Chart Industries, Inc.

Good morning and welcome to the Chart Industries, Inc. 2023 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. 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, May 5, 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 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 Ivinko, Chart Industries CEO. Please go ahead.

Thank you, and good morning. Thanks, everybody, for joining us this morning. With me today is Joe Brinkman, our CFO. we will share our strong first quarter 2023 results as well as the ahead of schedule cost and commercial synergy progress that we have made following our completion of the Howden acquisition on March 17th. There are two important data points related to the presentation we released this morning. First, all results discussed relate to continuing operations and the only discontinued operations in the quarter are related to the March 2023 settlement for the specific fertility clinic litigation matter related to our 2020 divestiture of our cryo-bio business. Second, unless otherwise noted, the first quarter 2023 results are full chart standalone for the quarter, plus Howden's Q1 results from our stub ownership period, which was March 17th to March 31st, 2023. Starting on slide four, we have, over the past six months, executed each step of our plan as laid out either on schedule or ahead of schedule. We will continually reiterate that mantra of executing on time or early to our target, including our 2023 increased guidance and our activities related to debt pay down. Slide six shows the strength in our first quarter 2023 financial results, starting with record backlog of $3.9 billion for the combined company as well as record backlog at both Chart and Howden on a standalone basis. This was supported by Q1 broad-based order demand totaling $747.7 million, with Howden contributing $121 million of orders in their two-week stub period. We'll go into more detailed order information throughout the presentation. First quarter 2023 sales were a record $537.9 million. The Howden stub period contribution to Q1 sales was approximately $110 million. Note that for timing reasons, the stub revenue is not indicative of anticipated results for any given two-week period. Sales for three of our four segments, inclusive of the Howden two-week ownership period, grew more than 18% when compared to the first quarter of 2022. Repair, service, and leasing grew 144% in that timeframe, and chart standalone first quarter 2023 RSL grew 11.2% compared to Q1 2022. Including our Houghton ownership period, first quarter 2023 also had record sales in RSL, HTS, and specialty. Both RSL and HTS had record sales on a chart standalone basis. Hydrogen sales increased 12.2% in Q1 compared to Q1 2022. with Howden standalone full first quarter 2023 hydrogen sales in both new build and aftermarket growing over 10% each compared to Howden standalone first quarter 2022. Howden had record trailing 12-month sales, which were an increase of 11% on a reported basis when compared to the first quarter 2022 LTM. And this would have been 19% growth if excluding the FX impact. We are also pleased with our first quarter 2023 margin performance in both the reported and adjusted metrics. Reported gross profit as a percent of sales of 28.2% increased 460 basis points compared to Q1 2022. When adjusted for one-time costs, gross margin as a percent of sales was 28.6%. This contributed to first quarter 2023 adjusted EBITDA margin of 19%, an increase of 350 basis points compared to Q1 2022. I'd also point out our adjusted free cash flow for the quarter of $16.1 million, and I'd reiterate the continuing operations element of that adjusted free cash flow, excluding the Pacific Fertility Clinic settlement. I already spoke about our record sales in Q1, and on slide 7, you can see each segment's records for the first quarter. These records are for both chart, standalone in the segment, as well as with the combined Q1 results. We're particularly pleased with the RSL segment, which posted records both including and excluding how in sub for sales, gross profit, and operating income, as well as the margin for each of those metrics. And I'd be remiss not to point out that both HTS and RSL gross profit margin grew over 1,100 basis points compared to the first quarter of 2022. Slide 8 shows the incremental margin improvement in gross operating and EBITDA margin, both reported and adjusted. Note the lower left-hand box on slide 8, which are items that are not added back or adjusted. If these had been not in the first quarter of 2023, our adjusted EBITDA would have been over 20%. Slide 9 shows a subset of new billed first quarter 2023 orders. Our carbon capture orders were an all-time record, with bookings for Earthly Labs CC Elm for biogas for $2.7 million, facilitated via Howden's biogas experience, and an air cooler order for a large direct air capture project for $2.8 million. We also see direct air capture as a commercial synergy ahead, in particular incorporating Howden's fan offering. Over the past year, we have seen an increase in rail car demand, and Q1 was no exception, with orders for over 40 cars. We continue to be bullish on all things LNG, And in Q1, we booked a big LNG order from Bechtel for air-cooled heat exchangers, raised aluminum heat exchanger, and ethylene storage tanks for SEMPRA Infrastructure's Port Arthur big LNG project. We also received an order for $115 million from Wisan Heavy Industry for small-scale LNG projects, all driven by our IPSMR technology and equipment, including one for end-customer ENI. First quarter 2023 small-scale and floating LNG orders totaled $139 million, which was a 263% increase for these types of orders compared to the first quarter of 2022. Cowden posted multiple order wins in the nexus of clean end markets, including a meaningful sub-period wastewater treatment order for the first of 10 compressors with a new customer in Canada. Another example of a Howden order in the first quarter was for a food ingredient processing plant, where two Howden turbo generators will replace two pressure reduction valves, which replaces the purchase of power from the grid for the customer. Slide 10 shows the breadth of our RSL offering now, with key first quarter accomplishments, including Howden's execution of 23 long-term service and framework agreements covering fans, compressors, steam turbines, and blowers. This brings a total number of active Howden LTSAs and framework agreements to 245, and this number is increasing each month. Howden's full standalone first quarter 2023 aftermarket service and repair book-to-bill was 1.23. Over the past weeks, you've seen us announce expanded partnerships and agreements as shown on slide 11. To date, since the close of the acquisition, we have expanded partnerships and added agreements with 23 different parties of which we have already received orders from a subset of them. The potential here is significant in both the near and long term, with each representing multiple millions of dollars of chart and housing combined content opportunity. We anticipate receiving new and additional orders before year end 2023 from approximately 60% of these partners. Slides 12 and 13 point out examples of the macro tailwinds we continue to see across our end markets. Let me point out a couple of them, starting on row one on slide 12. The U.S. Environmental Protection Agency proposed the first-ever national standard to address PFAS contamination in drinking water. After the announcement, which was in Q1, we've been quoting much higher than typical volume, as many public and private water utilities have multiple sites that they need to address. We won an award for a turnkey PFAS resin replacement and disposal for our treatment as a service in a New Jersey borough that decided to move forward now with a replacement so that they do not exceed the proposed EPA limit in their high demand summer period. This week, we also received an order that is a retrofit to install our media for the removal of PFAS in another state. Row 3 discusses the April announcement from the G7, which I like to point out because it supports not only the continued development of natural gas and CCUS infrastructure, but it also pushes for low carbon hydrogen, renewable energy, and carbon mitigation all activities that we are involved in. For chart-specific demand trends, turn to slide 14. Our end markets are all trending positive for our solutions with a few specifics I'd like to point out. Row one, increasing demand for site services. This is, in particular, service and repair. And we're also having customers ask to use our field service capabilities to help them do repair work for their customers. In row four, which is hydrogen, We're commercially seeing all aspects of the value chain being built from production to storage and transport to end use. And all are showing up now in our order book, which is a little bit different than what you saw over the last three years where it was primarily focused on production and storage and transport. We're also now well-positioned in gaseous and liquid hydrogen and expect to continue to see new regulation imposed regionally and globally, such as the concept of OF A PENDING EUROPEAN REGULATION TO IMPOSE A MAXIMUM DISTANCE BETWEEN RENEWABLE STATIONS. ALL OF THIS IS POSITIVE FOR US. AND WHILE WE COULD SPEND A LOT OF TIME ON THIS PAGE, THE LAST THING I'LL POINT OUT IS ON ROW 8, WE HAVE A LARGE AMOUNT OF DEMAND IN ELECTRIFICATION AND MINE SAFETY, AND I'LL TALK ABOUT THAT ON AN UPCOMING SLIDE. NOW BRINKMAN WILL SHARE MORE ABOUT OUR SETUP FOR A STRONG REMAINDER OF 2023.

SLIDE 15 HAS BEEN SHOWN A FEW TIMES PREVIOUSLY, SO A QUICK REITERATION HERE. NOT ONLY DO CHART, HOWDEN, AND THE COMBINED BUSINESSES HAVE RECORD BACKLOGS AS OF MARCH 31ST, THE BACKLOGS ARE COMPLEMENTARY TO EACH OTHER ON REVENUE AND SHIPMENTS, SUPPORTING CONSISTENT DOUBLE-DIGIT GROWTH THROUGH A CYCLE. THE MESSAGE ON SLIDE 16 IS THAT MATERIAL INPUT COSTS ARE EITHER DECREASING OR AT A MINIMUM BECOMING MORE CONSISTENT, AS IS AVAILABILITY. AND THEREFORE, WE ARE COMFORTABLE THAT THE CURRENT MACRO OPERATING ENVIRONMENT IS STABLE especially as compared to the last two years, and we are cautiously optimistic that it is improving. Note that these top inputs are similar for both Chart and Howden. We continue to hold pricing and take further action as needed. We have added a fourth category on slide 17 for our broadened LTSAs via Howden. These LTSA contracts include labor, material, and transport increases for inflation throughout the period of the contract. We continue to be a leader in working with certifying bodies and have first certifications in many applications. These are a key differentiator, especially in markets where there are regional certifying bodies such as hydrogen and carbon capture. Howden adds additional certifications, including in the first quarter as shown on slide 18, successful ISO recertifications as well as renewal of the Aveda quality certification. which is a prerequisite for service work in the UK on wastewater plants. Howden fits well within our existing external segment reporting structure as shown on slide 20, and we will continue to report this way. Similar to chart, when the same Howden product can be used in multiple end markets and applications, it will be categorized based on the application. For example, if a specialty compressor is used in a hydrogen application, it will be in specialty products. All aftermarket service and repair is included in the RSL segment, which is now estimated to be above 30% of our total revenue annually.