Chart Industries, Inc. (GTLS) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Chart Industries, Inc. strategic acquisitions conference call. [Operator Instructions] A telephone replay of today's broadcast will be available following the conclusion of the call until Tuesday, November 10, 2020. The replay information is contained in the company's press release. Before we begin, the company would like to remind you that statements made during this call that are not historical in fact are forward-looking statements. Please refer to the information regarding forward-looking statements and risk factors included in the company's latest SEC filings. 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 Evanko, Chart Industries' CEO.

Thank you, Liz, and good afternoon, everyone, and thanks for joining us on this mid-quarter acquisition update call pretty much at the last minute here. I'm very excited to announce 2 completed acquisitions that further our product offerings into our high growth, high-margin businesses of clean energy, specialty products and repair and service. I'll walk through the supplemental deck that was included with the press release that just went out on our acquisition of BlueInGreen. Our strategy, as shown on the left-hand side of Slide 3 is unchanged, and today's announcement fit in naturally. To better represent our clean offering, which includes specialty products for water treatment, we have updated the right-hand circle to reflect water and represent both blue and green. Before getting into the acquisition of BlueInGreen, let's start with the acquisition of the Microbulk cryogenic tank intellectual property, equipment and other assets from IC Biomedical, a private entity, which was completed yesterday and is shown on Slide 4. Many of you are familiar with this Microbulk cryogenic tank business as it was originally developed by the former Taylor-Wharton, then purchased by Worthington Industries and finally sold to ICB, along with their cryobio assets. The addition of the former Worthington Taylor-Wharton Microbulk tanks to our product offering is another step in our strategy to bolt-on complementary equipment to our core unique cryogenic capabilities. This acquisition is a natural fit and highly synergistic. It expands our distribution and storage cryogenic tank product offering for both industrial gas majors and independent distributors, including many that currently have long-term agreements in place with us. It also provides for an ongoing supply arrangement to provide Microbulk products to IC Biomedical for any non-cryobiological equipment needs that they may have in the future. And finally, this deal adds a unique, highly engineered food processing tank to our specialty product offering. These tanks are used in food plants to inject liquid nitrogen into the blending process of chicken nuggets, which, of course, are one of the primary food groups. Now moving to another specialty product and market, water treatment, starting on Slide 5. Today, we completed the acquisition of BlueInGreen, LLC, a leading dissolved-gas expert, providing custom-engineered solutions for water treatment and industrial process applications that delivers tangible economic, social and environmental value. The stock purchase was completed for a purchase price of $20 million in cash at closing, plus a potential earnout not to exceed $6 million in the aggregate. I'll refer to BlueInGreen also as BIG. The combination of Chart equipment and BlueInGreen's technology enables solutions to efficiently deliver dissolved oxygen, carbon dioxide and ozone into water results in a full package. Chart and BlueInGreen have long worked together as our cryogenic storage and vaporization equipment provides the feed gas to BlueInGreen's technology. We'll talk about that on the coming slide. We know the business and love it, not only for the additional position it gives us in water treatment, where demand growth has been phenomenal over the past couple of years, in particular, in 2020. As we mentioned on our last earnings call, our year-to-date 2020 orders have already exceeded 2019's full year orders and BIG's annual revenue growth has been over 45% since 2016. And is expected to continue based on the backlog and highly actionable opportunities in our combined commercial pipeline. As you're aware, there is a heightened movement toward clean energy for power and also access to clean water. Our offering addresses both of these topics, while helping our customers achieve their ESG targets, too. For example, BIG solution consumes 20% to 40% less gas than other alternatives for the same level of treatment as well as delivering the solution with the smallest energy, carbon and physical footprint. Our combined solution will be offered either through a treatment as a service contract, capital sale or a combination thereof via ala carte services, further growing our repair service and leasing business to our 20% of revenue near term target. And as you all have heard me say many times, we like food and beverage because those customers have multiple facilities and stores globally that would need equipment, while the same applies to water through both Chart and BIG's strong relationships and successful installations with large multinational industrial customers. We have a large combined pipeline of opportunities ahead across those same customers' vast number of facilities. Additionally, BlueInGreen has preferred positioning with third-party validation with numerous consulting engineering firms such as Jacobs Engineering, Black & Veatch, CDM Smith, Stantec, Burns & McDonnell, Carollo, and Brown & Caldwell, and also like Georgia-Pacific, Del Monte Foods, Campbell’s and Tyson Foods. And finally, as we always do, we buy companies with strong management teams that are going to stay with and run the business. In this case, the entire BlueInGreen's team are industry experts, and we're excited to announce that Chris Milligan, BIG's CEO, will run our combined water business effective immediately, as we spotlighted on our earnings call a few weeks ago, both in the second and third quarter as well. Slide 6 shows the water treatment aspects of our business where we have seen increasing demand for desalination as a solution for water scarcities in places such as the Middle East. Year-to-date, through September 30, 2020, our water treatment orders were $10.3 million, compared to $6 million for the entire year of 2019. Also in the third quarter of 2020, we booked record orders for 6 facilities. Included in Q3 was a contract of $3.7 million with Archer Western as well as a $1 million order for equipment for the world's largest wastewater treatment plant being constructed in Egypt. As many of you are aware, water treatment and water access has a heightened focus. And it's not just power or energy-related either. As we have previously commented, we focus on 4 of the 17 United Nations Sustainable Development Goals related to climate action, affordable and clean energy, sustainable cities and clean water and sanitation. The BlueInGreen acquisition builds on our focus on these targets as well as the increasing focus globally on ESG for all of the reasons shown on Slide 7. A few specific statistics to share about these. There is a 62% increase in electricity demand expected by 2040 and 140% increase in the power industry's water use by 2050. Possibly more striking is that today, energy for water treatment is often the largest single municipal operating cost. With many locations in the world-facing water scarcity and tighter regulation and permitting, desalinization is becoming a trend. With that trend comes requirements for corrosion control and the challenge of space for treatment capacity. But even in places that are fortunate to have access to water, led from legacy pipes and plumbing and private properties are increasingly leaching into drinking water. And as the population rises and secondary cities increase, water and power demand is rising. Finally, corporate and personal objectives are heightened to improve energy and water efficiencies while reducing greenhouse gas emissions. Governments in the private sector continue to commit to targets of zero-emissions and achieving carbon-neutral societies in the coming decades. Just this past week, both Japan's Prime Minister and South Korea's President have set such targets. This business will benefit from all of these trends. For those who want more detail, we have included Slide 8 for your perusal. Obviously, I won't walk through these, as you just heard the overarching concept. But I would point you to the right-hand side of the slide, which shows our now broad-based capability to address this market with a full water treatment package. To touch on a few extremely differentiated areas. All platforms mitigate energy use and GHG emissions by 50% to 75%. We have the lowest operating and maintenance costs when compared to the alternatives. Retrofits provide additional capacity without increasing basin footprint and also can replace conventional aeration without taking the facility offline. Corrosion control of drinking water and collection infrastructure is also offered and containerized mobile modular solutions are ideally suited to distributed remediation. And finally, on the topic of market, previously, we had sized our water treatment addressable market as $400 million. The total market opportunity has tens of billions of dollars of potential over the coming decade. But for the time being, we are increasing our near-term addressable market opportunity from $400 million to $700 million, as a result, of this acquisition and our combined businesses. So let's talk about how the BIG and Chart offering addresses the market. Visual on Slide 9 demonstrates how the combination of chart Equipment and BlueInGreen technology result in our full water treatment package. Chart provides the cryogenic storage and vaporization equipment that provides speed gas to BlueInGreen. BlueInGreen attains a supersaturated solution, delivers it to the basin pipe lagoon, lake or other water source. BlueInGreen uses downstream sensors in the water to automatically control the concentration. And I would also add that similar to our modular capabilities that we offer for LNG applications; through this acquisition, we're now able to offer modularized container installation and equipment, which makes it easier for customers to choose which design, size and solution best fits their water treatment needs. We categorize our capabilities into oxidation, oxygenation, PH adjustment and odor control, as shown on Slide 10, with associated applications. Oxygenation is used to increase activity of the aerobic digestion process. Hydroelectric plants require oxygenation downstream as the EPA mandates a specific oxygen content. Examples of those using oxygenation include Alabama Power and Georgia Power. Oxidation is typically used in advanced oxidation process, or AOP, which is combining multiple processes in a single water treatment plant. For example, Ozone, UV peroxide, activated carbon filters, amongst others. For PH adjustment, carbon dioxide is dissolved into the water creating a mild carbonic acid, which is an ideal asset for water treatment processes because it is self limiting and mitigates overshooting the PH in the water. It's also a very safe alternative to conventional sulphuric acid that require trained personnel to handle as well as specific and specialty design storage areas. Our dissolution system has a transfer efficiency of 100% utilizing the patented supersaturation technology of BIG. This saves on both water and Co2 as well as building infrastructure as a deep basin is not required. For odor control application, similar to oxygenation, oxygen is dissolved into water to increase the activity of aerobic digestion. The oxygen is used to ensure the growth and sustainability of the microorganisms to break down the sludge in a wastewater treatment facility. Chart's liquid oxygen storage and vaporization, coupled with BIG highly efficient dissolution system significantly reduces operational costs for plant. This is one of those deals that just fits like a glove, in particular, because our companies have been working together for many years on multiple projects. As you can see on Slide 11, there are many existing installations with both Chart equipment and BIG Solutions, ranging from municipalities, such as Wichita Falls in Fayetteville, Arkansas, where BlueInGreen is headquartered and a team will remain to industrial applications such as ph adjustment and odor control for food companies. Not only do we expect the stand-alone business to be immediately accretive to Chart even before the extensive identified synergies, we expect a steep growth curve to revenue of over $20 million in 2022 at 50% plus gross margin as a percent of sales. Slide 12 demonstrates the inter linkages between our equipment and used applications and emphasize the fact that we play in multiple facets of the clean energy world whether power or water, or capturing either for reuse and recycling. I think it's sometimes lost on those newer to the Chart's story, exactly how much our equipment is used in these applications and also exactly how much growth there is in these spaces. Let's take a couple of examples demonstrated on this slide. The electrolysis process for hydrogen converts water into hydrogen and oxygen. Our water treatment equipment can treat wastewater and feed it to an electrolysis plant to convert to hydrogen. The purity requirements for water are very stringent for electrolysis, so the water may need additional treatment. In addition, if hydrogen is liquefied, the water can be used for process cooling for the liquefaction compressors and improve the efficiency of the process, lowering power consumption. Another alternative could be natural gas power, supplementing wind and solar on site. Thereby resulting in more hydrogen production and constant output versus wind and solar alone. If carbon capture has been incorporated, we have a combination of green and blue hydrogen and a better economic model. And finally, as I commented previously, we are seeing more projects in regions such as Africa, where both power and water infrastructure are being built hand-in-hand. This acquisition furthers our ability to penetrate that type of build-out. As a result of these acquisitions, we have increased our 2021 outlook. Revenue is now expected to be in the range of $1.26 to $1.335 billion. With associated diluted adjusted earnings per share of $3.10 to $3.45 on approximately 35.3 million weighted average shares outstanding. While the Microbulk business only requires low ongoing maintenance capital expenditures, we do expect to invest in the balloon green business and are estimating an increase of $2 million to our CapEx outlook. Neither of these acquisitions is expected to materially impact the fourth quarter of 2020 at this point. So 2020 guidance is unchanged. With that, I'll turn it back to you, Liz, to open it up for questions.

[Operator Instructions] Our first question comes from the line of Rob Brown with Lake Street Capital Markets.

Just wondering if you can give us a sense of the projects that the BIG system and your system are typically? And what's the typical project size to Chart? And what's typical sales cycle? And who are you really selling into? Is it the EPC? Or is it the end water treatment plan?

Sure. So typically, on the projects that we've done together, and I'll give you a couple of stats around that. We have, over the last year or so of the Chart wins about 1/3 of those have been also BlueInGreen wins. And similarly, of the 15 projects in start-up and production for BlueInGreen, 9 were direct equipment orders with Chart, and nearly all of those would have Chart equipment on them generally through a leasing arrangement with a major distributor. In terms of content for water treatment projects, our projects can be anywhere from $350,000 to $4 million depending on the size and the structure of a facility, in particular, on the municipality side of things. And typically, BlueInGreen's contract size is somewhere between $500,000 and $750,000, something in that same range of Chart equipment.

Okay. And then I just wanted to confirm the CapEx. Are you adding capacity in that facility? Or what's the CapEx for?

Yes. We put that as a placeholder at this point because we haven't identified specific CapEx needs, but there is an opportunity for a cost synergy to bring certain manufacturing in-house that currently BIG uses outside or third party manufacturing. So that's why we included that placeholder. It's likely to be less than that. But we wanted to make sure that we had coverage to do that quickly and achieve the cost synergies associated with that in-house manufacturing.

Next question comes from Eric Stine with Craig-Hallum.

So for BlueInGreen, you mentioned that with the Chart and BIG solution that you offered either treatment as a service capital sale or a combination, I mean, I guess, how do you anticipate -- I mean, given the growth that you are forecasting, should we take that, that you think that would be more of a capital sale? Or I'd just love to hear anything about demand in the market. Do you think there's demand for it as a service or a capital sale at this point?

So my estimation on that is based on kind of the history of the BlueInGreen business and also what we're seeing in the space right now is that there's somewhere between 10% to 20% of the revenue would be around kind of the leasing model? And then the remainder of that is more of a traditional capital sale. Part of Rob's question that he asked around CapEx. We certainly are going to look to expand the available fleet of modularized container solutions. And so I would anticipate that having a little more flexibility and availability of that fleet might drive that leasing portion a little bit higher. But overall, just kind of the way that we're seeing the trend in the market go, the typical answer is going to be a capital sale.

Okay. And then talking about your expectations for 2022 and that 50% margin, I mean, is that based off of more of a capital sale. I mean is that indicative more of the capital sale margin and we should anticipate that a treatment-as-a-service margin would likely be higher than that?

That's a correct assumption. And if you look at blended gross margins of this business, it's actually just over 60%. So we've kind of tapered that back in true Chart form where we like to make sure that we can achieve, we're putting out to the market. But certainly, with treatment-as-a-service, that's a much higher-margin than the 50% number.

Our next question comes from Pavel Molchanov with Raymond James.

Does BlueInGreen have any modular capabilities and specifically thinking about kind of low-income countries, sub-Saharan Africa, perhaps where smaller scale water projects are more relevant?

Absolutely spot on question, Pavel. And yes. So the modularized-containerized solutions are definitely kind of providing the customer and client a best-fit approach, which is, we anticipate a lot of interest in this in locations that are challenged or don't have access to water and the kind of fully functional solution with technology fit and applications fit, having that ability to figure out what can you use and what's the most cost-effective solution. I think it's the best part of the BlueInGreen product offering to attack those types of regions and countries. Additionally, we see lots of potential opportunity in terms of addressing emergency needs of customers around this modular-containerized solution. So you have the ability to move it around you so quickly and whether you're addressing something that's temporary or want to leave it in place. Whether you're addressing an immediate compliance concern? Or to your point, where you're getting into a more remote region and this is an easier solution. So we're very excited about that aspect of the business.

Okay. I remember on the earnings call a few weeks ago, if I'm not mistaken, you referenced 3 specific M&A situations that you were kind of progressing that obviously you did not want to speak about at the time. Is it safe to say that you've announced 2 of those 3 today, and then 1 is still outstanding?

That is a safe statement, yes. And obviously, we continually work on the pipeline beyond the one that's outstanding. So there is multiple others in various stages in our pipeline.

Our next question comes from Chase Mulvehill with Bank of America.