Chart Industries, Inc.

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Good morning and welcome to the Chart Industries, Inc. 2023 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 were 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 company replay of today's broadcast will be available following the conclusion of the call until Monday, August 28th, 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 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 Ivanko, Chart Industries President and CEO, please go ahead.

Thank you, Michelle, and thank you all for joining us this morning. With me today is Joe Brinkman, our CFO. We're pleased to share our record second quarter 2023 results after closing our first full quarter of housing ownership stronger than ever, including considerable progress on cost and commercial synergies, operational cash generation, and other key deleveraging activities, which we anticipate puts us in a position to meet our 2.5 to 2.9 net leverage ratio goal earlier than originally anticipated, now the middle of 2024 as compared to our prior expectation of year-end 2024. Before we get into these details, please refer to slide four of the presentation we released this morning. First, all results discussed relate to continuing operations. They exclude the Roots financial results for our entire ownership period following the completion of our Howden acquisition on March 17, 2023, as the result of our executing a definitive agreement to sell the Roots business to Ingersoll Rand. We're excited to share that earlier this week, we received regulatory clearance for the Roots divestiture, and it is expected to close no later than August 18. We intend to use the proceeds for debt paydown. Slide 5 summarizes key takeaways. Our second quarter 2023 book to bill was 1.17, which contributed to record ending backlog for the combined business, as well as record backlog for both chart and touted. We have realized over $96 million of annualized cost synergies and over $94 million of commercial synergies. Our commercial synergy pipeline increased to over $1 billion from approximately 800 million in mid-June. By way of example, this month we booked a commercial synergy win for $41.5 million with a key customer in the Middle East for brazed aluminum heat exchangers and cold boxes, which came as a result of Howden's operation, physical presence, and team in the region. And just yesterday, we received a large award for compressors for a chart customer's ammonia project, as well as a separate customer's carbon capture synergy order for an engineering study funded by the Walloon government and the European Union. We posted record reported gross profit margin of 30.9% and adjusted gross margin of 32.5%. Record adjusted EBITDA of $195.3 million and adjusted EBITDA margin of 21.5%. Our second quarter reported free cash flow was $76.2 million and helped drive net leverage of 3.86 or 3.72 when pro forma for the two announced divestitures. When adjusted for net income only related adjustments, second quarter free cash flow was 86.6 million. Also in the second quarter, Howden, on a standalone basis, had record reported backlog, orders, gross profit, and EBITDA. On Wednesday, we executed a definitive agreement to sell our Cofimco fan business for $80 million to PX3 partners, which is expected to close in the second half 2023. And I already mentioned that earlier this week, we received clearance for the Roots divestiture. Note that neither the Roots nor CoFIMCO divestitures impacts our synergy targets, and the purchase prices for each were in line with prior deal multiples that we've done. These are two steps in executing the defined perimeter of potential asset divestitures that we continue to anticipate to total approximately $500 million when complete. As we have shared previously, we adapt how we structure the potential divestitures to optimize the sales prices and multiples for maximum cash opportunity. A little more information on why we are selling Cofimco. Cofimco is one part of our fans product offering, specifically axial flow fans manufactured in a dedicated standalone building with a dedicated team in Italy. Cofimco sells original equipment only primarily to traditional energy markets and is part of the ChartLegacy portfolio. With the addition of Howden's cooling fans that are differentiated with low noise operating capabilities and highly complement our TART tough light fans, which operate in extreme environments, we see numerous synergies there. Additionally, Howden cooling fans and tough light are both primarily serving the energy transition end markets in which customers are focusing on optimizing their facilities and purchasing more full solution offerings. And finally, We're reiterating our 2023 outlook and 2024 adjusted EBITDA of approximately $1.3 billion. We include slides six and seven because they align with our ongoing mantra of executing on time or early against our laid out target. To date, we have executed each step of our plan, either on schedule or ahead of schedule, and we look forward to continuing to add green check marks in the coming months. Brinkman will now talk about the macro background for our expected continuing demand.

What stands out on slide nine is the breadth of our end markets and the variety of ways our full nexus of clean solutions and molecule agnostic approach play across these markets. This adds consistency in our order book and ability to grow. Slide nine is what we are seeing at a macro level, which continues to be positive, supported by both the public and private sectors. Globally, numerous direct subsidies for low carbon applications have been announced in addition to tax incentives. We expect more mandates for low carbon emissions across many industries, which in turn is anticipated to drive demand for our full renewable solutions. In the past few months alone, here are some examples of activities that are anticipated to drive additional growth in our business in the coming years. The US National Clean Hydrogen Strategy and Roadmap was released. South Africa and Germany signed an agreement to form a pact to grow the hydrogen market in Africa. The EPA's proposed rule requiring businesses to disclose PFAS in any product from 2011 is expected to go into effect in the coming months. Lithium output is expected to triple this decade. NASA and the Indian Space Organization plan to have a framework for human space exploration by the end of the year. We are seeing some of this reflected in our end markets today and believe more is still to come in the second half of 2023 and beyond. as specifics of certain funding programs are determined, such as the United States IRA and the U.S. Department of Energy's hydrogen hub selections expected later this year. On slide 10, starting on the top row, we are seeing very strong aftermarket service and repair activity, both impacting the second quarter in a positive way, as well as expected to impact future years through multiple multi-year long-term service agreements being executed. in particular in the markets of mine safety and LNG infrastructure, and across all geographies. Yesterday was busy. As you heard Jill mention, some Synergy wins. Another one we received was a Synergy five-year service agreement with a Chart Legacy hydrogen customer for Howden compression service. As a reminder, aftermarket service and repair comprises over 30% of our revenues. We have received two big LNG related awards so far this year to date, and we expect to book an additional Big LNG order in the second half of 2023, as global LNG needs continue with the energy transition in various stages of evolution, depending upon market and application. The energy transition is driving demand for critical minerals, and there is an increasing spend in intelligent and responsible mining, which fits well with our cooling fans and vent sim offerings. Additionally, we are seeing helium activity increasing with more traditional energy customers purchasing energy engineering studies to potentially capture the helium at their existing locations. As next generation rockets near commercial readiness, the space exploration companies developing these heavy lift vehicles are investing in vital launch infrastructure. Our Theodore, Alabama facility expansion, also known as Teddy 2, is ideally positioned to fuse the consequent increased demand for cryogenic molecule storage. Its strategic location, with both water access and proximity to plant launch sites, reduces transportation costs and risks associated with moving tanks of such considerable dimensions, tanks with a capacity of 70% larger than any shop-built tank globally. We look forward to our ribbon cutting ceremony this coming Monday at the site where we already have approximately $50 million in backlog for the expansion. We should not forget about water treatment as this is an end market for the increasing regulations such as EPA PFAS is generating more interest in our water treatment solutions. There are other factors also driving increased activity such as higher temperatures resulting in more treatment as a service wind and the need for global desalinization, creating new global opportunities. Just this month, we won a $2.3 million order via our at-edge water technologies for a full-scale treatment plant project upgrade for a groundwater remediation site near Chicago. We also expect large water treatment tenders in the second half of 2023 in India, a market where we are well positioned. With customers buying multiple solutions from us, Our commercial opportunity pipeline has broadened, which Jill will talk about on slide 11.

Our total commercial pipeline of opportunities currently is over $20 billion and includes over 1 million of potential synergy orders. Worth noting on slide 11 is that in just one quarter, so since the end of Q1-23, we have increased the number of customers and potential customers in hydrogen, carbon capture, and water treatment by over 7%, 18%, and 23%. That is a good demonstration of our one-chart sales force, as well as the breadth of our global customer base. LNG continues to be a market that we view numerous opportunities ahead, and early this morning, we received notification of a $28.75 million order from Wisan Heavy Industry for a small-scale LNG project in the Eastern Hemisphere. You can see an increase in potential international customers contemplating using Chart's IPSMR technology for their upcoming big LNG projects outside of the United States. in the first row of the table. International customers are looking to move to modular LNG trains to improve time to market, minimize site work, and reduce costs, which our IPSMR technology lends itself to. And while we can't address the who these customers are, as we're under NDAs, we can share that the project locations include Africa, Middle East, South America, Southeast Asia, and Oceania. We speak regularly about the importance of partnerships, development agreements, and commercial agreements as a key part of our commercial penetration strategy. We saw an increase in execution of these partnerships, which I attribute to the combination of Chart and Howden together, a synergy that we will see through the commercial synergy order book, as we expect at least 70% of these partners to place orders with us before year end, many of which have already. Examples of our newer partners are shown on slide 12, just a couple I'd like to point out, Veolia, with whom we signed a frame agreement for our turbo fans for mechanical vapor recompression solutions placed more than $8 million of related orders in the quarter. Siemens Mobility executed a master framework agreement with us for both chart and houding content and applications globally. And an aerospace company executed an MOU for our hydrogen offerings and clean energy technical development. The 43 agreements we have executed or expanded since we closed on houding acquisition span such a variety of applications. Over 20% of these agreements cover multiple decarbonization and markets. Second quarter 2023 orders were $1.063 billion. It is the first time in our history that we have booked over 100 individual orders, each greater than $1 million, as shown on slide 13. And we had eight over $10 million individual orders across multiple applications. This resulted in a book to bill of 1.17, as I mentioned earlier, supporting our 2023 and 2024 outlooks. The steady broad-based demand has continued into July. I'm pleased to see the frequency of synergy winds increasing and share with you today on the right-hand side of the slide the breadth of this month's larger orders, ranging from wastewater in Africa to over $8 million of additional scope for an Australian customer for mine ventilation to EGR blowers for marine. Slide 14 shows areas that we see more and more growth opportunity ahead. With 22 first-of-a-kind and 86 orders booked with new customers, we continue to expand and differentiate ourselves. One example of a Q2 first-of-a-kind order was for the world's largest cryogenic tanks at 1,700 cubic meters for space exploration. Some of you may remember the picture of the huge tank being transported from our ChartChina facility in a prior investor deck. That's definitely huge, and that was only 1,000 cubic meters. I want to emphasize the performance of aftermarket service and repair and the growth opportunities that that brings to us. Already over 30% of our sales RSL had a record second quarter. RSL segment had records in sales, gross profit, operating income, and orders increased by 32.9% in the second quarter of 2023 when compared to the second quarter of 2022 pro forma for the combined business. We continue to expand the customer base and scope for our long-term service agreements, which you can see some of those examples executed in the second quarter in July on the bottom of slide 14. Howden specifically, was a key driver in the RSL segment performance, with Howden standalone aftermarket posting record sales and growing sequentially 21%. Leveraging the Howden digital tools and install-based management team, we have added approximately 46,500 ChartLegacy installed assets into the tool, which has identified over 500 customer sites where there are both Chart and Howden assets. And this only represents approximately 20% of our Chart legacy install base loaded in the system to date. We plan to go ahead in the third quarter, continue that process, as well as taking Howden's aftermarket global pricing tool across the segment, further cross-train our field service teams, and continue to incorporate Howden's digital uptime solution into Chart's products. The key takeaway of slide 15 is that generally our supply chain is improving, although there are still lead time delays up the tiers of our supply chain. Carbon steel has declined the last three months, and cost is now below 23 of our 30 prior month costs. While stainless steel 304 continues at higher than typical cost, availability has improved, and LME aluminum is back to early 2021 levels. Year to date, aluminum has been more consistent and less volatile in cost than had been the case in the last two years. And finally, freight has returned to pre-COVID levels, and we've seen far fewer challenges in the availability of freight and drivers. Slide 17 shows the results of the business, and as a reminder, this is excluding roots. The Q2 2022 period shown is pro forma for chart and Howden in total, x roots, so it's on an apples to apples basis. We are extremely pleased with all the financial records as shown on the right-hand side of the page. Let me point out a few of the specifics that really show the strength of the combined business. record backlog, and the backlog visibility that we have supports our 2023 and 2024 confidence in our outlook. 32.5% adjusted record gross margin. It contributed to adjusted EBITDA margin of 21.5%. And really, I think this gross margin is one of the key takeaways from our second quarter performance, both reported and adjusted above 30.9%. And some of you may recall a year ago when we were in the mid-20s and predicting to get to over 30%. So that's where we are now, and obviously we plan to stay north of that number going forward. Additionally, both reported gross margin and reported EBITDA margin grew 300 BIPs compared to Q2 2022, also performant. So I want to take a moment to congratulate and share some of the second quarter 23 regional performance, where our Middle East and Africa region posted stellar results in multiple records, with second quarter bookings up 92%. sales up 16% and EBITDA up 52% compared to the second quarter of last year. Our China region posted record operating income as a percent of sales, and our Asia-Pac and India region had record orders in the quarter. Second quarter 2023 sales of $908.1 million grew 10.3% reported and 11.5% excluding foreign exchange impacts when compared to the second quarter of 2022, also on a pro forma basis. Inclusive, approved, and excluding negative effects, second quarter 2023 sales were approximately $959 million, and we had timing shifts of approximately $70 million based on customer needs and supply chain that moved to the second half. If you had all of those together, we would have been above a billion dollars in sales for the second quarter of 2023. Joe is going to talk in a few minutes about our expected second half sequential sales growth. And I would note as well that as we've moved from the individual component sales to our full solution offering, it gives us more project-based business. And while we say every quarter we have quarterly shifts in sales, this also gives us more visibility into the backlog for the coming years ahead. We're very pleased with our net cash provided from operating activities this quarter of $97.1 million, net of CapEx of $20.9 million, our free cash flow, for the second quarter was $76.2 million. The strong second quarter operational cash flow generation contributes to our reiteration of our full year adjusted free cash flow guide of $300 to $350 million. Slide 18 really shows you the progression on the gross margin and both reported and adjusted in the second quarter gross margin as percent of sales, our records. This is really driven by our continued focus on price cost, continuous improvement activities, We're bringing Houghton business excellence across the combined organization, the full solution projects that I just described, and our early cost synergy achievement, which you can see on slide 20. We've achieved approximately 55% of our year one cost synergy target and 63% of our year one commercial synergy target since the close of the acquisition. We've achieved $96.5 million of annualized cost synergies, and we also see more cost synergy potential identified as the two teams work together, such as additional footprint consolidation opportunities, more insourcing from existing outsourced activity, and additional streamlining of back office activities. We're thrilled with the earlier than anticipated achievement of commercial cross-selling, $94 million of Synergy orders booked to date. On the bottom of slide 22, you can see some of our recent Synergy commercial wins, which, as I mentioned already, are increasing in frequency. These included earthly labs, small-scale carbon capture, largest ever award with Babcock and Wilcox for over $3 million, and we'll utilize chart and housing equipment. We're excited as well to have more and more engineering contracts related to carbon capture and a $400,000 carbon capture synergy award that's backed by the Walloon government and the European Union. And in July, I already commented that we were awarded a $41.5 million synergy order to provide a large Middle Eastern customer with eight cold boxes for an ethane recovery project, which you can see on slide 21. It truly is the result of having Howden's physical operation and team member presence in the region. All of these results in rapid synergy achievement comes from our global One Chart team members. Often I'm asked to describe our culture, and I've thought a long time about how I could try to put into the words The spirit, the culture of this combined team. So I put a lot of thought into that and where I landed was an analogy to a TV game show. So if you don't know this TV game show, you have to look it up to understand this analogy. But my just turned 10 year old daughter loves this show. It's called Are you smarter than a fifth grader? Which I can tell you I'm definitely not. If you haven't seen it again, watch at least a portion to get the idea of the analogy to our culture. What it is is surround yourself with a great team. foster and utilize that team's expertise experience, celebrate wins, and do your best to offer a collaborative and supportive environment, even when faced with challenges. And you can see a bit of that in action on slide 22, which shows the culture in quotes from our global team. What I call out is related to an early Synergy win. In order to win an order, our customer needed to rebuild in the Houston area. Howden's Houston Service Center did not have the crane capacity to lift the customer's compressor. Chart's Beasley, Texas site was glad to help, and together we were able to say yes to the customer. This spirit of collaboration, accomplishment, and in-house training is embedded in our culture with further examples on slide 23. So let's move to the last couple sections here, starting on slide 25, which shows the meaningful progress we have made toward our deleveraging goals. The updates in green text are since our last investor deck that we issued on June 15th, just six weeks ago. I've already discussed the additional divestiture activity and approval to close on roots, so let me touch on a few other noteworthy cash and balance sheet accomplishments. We completed the working capital settlement related to the Howden acquisition, which resulted in cash to us from seller of $17.5 million that was received this week. We've executed two building and property sales agreements, totaling about $5.5 million, both anticipated to close in the third quarter. And we successfully repatriated approximately $20 million of cash from China and anticipate an incremental $60 million or so of cash globally to repatriate in the second half 2023. And these are amongst many more actions underway. Our second quarter 2023 net leverage ratio of 3.86 is shown on slide 26, and given our progress On cash from operating activities, as well as our additional activities that I've already mentioned, we expect to accelerate into our high two times net leverage ratio range earlier than originally anticipated. Until we reach our target, we will maintain our financial policy as previously shared and shown on slide 26. So Joe, bring us home with our outlook here.

On slide 28, we have our guidance table. We are reiterating our ranges for revenue, adjusted EBITDA, and adjusted free cash flow. At the same time, we are raising the lower end of adjusted EPS to reflect the use of ROOTS proceeds for debt reduction, partially offset by higher tax rate of 23% in 2023. We have numerous tax planning strategies in place to reduce that rate, so stay tuned. Cash available for debt pay down is now $655 million to $705 million and reflects the expected proceeds from the ROOTS and COFIMCO divestitures. Turning to slide 29. This slide highlights some of the reasons why we expect to have a higher second half of the year versus the first half. First, in line with our normal seasonality, we expect revenue, earnings, and free cash flow to grow each quarter sequentially as we move through the year. Second, both big LNG and broader small and medium projects are ramping based on earlier orders, including hydrogen. This is based on timing of projects and our backlog. and we are now even starting to see repairs and replacement activity in hydrogen. These projects are mix accredited to overall chart and help to drive additional absorption in our factories. We also anticipate a ramp in both commercial and cost synergies, which we detailed earlier, including increasing our commercial synergy opportunity pipeline. Last one I will call out is price cost. We remain disciplined on price cost and are still catching up on favorable price given the timing of price increases. Our 2024 EBITDA outlook of $1.3 billion remains unchanged as shown on slide 30. With the momentum we described today building at a fast pace, we feel confident in our ability to deliver this result.

We want to close our prepared remarks with a huge thank you to our entire OneChart team. You can see the incredible accomplishments from the second quarter beyond the financial results on slide 31. We closed with 71% of our sites injury-free for one year or more. achieved numerous certifications, including type approval for the first-ever liquid hydrogen iso container, and we were named a top 10 carbon capture company in the world by Carbon Herald, to name a few. Great job, OneChart team. And now, Michelle, please open it up for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to remove yourself from the queue, please press star followed by the two. If you're using a speakerphone, please lift the hands up before pressing any keys. To give everyone a chance to ask a question, we ask that you limit yourself to one question each. Our first question comes from James West, Evercore ISI. Please go ahead.

Thanks, and good morning, Jill and team.

Hey, James. Good morning.

So, Jill, I'm curious about, as you execute on the backlog and the wins here and the costs out, how you're thinking about margin expansion for the business going forward over the next several quarters and maybe even the next several years, but but how you're thinking about what the incrementals should look like for the business, given there's a lot of moving factors here, a lot of different things at play with the integration, but how you're thinking about the incrementals for the business.

Yeah, thanks, James, for the question. And definitely exciting times for us now with that record gross margin, both reported and adjusted. is really the start in what we see as continuing to build upon these levers that we have to pull to expand that margin even further. So I'm not going to get specific to the second half of the year, but what I will say is that we certainly anticipate in the coming period and years that we'll take that 31% reported up to the mid-30s through multiple different actions, taking advantage of the RSL, so the Aftermarket Service Repair Act, I keep banging home on that one because it's truly a great growth opportunity and is mix and margin accretive to us. The more projects in the backlog really is something that not only I'm pleased with having, you know, it's about 70% project work or so right now in terms of the mix. And I like to have that not only because typically they're just better margin as a project as a whole when you're offering a full solution in particular with the technology but also you know also because it does give us that backlog visibility and you know I hit the point that it's for our business it's not a quarter it's really having that visibility across the coming years and that will be a positive to to margin expansion as well and then certainly Another item that is achieved earlier than we had anticipated is this progress on the cost synergies. And we think we'll start to really see that drop through later this year and certainly in the full year 2024. So I'd say a very reasonable is the mid 30% gross margin consistently ahead of us. And we will also share detailed three-year outlook at our November investor day.

Right. Okay, got it. Looking forward to that. And then a question on maybe a follow-up, not a related follow-up, but a question on hydrogen, because we're going to see the DOE's Hydrogen Hubs Awards come out here in the next several months. We've also had the recent announcement of, I think, a billion dollars for demand for hydrogen from the DOE. Could you maybe talk about kind of how you see the U.S. market playing out here with respect to hydrogen and how Shark intends to capitalize, which I think you'll capitalize significantly, to capitalize on this opportunity?

Yeah, I mean, I definitely think the U.S. has really in the last couple of years picked up the pace in terms of being a hydrogen leader from the public sector perspective and You know, Joe's comment in the prepared remarks around the fact that I think we're seeing some of this in backlog, but I actually don't think any of the activity, commercial activity that will result from the DOE hydrogen hubs and even from the IRA activities is reflected in our current backlog right now. So a huge opportunity ahead with, you know, how in 100 plus years of hydrogen experience, our 60 or so years with now we have really stationary and rotating, And these couple of synergy wins that we commented on yesterday, you know, 15 plus million are bringing hydrogen compression into the states here. And that's pre the hub activity. We'll be beneficiaries of the hub. So while we don't typically apply directly to the DOE because we're suppliers to those that are going to operate the production or storage and transport or end use equipment, we'll be the beneficiary of those hub winners. And it's really interesting. Just this week, I spent some time with one of the applicants earlier this week, which is a Canadian company that also has U.S. partners, and that's for a hub in the West, which we think is going to play out to be liquid. And then just yesterday with a U.S.-based company that's applying for hub activity in the Midwest, where not only do you see the federal government providing these opportunities ahead, but but also the states are doing so as well. I think Illinois specifically, why you're seeing so much activity in that state is because they have a state incentive, and I might get this wrong, but it's like a dollar a kilogram or something like that on the production side. So we really stand to benefit across the hydrogen value chain, and I think we've captured it fairly well in the addressable market ahead, but I'm excited to see, you know, we've done pretty darn well in hydrogen the last few years. Again, nobody cared about it before 2020. But I'm excited to see what the U.S. actual awards through the DOE bring to our order book later this year.

Got it. Okay. Thanks, Jill. Thanks, James.

Thank you. The next question comes from Ben Nolan of Stifel. Please go ahead.

Thanks. Hey, Jill. Joe, yeah, we here in Illinois, we're good at spending money, that is for sure. I have to fit it into, you guys are in the big leagues now, so I only have one question. I have to bring my A game. I guess the thing that comes to mind the most is, Jill, you were talking about $20 billion of orders, right? that you're currently of line of sight on. I'm curious how you think about a few things in that respect. What's the timeframe that you'd say that fits into? But then also, how do you think about the conversion of sort of that pipeline to the actual orders for you? Has that changed at all, do you think, with Howden, just in terms of the percentage of things that And, you know, I mean, what's a realistic number for us to think about? If you have 20, how should we think about what that would mean for you?

Yeah, thanks, Ben, for the question. And, you know, Illinois definitely good at spending money, but that groundwater remediation project near Chicago is another two plus million for us. So we're not complaining about the public and private sector there in the Midwest. With that said, to your question on the $20 billion, yeah, it's definitely accelerating, and I would say almost daily when I talk to Belling, our chief commercial officer, the amount of potential activity and wins coming into that pipeline grows. And what we typically look at is the next 24 months of what's in our sales force or in our CRM system. So that gives you a sense of – the timeframe, the billion dollars plus-ish of synergy orders is about a 12-month timeframe, so next year. That's the subtext to that 20. When we look at what we're seeing as a result of Howden and being together, we're definitely seeing more project activity and awards more frequently. So the comment about 100-plus individual, I think it was 133 individual projects orders in the second quarter greater than a million each, that's doubled essentially from what we were on a standalone basis. And so we're getting much better visibility and I'd say more frequency of wins. We typically would say the way we look at our pipeline on the commercial side is anything that has a 40% plus probability, which a little bit is subjective, right? Our teams kind of get a sense of that based on where the project is, based on if a customer needs funding, et cetera. So anything that's 40% probability, and you can kind of pretty easily apply that to the metric, then historically we would have had about a 40% win rate on that higher probability group. We're definitely seeing a higher win rate in the combined business. I don't have a specific percent yet to be able to apply because it's only been a quarter or so. If I were... kind of back of the envelope in it, I'd say it's probably a 50% win rate on that higher probability business. So we'll see acceleration, we'll see more larger projects, and therefore we anticipate as we head into 2024, we'll have much greater visibility based on the backlog heading into the year than either business had on a standalone basis ever before. So, you know, definitely, definitely an accelerant by having Howden with us. And I really attribute that to the breadth of the global team geographically, expertise-wise, and probably the number one being our ability to sell a bigger package.

All right. That's helpful. I appreciate it. Thanks, Jill.

Thank you, Ben.

Thank you. Next question comes from Mark Bianchi of TD Cohen, please go ahead.

Thanks. I wanted to follow on the order discussion a little bit. You have a big LNG award in second quarter and an expectation for one in the second half. I was hoping you could help quantify those. And then also related to orders, as we think about the 2024 guidance of $1.3 billion, what sort of book to bill do we need to see in the back half to kind of be comfortable that that's on track?

Thanks, Mark, for the question. Let me start with the big LNG side. So yeah, obviously, the way we worded it, we were not able to share the specific project. But the two we won in the first half were both equipment, so did not have IPSMR technology with them. Typically, those would be between $100 and $200 million. This one's around the $200 million mark-ish in the second quarter. And then in the second half, we anticipate – we said – I think we said one. I'm not sure if we said at least one or one, but let's call it one. And that one would be – would involve IPSMR technology and probably between 100 and 200 also because it would be one that we would expect to be starting with a smaller number of trains. And then – to your book-to-bill question heading into 2024, one or above is the book-to-bill that we want to see in the second half to not only be comfortable, we'd be really comfortable heading into 2024 if we have the second half above one. That kind of goes to the follow-on to the prior question where we want to head into 2024 based on what we're seeing in combined business a higher than typically historically booked backlog. That was a lot of words. Higher than normal heading into the year. So that requires a one or above.

Great. Thanks so much. Thanks, Mark.

Thank you. The next question comes from Scott Gruber of Citigroup. Please go ahead.

Yes, good morning.

Hey, Scott.

If I heard the prepared remarks correct, it sounds like there could be some revenue catch up in the second half. Is that fair? And could we still be thinking about the midpoint of the full year revenue guidance as the base case?

Yeah, so you did hear that correctly because we had some movements. And again, it's not atypical in our business, especially on the project side for things to move between quarters because these projects are 24 months in delivery length. So, yes, you heard our prepared comment correctly. And there's a wide series of ways you get to the low, the medium, and the high end of our guide, ranging anywhere from additional projects coming into the backlog in the third quarter, which would be drivers to the higher end. And, you know, our comfort level at the midpoint is comfortable.

Got it. And obviously, 2Q margins were strong, and the consensus expectation has been that you continue to build upon the margin profile each quarter with cost synergies and operating leverage. How are you thinking about the 3Q and 4Q trajectory now on the margin side after posting a very strong 2Q? Were there any one-offs that may not repeat? that could restrain the margins, or should we still be expecting the percent margin to expand here in 3Q and 4Q?

Yeah, I mean, I think the best way to answer that is we continue to say we're going to be above where we are, where we posted, and above that 30% mark. Yeah, there's some mixed things between quarters that, yeah, are you at 30.5% or 31.5% that can... can move quarter margin, but it's not going to move from 31% this quarter to 28% next. That is certainly not what we're seeing. So from a general perspective, we expect to continue to grow that gross margin and operating margin, as well as the execute against the EBITDA improvement from where we sit today in the second half, and that's synergy related as well.

I appreciate all of it. Thank you, Jill.

Thank you. The next question comes from Sam Bruhl of Jefferies. Please go ahead.

Hey, good morning, Jill.

Sam.

I wanted to touch on hydrogen, and I know that James West kind of addressed this already, but I'll ask it in a little bit of a different way. We know we got the Treasury guidance on the 45V tax credit looming. Clearly, you guys would benefit from more lenient rules around how you can claim that tax credit. I know you were a signatory of a letter that I think Plug spearheaded that was sent out earlier this week. So just curious if you can give us any color on how those lobbying efforts are going and And then sort of irrespective of how the guidance ends up shaking out, do you think just having clarity on what the rules are are going to unlock some demand for hydrogen equipment and boost specialty margin orders in the back half of this year and then in 2024?

Yeah, great point, Sam. And I'll start with the last part of your question there on the clarity in the rules. I think I won't say more than anything else, but certainly a top tier catalyst in unlocking some of these orders of people understanding the parameters and how the IRA, how the credit systems and the incentive systems work. And I hear more than anything with customers who haven't yet booked an order with us or who want to, but we're saying, hey, you don't have the funding, so we can't book it. is really around understanding the IRS ramifications for the IRA. So I definitely think clarity acts as a catalyst. I think we saw a little bit of that even in the carbon capture clarity late last year and early this year, at least to get people moving on the feed and the pre-feed studies for CCUS larger scale. And then in terms of the lobbying efforts, like anything, this stuff takes time. The folks that are putting this stuff into action hear from a lot of stakeholders, and I think the ultimate answer here is we will get to a pragmatic and clear answer later this year. And certainly what we're seeing, I mean, heck, we're seeing in the order books you know, millions of dollars of orders that are not tied to the incentives, or I say incentives loosely, to the policy. And I think that through our conversations with customers in these 19 DOE hydrogen hubs, you know, we would have content in the super majority of them, and those guys are really the ones that I think the DOE side of this is where the number one catalyst to unlocking this activity resides. The other thing I like about the hydrogen hub members, again, we're a supplier to them. We're not actually in the DOE funding. What I like about it is these are blue chip names. These are not kind of startup-y names. So you have not only their own balance sheets, but you have their link to the potential projects going into that hydrogen hub. So a long way to answer that. I think all of the elements of your question, the spot-on answer is yes. And we get feedback amongst these lobbying efforts that the second half is going to be the timeframe.

All right. Awesome. Thanks, Jill.

Thanks, Sam.

Thank you. The next question comes from Pavel Malkovich. Malkunov of Raymond James, please go ahead.

Thanks for taking the question. I'm going to try to kind of link up two different themes here. One of the headwinds to green hydrogen projects in plenty of areas has been the availability of fresh water. And I'm curious how charts water treatment solutions can facilitate the creation of green hydrogen projects.

Thanks, Pavel. Good to talk to you. And also, I very much appreciate the macro question around these end markets, because I think that we call it the nexus of clean, but these interlinkages, we're seeing more and more customers that are buying solutions, technology, and equipment from us for more than one end market. So the linkage of water to hydrogen or food and beverage to carbon capture is certainly starting to take hold in our business, which is one of the strategic fundamental premises of building out the portfolio the way that we have. Our water treatment technologies, and you heard Joe Biar talk about the various different kind of accelerants in that space, whether it's high temperatures in the summer for treatment as a service, people trying to get ahead of the PFAS regs. Or, again, the green hydrogen is certainly one that we hear that regularly. We have a trial containerized water treatment, basically sits in front of an electrolyzer capability through our added water technologies, which can treat rainwater to make it pure for green hydrogen electrolysis. That's really pilot stage type of answer. But if you're talking about our capabilities, we hit all treatment on all 300 plus contaminants that are out there, multiple contaminants at one time. And so we see that related to the de-cell side of things globally to link up to the green hydrogen. So we're very well positioned water-wise, treatment-wise. And my view is the international markets for our water treatment business are have the highest growth potential, even when contemplating the EPA regulations in the U.S., because this is truly a problem, forgetting green hydrogen, but truly a problem is just clean water. So lots of opportunities, not only just pure play water treatment, but also linking up with the green hydrogen play.

Thanks very much.

Thanks, Lavelle.

Thank you. The next question comes from Martin Maloy of Johnson Rice, please go ahead.

Good morning.

Hey, Marty.

Hi. Great to see the acceleration of the timetable to get to your net leverage ratio targets. I was wondering if maybe you could walk us from the EBITDA guidance for next year to a free cash flow range, maybe talk about working capital usage second half of this year and for next year.

Sure. We haven't specifically given cash flow or cash available for net pay down, but what I'd say for 2024, I should say, we will do that as the year progresses. But what I'd say on the working capital side of things is the second half of this year, let's see, we got about, I think we got about 90 to 100 million total in CapEx for the full year. So you just back out the first half. from that, and that should be pretty darn consistent in 2024. If we have any additional organic CapEx projects of note, we will call those out separately. But we generally, both the chart and how in the combined business, operate as a fairly low CapEx company. And then, you know, you've got to walk from the EBITDA figure that we have, and so you've got the working capital component, the interest expense, which you want to make sure that you're including the 380 of the announced divestitures coming out in the third quarter from interest expense. And, yeah, we'll get a little more nuance later this year around the balance sheet optimization activities. You know, there's there will be moments ahead here in the coming 12 months where I think we can even do better on kind of our weighted average cost of debt through multiple different opportunistic ways. And then, you know, other than that, we've got, I think we captured it, right? What did I miss, Greg? Working capital, interest, taxes, taxes, you know, taxes, we really need to optimize that tax rate. So I've got to use a 20% for 2024. And you get in that, you kind of can get in that $550, $600-ish. Oh, and Walsh doesn't like that I gave that number.

Okay, thank you.

You're good, Marty. Thank you.

Thank you. The next question comes from Eric Stein of Craig Hallam. Please go ahead.

Hi, Jill. Hi, Jill. Eric, good morning. Good morning. Hey, so I just want to come back to the 2024 EBITDA outlook. I mean, this continues to be an area that I do still hear skepticism from people on. And you've, I mean, great first look at the combined business. You spent a lot of time there. I mean, maybe could you break down just between revenues and you laid out how you get there on an order basis. And then on the margin line, I mean, it seems like you you know, are very confident in that level, despite kind of the view that's out there with a lot of visibility. I mean, are there anything, is there anything that you're worried about or that you feel like more needs to be done to get there? Or, I mean, is your confidence in that extremely high?

Yeah, thanks for the question, Eric. And we will give, I was smiling on the last question from Marty, but we will give detailed outlook for 2024 and the three years at our analyst base. So those metrics will follow. But directionally, we have certainly, again, a year ago, sat here in the mid-20s gross margin and said, we'll get to 30. And now we're there. We intend to stay north of that number. Obviously, things, you know, you got mixed things, things like that. But we don't, even with mixed shifts and things like that, we don't expect to drop below that 30% gross margin as percent of sales. And said differently, you know, as I answered, I think, James' question earlier, expect that to continue to increase in the coming years. More needs to be done. Yeah, you know, listen, I think there's always more to be done. And I think that we can't take our foot off the pedal on cost synergy achievement. That's crucial to getting our year one, but also increasing those margins that we've discussed. I think that there's quite a bit of productivity we can unlock. Productivity is such a loose term, but what I mean by that is I briefly said we're going to take Howden Business Excellence fundamental premises to chart business excellence, and we've implemented a dedicated team under Curtis Dubbings, under our SVP of Integration and Continuous Improvement, to roll that out across the organization. What I'd like to see happen as we head into 2024, and this is well underway in the background, is that we are laser targeted and focused on a reduction to cost of goods sold through those productivity and continuous improvement initiatives. And those two things, cost synergies and a much more formalized continuous improvement strategy, approach that is standardized across the combined organization, I think are two key things that can unlock that margin growth. And then my last part to answer your question is we can't get lazy on price cost. So Joe, BR mentioned it, I mentioned it in the prepared remarks, and the fact that we said it two or three times was purposeful because this is a time where with the supply chain tempering, if we can hold price, we can really take advantage of that kind of storm that hit us the wrong way a couple of years ago, and now let's hold on to it going the right way.

Okay, thank you.

Thank you. The next question comes from Adi Modak of Goldman Sachs. Please go ahead.

Hey, good morning, team. Jill, congrats on the... Good morning. Congrats on the additional divestiture that you announced. Sounds like the 500 million target is on track. In the slide, you noted potential for additional divestiture. I was just wondering, what is the nature of that? Could that meaningfully add to the deleveraging plan? Is it smaller? Any color you can add there? And maybe also touch on the EBITDA impact that we could see or should think about from these divestitures?

Yeah, thanks, Adi. First of all, thank you for the congratulations. We were really pleased to get this second key step in that process done and on the time frame that we wanted to do it. And I think I said it like four times in my remarks how pleased I am that we know the funding date for the roots divestiture, too. So ticking along against what we wanted really on schedule or a little bit early. And again, I think people focus in on two divestitures, and we're trying to make sure that everybody understands that there's a perimeter that we defined, and we're optimizing how we do these sales in order to maximize the cash. The potential for additional divestiture comment is one that our teams, as they've gotten to work day-to-day and hour-to-hour together, have really generated an exceptional amount of ideas on the synergy achievement side, and I would say we've more than anything on the commercial synergy achievement as they've seen what each portfolio has and how it works in some of these end markets. So as part of that, we've kind of seen, okay, does this play or does that not play? There's not a specific one I have in mind, but we as an executive team are constantly looking at the portfolio to see if there's anything else that we'd consider as a distraction or not synergistic. So I would say is it's a comment that says, We're evaluating this on a regular basis to make sure that we have the most optimized portfolio. And we're three and four months in. So there's nothing specific to that besides the fact that we want to get through the original perimeter. And we'll always look for more opportunities. And then the last part of your question, EBITDA impact, I think what we have laid out in terms of our outlooks, both for 23 and for 24, we didn't take EBITDA impact out for ROOTS or for COFIMCO. And that there's probably the stopping point of what we can take out of our outlooks without having to make some tweaks, but they wouldn't be material tweaks. So that's kind of the short answer to your question. Or actually, I think it was a long answer. But thanks, Adi.

Appreciate the call. Thank you.

Thank you. The next question comes from Rob Brown, Lake Street Capital Markets. Please go ahead.

Good morning, Joan Jo. Good morning, Rob. Just wanted to follow back to the aftermarket business and just get a little more color on what sort of remains there in terms of getting that business going. Is it really getting Howden's activity back into the legacy charter? Just what you see there in terms of opportunity to grow that further.

Yeah, it's definitely, you know, I really love that piece of the business. And I feel like it's maybe been a little underappreciated. I feel like that and water have been underappreciated by the outside world for what's in our portfolio. There's so many levers in aftermarket service repair that we have to go after. Mark Krug and his expert team up in Buffalo have done a really good job of corralling that, I said, 20% of our chart legacy install base and getting it through the Howden tool and getting the customer sites over to the commercial team to be able to leverage that LTSA sale. So, yeah, 80% more chart legacy just through that group and that capability that Haddon brought to us. We haven't even touched the sphere on taking digital uptime to the chart original build, so we're just getting We've been really working through the designs and some prototypes and some pilots on that. So I think there's great opportunity there. And then just the footprint itself of 50-plus locations gives us many, many more opportunities even that we never had before because we weren't physically anywhere outside of WeChart Legacy, anywhere outside of the U.S. or just small pockets in Europe. Brinkman, what else you got on that?

Yeah, I mean, just... just the the different level of focus that howden brings to the aftermarket versus legacy chart you know with it being such a high percentage of the revenue uh from from legacy howden of of roughly half the revenue there and as jill pointed out the the global footprint um there was with chart we're just just basically a us-based aftermarket focus for the most part with a little bit with a little bit in europe there so that Just the infrastructure and, you know, not only physical, but the human resources with the deep experience targeting aftermarket is really transforming charts, legacy charts, focus on aftermarket and opportunities here. So it's in progress and going nicely.

Okay, great. Thank you. I'll turn it over.

Thank you.

The last question comes from Craig Scheer of Toy Brothers. Please go ahead.

Good morning. Thanks for getting me in. Good morning, Craig. Just a real quick one. Congratulations on executing on everything, but also specifically in big LNG per what you had guided on the first quarter call. My question is this having legs and prospects of another two or three big LNG orders next year.

Yeah, thank you, Craig, and thanks for really understanding the business all throughout the year. Yeah, I mean, listen, we think of big LNG as four categories, right, or LNG as four categories. Big LNG, number two is small-scale floating, number three is LNG infrastructure, and number four is what we'd call the aftermarket, so that's brownfielding and repair service or add-ons. And my view is very bullish on this continuing in all four of those elements, and some of them shifting, right? So maybe I'll take a little bit of time because each one of these is nuanced a little bit and looks different than it did a year ago. So big LNG, you know, a year ago you had everybody and their brother that had – even a thought about doing a big LNG export terminal coming into the fray. And while that was great, you saw some confusion from the offtakers as well. And now you're really into the key participants and operators that can do it, have proven that they've done it, or have FID and FERC, et cetera. So having a smaller base of operators that are going to build I think has also helped move ahead some of these FIDs through offtake because there's less confusion of who's who in the market. So our view is that this continues on. I mean, look on Big LNG. Last year, we looked at $620 million of Big LNG orders. I think, you know, two or three projects. Never before in the history did you have multiple projects in one year get booked, let alone multiple projects this following consecutive year. And now we're talking about seeing that happen 22, 23, 24. And that gives us a really nice runway through this decade. Then you go into the second category, small-scale floating. I threw in that this morning we got that award for $28.7 million for small-scale, which is with a customer in APAC in the Eastern Hemisphere. And That is a shift, right? Well, there's certainly activity in North America continuing to happen. We have seen the uptick in the opportunities outside of North America is where I think that this future next few years focus is going to be in that category. And then third on LNG infrastructure, you know, fits and starts there, right? That's where our HLNG vehicle tank, just horrible demand has been, but that's also been great to have in the portfolio because it's been the jumping off point for our liquid hydrogen onboard tank. So that's actually an interesting play that we want to keep because we do think heavy-duty LNG trucks still play, but liquid hydrogen heavy-duty trucks is another great avenue to have that product line hit. LNG fueling stations and trailers and ISOs, you have to have that because if you're exporting LNG, you've got to be able to import it. And then the last category I think is one that We haven't seen a ton of activity in to date, but we're seeing numerous NRU and HHC, nitrogen rejection unit, heavy hydrocarbon removal studies underway, in particular in the United States where the gas composition is different, and that creates a problem for all of these LNG operators. So I think that you'll see some NRU and HHC tack on activity in the coming couple of years.

Great. Thank you.

Thank you.

I will turn the call back to Jill Ivanko for closing remarks.

Thank you, Michelle. Thanks, everybody. Have a great Friday and great weekend. Bye-bye.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.