particular in what we refer to as the nexus of clean, clean power, clean water, clean food, and clean industrials. This reflects the current focus on energy security, access, resiliency, which is complementing, not offsetting, energy transition, or said differently, the focus on sustainable solutions. Rather, these two are actually both needed, and we're differentiated in offering that. One of the ways we look at our differentiation is through our first-of-a-kind orders or as we call them internally, our folking orders. In the quarter, we booked 23 first of a kind, bringing year-to-date folks to 51, as well as 85 orders with new customers this quarter, bringing year-to-date to 169 new customer orders. Both the first of a kind and new customer metrics are on track to meet or exceed 2021, demonstrating that there is considerable further potential growth in our addressable market globally. To give you a sense of the first-of-a-kind and new customers that we're working with, here are a few examples of ones booked in Q2. An arsenic water treatment system for Love's Travel Stop, our first Earthly Labs carbon capture system for a brewery in Turks and Caicos, an order for Chart's heaviest on-site cryogenic tanks to date from a US space exploration company, and a seed study for supply of LNG bunkering systems for LNG ferries in the Greek islands. We continued our trend of more consistent and frequent orders of over $1 million each, with 61 of them booked in the second quarter, making this our fourth consecutive quarter with over 60 such individual orders. And finally, our partnerships and collaborations through memorandums of understandings and long-term agreements continue to grow. In Q2, we executed eight MOUs and agreements, including two for LNG, three for carbon capture, two for hydrogen, and one for air-cooled heat exchanger master supply. One of the MOUs in carbon capture is with Wolf Carbon Solutions US LLC, an affiliate of Wolf Midstream. Wolf and its affiliate are committed to the development of world-scale CO2 carbon capture, transportation, and sequestration infrastructure. Wolf Midstream owns and operates the Alberta Carbon Trunk Line, which has infrastructure that includes CO2 conditioning and compression, and one of the world's largest capacity CO2 pipelines, where captured CO2 is currently being used for enhanced oil recovery with future access to the Wolf midstream sequestration hub currently under development. Through our cooperation agreement, we will work together using our SES cryogenic carbon capture technology at mutually agreed upon host sites located along Wolf Mount Simon hub carbon pipeline system. Let's move to slide four, which shows the details of the larger orders in the first half of the year. Year to date, we've booked approximately $529 million of big LNG orders, including $300 million in the second quarter for our full notice to proceed on Chenier's Corpus Christi Stage 3 LNG export terminal. Total chart content on Chenier's Stage 3 project is over $350 million, and the entire amount is currently in backlog as of the end of the second quarter. There are a lot of things to like about Slide 4. Perhaps what I like most is that the mid-size orders, orders $15 to $40 million each, are across multiple applications. whether space exploration, trailers, utility LNG, floating LNG, or hydrogen. Now direct your attention to the far right column on the table of slide four. The message here is that we view all of this as providing high confidence in our multi-year momentum. In particular, because as you've heard me say numerous times before, quarters in our business are too short to measure any particular project, with multiple projects being multi-year. So realizing that financial modelers will want to know how this impacts the second half of 2022, we've included this far right column. Now for us, we don't think of it as a calendar year or that the company stops at December 31st, as many of these projects do cut across more than one calendar. So this is important when it comes to your second half 2022 financial modeling. While we will get some big LNG revenue recognition in the year, all the projects shown in row six through 11 have the majority of the revenue recognized in 2023 and beyond. Again, setting us up for a very high level of confidence in our three-year outlook that was previously disclosed. But this is also meant as a key piece of information when looking at what is modeled into 2022. And note that orders on rows 9 through 11 do not have any anticipated 2022 revenue associated with them. So having five of our past six quarters set new records for orders has also resulted in an average order quarter, excluding big LNG, of over $445 million in the last six quarters. This compares to the average of $250 million per quarter from 2016 through 2020. So while we'll not hit $450 million or more every single quarter ahead of us, we certainly anticipate continuing to book each quarter at a significantly higher level than the five-year 2016 to 2020 average. So let's move to slide six, where one of the questions that we've been receiving is whether we're seeing a softening in demand due to a potential recession. So on slide six, you can see some of the order activity for the first few weeks of July. We continue to book orders for a variety of applications, 16 over $1 million each so far. Noteworthy to point out the rail car commitment for $6.5 million, and our second water treatment order for India this year for $5 million. We're also beginning to see more orders for storage-related equipment. Just this week, we booked a $1.5 million order for tanks for this application. For example, We're also very delighted to be supplying equipment that support carbon cures, end-to-end carbon removal and mineralization solutions, which are essential to achieving our joint goal of decarbonizing the concrete industry. We immediately saw carbon capture and storage inbound inquiry increases since Wednesday evening's press release about the U.S. Inflation Act. For example, in the first 18 hours after that release, we had six new leads come in, which is certainly more than normal in that period of time. Final point on this slide is that we currently have over 2,700 opportunities totaling over $8.5 billion that are in our commercial quotation pipeline. I reiterate my earlier comment. The message here is that we view all of this as significant multi-year momentum. Slide seven shows the second quarter financial summary. In addition to record orders, backlog, and sales, this was our all-time record reported gross margin and record reported operating income quarter. Reported operating income as a percent of sales of 7.3% was the highest in the past year, and one adjusted for one-time costs from deal integration, startup capacity, and restructuring was 9.9%, also the highest in the past year. Reported growth margin as a percent of sales for the second quarter of 2022 was 23.4%, and one adjusted for those costs mentioned was 25.3%. This growth margin as a percent of sales for the quarter reflects both our continued progress on pricing versus input costs, as well as the high shipment quarter of price-cost lag backlog in our cryotank solutions and heat transfer system segments. The CTS segment had the most long-term agreement price indexing timed into the second quarter 2022 from a backlog perspective, and we shipped more than was originally anticipated heading into the quarter. Or said differently, we shipped more in Q2, which was previously in our Q3 forecast thinking. So as mentioned in prior quarters, realizing the continued benefits of these price increases and cost control actions that we've taken sets up the second half of 2022 to continue to incrementally increase operating margin and gross margin, as well as both metrics as a percent of sales. And while not shown on this slide, an important metric is free cash flow. Second quarter 2022 free cash flow net of capital expenditures of $17 million was $18 million, and adjusted free cash flow was $37 million. We continue to expect our full year 2022 adjusted free cash flow to be in the range of $175 million to $225 million, even as we anticipate that we will strategically continue to hold higher than typical inventory throughout the year. While we move the two red, yellow, green challenges slides to the end of the appendix, they are updated in the deck for our current perspectives on each category. The following four slides, slides 8 through 11, demonstrate our margin improvement actions. First, more price increases had to be taken across the past five quarters than would have been in a typical environment. And we anticipate holding onto much of this pricing while giving the surcharge back to our customers when macro conditions abate for a period of time. Second, our higher margin businesses are also our fastest growing businesses, and therefore we anticipate a margin mixed benefit. Third, larger and more project work contributes to more consistency in our shops, as well as more standardization opportunities. And finally, our productivity and automation activities are a strong focus for us, and we have numerous additional opportunities for this ahead on our roadmap. So turning to slide eight, some of the leading commodities, which are drivers of our raw material costs, including nickel and aluminum in the United States, are either at or below pre-Russia-Ukraine conflict levels. We expect this trend to continue throughout the third quarter of 2022. We're also seeing capacity at the mills opening up which, along with new investments coming online, sets our expectations that the United States market will be in a much more stable position for the foreseeable future. The metal producers in the U.S. are also swiftly switching to producing new material using scrap, which reduces reliability on foreign partners and reduces the impact of unpredictable geopolitical events. And while Europe is not as stable as what I just described for the U.S., we do expect EU raw material numbers to stabilize as they have in the U.S. as consumption and demand reduces. With all that said, we continue to take proactive steps to continue to have multiple suppliers, both globally and regionally, as well as thoughtful safety stock when to do, as you have seen us do over the past five quarters. As many of you are aware, we've taken three types of pricing actions over those past five quarters, plus a surcharge. The three types of pricing are shown on the right-hand side of slide nine. In addition to maintaining our short bid validity timing on project quotations, We have implemented five separate base price increases over the past six quarters and had three surcharge increases since implementing in the third quarter of 2021. This is in addition to the quarterly or semiannual index based adjustments in our LTAs with specific industrial gas customers. The LTA bucket has by far been our longest to work through the lag of pricing costs in our backlog. And as I commented already today, we burned off a meaningful amount of that in the second quarter 2022. primarily reflected in the CTS gross margin. We view this as a positive setup to the second half anticipated margin improvement. And note that all pricing and surcharges remain in effect to date in the third quarter, and we expect them to throughout the quarter. I shared on the Q1 earnings call specific actions related to the delta between freight costs and our ability to pass that through to our customers. You can see on the left-hand graph on slide 10 that we are net neutral for the first time in what we believe is in our history, but certainly at a minimum the past few years. The right-hand graph on this slide shows the global container freight index for the past three years, demonstrating the dramatic increase from June of 2020 to present. Just to compare, this delta of what we could pass to our customers versus our own cost netted a negative impact to our P&L of $1.5 million per quarter last year. One of the areas that I'm most excited about is our organic automation and productivity activities that are underway, but also the ones on the horizon. I've shown six on slide 11, and that's six of the dozens of automation projects that are happening around the globe in our facilities. These six projects are all 2022 impact. Three of them are fully implemented as of the end of June, while the other three will be complete by year end. Combined, we expect they will contribute over $1.1 million of productivity savings on an annualized basis. As I mentioned on an earlier slide, reported operating income as a percent of sales of 7.3%, was the highest in the past year, and when adjusted for one-time costs, was 9.9%, also the highest in the past year, which you can see on slide 12. There is also a gross margin as a percent of sales trend slide included in the appendix for your reference. Worth pointing out is that we continue to see areas of the business impacted by unusual costs and inefficiencies due to the not yet tempering portion of the macro challenges that have been well documented. Examples of this include inefficiencies in direct costs from forced measures we're under, certain expedited costs from suppliers given long supply lead times, weather impacts to production, to name a few. We do not add these costs back to our adjusted profit or earnings per share, but we do quantify their impact, which for the second quarter was approximately $13 million. This gives you a sense that we would be at 13% off margin if these were no longer an impact. I want to pause here and thank our OneChart global team members who have been extremely agile in their response to our high demand coupled with the macro challenges that I just described. For example, 11 of our manufacturing locations had 100% on-time delivery in Q2. And as of June 30th, we achieved our lowest total recordable safety incident rate in our history at 0.57. So moving on here to slide 13, this is just a repeat of a prior ad-back slide and is included only as a reference for you. And then quickly turning to slide 14, this compares our second quarter to our first quarter 2022 ad-backs to earnings per share. I'm not going to take you through the detail, just message that this is consistent with what we have previously said and driven in part by year one acquisition integrations concluding and in part by our organic startup and capacity coming online, which will have multiple activity related to in the third quarter. In the second quarter, we completed the Oklahoma to Beasley, Texas air-cooled heat exchanger relocation and restructuring. We substantially completed the Shree City, India capacity expansion and completed the U.S. repair greenfield expansion. Based on timing of specific organic and integration activities, we expect the third quarter to be really busy as we bring projects related to capacity startup and new product lines in flight. Our reported earnings per share of 36 cents included negative net 22 cents from our mark-to-market adjustment, as well as one-time specific costs of 30 cents. Adjusted EPS of 88 cents reflects our continuing execution of price increases, cost controls, while also including that drag that I mentioned from the high shipment quarter of lagged backlog in CTS and HTS. Note that we did not add back the negative impact to sales or EPS this quarter from the foreign exchange rate changes, and we anticipate that these will continue to be variable throughout the second half. We estimate the second quarter impact from the foreign exchange rate changes to be approximately negative 12 million to sales and approximately negative 5 cents to EPS. Now turning to slide 16, Joe.