Chart Industries, Inc.

Good morning and welcome to the Chart Industries, Inc. 2023 fourth quarter and full year results conference call. All lines have been placed on mute to prevent any 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. A telephone replay for today's broadcast will be available approximately two hours following the conclusion of the call until Friday, March 29, 2024. The replay information is contained in the company's press release. Before we begin, the company would like to remind you that statements metering 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 Evenko, Chart Industries CEO. Please go ahead.

Thank you, Julie, and good morning, everyone. Thank you for joining Joe Brinkman, our CFO, and me to walk through our record fourth quarter and full year 2023 results. Our results shown are from continuing operations. I refer you to our earnings release for reported results. For purposes of our discussion this morning, when referring to the fourth quarter 2022, full year 2022, or any quarter of 2023 comparative period, All metrics are pro forma for continuing operations of the combined business of Chart and Howden. This includes Howden, excludes Roots, and excludes November and December of 2022 of the divested American Fan, Cofimco, and Cryo Diffusion businesses. Information on divestitures completed in 2023 can be found on slide four. Starting on slide six, as a reminder, we closed on the acquisition of Howden on March 17th, 2023. We have exceeded both our original year one commercial and cost synergy targets ahead of the one year mark. Commercial synergy awards to date of approximately $530 million also exceeded our year three commercial synergy target. We have achieved over $181 million of cost synergies to date. The Howden acquisition has also contributed many other benefits, including less reliance on big LNG projects, more aftermarket service and repair, less cyclicality, broader geographic diversity, and less customer concentration. In 2023, our top 10 customers made up about 25% of our sales, whereas in 2021 and 2022, they comprised 39% and 38% on a chart standalone basis. In the fourth quarter of 2023, we had record orders, backlog, sales, gross profit, gross profit margin, operating income, operating income margin, EBITDA, EBITDA margin, adjusted EPS, and reported and adjusted free cash flow. Our highest reported gross margin quarter ever in the fourth quarter of 32.9% contributed to our reported Q4 operating margin of 21% and EBITDA margin of 21.7%. When adjusting for primarily housing-related integration and deal-associated costs, adjusted EBITDA margin was 24.2%. Sales of $1.02 billion was a record quarter as well, the only quarter to date that we have exceeded $1 billion. And in a few minutes, Joe will talk about other throughput activities that we have underway to further drive this ahead. Q4 sales were up sequentially 13% and 12.5% compared to Q4 2022. While we surpassed the $1 billion mark and set numerous profitability records as I just described, we had anticipated higher revenues related to revenue recognition timing in the quarter. Our year-end net leverage ratio of 3.35 was supported by an increase in cash on hand and debt pay down totaling approximately $291 million in Q4. As part of our Howden integration, we executed a plan to align our legal entity structure with our integrated operations. This resulted in a positive impact, on our effective tax rate and sets us up for future back office synergies, efficient and flexible cash management, and an anticipated future, steadier, sustainable tax rate. Our fourth quarter of 23 results compared to pro forma Q4 22 and sequentially to the third quarter of 23 can be seen on slide seven. The far right hand column shows the changes in each metric year over year. Orders are up over 28%. Reported gross margin increased 540 basis points. Adjusted EBITDA increased by 64% and adjusted EBITDA margin by 760 bps. Q4 2023 adjusted earnings per diluted share were $2.25. Fourth quarter free cash flow was $110 million and adjusted was 120. Joe will speak to the details in a moment. The middle column on slide seven shows that every metric increased sequentially in the fourth quarter compared to the third quarter of 2023. Even when considering that the third quarter included an entire quarter of COFIMCO American fans and cryo-diffusion results, whereas the fourth quarter only included one month of these as they were divested the last week of October 2023. Q4 also contributed to a record full year, as you can see on slide eight. Including the Howden stub period, pro forma full year 23 sales were $3.66 billion. Strong operational margins throughout the year, including all of our Howden ownership quarters being above 30% reported gross margin, contributed to full year 23 gross margin as 31%. As we look to 2024, and we'll have a section on this coming up here, but in summary, we anticipate that each of our segments and each of our regions, which are Americas, Europe, Middle East, Africa, APAC, India, and China, will each grow sales compared to 2023. Our fourth quarter was our highest ever order quarter in our pro forma history, with over $1.2 billion of awards received. Slide 9 shows pro forma orders and backlog trends. The fourth quarter was the highest order quarter of the year for both cryo tank solutions and heat transfer systems. Repair service and leasing orders were over $328 million, marking our three full quarters of Howden ownership having RSL orders each above $315 million. This reflects the growing adoption of our aftermarket programs to both Howden and ChartLegacy installed bases and the increasing pull-through of our original equipment customers to aftermarket. In 2023, RSL orders for the full year were up 25%, and our long-term service agreements and framework agreements increased more than 4% year over year. Just a few comments about the diversity of our 2023 year-end backlog. Space exploration, carbon capture, hydrogen and helium, raised aluminum heat exchangers, and HTS systems all have record backlog as of the end of the year. Combined, these end markets account for approximately half of our total backlog. RSL, just under 14% of total backlog, and CTS, just under 9%. The remaining approximately 27% is comprised of the rest of specialty products, as well as HTS air coolers and VRV heat exchangers. We have seen a surge in demand for Howden screw compressors driven by food and beverage refrigeration, emissions reduction via flare gas recovery, and expansion of methane compression. The year-end 2023 backlog for this particular product is two times prior year, contributing to our higher than historically typical backlog coverage for the year. As we have shared, we have a significantly below 1% cancellation rate of backlog. There's a theme that we're seeing across many of our markets of increasing project size and engineering content. A few comments by end markets of what we're seeing to start 2024, starting with industrial gas. In EMEA, our pipeline's strong, we had an excellent January of orders, and project sizes are increasing. For industrial gas in the U.S. and the rest of the world, the commercial pipeline remains strong, inclusive of hydrogen opportunities. While we expect a quote-unquote strong quarter for CTS orders compared to other first quarters and prior years, Q1 is typically and still expected for this end market to be our lowest quarter of the year. In energy markets, we are seeing moderating North American demand, which is offset by increasing international inbound since the beginning of the year. The global market for LNG continues unabated. As the United States pauses, the rest of the world accelerates. This is evident in our commercial pipelines for big LNG and small-scale and floating LNG, which can be seen in the appendix on slide 28. As of now, we have 30 potential big LNG projects in our pipeline, including 15 international opportunities for potential IPSMR usage. Both of these metrics increased from Q3 and year-end 2023. Similarly, since the beginning of this year of 2024, small and floating potential projects in our commercial pipeline increased about 4.5%, mainly driven by additional international opportunities. In the case of Qatar, we do have potential opportunities to participate, including with cryogenic equipment, compression, de-bottlenecking, and process technologies. Our near-term prospects, we believe, are on heat rejection optimization on existing facilities and potential pretreatment heat exchangers for expansion plans. Specialty products demand is consistently strong, and we're also seeing increasing potential project sizes as a theme in many of these end markets as well. Marine has an increasing commercial pipeline, in part due to our upcoming jumbo tank capacity at Teddy 2, as well as multiple Howden air lubrication opportunities. SpaceX market remains robust. HLNG over-the-road vehicle tank activity is increasing, albeit not at prior levels, but certainly that look is better than the past two years' actual activity. As of yesterday, Q1 2024, quarter to date, We've booked orders for HLNG vehicle tanks that equate to more than 50% of last year's full year HLNG vehicle tank sales. Mining and metals markets remain very strong, driven by global demand for electrification and a push to reduce carbon footprints using DRI processes, hydrogen and metals, and other solutions such as our VentSim offering. Our mining and metals pipeline of opportunities identified has increased approximately 10% pro forma year over year. CCUS activity is also increasing with our small-scale earthly labs offering going international. And again, in this end market, project sizes for potential chart content are getting larger. Hydrogen pipeline remains active. We're paying close attention to U.S. timings specifically related to hydrogen hubs and IRA clarifications. Internationally, there's also increasing traction, including the recent European Commission approval of 6.9 billion euros in state aid for development of the hydrogen value chain. We are excited to announce that last week we were awarded a significant hydrogen compression solution within the renewable hydrogen industry. Using Howden's reciprocating compression technology, this is the largest single compressor award in dollars in Howden's 167-year history. It's also a synergy win, as the solution includes ChartLegacy pressure vessel equipment. And finally, as we like to see, it brings with it the future opportunity for installation and post-installation monitoring. Aftermarket service and repair is off to a consistent start quarter to date with multiple customers across end markets, in particular in Europe. In the Americas, we entered 2024 with RSL backlog a bit better than normal, and quoting activity remains strong. You can see our increasing operational margin metrics, including the sequential increase in reported gross profit margin, on the left-hand side of slide 10. The same up and to the right trend applies for EBITDA and adjusted EBITDA margin on the right-hand side, reflective of our full solution mix, aftermarket service and repair, over 30% of our business, productivity actions, cost synergies, and additional volume throughput. Moving to slide 11, this shows sequential segment reported results for sales, gross, and operating margins, for Q3 and Q4 of 23. CTS, HTS, and RSL segments all had record sales in the fourth quarter. CTS and RSL sales were up over 29% and 25% sequentially compared to Q3. Specialty sales did decline sequentially, which was driven by the marine end market, which had a full quarter of American fans in Q3 and not in Q4 due to divestiture, as well as from revenue timing for hydrogen, metals, and space exploration. We expect all of these to be strong contributors to 2024 sales as we had full-year record orders in hydrogen, metals, and space. Each segment did have its highest reported gross margin quarter of the year in the fourth quarter of 2023. And finally, we're focused on cost control with the strength in gross margin dropping through to operating margin results in each segment.

Slide 12 shows our cash generated from operations in the fourth quarter of 2023 of $130 million. netted with $20 million of CapEx, our adjusted Q4 free cash flow is 12% of sales. Our priority has been and continues to be debt pay down and leverage reduction. Our net leverage ratio went from 4.08 in Q1 of 2023 to 3.35 as we exited the year, a meaningful step towards our anticipated and reiterated mid-2024 target of 2.5 to 2.9, and overall target net leverage ratio range of 2 to 2.5 there were specific outflows of cash in the fourth quarter 2023 that we did not adjust shown on the right hand side of slide 13. we ended ended the year with 814 million dollars of liquidity in addition to paying down over 150 million dollars of our term loan b in the year our weighted average interest rate of 7.8 percent was down approximately 25 basis points from the end of q3 in addition to operational cash focus from our entire organization on our cash culture, we continue to work additional cash generation activities, whether evaluating potential minority investment exits, sale of underutilized real estate, and cash repatriation. We reiterate our financial policy and commitment to debt pay down as shown on the bottom right-hand side of slide 13. Slide 15 shows our main material cost input trends. They remain stable and in some cases are trending down. Looking at the lower right-hand freight chart, the trend has been up the past few months, yet we have seen pricing leveling in recent weeks, and in many of our customer agreements, we passed the freight costs through to them. We are carefully monitoring the Red Sea situation. As of now, we have not seen any major impacts on material availability into the plants. We are experiencing, though, approximately two- to three-week delay on certain routes. We have three main categories of pricing, project pricing, price lists for component sales, and price mechanisms and long-term agreements. Over the past three years, we have incorporated price increases to adapt to the increasing cost environment, and we have held this pricing. The continuous part of our business is ongoing new certifications, customer site approvals, productivity, automation, and what we call chart business excellence, or CBE. This year is no different and includes our Lean Six Sigma training program, for our internal team members, as well as approximately $115 to $125 million of capital spend expected in 2024. The capex spend includes capacity expansions as shown on the top of slide 16. We actively manage our cost structure and see further synergies ahead this year inclusive of insourcing and localization for compressor and fan products. Over the next few slides, starting on slide 18, we will walk through the elements of our 2024 outlook range. We anticipate our full year 2024 sales to be in the range of $4.7 to $5 billion, with forecasted full year 2024 adjusted EBITDA in the range of $1.175 to $1.3 billion. Free cash flow guidance of $575 to $625 million is defined as operating cash flow, less capital expenditures.