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

Good morning, and welcome to the Chart Industries, Inc. Carbon Capture Growth 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 June 11, 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, in fact -- 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 statements. I would now like to turn the conference over to Jill Evanko, Chart Industries' CEO.

Thanks, Lara. Good morning, everyone. Thanks for joining us again. This is going to be a brief overview of our newest investment in commercial MOU with Earthly Labs, and we'll start on Slide 3. We closed on the $5 million investment for 15% ownership of the company late yesterday and further build on our existing relationship as the supplier of tanks for Earthly Labs' unique small-scale carbon capture solution. On Slide 4, you can see some of the many food and beverage customers that we, at Chart, serve with our CO2 equipment. This is just the subset of our food and beverage-related customers, which we approximate that we sold our equipment to over 5,000 customer locations last year. And what do Wagner Family of Wines, Night Shift Brewing, Coppola Wines, Tiger Shark, Great Shark, Bay Brewing, all have in common? The 3 things shown on the right-hand side of the page. They are existing Chart customers for either CO2 or dosing equipment. They need CO2 to produce or preserve their product, and they emit CO2 when they're making their product. So here is a problem that we can definitely solve. Why not help our customers reuse their own CO2 where they can have easy access to what they, otherwise, would need to purchase and address their ESG targets, which are very prominent, in particular, in sustainable wineries and craft breweries. While it seems easy, but it isn't. These players need a small footprint, regulatory required 99.9% pure CO2, something that can be installed in days, not months or years, fits in a very small space on-site, is affordable and has a reasonable energy draw as power is key at smaller brewers. So please meet CiCi. Shown on Slide 5, CiCi is Earthly Labs' small-scale carbon capture unit, which is about the size of a refrigerator and can be installed in less than a week on site. The most commercialized current unit is the CiCi model Oak, which sells for approximately $100,000 total all-in. A fun story. Why is CiCi named CiCi? So obviously, carbon capture is CiCi. But the fun part of the Alexa of small-scale carbon capture is that all brewery personnel tend to name their equipment. As CiCi began being rolled out commercially, the Earthly Labs team noticed that it would be named differently at each location. So instead of Frank, Joe, Bob or some other name, why not make CiCi a common in the industry for this unit. CiCi has worked with Chart Equipment since inception, with Earthly Labs, including Chart cryogenic CO2 storage tanks, vaporizers and regulators as standard part of its offering to customers. The commercial MOU signed by our parties in connection with our investment provides a framework to formalize the relationship and accelerate Earthly Labs' high demand into even higher order and revenue growth. Earthly Labs' market-driven solution is unique in the carbon capture space, as you can see from meeting beverage-grade CO2 purity cost effectiveness, ease of and quick installation and fast payback. Another key differentiator and something we intend to build on with Earthly Labs is our cloud-based software solution enabling real-time CO2 capture insights and ongoing value for the owners and operators. Their IoT platform delivers at-a-glance monitoring on your phone or other device for oxygen levels, pressures, temperatures, CO2 capture volume and alerts or maintenance notices. Additionally, customers can use this data to gather reporting information that can be used towards receiving benefits of government carbon credit programs. We intend to leverage this IoT platform broader across Chart products and offer this carbon credit opportunity to more of our customers. You can see CiCi on the left-hand side of Slide 6, and Chart's Carbo-Max and Vaporman in the middle, which comprise the 3 major components of the solution. The next couple of slides, 7 and 8, show examples of CiCi on-site at actual customers. Slide 7 is Buoy Beer, which utilizes the CiCi Oak in its Oregon brewery. I would point to the middle photo where you can see the size of the unit and how it fits in smaller, more snug spots within a facility. Slide 8 is a great example of the way the nexus of the clean revolution is working together. In this case, the State of Colorado did a pilot with Denver Beer Company, where the CO2 capture was used in the nearby cannabis grow facility. The result of the pilot was that plants responded better to natural CO2, resulting in a 2% higher yield. This investment further builds upon our cryogenic carbon and direct air capture offering and solutions. We have a full solution option now at all scales for our customers, inclusive of the process technology itself or an a la carte menu for them to choose from. By offering various purities in cost-effective solutions or engineering-specific design, we are able to address what our customer wants most for their individual carbon capture needs. You've heard me talk about part of our strategy and investments in acquisitions is ensuring a strong leader in associated team. Earthly Labs is no exception. And I would point out that in addition to being a patent holder and a very successful entrepreneur, Founder and CEO, Amy, George, and I share a passion for sustainability commitment to advance economic, environmental and social performance goals as well as to diversity in our respective industries, while offering leading products and solutions. As a fellow female CEO, I'm excited to work with Amy to offer our customers, whether a small business or a multinational, solutions to reduce or eliminate their carbon footprint and waste. As I mentioned previously, those in the craft brewing, winery and botanical businesses are very conscious of leaving the earth a better place. On Slide 11, you can see some of the new adopters of CiCi. Denver Brewing cannibals example that I talked about earlier, shown in the upper right-hand side of the slide. Another example is Proof Brewing, the first craft brewery in Florida that implemented the Earthly Labs solution. They're capturing more than 100,000 pounds of waste CO2, which is the equivalent of 1,500 trees worth of CO2. Much of this work has been recognized whether in AB InBev's 100-plus accelerators, where, in 2018, Earthly Labs is 21st out of over 300 global entries or in the spotlights received by Forbes, The Washington Post and CNN over the past 2 years. And we are certain that this is just the beginning of how this solution will take hold. Many people have a higher addressable market for carbon and direct air capture than the $800 million that was shown on Slide 12. And we don't disagree. It's purely the time horizon we're discussing that makes our TAM not as high as others. But we do expect it to continue to grow as the decade unfolds. In particular, as Amy, her team and our entire Chart team shares the mission to avoid 40 billion tons of CO2 emissions by 2030, with carbon capture expected to provide at least 13% of this reduction. So let's start with the fact that we're continuing to find ways to offer innovative solutions and expand our share of the market pie. Our investment today increased our TAM by $200 million, driven by the existing market adoption, Earthly Labs' commercial pipeline of opportunities, which is over $45 million and our expected commercial pull-through to existing Chart food, beverage and botanical customers that I talked about at the opening. With just about 9,000 breweries in the United States and approximately 20,000 globally, in addition to 11,000 wineries in the U.S., you can calculate that this is a very realistic potential addressable market. You can also see the evolution specifics around our carbon capture market on Slide 13, starting before we owned Sustainable Energy Solutions, or SES, where we included our existing equipment offering. In and of itself, the air cooled heat exchanger offering we have comprises between 20% and 50% of the equipment cost at any CCUS facility. So while that was a meaningful market potential on its own, adding the process itself opened up a significantly greater market potential and also allows us to bid on full projects. Couple that with our investment in Svante in February, and we're finding ways to partner the best of each offering for the lowest CapEx and OpEx with the proper purity for industrial energy various different applications. Now we're adding another affordable scale solution that expands and penetrates Chart's carbon capture in the nexus of clean power, water, food and industrials. And to wrap it up before Q&A, Slide 14 is one of the many that you're familiar with, our strategy circle. You can read how Earthly Labs builds upon our strategy at Chart in each of the gray boxes around letters A through E. I've highlighted a few that are very near-term leverage points for us, furthering our high-growth segment of repair service and leasing with annual maintenance subscriptions and IoT monitoring through Earthly Labs as we leverage their IoT capabilities beyond just CiCi. The link between having the information to support our customers as they report on their ESG or sustainability scorecards as well as helping them seek out carbon credits is very meaningful. And the margin profile of the business is well above our average Chart gross margin as a percent of sales and at the high end or above our 2 highest margin segments. And I would be remised if I didn't point out that the boxes coupled with our strategy wheel were substantially thought about by Amy and her team. These are truly believed in between our 2 companies. So to be better aligned than that. So Lara, let's please open it up for Q&A.

[Operator Instructions] Your first question will come from the line of Connor Lynagh from Morgan Stanley.

Just sort of a higher-level one to start here. One of the questions we've been getting on your strategies as far as these MOUs and investments versus acquisitions go is, what it takes when you do what? So could you maybe discuss why you went the minority investment route here? And how that sort of comes about versus some of the more just MOU or full-scale acquisitions that you've done historically?

Sure. So well, first and foremost, if somebody's not ready to sell their full companies, you can't really get there on the full acquisition. But in this particular scenario, we do these investments and acquisitions through our industry contacts. So we're very familiar with the company, and this one came about the same way the new bankers involved in these. So we're very familiar with the go-to-market strategies of each other's companies. And in the case of Earthly Labs, we, certainly, are very interested in owning it outright. And we'll be working with Amy and her team to try to make that happen in the future. So with that said, this was a good starting point. We felt like this was a good and realistic valuation. In connection with having some of the minority position, there's also ways to continue to help grow the business, and that's through our manufacturing capabilities. And we also, in this particular case, find this to be a really unique solution with no competitors at this particular size, scale and purity. So that's a very unique position to have ownership in. Whereas in the cases of partnering without minority investment, either the company doesn't need the investment at that point in time or there's multiple other parties that are involved, and that's not something that we typically like to get involved in where there could be competition that also have portions of the business, or we're able to accomplish that together without wanting to particularly have a piece of the pie going forward. So ultimately, in many cases of the investments versus a full acquisition, it's where the business is in terms of their maturity and growth and how they want to approach the market, whether from an entrepreneurial perspective and then eventually in the structures. We tend to have a right of first refusal on purchasing additional shares.

Got it. That's helpful. So I'm just looking at the TAM slide here. And basically, I'm wondering if you could just illuminate a little bit what the sort of size of the typical project looks like from a Chart content perspective. And maybe if we're looking at this list of brewery, winery, agriculture, residential, how big, respectively, do you see the opportunities of those specific end markets?

Yes. One of the things that we really like about this particular solution is my comments around the affordability and the speed with which it can be installed. You're talking about really different ends of the spectrum when you're talking about an energy or a large industrial application, which you'd see more on the SES and the Svante side than solving for very specific smaller scale applications. So that was something that we had been working on ourselves. And we found Earthly Labs to be already in the market and not something that we could have done very quickly organically. In terms of the size, I commented that the CiCi current model that's in the market is $100,000 all in, and the majority of that dollar amount is Chart equipment and will continue to be Chart equipment even more so with the commercial MOU. So we see a lot of this scaling very quickly, in particular, as Amy and her team have more access to build the units, and that's one of the capabilities that we bring in our respective shops. On the higher-end side, meaning the higher size side, if you're talking about, regardless whether it's Svante or SES technology in a 10- to 30-ton per day facility, which is really in the land of energy and large industrial, is pretty small. So a demonstration size project. The technology itself is going to be somewhere between $10 million and $25 million, and then the Chart equipment content will be somewhere between $5 million and $8 million on that size. And then you can pretty easily scale it up if you're talking about in these larger cement style carbon capture facilities, you're talking about over 1,000-ton per day type of sizes. And in that case, our process and equipment content is upward of $75 million to $125 million in those sizes. So we've been real conservative in terms of the addressable market because we view those larger-scale projects as beyond year 3. They do take a little bit longer. So if you were kind of equating or equivalent, I don't know, whatever the word is, making them equivalent to a larger scale or a mid-scale LNG project in terms of how long they take to construct, that would be a similar comparison. And that's why you don't see any significant amount related to that in our near-term addressable market.

Your next question will come from the line of Ian MacPherson from Simmons.

You talked about the capital infusion going towards expanding -- innovating Earthly Labs to capture 20 tons CO2 from larger facilities. Can you speak to how that expansion in terms of project size feeds into how much money the company is earning today vis-a-vis the projection in the TAM? And sort of what that bridge looks like from the current customer base to what larger installations look like in the year or years ahead?

For sure. So the -- there's -- this is a really uniquely positioned offering in that the competition likes to be at a significantly larger level. So some of the larger breweries, the name brand brewery that you would be familiar with, they have a solution that's similar to this. And -- but that particular offering doesn't go lower than 500,000 barrels. So this is a sub-500,000 barrel type of market approach. And currently, it's 200,000 or less is where the commercial units, which are dozens and dozens are already out installed in the market. So as you kind of get a little bit larger, you're now talking about the price going from $100,000 to $1 million type of movement when you're getting much higher in the store -- global winery market or the energy agriculture market and you really in that 200,000 to 500,000 if you're talking about beverage. And I would say, on that side of things, the development is pretty near term. They're talking about being able to kind of roll this out in the next 18 months or so in that size and scale. What we see around the profitability is incurring gross margin as a percent of sales on the individual units round about 45% -- 45% to 50% for Earthly. And what we see is as we get more and more volume, certainly, it's still to the higher end, the higher priced units and the larger units, you're capturing more margin. And a lot of that margin also comes from the efficiencies around the manufacturing that either their outsourced current provider will continue to provide or we will provide in-house. So definitely, margin comes with a little bit of volume and also just simply math on the larger units having higher purchase price.

Okay. That's helpful. And then I also just want to ask, is the plan for this business North American-focused? Or does it go globally into Europe? I'm just thinking in terms of in Europe, where maybe more ubiquitous carbon pricing might come sooner than later, that would be an accelerant for this business relative to North America. So just thoughts on the near and medium-term geographic strategy for food and beverage.

Yes. No, it's totally global, and that's one of the things that Amy and her team have needed the support on is, literally, we sat down a few weeks ago and we're talking about what are we going to do once the investment is done? And how we're going to go from here? And I get these calls every day from around the world saying, "Hey, I want your solution." So we're going to be a key enabler in getting the solution outside of North America. They're already well underway in Canada, so outside of the U.S. In the acceleration of the current CO2 capture markets, we're already -- Earthly Labs is already in discussion with indoor agriculture folks that are doing botanicals cannabis on off-taking and extraction of dry ice, so recycling CO2 loss back into the dry ice applications. But the most global market and to your point is around the beverage side of things. And global wineries multiples already under NDAs. And the CO2 marketplace, as you commented, in particular, in Europe, is very, very interested in getting the CiCi. And that's also through companies like AB InBev that are global. So there's a great opportunity. And you guys have heard me say this over the last few years where why I love food and beverage is because you have this global numerous locations. It's not just, okay, we do it once, so we put it in one plant and we're done. No. Many, many companies have just hundreds and hundreds, if not, thousands of sites around the world. And that's a very, very near-term opportunity for our fleet.

Your next question will come from the line of Rob Brown from Lake Street Capital.

On the CO2 TAM, it keeps expanding. Is there kind of a size you think you can get that to in terms of TAM? Or maybe is it too not visible at this point?

Yes. I mean you're saying what could $800 million be, say, in year 7 to 10? Or how much of the $800 million, do we think we're going to get?

Really how -- kind of how big could that $800 million be -- could that grow to? What do you think...