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

Good morning, and welcome to the Chart Industries, Inc. Project Billy Joel Acquisition Conference Call. [Operator Instructions] The company's supplemental presentation was 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 following the conclusion of the call until February 23, 2021. 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 the risk factors included in the company's earnings release and the 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 Evanko, Chart Industries' CEO. You may begin.

Thank you, Tuwanda. Good morning, everyone, and thank you for joining us for our Project Billy Joel Call, where we'll discuss today's acquisition of Cryogenic Gas Technologies, Inc. or what I will refer to as Cryo Technologies, or CT, for $55 million in cash. But before we get into the highly synergistic and complementary nature of our 2 companies together, which, by the way, we've been working together for 20 years, let me step back and explain why we called this Project Billy Joel. Many of you know the Billy Joel Song, Allentown, a location that some would consider to be the heart of industrial gases in the United States. So Wade and Merk, give us your best version. [Presentation]

Well, we're here actually to tell you that Cryo Technologies as part of the Chart family is going to be staying in Allentown, which is one of the first questions that Rick Hessinger, one of the founders of business and a controlling shareholder asked me. And like you all have heard me say on numerous occasions, we will not do [Audio Gap] the team isn't planning to stay with the business. So welcome to Chart, Rick, and the entire Cryo Technologies team. We're thrilled to have a presence in Allentown and extremely pleased to combine our offerings. For those of you who don't know CT, their team has over 270 years of combined cryogenic experience. And Rick and team, you heard Wade and Merk sing, and you've seen me dance, so we're officially throwing the Jerusalema dance challenge over to you and your team. Cryo Technologies is a global leader in custom engineered process systems to separate, purify, refrigerate, liquefy and distribute high-value industrial gases such as hydrogen, helium, argon and hydrocarbons, with design capabilities for cold boxes for hydrogen and helium use. The distribution systems, Cryo Technologies supplies are located within the helium and hydrogen liquefaction facilities and are inclusive of trailer loading systems, which facilitates the first step in product distribution. All of this fits directly into our strategy of taking advantage of the interlinkages of the clean power, water, food and industrial nexuses. And you can see on Slide 3, the expanded capabilities Cryo Technologies brings to that offering. This transaction adds yet another key technology to our energy transition portfolio. CT's hydrogen and helium liquefaction know-how and demonstrated experience, combined with Chart's wide-ranging equipment collection, offers our customers one-stop shopping for the entire liquefaction value chain. Slide 4 of the supplemental deck provide some background about Cryo Technologies in their global liquefaction experience. The company was formed in 1995. And as I said earlier, we've worked together for over 20 years with us providing the brazed aluminum heat exchangers to Cryo Technologies' liquefaction projects. So why is this deal so synergistic and natural for our 2 companies to come together? Some examples of the ways our companies benefit each other include, first, similar to the BlueInGreen acquisition in water treatment we did at the end of last year, where we would consistently be the equipment provider chosen with their process technology, we consistently would provide equipment with CT's processes. As we've said, our commercial pipeline for specialty products, in particular, hydrogen is extremely active. CT's is too. This combination increases capability and capacity for both of our active hydrogen and helium liquefaction pipeline of commercial opportunities, which is inclusive of design and installation. Joining Chart offers the opportunity for Cryo Technologies' customers and end users to have greater direct access not only to hydrogen distribution equipment, but also add-on technologies in the renewable space, such as carbon capture, water treatment and access to our partners in the hydrogen generation and consumer distribution arenas. I have to say, our engineering and commercial teams are pretty darn excited about this combination of our companies. On Friday, I was at a customer with our Chief Commercial Officer, who we call Joe Selling Belling; and our Chief Technology Officer, Doug Ducote, and I asked them to give me a way to describe this [ deal ]. The best response was Chart and Cryo Technologies, a combination so awesome it can clap with one hand. Now that's pretty silly. But back to being [ serious ] here, in addition to a post-synergy EBITDA multiple, low to mid-single digits, the acquisition is immediately accretive to us, bringing expected revenue in 2021 of $30 million and non-diluted associated earnings per share of $0.15 to $0.20. This will be additive to our already expected 2021 guidance raise, which we'll share in full on Thursday with you. On the next slide is our specialty products, addressable market sizes for the near term. A slide that you have seen previously, but continues to expand. Our hydrogen addressable market of $1.1 billion is now $2.1 billion, the result of 2 things in the last week. First, previously, our addressable market did not include any potential for our liquid hydrogen onboard vehicle tanks. Our joint development agreement with Ballard Power Systems for heavy-duty transportation applications, the progress of our liquid hydrogen onboard vehicle tank through prototype and testing in the shop and the commercial interest of Class A commercial truck customers for these applications gives us confidence to increase our TAM by $200 million for this. Second, today's addition of expanded hydrogen liquefaction capabilities and commercial pipeline opens up the very broad liquefaction process market, for which our combined content Chart's and [Audio Gap] technology on these projects ranges from $50 million to $100 million each. Our combined content would be inclusive of the liquefier, storage and trailer loading, and these estimates are for 5 ton per day to 60 ton per day plants. We are expanding our total addressable market by $800 million for this. CT also opens us up to the helium market and provides access to large helium liquefaction projects, which require storage, ISO containers and transport, [ core ] Chart equipment. Helium is very essential for welding gas and is in high demand. It is used extensively for the most stringent leak testing requirements. And given that it liquifies at the coldest temperature of any molecule, think about this, it's actually colder than hydrogen, and it's an inner gas, so it won't burn or react, which is helpful in applications where a small molecule is needed, typically many industrial applications. There is a significant amount of helium activity in Russia right now with some industry experts predicting that Russia will become the helium capital of the world in the next decade. Rick and his team are currently working on multiple helium liquefaction commercial opportunities, include 2 of which are expected to move ahead at some point in this year. We have sized our addressable market in the near-term or the next 4 years for helium liquefaction at $250 million. This is based on an assumption of 1 to 2 plants per year. These additions bring our total specialty products addressable market size to $5.75 billion. Moving to [Audio Gap] slide. We continue to maintain our perspective that our strong free cash flow generation will be used to pay down debt and invest organically and inorganically in growth and productivity capital. Our view of maintaining our net leverage ratio at or below 2 is unchanged. And you can see our December 31 pro forma for both our recent Svante carbon capture investment and today's acquisition is 2.01, which excludes the benefit from our investment in McPhy. If including the investment in McPhy benefit in the fourth quarter, net leverage ratio is 1.87. I'll now turn it over to Tuwanda for Q&A.

[Operator Instructions] Our first question comes from the line of Connor Lynagh with Morgan Stanley.

Yes. Obviously, you guys have been delivering pretty quickly on a lot of the deals that you suggested were in the pipeline. I just want to get maybe an update from you, you're sort of thinking, I think there were maybe 1 or 2 others that you had called out previously that were potentials. And so just wanted to get your feeling for strategic priorities in terms of integrating these deals that you've announced thus far and integrating the sales teams and things like that versus how much more you're potentially on the hunt there?

Yes, Connor. So we do have a couple more potentials in the pipeline. We're very, very pleased with what we had so far. And around the integration side of things, our biggest opportunity is to continue to allow Cryo Technologies to build upon what they have and then have our engineers work together to go after these opportunities, optimize fabrication, have the kind of full integration of our manufacturing and equipment capabilities and their process capabilities to really offer a great package to the dozens of liquefaction and potential projects in our commercial pipeline. So we'll be focused there really around engineering and the commercial opportunities. In terms of the other M&A deals, I got to say, I've kind of learned my lesson about really sharing much detail on that because either -- the shareholders either get out over their [ fees ] or my competition decides they're going to kind of try to take one out from me. So all I can tell you is that we do have a pipeline, but these are more in the line of $15 million to $30 million type investments. So I'll leave it at that.

Okay. And maybe more focused on this deal here as a follow-up. I think you gave some color on this, but I'm admittedly a little dense on the engineering side. So could you just help me think through in terms of what products are added and what capabilities are added? How does your legacy content work with the new content here? And how should I think about -- I think you gave some incremental content opportunity, but if you could just run through that again, legacy versus incremental for what you've got here?

Sure. So the #1 thing to think about is our brazed aluminum heat exchangers work with CT's liquefaction processes. And that's a really -- that's a very nice match, and it will continue to go. But it will be going together now instead of one of us getting the order and the other one kind of being a sub to each other. So the brazed aluminum heat exchanger is a key part of liquefaction. If you look at the rest of the distribution side of things and other equipment, there's quite a bit on the storage tank side that we have on the D&S, and there's also transport opportunities as these projects look at how do they transport the molecule after the molecule is produced. There's quite a bit of loading within the site, as I referenced in my prepared comments. So for us, this is really about adding additive from an equipment perspective, but we also -- both Rick and his team and Doug and our team do quite a bit on liquefaction. And in some cases, we're both bidding on the same projects for hydrogen liquefaction. And by -- there's not many hydrogen liquefaction companies out there in the world that can do what Cryo Technologies can do, and that can do what Chart can do. And so putting it together is pretty meaningful in terms of upping that win percentage in the pipeline. So I think that's a way -- another way for you to think about the additive nature of this. Helium. We have helium storage tanks on the D&S side of the business. But we have never had helium liquefaction and very rarely have our braze been used in helium applications. And so this is really what I consider a greenfield market for Chart, where CT has an extensive amount of experience in helium. And this is a molecule that is highly sought after and in most years is in high demand, whereas other molecules kind of have ups and downs in terms of their demand level. We see most of the helium applications outside of the United States. And so by having CT have these relationships and in some cases, even having the only helium liquefaction facility that can -- that is of a certain size, that's a huge benefit to the entry point for our equipment.

Our next question comes from the line of Ron (sic) [ Rob ] Brown with Lake Street.

Just a little bit more on the process technology. Is this really specific to hydrogen and helium? Or are there other applications of different molecules that this technology maybe brings to you?

There's other applications that it brings to us as well. The way to think about the process in general is when you're handling the hardest molecules to handle, i.e., helium and hydrogen, you can handle pretty much any other molecule. And so there's multiple different avenues of synergy opportunity that we see. As you know, IPSMR and IPSMR+ for us is very active on LNG side, both on the potential mid-scale projects that we see a couple of rolling to FID, but also on the small-scale side, and there's a lot of micro scale. People have different definitions for micro, but micro and small-scale liquefaction opportunities where LNG providers are thinking about the future, whether that's 2030 or 2035. And as they build small-scale facilities, they're thinking about how do I make it hydrogen-ready as an example. So there's quite a bit of opportunity for this to be building upon what our philosophy and our strategy is, which is, at the end of the day, the power solution out there is going to be a hybrid of multiple different modules. But he or she who figures out how to handle these molecules from the process all the way through to the equipment [Audio Gap] is going to be able to solve the cost and the scale issue that's going to unfold as the decade goes on. So this is a really nice addition to that part of our strategy.

Okay. Great. And maybe just on the competitive front, who else sort of does the technology in the hydrogen side that CT does? And I guess, what else is out there for competing technologies?

We're aware of very few. We certainly see some of the industrial gas majors have kind of the process side that is being looked at expanding into some of these other molecules. There's niche companies that are small and starting up on the process side. We see very few -- very little competition on the liquefaction elements. We see more competition in general on the gaseous side of the house. So we're -- I would go so far as to say that we have a very, very unique offering that doesn't have a competitor out there, but there's competitors within aspects of CT's and Chart's businesses. So kind of that theme concept that we've said all along for Chart where we don't have a peer at the total Chart level. But as you delve into specific product categories or specific processes, there are competitors in each one of those.

Our next question comes from the line of Eric Stine with Craig-Hallum.

So I mean, obviously, a pretty attractive multiple here, and I get why this is attractive to Chart. Just curious, I mean, if you can provide any back story on how this came together? Has this been something that's been in the works for a while? Or was there some motivation on CT side to get this done? Any color would help.

Sure. So we have desired to partner with CT for a long time, and we had a really good relationship over the years in terms of kind of supplier customer. And I would say the fundamental element of both of our companies is high engineering expertise. And when you have respect for each other in the engineering side of things, that really builds a good report as time went on. Rick and his team have had -- certainly have had numerous opportunities to look at potential sale of the business being as unique as they are. And we've just kept the dialogue going. And as that dialogue continued on, we found lots of synergies as we talked and got to know each other. And over the last 4, 5 months, Rick and his adviser, Rich, and myself and our team just kind of said, "Hey, this is -- the feels -- feels right right now." We both, I think, have been fair to each other throughout getting to the point we're at today, and we really see that kind of, as we called it, the match made in liquefaction heaven. But the reality is that it's a good match. It feels like the right time. And I think Rick felt the same way about that. But it's always nice to do this with a partner that you have a longstanding relationship, and you know how they operate their business. I would also say that -- Eric, you know us probably better than most. And we are super pleased when we can do this without bankers, no offense to the bankers on the line. But it makes for a lot of collaboration, and it allows you to get out of the gate fast after you close because you know each other really well. So all in all, I don't know that, that necessarily answered kind of why exactly at this moment in time, but that's the back story there. And I have to say that I'm so happy today because I am certain there were many other suitors out there, and it just pleases me that we ended up with 2 highly skilled engineering teams in the cryogenic space together because it's huge for both of our teams.

No, that's great color. Maybe just last one for me. Just curious on the aftermarket business. I mean what does CT's aftermarket business look like? Is that something you plug right into your business? Or is that something that you think as part of your platform, you can grow that?

So what we like about the combination is the front and the back end. So what I would consider is design and install being the front end and then the aftermarket element as the back end. We think we can bring a lot more to the service element in the aftermarket side simply because they spend a lot of their time on the upfront design and engineering, and we do much more on the welding and the knuckle dragging type of manufacturing. And so by having that set up from the beginning, we'll be able to come in on the aftermarket side and really grow that element on these facilities. So I see that as a significant growth potential area from the combination. And I wouldn't -- don't sell the design and installation aspect short. That's -- as you know, that's a key part of how we get into project early, and that's also a key part of how CT gets into their projects early. And with that, and the combination of us now having our 26 global manufacturing facilities closer to these projects, we're really going to be able to offer an even more cost competitive answer for our customers, still generating a decent margin.

Our next question comes from the line of J.B. Lowe with Citi.

I'm just going to say, Wade and Merk, that was incredible version of Allentown. Just have to mention that. I can't believe nobody mentioned it yet.

A moment of audio issue there, but they got passed it.

No, it worked. It worked. I just had a question on helium since that's the kind of -- the market potential for hydrogen is pretty well known. I'm just wondering, is there anything on the helium side? I mean I know it's used in some electronic manufacturing, some other manufacturing processes. It's used in space, applications. Is there anything on the helium side in terms of growth potential that could mirror the potential hydrogen? Or is it more of a steady grower?

Generally, it's been more of a steady grower, but we're hearing more and more in the last 9 months from our customers. So even before Rick and I got going on this, we were hearing from the big oil companies questions around how could we handle storage equipment and transport equipment for helium? And that was primarily in between Middle East and Europe kind of where we were hearing a lot of that discussion. So there's probably some growth pent-up there, but I wouldn't -- from what we know right now, I wouldn't size it comparably to hydrogen. But I do think it's consistent, and it's the only molecule right that can essentially study at near 0 -- near absolute 0 temperatures. And extremely important, as you said, in the semiconductor area and applications where flammability might be a concern. So I see it as a nice growth area, but I haven't seen that further around it as you see on hydrogen right now.

Okay. Fair enough. And I know that a lot of the kind of next wave of at least supply is going to come from Russia is -- at least in terms of helium. Do you guys -- is there going to be a lot of liquefaction facilities built in Russia? Is this something that -- is this an area -- sales area that you guys are focused on? What's your presence like in Russia today? And what do you think about the helium opportunity there?

Yes. So I definitely think there's going to be multiple liquefaction plants for helium in Russia and surrounding areas there. Right now, we have considerable amount of activity in Russia on the LNG side of our business, and we'll share a little bit more about that on Thursday with you. And so it's been on storage equipment, fueling stations, and transport has been our primary experience. And that's been getting way more active in the last 2 months. And so from the helium liquefaction side with the familiarity we have with CT's pipelines, Russia is definitely going to be an active market in the next 3 years.