Chart Industries, Inc.

Good morning and welcome to the Chart Industries, Inc. 2022 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. If you have not received the release, you may access it 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, March 3, 2023. 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, including 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 Avenko, Chart Industry CEO, who may begin.

Thank you, Justin, and thanks, everybody, for joining us this morning. With me today is Joe Brinkman, our CFO, and together we will walk through the presentation that was released this morning. While the deck has numerous updates that can be reviewed at your convenience, our formal remarks today will focus on our 2023 outlook, our record fourth quarter and full year 2022 results, the current operating environment, numerous tailwinds that both Chart and Howden are experiencing, and a status on the closing of our pending Howden acquisition. Before we get into our 2022 results and how they springboard us into our reiterated 2023 outlook, note that everything included in the supplemental presentation and our formal remarks today relates to continuing operations. We have reached a preliminary settlement in the Pacific Fertility Clinic litigation matter related to our 2020 divestiture of our cryo-bio business. And as noted in the press release, this will be included in discontinued operations. We are very pleased to put this episode from our prior divestiture behind us and resolve these 217 cases. More specifics regarding the settlement will be included in our 10-K filing. Starting on slide four, we reiterate our chart standalone outlook for 2023 for sales in the range of $2.1 to $2.2 billion. We are confident in this range given our strong visibility and further supported by the five items on the bottom of the slide. First, it is not unusual for project revenue to shift between quarters. We anticipate realizing pushed fourth quarter 2022 revenue in 2023, but we did not increase our outlook for that timing shift. Second, our outlook does not include any additional mid or large project orders between now and the end of the first half of 2023, which could provide additional revenue in the second half of the year. Third, even though we are seeing end market improvement in HLNG vehicle tank sales, our sales forecast for those HLNG tanks is flat with 2022. Fourth, as of the end of 2022, we had record backlog of $2.3 billion with approximately 60% of the full-year 2023 sales outlook already in backlog, higher than in prior years. And finally, we have existing capacity to deliver on our backlog and any potential new orders that could materialize throughout the year. We are also reiterating our previous 2023 guidance associated with our prior adjusted non-diluted earnings per share outlooks which was a 2023 standalone full-year equivalent adjusted EBITDA of $440 to $480 million, which you see. We will be using EBITDA as a financial metric going forward. In light of adjustments, cost, and variable metrics and timing associated with the Howden acquisition, we will not provide standalone chart adjusted earnings per non-diluted share for 2023. Yet following the close of the Howden acquisition, we will provide updated combined company guidance for the calendar year 2023 for sales, adjusted diluted earnings per share, EBITDA, and adjusted free cash flow. All of the current share count and interest information as of now is included in the supplemental presentation. Our adjusted 2023 full year free cash flow is also reiterated in the range of $250 to $300 million. including our reiterated capital expenditure outlook of $60 to $65 million. Effective in the results presented today for the fourth quarter of 2022, we are no longer adjusting inventory items for free cash flow. Seasonally, as in past years, our first quarter is typically our lowest quarter of the year, and we expect that normal first quarter seasonality in 2023. Given this and the timing of our backlog, we expect quarterly revenues, gross margin, and operating margins to continue to increase sequentially over the course of this year. The walk in the middle of this slide shows our backlog as of the end of 2022 that's available for 2023 sales recognition, giving us strong visibility to our year, as well as book and ship for the year, which is consistent with prior year's book and ship activity. Moving to slide five, this shows each of our segments and the anticipated standalone year-over-year 2023 full-year growth. We have the strongest backlog that we have ever had, and that supports confidence in heat transfer systems, specialty products, and cryotank solutions outlooks. In repair service and leasing, Lifecycle, which is our field service group, had the largest order month in December of 2022 and continued with a strong start to 2023 orders, supporting strong first-half 2023 RSL sales and margin. One example is a recent field service order for $2.6 million in the Middle East. We have included a section in the deck on slide 10 through 16 that provides specifics for end market tailwinds and their positive impact to Chart and Howden, and even more so to the combination of our companies together. We'll not spend time on this call today on those detailed slides, but rather speak to an overview as shown on slide six. Not only do we as Chart have our largest commercial pipeline for the next two years, We also have started 2023 very strong from an order perspective, with over $285 million of orders in January alone. So let me give a few market condition updates by segment. Related to HTS, we have seen more orders recently related to cryo plants being built by midstream companies, and we're seeing steady turnaround work in PETCHEM. Biofuel and renewable diesel activity continues with large air cooler demand. And demand with our LNG customers continues at robust levels. Small-scale and floating LNG continue to advance with several orders expected to be released in 2023. And we do also expect further big LNG activity this year in our order books. This expectation is not only for process technology and equipment, it is also for more opportunities for nitrogen rejection unit studies and potential NRU implementation orders. Related to specialty products. In hydrogen, we are seeing broader geographic penetration in places such as Korea, China, and Canada, as well as additional subsegments such as utility power generation, like the energy vault order we just received, as well as marine activity in hydrogen picking up for storage and fuel systems. Multiple government funding programs are incentivizing partnerships like the U.S. Department of Energy Hydrogen Hub Consortium's where we are also well positioned, as is Howden, for opportunities in production, transportation, and export projects. We're seeing increasing interest with heavy-duty fuel cell trucks, driving demand and active order activity for our hydrogen fuel station equipment with multiple customers. In carbon capture and storage, opportunities are growing in both size and quantity, driven by expansion of brewery and winery customers as well as expansion into newer segments such as lime kilns, biogas, coffee, and dry ice. CO2 shortages globally are driving immediate demand, and our customers are now looking to move from our large-scale carbon capture feed or engineering studies to actual CCUS plant deployment, including our expectation for initial equipment orders in the near term. There's also a helium shortage, which is driving a number of customers to move ahead with producing more volume, resulting in us seeing a heavy increase in quotation activities for our helium process technology. Food and beverage demand is also continuing its steady increase, and space exploration has kicked off 2023 with high demand levels, a strong funnel of projects, and multiple million-dollar-plus orders. Strength in our water treatment business continues as our average opportunity size is increasing, and we see significant chart water opportunities for growth ahead in international regions where access to clean drinking water and wastewater treatment is now receiving government funding. And for cryotank solutions, primarily related to industrial gas, our customers in this market have told us that they have all budgeted for normal year-over-year growth, and orders are in line with that so far in 2023. We included slide 7 to show some of our 2023 year-to-date orders because it demonstrates not only these macro tailwinds just described, but also our continued broad-based demand. I won't go through everything here, but pointing out just a couple of these so far in 2023, including an order for LNG systems with WESON heavy industries for $115 million, a floating LNG order for brazed aluminum heat exchangers for $19.5 million, and additional POs for our liquid hydrogen and oxygen trailers plus a water purification system for electrolyzer production. We have very strong commercial movement in carbon capture, as I just described the market tailwinds, both large and small, with orders for fans for a major direct air capture project, tanks and orcas for methane elimination, our first sale of Earthly Labs' 4cc oak units to a beverage distributor, and an expanded engineering work with KAUST in the Middle East. We announced our definitive agreement to acquire Howden, a leading global provider of mission-critical air and gas handling products and services, on November 9, 2022, with an anticipated closing date in the first half of 2023. Moving to slide 8, we completed our financing activities related to the transaction in December within our previously stated anticipated blended weighted average cost of debt range. We have received clearances from all except two of our total required regulatory approvals. Pending receipt of these two remaining international regulatory approvals, we now anticipate that the transaction could close in the next five days and are optimistic, based on information received as recently as this morning, that it could close before the end of the first quarter 2023. As a reminder for all the slides that refer to Howden in this presentation, we're still pending those approvals before closing. Both teams remain laser-focused on execution, and Howden, like Chart, continued to experience strong demand from numerous macro tailwinds in their end markets in the fourth quarter 2022 and into the first quarter of 2023. Our previously shared pro forma 2023 for the combined business outlook remains unchanged. Our view for the 12 months pro forma adjusted 2023 EBITDA is approximately $1 billion, inclusive of cost synergies. and we continue to anticipate reaching our estimated pro forma net leverage ratio target in the high 2X range by the end of 2024. We reiterate our financial policy as previously laid out and included in the appendix of the deck. We're currently pursuing divestitures of two product lines related to the combined business. While there can be no assurances of the completion of or proceeds from these activities, we continue to target a completion of these within the next three to six months and continue to anticipate combined proceeds of approximately $500 million from these divestitures. Slide 9 is a slide that we have shared previously and are including today to reiterate our confidence in the combined business 2024 outlook. And the next section, as I referred to earlier, slides 10 through 16, are those detailed end market updates and the positive impact the nexus of clean end markets have on Chart, Howden, and the combined offering. For now, let's move ahead to slide 18, Joe.

Thanks, Jill. Slides 18 through 20 are updates on our supply chain, as well as our pricing strategies and actions. On slide 18, you can see our top raw material inputs, as well as the global container freight index. We are back to end of 2020 levels for aluminum, carbon steel, and freight, while stainless steel is out of its peak range, but not back to pre-COVID levels. Turning to slide 19, While we are not yet seeing consistency in the input costs, we are seeing better availability from the supply chain, as well as tempering costs, and expect that to continue this year, barring no unforeseen geopolitical events. We also expect the cost of energy to be more stable this year than in the prior two. The first column of data from the left-hand side of the slide is changing costs from January 31st of 2022 to January 31st of 2023. You can see decline IN COST IN ALL THREE. THE SECOND COLUMN SHOWS THE VARIABILITY WITHIN THE 2022 YEAR, SO WHILE COST IS TEMPERING, WE STILL MUST STRATEGICALLY SOURCE FROM OUR LOCAL AND GLOBAL SUPPLY BASE. WITH THE VARIABILITY STILL IN PLAY, WE CONTINUE TO HOLD OUR PRICING PRACTICES THAT WE HAVE DEPLOYED THE PAST 24 MONTHS AS WELL AS CONTINUE TO SURGICALLY INCREASE PRICE AS SHOWN ON SLIDE 20. WE'RE ALSO CONTINUING TO MAINTAIN OUR SURCHARGE. WE HAVE NOT SEEN THIS IMPACT DEMAND TO DATE. I will now hand it back to Jill to cover the next section, our fourth quarter and full year 2022 results.