Chart Industries, Inc.

Good morning, and welcome to the Chart Industries Inc. 2024 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 telephone replay of today's broadcast will be available approximately two hours following the conclusion of the call until Sunday, September 1st, 2024. 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, or forward-looking statements. Please refer to the information regarding forward-looking statements and risk factors included in the company's earning release and latest filing with the SEC. The company undertakes no obligation to update publicly or revise any forward-looking statements. I would now like to turn the conference over to Jill Ivanko, Chart Industries CEO. Please go ahead.

Thank you, Joelle. Good morning and thank you for joining Joe Brinkman, our CFO, and me to walk through our second quarter 2024 results. We are executing consistently and on the path to our reiterated medium-term financial targets, including organic sales CAGR of mid-teens, mid-30% gross margin, adjusted diluted EPS growth CAGR of mid-40%, and free cash flow conversion to attain our target net leverage ratio range of 2 to 2.5. For all periods referenced, all metrics are pro forma for continuing operations of the combined business of Chart and Howden, unless otherwise noted, which also excludes all assets divested in 2023. Starting on slide five, I will point you to the far right-hand column of the table showing the growth in each metric from the second quarter 23 to the second quarter 24. We had numerous all-time historical records in Q2. These included all-time record reported sales, backlog, gross profit, gross margin, operating income and margin, EBITDA and EBITDA margin. All of the associated adjusted metrics for these are also all-time records. Orders were $1.16 billion. an increase of 12%, and an increase of about 40% excluding big LNG. Demand remains robust. In a few slides, we will take you through some examples of key wins in the second quarter, including a $40 million data center win for our air-cooled heat exchangers and record orders for carbon capture, metals, mining, water treatment, and field service. Record sales of $1.04 billion increased 18.8%. Repair service leasing, or aftermarket segment as we use for shorthand, was about 35% of our second quarter sales. We had record reported gross margin of 33.8% and record reported operating income of $167.8 million, or 16.1% of sales. This was also a record $225.7 million when adjusted for specific items primarily related to the Howden integration and consolidation and restructure of our Asia Pacific region into our Middle East and Africa region, resulting in 21.7% record adjusted operating margin. Record reported EBITDA of $229.6 million was also a record 22.1% of sales. When adjusted, EBITDA margin was a record 24.7% of sales. We are focused on simplifying metrics Therefore, we have included the negative impact of the mandatory preferred dividend in our adjusted diluted EPS, which was not included in prior periods, nor was it in our prior outlook. So compared to the prior outlook, the second quarter adjusted EPS had a negative 14 cent impact from that, and our updated full year guidance compared to prior has a negative 60 cent impact from that, from this definitional change, which has no impact on the underlying business, nor anticipated operational performance. Reported diluted EPS of $1.10 when adjusted was adjusted diluted EPS of $2.18, which again includes that negative 14 cent impact of the mandatory preferred dividend and 4 cents of negative foreign exchange. Our June 30th net leverage ratio of 3.26 has declined from 4.08 since closing on Howden five quarters ago. We'll discuss cash in more detail in a moment. Turning to slide six, Our four key takeaways are shown here, which we will touch on throughout the deck today. On slide seven, you can see both the increases in each metric year over year, as well as the sequential increases in each metric from Q1 to Q2 2024. Every segment and every region sales increased year over year, and there were record sales in both the RSL and specialty product segments in the second quarter of 24. We are pleased with our operational margin expansion, as you can see on the page and again on slide 8, which shows the gross margin dropping through to operating profit and margin. The incremental second quarter 23 to second quarter 24 operational margin improvements increased meaningfully, and all metrics shown on slide 8 were records this quarter. Reported gross margin was a 310 basis point improvement, adjusted operating margin grew 490 basis points, and adjusted EBITDA margin increased 330 basis points. It is important to note that we do have more room to expand margin ahead. We will continue to execute further cost synergies. We have established chart business excellence and associated Six Sigma continuous improvement activities throughout the organization, and we continue to anticipate and execute on further productivity and throughput improvements ahead. Both cost and commercial synergies have been a key part of our operational margin expansion being ahead of schedule. As you can see on slide nine, we have exceeded both the size and timing goals of our original year three commercial synergy target, which was $350 million by March of 2026. As of yesterday, we have achieved $924 million of commercial synergies and are well on our way to the billion dollar mark, which we anticipate to hit in the third quarter 2024. Cost synergies are tracking ahead of schedule toward our original year three target of $250 million, with $223 million already achieved. We expect to pass the three-year target by the end of 2024. In the second quarter of 2024, we combined our Asia-Pac India region with our Middle East Africa region, achieving further back-office synergies. Going forward, we are accelerating the localization of products, utilizing our global footprint. Slide 10 shows some examples of the breadth of our Q2 commercial wins, including compressor packages for direct reduction iron for DRI application. We are seeing an increasing number of those opportunities in DRI, including this being our second consecutive quarter of orders in new green steel applications. We also received an order for cryogenic storage tanks for semiconductor company as they continue to manufacture more in the United States. Another benefit of our global manufacturing footprint as near-shoring trends occur. Q2 also continued our streak of strong orders that individually were each over $1 million, with 147 of those in the quarter and 24 first-of-kind orders. This diversity of awards also reflects our commercial pipeline's breadth across end markets, products, solutions, and applications. This gives us the opportunity to have a relatively consistent order rate, as we have shown over the past 12 months, with book-to-bill consistently above one. The third quarter 2024 activity has started strong, with RSL booking a $10.5 million order for Power Africa power station spares. And further orders from this customer, totaling over $25 million, are expected to be awarded in the second half. In July, we also received an order for approximately $27 million for a significant petrochemical project in Asia Pac. Space exploration orders in July totaled $19 million. Additionally, Airbus has awarded us a contract to fabricate a liquid hydrogen inner vessel subsystem to integrate into an Airbus Zero-E physical demonstrator program. We are able to serve the breadth of the end markets and applications just discussed without having to change our manufacturing operations. For example, we manufacture compressors at multiple locations globally, and they serve traditional energy applications as well as specialty markets, including hydrogen and carbon capture. On slide 11, you can see examples of our equipment that are used across molecules and from traditional energy to energy transition to specialty markets. Because of this, we do not foresee a material impact to our outlook as a result of the U.S. presidential election, regardless of administration. Our ability to serve multiple applications in markets with these existing manufacturing capacities Along with our synergies between Chart and Howden are the primary drivers of our commercial pipeline of opportunities for the next three years, being at an all-time high, over $23 billion. We expect to further increase the pipeline from data centers and artificial intelligence cooling and storage needs, given the energy-intensive environment as shown on slide 12. As mentioned earlier, in the second quarter, we received an award from a data center provider for approximately $40 million for air-cooled heat exchangers for heat rejection. the starting point with the key customer that we anticipate will continue to expand volume ahead. The data center and artificial intelligence opportunity for us, specifically based on three gigawatts of data center addition per year, is approximately $500 million, and it can expand from there to heavy industrial chilling using Howden's leading screw compressors. We anticipate also that our ToughLite 4 fan offering will be a key part of data center cooling applications. You can see our ToughLite 4s in action in the photo in the middle right of slide 12, which is at a location in Texas. In this photo, you can see the uniquely designed backwards sweep characteristic, which improves efficiency and resiliency. ToughLite 4s are another good example of the same equipment being used in multiple end markets, and you'll see this again in a few slides on LNG. In the second quarter, we booked two separate U.S. LNG export facility customers' orders to utilize these fans in their terminals. And we are very proud to support Cheniere's de-bottlenecking efforts with our ToughLite 4 fans at both their Sabine Pass and Corpus Christi locations. Another end market that our products serve is nuclear and SMR, as you can see on slide 13. And this is a market that is gaining traction. For us, our applications include fans and SMR applications, and mainly our orders to date have been split between France and North America. As slide 14 shows, LNG activity continues very actively and globally. including a conscious move of LNG operators to more modular solutions, specifically benefiting our IPSMR process technology. Our big LNG commercial pipeline expanded to 32 potential projects, with 16 potential international projects considering using IPSMR. We announced our liquefaction technology and equipment was chosen for ARGENT's anticipated 20 MTPA project, which is not yet booked into backlog and not included in our medium-term outlook. The upper left-hand box on slide 14 shows Q223 pro forma orders to Q224 for total company and for our HTS segment, which shows non-Big LNG orders growth for HTS being significant, representing a series of larger orders in the second quarter, including for air coolers and a South American small-scale LNG project, to name a couple. In LNG infrastructure, we booked our largest-ever order for our Dechen Czech Republic facility for an LNG regas project, And as of this past week, we have sold 103 LNG trailer orders in China year-to-date 24, comparing to 25 and 15 for the full years 23 and 22. Slide 15 shows how effectively the RSL or aftermarket segment is executing on our profitable growth strategy plus synergy attainment, which in turn increased RSL to about 35% of our second quarter sales. In the upper left-hand table, Sales were a record and grew over 26%, and margin was a record 49% driven by strong field work. Note that this level of RSL margin is not consistently typical. As a point of reference, all quarters to date since we acquired Howden, RSL has been above 43% gross margin, and margins in RSL have been on average 200 basis points higher than pro forma RSL pre-acquisition, driven by cost and commercial synergies. As a result of our fast response to customers and high value add to their operations, there does continue to be upside opportunity and margin benefits ahead in RSL. Second quarter 24 RSL orders of $312.4 million increased a half of a percent when compared to the second quarter 23. The second quarter of 23 did include three less frequent larger spares orders. On the right-hand side of slide 15, I would like to point out a few key second quarter wins we had in RSL. We added a three-year LTSA to the business with a CNG station customer, another great synergy example. Item B shown is an award for compressor LTSA in Turkey, and item E is critical heater parts for a power plant in Mexico, a great $6 million win. Both Turkey and Mexico are geographies where we are beginning to see stronger traction and penetration. We have seen great synergistic aftermarket wins to date, yet we do believe that we are at the beginning of these opportunities that exist in the combined business. For example, Key Legacy chart customers in refining power and gas production facilities have now engaged with the Howden local aftermarket teams for parts and services for cooling fans and air coolers. I'll now hand it over to Joe for the financial detail in our 2024 and medium-term outlook.

Moving to slide 16, you can see our free cash flow first and second quarter results. On the table, we are showing each category of the calculation that is considered operational cash in a period, so that you can tie directly to the beginning and ending balances on the balance sheet. Net cash from operating activities of $115 million includes long term, beyond one year balance changes that are not reflective of our quarterly operating activity, nor how we provide, or previously provided, our annual cash flow outlook. Removing those, combined with our $28 million of second quarter 2024 cap back spend, Our comparable Q2 operating free cash flow was approximately $115 million as compared to our original prior second quarter cash flow outlook of $175 million. The difference is due to two specific inter-quarter items that are cash flow timing that occurred in Q2. These were business decisions that we chose to make to drive stronger customer relationships with key long-term customers and are timing related where cash is expected in the second half of 2024. First, an emergency field service situation arose within the quarter. We dedicated a large field service team from other work to respond, and the associated timing of cash payment will be in the second half 2024. We also had a key customer whose project has a cash milestone in the second half request that they needed specific steps taken to hold schedule and the related materials purchase occurred earlier than we had previously planned. In the normal course of our larger project business, we achieve a cash positive or cash neutral position. We continue to see strong margins. Capital spending is declining as expected as our significant capacity expansions complete, and working capital continues to be a source of cash as shown on slide 17. As we had previously shared in our first quarter 2024 earnings call, We expected 125 million of milestone payments in the second quarter of 2024 for our top four projects, and we collected all of that. As you can see on slide 17, when considering AR, inventory, AP, and the net of unbilled and customer advances, we have reduced our net working capital from 23% of sales a year ago to 20% of sales in the second quarter of 2024. We anticipate our full-year 2024 sales to be in the range of approximately $4.45 billion to $4.6 billion, inclusive of an approximate 1% foreign exchange headwind. Forecasted full-year adjusted EBITDA is in the range of $1.08 to $1.15 billion. Our anticipated 2024 full-year adjusted EPS range is 1075 to 1175. This range is based on an effective tax rate range of approximately 20 to 21% and a diluted share count of approximately 47 million. Free cash flow guidance is in the range of approximately 400 to $475 million. Compared to our prior 2024 full year outlook, the main drivers of the change are foreign exchange, timing of sales on larger and longer projects, timing of larger awards received late in the second quarter 2024, having revenue impacts in 2025 and 2026, and a purely definitional change to our adjusted EPS calculation by no longer excluding the negative 60 cent mandatory preferred dividend EPS impact. We have included slide 20 as a bridge from first half 2024 actuals to the second half 2024 adjusted EBITDA outlook. On slide 22, you can see our reiterated medium term financial outlook through 2026. Given the breadth of our end markets and applications, we have multiple macro growth drivers, including energy access, growing need for energy given the increasing artificial intelligence trends, and the continued era of natural gas with energy transition. Our medium-term financial targets are underpinned by continued throughput and productivity activities underway, anticipated further and additional cost energy achievement, and normalizing capital expenditures. We are already in the neighborhood of our mid-term gross margin goal based on recent results. Additionally, this medium-term outlook doesn't include any Big LNG projects that were not in our backlog as of September 30th of 2023. There are several known Big LNG project awards not currently reflected in our backlog and not assumed in our guidance metrics, including IPSMR for an international oil company's Big LNG project, Margins Facility, and the Driftwood 27 MTPA export terminal, which is already permitted. These three big LNG projects that are not yet in backlog total approximately $1.5 billion of chart content. The medium-term outlook also excludes future benefits from the U.S. hydrogen hub projects. Just this week, the DOE's Office of Clean Energy Development finalized the second of seven projects that will receive funding. We anticipate to sequentially grow sales in 2025 and 2026, each in double digits, continue our margin expansion, and generate more cash with capital expenditures as a percentage of sales in the 2% to 2.5% range. To conclude, we are well on our way to our medium-term financial targets and would like to take this opportunity to thank our OneChart global team members for their efforts and for doing so safely. delivering our quarterly lowest rolling 12-month total recordable incident rates of 0.42. Joelle, please open it up for Q&A.