Chart Industries, Inc.

Good morning, and welcome to the Chart Industries Inc. 2024 Third 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, December 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 earnings released 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 Julie Vanko, Chart Industries CEO. Please go ahead.

Thank you, Joelle. Good morning and thank you all for joining our third quarter 2024 earnings call. Joining me today is our CFO, Joe Brinkman. We will begin on slide four of the supplemental deck that was released this morning. Results shown are from continuing operations. When referring to any comparative period, all metrics are pro forma for continuing operations of the combined business of Chart and Howden. Pro forma excludes the following businesses that were divested in 2023, Roots, American Fan, Cofimco, and Creo Diffusion. In the third quarter of 2024, we generated $200.7 million of net cash from operating activities and after $26 million of CapEx spend, had free cash flow of $174.6 million. This cash was used to reduce net debt and resulted in our September 30th net leverage ratio of 3.04, meaningful progress to our net leverage ratio target of 2 to 2.5, as well as our 2025 year-end net debt goal of $3 billion. In a few slides, we will discuss further balance sheet optimization plans. When compared to the third quarter 2023 pro forma, orders increased 5.4%. Sales of $1.06 billion increased 22.4%. Reported gross margin of 34.1% increased 350 basis points. Reported operating income of $178.5 million was $235.9 million when adjusted for items primarily related to the Howden integration and headcount restructuring. As a percent of sales, adjusted operating margin was 22.2%. Adjusted EBITDA of $260.7 million was 24.5% of sales. Our adjusted EPS was $2.18, which would have been $2.48, absent the $0.15 negative EPS impact related to foreign exchange of the quarter, and the delta of our Q3 tax rate of 26.5% to our originally assumed 20% rate. which was another negative 15 cent impact. The tax rate was impacted by our geographic profit mix. Year-to-date through September 30th, sales increased 19.6% when compared to year-to-date September 30th, 23 pro forma. And operating margin increased year-to-date by 510 basis points. Year-to-date through September 30th, all segments sales grew compared to year-to-date Q3 23. All segments gross margin increased and all segments SG&A as a percent of sales declined, reflecting operational improvements as well as earlier than anticipated cost synergy achievement. In the third quarter, we surpassed our original year three, which was 2026, target of $250 million of annualized cost synergies. Slide five is a summary of the third quarter compared to Q3 23, and we will cover each of these in the coming few slides. So moving to slide six, Our third quarter orders of $1.17 billion grew 5.4% compared to Q3 23. You can see some specific order examples booked in Q3 on the page, including a variety from traditional energy to hydrogen to marine to LNG. Siemens Energy ordered multiple air-cooled heat exchangers for a variety of energy projects, including Cass County Power Station in Turtle Creek. HD Hyundai Heavy Industries placed orders for exhaust gas recirculation, or EGRs, for marine chip engines. EGAD, part of SEAD group, placed an order for a diaphragm compressor for their green hydrogen plant in Italy. We received an order from ThyssenKrupp for process fans to be installed in a new cement line at the Mountain Cement Plant in Wyoming in the USA. And axial and jet fan contracts were awarded to us by Spark NEL for the Northeast Link Tunnels in Australia. We currently have over $23 billion in our commercial pipeline of opportunities. Each quarter this year, we had approximately 39% of our installed base of covered sites placing aftermarket orders with us. That is good traction, yet we have room for more coverage, especially as much of the concentration is still primarily related to Howden Legacy. We recently released enhancements to our customer aftermarket online digital portal, including customer outage timing, additional capabilities for part configurations, and an updated tank sizing application. We also have customers that have committed work to us that are not yet in backlog, totaling $1.95 billion of commitments. A few examples of these include, for LNG, ExxonMobil, as we released a few weeks ago, on behalf of Mozambique Ravuma Venture, the operator of the Area 4 concession in northern Mozambique's Ravuma Basin, announced its decision to select our IPSMR liquefaction technology and equipment for the Ravuma LNG project. And since that announcement, Viability Gap PLC, Engas Tanzania LTD, and Tanzania Petroleum Development Corporation have chosen to partner with us to utilize our IPSMR process and associated equipment for their small-scale LNG project. And for hydrogen, Renergy Group Partners LLC has chosen to partner on their green hydrogen plant in Egypt, which is anticipated to produce 450,000 tons of hydrogen per year. We also executed a collaboration agreement to work with Petrojet, Egypt's largest state-owned construction company, to advance hydrogen projects across Egypt. Nuclear is gaining traction. We serve the nuclear space with our fan offering for traditional nuclear facilities, as well as supporting SMR technologies with our gas circulators, fans, turbines, and air coolers. To start October, we received nuclear orders from both EDF and AXMA. Moving to slide seven, our third quarter 2024 had sales of $1.06 billion, an increase of 22.4% compared to Q3 23, and an increase sequentially of 2% when compared to the second quarter of 2024. This is the first time in our history that sales sequentially increased from the second to the third quarter. reflecting continued efforts for throughput improvement, LNG project activity, and specialty products projects moving to construction phases. Three of our four segments had record sales in the third quarter. We had a busy Q3 with many weather events, yet continue to focus on deliveries and other continuous improvement actions. While we did have early in the quarter impacts from Hurricane Beryl in our Texas shops, we were able to recover that within Q3. Our shops fared well through Hurricane Helene, with only a few days' disruption from power outages. Yet we still have more opportunity to improve throughput and have more continuous improvement efforts to take hold ahead. Some examples underway include Kaizen events globally using our chart business excellence or CBE tools, optimizing assembly locations in our facilities, such as moving kettle work to Allentown, Pennsylvania, to increase other activities at our new Iberia, Louisiana shop, Similarly, we are putting skid work in locations with larger and more capacity. Another example is an addition of two testing stations in our air cooler manufacturing facilities. And these are just a few examples, as we believe we have more throughput improvement opportunities ahead of us. The middle of slide seven shows adjusted operating income of $236 million, an increase of 53% when compared to Q3 23. All four segments reported operating income and margin increased compared to Q3 23. This resulted in adjusted EBITDA of $260.7 million, which does not include adjusting for negative foreign exchange headwinds of $9.3 million in the quarter. On slide 8, you can see the increases in gross profit margin, reported and adjusted operating margins, and EBITDA margins. All four segments had increases in gross operating and EBITDA margin when compared to the third quarter of 2023. Segment-specific information is shown on slide 9. Starting with cryotank solutions or CTS, third quarter 2024 CTS orders of $126.2 million decreased 17.5% when compared to the third quarter of 2023, primarily driven by the third quarter of 2023 having had one order for over $19 million for rail cars, which did not repeat. In the third quarter of 24, we did see slowing demand in China, in particular in industrial gas, which is primarily reflected in CTS. Sequentially compared to Q2 2024, CTS orders were down 20.6% as the second quarter had a large LNG re-gas skid order for over $20 million, and also we saw the slowing demand in China in the third quarter. Third quarter 2024 CTS sales of $162.5 million increased 4.6% when compared to the third quarter of 2023. Sequentially compared to Q2, 2024 CTS sales were down approximately $3 million. Reported gross profit margin of 25% in CTS increased 280 basis points compared to the third quarter of 2023 and 480 basis points sequentially driven primarily by project mix and operational improvements. CTS margins are typically in the low to mid-20s. Now moving to heat transfer systems, or HTS. Before I start on Q3 specifics, I want to take a moment to discuss the LNG market and growing adoption of our modular IPSMR technology. We already discussed Exxon Mozambique's utilization of IPSMR and wanted to share that recently two additional projects have shared with us their decision to use IPSMR for their LNG liquefaction facilities. Interest in IPSMR continues to grow as it is an accepted and validated solution for many projects. So back to the third quarter, HTS orders of $424.7 million increased 151% when compared to Q3 23, driven by multiple and various LNG and traditional energy equipment awards. These also contributed to a sequential increase of over 50% compared to the second quarter of 2024. Third quarter 2024 HTS sales of $256.2 million were a record as we execute on LNG and other project backlog. Q3 2024 sales increased 12.5% compared to Q3 2023. Sequentially, compared to the second quarter of this year, HTS sales increased 8.2% as we continue to execute on delivering our backlog and work on further throughput improvements in our shops. HTS Q3 gross profit margin was 29.8%, an increase of 340 basis points compared to Q3 23, driven primarily by project mix. Sequentially compared to the second quarter of this year, HTS gross margin improved based on higher volumes, project mix, and operational improvements. We anticipate HTS gross margin to be in the mid to high 20s consistently going forward. Moving to specialty products, third quarter 2024 specialty products orders were $237.8 million and decreased approximately 49% when compared to the third quarter 2023, as the third quarter of 2023 included larger hydrogen-related orders. Larger project timing for orders can vary between quarters, in particular in specialty products and HTS. We received customer commitments on certain projects that we did not book in Q3 given timing of paperwork and for one project, timing of their FID. We anticipate that we will receive orders for approximately two more larger specialty projects in the fourth quarter of 2024, one in hydrogen and one in mining, which already has been verbally awarded and terms and conditions are underway. Sequentially compared to Q2 2024, specialty orders declined 44%, driven by the second quarter's record orders in carbon capture, metals, mining, water treatment, and strong globally diverse hydrogen and helium awards. Third quarter 2024 specialty product sales of $283 million were a record for the segment and increased 25.9% when compared to the third quarter of 2023, driven primarily by increasing throughput and progress on specialty projects within the quarter. Sequentially, compared to the second quarter of 24, specialty sales increased 2%. Reported gross profit margin of approximately 26% increased 60 basis points compared to Q3 of last year, yet decreased sequentially when compared to the second quarter of 2024. The sequential decrease was due to third quarter 2024 expenses incurred at our newly opened Teddy 2 facility in Theodore, Alabama, and that was related to a supplier's machinery startup challenges at our site. and therefore associated inefficiencies on specific space exploration-related projects, which we do not anticipate repeating ahead. And finally, for the repair service and leasing segment, or RSL, third quarter 24 RSL orders of $377.9 million increased 16.5% when compared to the third quarter of 2023, driven in part by a larger aftermarket sale of equipment. Sequentially, compared to Q2, orders grew 21% for about $65 million, driven primarily by our Q3 $10.5 million order for Power Africa power station spares and the larger RSL equipment sale. Third quarter 2024 RSL sales of $360.5 million increased 36% versus Q3 of 23. Sequentially, Q3 sales were flat to Q2 24, which had large field service work and also reflects typical summer timing being slower in field service outages. Reported RSL gross profit margin of 47% was driven by the larger than typical aftermarket equipment sales. Sequentially to the second quarter of 2024, RSL gross margin declined from 49%, which was unusually high and driven by the large field service work in Q2. Now Joe will discuss cash balance sheet and our 24 and 25 outlooks.

Third quarter 2024 reported net cash from operating activities of $200.7 million plus capital expenditures of $26.1 million resulted in $174.6 million of free cash flow. Our September 30, 2024 net leverage ratio was 3.04 as shown on slide 10. We reiterate our financial policy that until we are in our target net leverage ratio range of two to two and a half times, We will not do any share repurchases or material cash acquisitions. The strength in Q3 cash reflects our ongoing cash culture efforts, chart business excellence, coordination of milestone billing, and increasing operational throughput. As we have previously indicated, we are coming off a period of heavy CapEx spend for capacity. Our CapEx spend is now normalizing, and we expect normalized CapEx to be between two and two and a half percent of sales. Networking capital defined as accounts receivable, inventory, accounts payable, unbilled contract revenue, customer advances, and billings in excess as a percent of trailing 12-month sales improved to 16%. As a reminder, we had our semi-annual unsecured interest payment of $79 million in the third quarter that will not repeat in the fourth quarter. Additionally, the fourth quarter has multiple milestones scheduled for collection, and tax is typically a tailwind to free cash flow in Q4. We continue to look to optimize our capital structure. We anticipate our 2017 seven-year convertible note to settle at maturity in November 2024 with a principal of approximately $259 million paid in cash and the premium settled with equity. Note that the share count will change upon settlement, which is contemplated in our outlook. Moving to slide 11, our full year 2024 sales outlook is approximately $4.2 to $4.3 billion, with anticipated full year 2024 adjusted EBITDA of approximately $1.015 to $1.045 billion. This reflects a year-over-year 18% to 21% sales growth range, which, as Jill described in her comments, reflects our year-to-date sales growth and margin progress. The sales growth at the lower end of the range is based on our confidence in what we have been able to consistently achieve year-to-date and backlog coverage. Achieving the higher end of the range will depend on larger project timing and further operational throughput actions already underway, which will continue into 2025. Our associated anticipated full-year 2024 adjusted diluted EPS is anticipated to be approximately $9 based on an anticipated tax rate of approximately 22%. Free cash flow is anticipated to be approximately $400 million. Our 2025 sales are anticipated to be in the range of $4.65 to $4.85 billion and anticipated adjusted EBITDA between $1.175 and $1.225 billion. We have strong backlog coverage for 2025 and also have line of sight to additional larger orders that we anticipate closing in the coming months. We anticipate our 2025 adjusted diluted EPS to be approximately $12 to $13 on a tax rate of approximately 22%. Additionally, we anticipate ending 2025 with approximately $3 billion of net debt based on full year 2025 free cash flow generation of approximately $550 to $600 million. We look forward to sharing additional details of our 2025 outlook at our investor day on November 12th. Joelle, please open it up for Q&A. Thank you.