Chart Industries, Inc.

Good morning and welcome to the Chart Industries Inc. 2022 Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' 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 replay of today's broadcast will be available following the conclusion of the call and 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 statements and risk factors included in the company's earnings release and latest findings 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 call over to Jill Ivanko, Chart Industry CEO. You may begin.

Thank you, Kevin, and thank you all for joining us today for our third quarter 2022 earnings call. We're very excited to share with you today what we believe to be a momentous third quarter, not only due to the number of records that were set, but also an important point for our high confidence in our strong outlook for 2023, which includes anticipated growth of over 25% in sales and over 50% in earnings per share. The numerous records in the third quarter include all-time record backlog sales, reported gross margin, reported operating income, reported non-diluted EPS, and adjusted non-diluted EPS. And while orders of $729 million is not a record, it is our second highest in history and second consecutive quarter of commitments above $700 million. With me on the call today is our CFO, Joe Brinson. 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. Let's kick off on slide four of the presentation with a slide many of you have become familiar with, our nexus of clean full solution offering. process technology and equipment for clean power, clean water, clean food, and clean industrial applications. This offering is becoming more and more pertinent to the global environment, in particular as you look at current challenges and opportunities in macro and geopolitical conditions, as shown on slide five. The three main categories shown on the left-hand side of the slide, which are in no particular order, are expected to remain as tailwinds to our business for the coming decades. LNG as a pragmatic and available energy source as countries around the world seek energy independence and security, CO2 shortages, and the continued focus on sustainability both in the public and private sector, furthered by the adoption of the U.S. Inflation Reduction Act, or the IRA, in mid-August. We'll spend some time throughout today's discussion on these topics and how they are manifesting themselves in our order book, as well as why we expect them to drive continued double-digit growth in our sales this decade. And these tailwinds are also starting to coalesce together. For example, we've been talking all year about CO2 shortages driving demand in our earthly labs offering, which solves for immediate access to beverage grade 99.9% purity CO2 captured in the process of beverage making. And now we're seeing the IRA bring together more demand on the small scale as well as the larger scale CCUS needs, which covers both macro tailwind two and three on this page. More examples of that shortly. Hydrogen is one of the markets and applications that is and will continue to benefit from the macro trends just described. I'm not going to walk you through all the data points on slide six. In summary, in one year, the difference in direct hydrogen investment announced is up 50%, and projects that are or will be under construction in the next eight years is up over 134%. Many countries have adopted national hydrogen strategies, including the UAE, recently announcing that they've engaged to work on one. We've continued to see growth and more consistency in hydrogen demand for our products and solutions over the past two years than what we had originally anticipated, with third quarter 2022 hydrogen related orders of $102.4 million, bringing our third quarter year to date 2022 above our full year 2021 hydrogen orders of $282 million. In the third quarter, we received the purchase order for a hydrogen liquefaction facility with associated water treatment for a project in West Texas with clean energy holdings. They've also signed a letter of intent with us, which is not booked as an order or in our backlog yet, for processing equipment for the additional three phases of their project with the same content as the first phase for each. This is another indicator that this trend in hydrogen is not slowing down. Also in the quarter, we received the $6.2 million order for hydrogen systems and equipment from a European shipyard who, with CHART, is working closely with a large European cruise line on a hydrogen-powered vessel, a $5.8 million order for two of the first transportable fuel stations for hydrogen fuel cell trucks, and liquid hydrogen tank orders for a major industrial gas customer's liquefaction plant in Europe. Importantly, this is another example of the global adoption of liquid hydrogen. And thinking back, historically, Europe was predominantly focused on gaseous hydrogen, And now we're seeing this movement more toward liquid for certain applications. While not yet booked, we also received a letter of intent from one of our industrial gas customers for a hydrogen liquefaction plant, which we expect to move to order in 2023. Our hydrogen sales of $118.7 million this year to date through September has been supported by our Theodore Alabama trailer and tank shop, which we affectionately call Teddy Trailers and Tanks. You may recall we purchased Teddy in October of 2020 for $10 million purchase price. At the time, the most trailers produced in that facility was nine in a year, and now we can produce more than one a week. By way of comparison, year-to-date 2021 through September, Teddy trailer sales were $5.2 million, and this year for that same period, they are $41.75 million. Some of this might be attributable to the Inflation Reduction Act, which set hydrogen CCUS and water in further motion. The IRA includes $300 billion in spending for energy and climate change, with multiple areas of the IRA directly supporting investments being made by our customers in those same areas. We believe that the IRA will drive more projects to happen sooner, which in turn increases our opportunities in the near term and this decade across our nexus of clean. You can see some statistics supporting this on slide seven. We've touched on hydrogen order activity already, but worth noting that as of the end of the third quarter, we had a pipeline of 658 hydrogen customers and potential customers, sequentially up 20% compared to the end of the second quarter, and up 83% compared to the end of 2021. Our water treatment business was already growing, setting new records throughout 2022. And while we can attribute some new inbound inquiries to the IRA, we think that the international trends in the adoption of water treatment are a key driver to our year-to-date commercial pipeline additions of $131 million. The area that we believe will be most swiftly and positively impacted by the IRA is carbon capture. We've seen a meaningful increase in inbound interest in our CCUS offering since the IRA was approved than before it, including a pipeline of 363 customers and potential customers, up over 142% compared to the end of 2021. New inbound opportunities in our small-scale earthly labs business totaled $9.2 million in the 75 days following the IRA announcement compared to new opportunities in the 60 days prior to the IRA of $5.56 million. In the third quarter, we also booked orders for our SES cryogenic carbon capture solutions with a customer in Saudi Arabia, as well as with the European Energy Infrastructure Company. And perhaps most interesting in terms of changes for CCUS since the IRA was passed isn't the anecdote that I have shared with some of you throughout the quarter that we had more inbound inquiries in the first 24 hours after the IRA was announced than we have ever had in any 24-hour period. But rather, that pre-IRA leads for CCUS were about 17.5 per month on average, and post-IRA leads are now 32.4 per month. As a result of continued and consistent order activity, as well as the IRAs that I just described adding more certainty to this decade's opportunities, We're increasing our specialty products total addressable market as shown on slide 8 in the near term by approximately $2 billion into $49.3 billion through 2030. Also note that in addition to the areas discussed under the IRA impact, we're increasing our 2030 TAM for gas by rail and space exploration applications. We're uniquely positioned in gas by rail for a variety of molecules. Additionally, we're in multiple discussions with existing and new potential customers about using not just our tender cars for rail, but also we have work underway with customers on the onboard liquid hydrogen tank for utilization in not just heavy-duty commercial vehicles, but also in locomotives. The private space exploration trend continues and is becoming a global market. As you're aware, we're expanding our Teddy, Alabama site for supersized tanks and are the only company in the world that can build 1,500 cubic meter cryogenic storage tanks. You can see the build of each one of the TAM changes on slide 41 in the appendix if you're interested. So moving to slide nine, this shows each of our three quarters this year and the orders that comprise are over $2 billion of commitments in the first nine months of the year. We received full notice to proceed on the remaining 12 cold box systems for venture global Plaquemines phase two project in the third quarter for $91.8 million, which brings year to date big LNG related orders to over $620 million. This marks three consecutive quarters that we have booked big LNG work, the first time this has happened in our history, as well as an indicator that LNG is going to be less cyclical across the coming years than in prior cycles. Our commercial pipeline of potential orders overall currently in discussion for order placement in the next two years or 24 months is greater than $9.5 billion. And so far in the month of October, demand continued across the business with 17 orders through two days ago this past Wednesday, each greater than $1 million, with a very wide range, ranging from space exploration to regas to refurbishment of a cold box, multiple air coolers, LNG fueling station, a large bulk tank order, just to name a few. Also noteworthy is that our dozer business had its biggest month of the year in October in terms of orders, and we still have a few more days to go this month. With over $2 million in orders first nine months in 2022 and five of our last seven quarter setting order records average quarterly orders excluding big lng in 2021 and 2022 are over 470 million dollars as you can see on the right hand side of slide 10. this compares the average of 250 million per quarter from 2016 to 2020 and as i said at the end of the second quarter a reminder that we're not going to hit 470 million dollars or more every single quarter ahead but we do anticipating anticipate continuing to book each quarter at a much higher level than our pre-2021 historical average. So, we were definitely pleased to beat multiple historical records this quarter, and this trend continued, as you can see on slide 12. As I mentioned at the outset of the call, Q3 was an all-time record backlog sales, reported gross margin, reported operating income, reported non-diluted EPS, and adjusted non-diluted EPS quarter. There were numerous other records across the business segments and individual sites, too many to name, but I am going to touch on a few, including the fact that our Shrew City India team posted record sales. Our VRV team, which you may recall, we purchased via an acquisition at the end of 2018, hit their best ever gross profit, gross margin, operating profit, and operating margin. And the parts repair and service piece of RSL did the same. Also worth pointing out is our reported operating margin as a percent of sales of 10.1% has only been achieved three other times this past decade. We'll discuss that more in a moment. An important and critical part of our business is our number one priority of safety. We achieved our lowest safety total recordable incident rate in Q3, and I'm proud to share that 79% of our sites have had no safety incidents in the trailing 12 month period. On slide 13, You can see our third quarter 2022 results with the green box denoting historical highs. Our third quarter 2022 orders were the second highest in our history with all of our top three historical record quarters occurring in 2022. This contributed to our eighth consecutive quarter of record backlog of 2.254 billion. Backlog is now 100% higher than one year ago. Both heat transfer systems and specialty had record backlogs as of the end of the third quarter. Not only is this the first time we have surpassed $2 billion in backlog, the composition of our backlog is varied, which gives us further confidence in the growth outlook we're presenting for 2023 and beyond. As shown on slide 14, reported gross profit was an all-time record, and that translated to 25.4% reported gross margin as a percent of sales. When adjusted for unusual items, it was 27.3%. and in line with our anticipated sequential margin improvement to exit the fourth quarter 2022 at 30% gross margin as a percent of sales or more. We also continue to face headwinds in the macro environment that we do not add back to adjusted gross margin, adjusted operating margin, or adjusted EPS. Those you can see listed on the side of slide 14. I'll get into segment gross margin specifics in a moment, but as a tee-up, three of our four segments reported gross margin as a percent of sales increased by more than 170 basis points sequentially compared to the second quarter of 2022, with HTS increasing over 700 bps. The third quarter of 2022 was only the fourth time in the past decade that we had reported operating income as a percent of sales of 10.1% or more, and adjusted operating income as a percent of sales of 12.6% is shown on slide 15. The reported operating income of the 10.1% was the highest since the third quarter of 2020 as well. All of these activities roll into our record reported EPS and record adjusted EPS of $1.15 and $1.49 respectively shown on slide 16. We reduced the ad back shown by our mark-to-market benefit as well as our restructuring release in RSL, net of cost, as we concluded restructuring activities in that segment. The third quarter of 2022 was our last quarter for integration-related costs from our acquisitions of ad-edge water technologies, as well as LA Turbine, as each hit their one-year anniversary in the chart family. We did not add back the negative impact to sales or EPS from currency headwinds or FX rate changes, and we do anticipate that these will continue to be variable in the coming quarters. We estimate the third quarter 2022 impact from foreign exchange rate changes was approximately net negative six cents to EPS when you're netting translation and transaction. I won't spend time on slide 17. It's included as a visual of the progress we have made operationally across the past year. The left-hand side is our recorded EPS walk from Q3 2021 to Q3 2022, and the right-hand side is our adjusted, both reflecting continued progress in operational margin improvement execution. The next section of our presentation provides an update on operating activities that support our sequential margin increases, as well as continuing to meet the ongoing demand across the business with targeted capacity expansion. Starting on slide 19, the top row and bottom left graph relate to our main input material costs. You've seen these graphs previously, and the good news is that input costs were similar to the second quarter 2022, yet the backdrop is still continued geopolitical and inflationary uncertainty. Gas and energy prices are a key driver in component availability and cost, in particular in the EU. And while recent prices have been declining, they're still over five times the 2019 standard price. We have and continue to proactively fortify our supply chain channels, both globally and locally, to reduce the associated risks. You can see examples of these commitments in our press release. The bottom right-hand graph on slide 19 shows the global freight index. You can see that while it's trending in the right direction, it's still like material input costs above historical run rates. We have now had two quarters in a row where net neutral on freight costs as a result of pass-through to customers. By way of quick comparison, in 2021, we averaged about $1.4 million of additional costs on freight per quarter through the P&L. Despite the ongoing and well-discussed supply chain challenges, I would like to congratulate our global team members. They continue to drive improvements in our shops. In this quarter, we had 12 of our manufacturing facilities with 100% on-time delivery. And none of what I just mentioned is new in terms of operating in uncertain environments. So we continue to look for ways to differentiate our business in the four main categories shown on slide 20. First, pricing. We've completed multiple price increases over the past 15 months, including additional actions taken in the third quarter of 2022 and planned across the next six months. Second, cost control, a fundamental operating principle in the business. And we continue to look for productivity and automation projects, which Joe will talk about in a moment. Third, furthering collaborations and partnerships, in particular in specialty products. And finally, building on chart-specific differentiators, such as our ability to help our customers very early in their design phase for first-of-a-kind projects and being a first mover on receiving certifications for equipment in places like Korea and China, which we believe will be an important differentiator as specialty markets move from regional to global. across this decade. In the third quarter of 2022, we executed eight MOUs, of which two included master supply agreements, which you can see on the left-hand side of slide 21. Four related to carbon capture and CO2 equipment, two for hydrogen, and one each for liquefaction and LNG, further demonstrating the breadth of our solution offering and penetration across the nexus of clean. One of the master supply agreements was for LNG equipment with Yan Chang and Shell Petroleum, while another was with a major beverage company for carbon capture and storage technology and equipment. Our 79 new customers this quarter were across a broad reach of geographies, 43% North American, 37% Asia Pacific, and approximately 20% in Europe and the Middle East. One of our favorite topics, first-of-a-kind orders, were 17 in the third quarter, also comprised of geographic and application breadth, which you can see on the right-hand side of slide 21. We kicked off our first feasibility study for carbon capture with bio-based food ingredients with BioVeritas. We booked an order with Firefly for a space exploration application, and we welcomed a new customer in Asia Pacific for food and beverage equipment. Certifications globally and regionally in cryogenic equipment, as I commented, are a key differentiator. We received numerous new certifications shown in the middle of the page. and this included approvals for specific product lines in Australia, Canada, and Korea. Now I'll turn it over to Joe Brinkman on some operational productivity and capacity expansions in flight.

Thanks, Jill. Our ongoing organic productivity and automations projects are constantly in flight, with a few new examples to share this quarter shown on slide 22. These six projects are just a sample of the multiples we have underway. and should give you a good sense of how they help with margin improvement as well as capacity in some cases. Take the middle top row, which in our ChartChina facility, the SAW welder was integrated into the other end of the original MIG welder arm to achieve two welding processes for the same equipment, which significantly improves the plant capacity and efficiency. By way of comment, these types of projects have enabled ChartChina to consistently break records with the third quarter of 2022, their highest gross margin and operating income quarter since 2014. Another example shown on slide 22 is in the bottom row, middle, where we are implementing a bellows machine for automatic rotation of a vacuum insulated pipe during the welding process. This improves weld time by 68% and generates with one machine over 53,000 a year in savings. We are very excited to receive our brazing furnace after a year in the making into our Tulsa, Oklahoma flexible manufacturing facility in the quarter, which you can see an actual photo of on slide 23. We will begin post-braze activity in the fourth quarter, which is right on schedule and supports more capacity for a variety of different end applications that use brazed aluminum heat exchangers, whether it be LNG, hydrogen, helium, or CCUS. As a reminder for our expansion in Theodore, Alabama along Mobile Bay, as shown on slide 24, we already have a space exploration order booked to go through this expanded location for which the build out is progressing on our original timeline. And on slide 25, we have a similar situation in our GOFA Germany trailer facility. where we are expanding on our existing property and have a base load order of $22 million that will be delivered out of the expanded location in 2024. We anticipate production will begin either late third quarter of 2023 or early fourth quarter of 2023 in the expansion, which is also set to have a new area for service and repair. I'll now turn it back to Jill to quickly run through segment performance starting on slide 27. Thanks, Jill.