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

Good morning, and welcome to the Chart Industries, Inc. supplemental information regarding the Howden acquisition conference call. [Operator Instructions] The company's release and 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 Monday, November 21, 2022. 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 earnings release 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 call over to Jill Evanko, Chart Industries' CEO. Please go ahead.

Thank you, Cheryl, and good morning, and thank you all for joining today for us to share additional information regarding our agreement to acquire Howden. I will reference the supplemental deck release this morning, starting on Slide 3. We have strong conviction that this combination of companies will build upon our strategy to date of becoming the leader in the clean energy transition and the Nexus of Clean: clean power, clean water, clean food and clean industrials. At the same time, Howden adds resilience to our growth profile with their strength and consistency in aftermarket service and repair, with nearly 50% of their revenue in aftermarket, enhanced free cash flow profile and broad access to high-growth specialty end markets that we either do not have access to today, or that they will help us penetrate further. The combined business will have pro forma EBITDA of $1 billion, including synergies, which are highly actionable immediately upon closing. I will spend some time today sharing what has happened with the Howden business over the past 3 years. As many remember it as what it was before, it's very similar to Chart's strategic and tactical pivot to take advantage of these higher growth and sustainability-linked end markets. Howden and Chart together are a powerful combination. The combined company is expected to grow in the mid-teens with meaningfully higher quality EBITDA margins as a percent of sales, greater than 20% for the combined business. The synergies of the deal are detailed and well understood, the detail which I will return to in a few slides. Aftermarket service and repair, which is resilient through a cycle, will be over 30% of the combined business, a significant increase compared to our stand-alone, under 15% of revenue, as you can see on Slide 4. The aftermarket business of 30%-plus of total revenue combined is also a 42% gross margin combination, which contributes to the runway for EBITDA expansion. Our cultures of innovation are similar and strong, with numerous patents and trade names globally. Also important to note is the depth of engineering that comes with the Howden business, furthering our ability to stay ahead on new products, certifications and first-of-a-kind offerings. Over the past few days, we have received similar questions, as shown on Slide 5, around better understanding the Howden business as it is now versus 3 years ago and the compelling strategic combination by bringing us together to create the global energy transition, hydrogen and aftermarket leader position. I will hit on each of these points and talk to the financing commitments in the coming slides. Moving to Slide 7. Many of you are familiar with the 3 investment principles that we have used for our inorganic penetration into the specialty end markets by adding products and technologies into our portfolio. Howden hits all 3 of these. First, the deal brings Chart access to customers and commercial projects that could not be accessed without significant organic investment, including giving us access to new end markets such as nuclear, energy recovery, biomass and clean metals and clean mining. Second, it brings Chart access to geographies that otherwise could not readily be accessed due to lack of product experience in the region, certification requirements or government funding and relationships. As you've heard me say on numerous occasions, the differentiator for us is not only our first mover advantage of First-of-a-Kind, our localized manufacturing footprint, but also our ability to get our equipment certified for newer clean energy and power applications at a regional level. Howden's physical presence in Africa, in South Korea, Middle East, Central and South America and EU member states will accelerate this. And third, it adds equipment or process that builds out the a la carte or full solution menu for applicable high-growth markets. And you will see that Howden hits this principle across the board, with capabilities, engineering, offerings, systems, solutions, service, all designed to enable both sets of our customers to accelerate their pathway to the clean energy transition and other clean markets. Both Howden and Chart have undergone transformations over the past few years, as you can see on Slide 8. The strategic pivot made and tactical playbooks used by both companies are very similar. Each of our equipment offerings had been predominantly used in oil and gas or coal, yet that same equipment can be and is used in the higher growth and ESG-oriented end markets that you've heard me speak about regularly. Take, for example, our brazed aluminum heat exchangers. These can be used in traditional oilfield applications. They are also used in LNG liquefaction, hydrogen liquefaction and helium liquefaction, and can be used in carbon capture and storage as well. Same goes for our air cooler offering. Turning to Howden, and the same pivot applies. Piston compressors were a traditional solution for hydrocrackers, which is a traditional refining process. They are now deployed in green hydrogen production to compress hydrogen produced by electrolysis. Another example in the Howden category is diaphragm compressors, which had traditional applications in the chemical industry and are now the best solution when high pressures are needed in the hydrogen refueling station. Also, the financial profiles of both companies are more resilient, whereas both used to be revenue cyclical, the transformation in the businesses are in part reflected in year-over-year top line growth with both Chart and Howden, when comparing our current year to 2019, up approximately 27% to 28%. Finally, the aftermarket service and repair that I've mentioned a few times already, above 44% of total sales at Howden demonstrates the resiliency and improved EBITDA. Combine that with this year being 592 uptime assets in place, so that's the digital piece related to the aftermarket, compared to just 9 in 2019. So moving to Slide 9. You can see both companies have deployed capital to expand our solutions into these high-growth areas, with Howden's capital deployment having a focus on serving the hydrogen and energy recovery markets. Their CPI acquisition serves the hydrogen market, while Peter Brotherhood serves energy recovery, which is waste-to-energy, waste heat recovery and biomass combustion. It is also worth noting that we will be able to pull Howden's offering through to our minority investments with which we have commercial MOUs. We'll circle back to that shortly. All acquisitions are fully integrated and at an aggregate level, performing above original acquisition expectations. So you can see that delivering inorganic growth through expeditious and effective integration is in the DNA of both of our businesses. On Slide 11, you can see the menu for the Nexus of Clean and how Howden solutions play across each category on the far right-hand side of the slide. Also in the solution column, you can see Howden brings us access to numerous markets that are at the center of carbon emission reduction. Those are shown in the orange boxes, whether energy recovery, biofuel, cement and mining. Mining is often thought of as activities in mining, which would not be considered clean, but most of mining for Howden is related to metals for electrification, so it's a common misperception to overcome that it's not coal-oriented. Drivers of this move to cleaner solutions include the expansion of metals for applications such as electric batteries. Also, all mines need ventilation, and Howden leads in all applications for this, including their software VentSim, which is the gold standard for simulation and controls. The green dash boxes on Slide 11 are end markets where we already play, and Howden helps us play in an expanded capacity. We will talk through our combined leadership position in hydrogen, water treatment and CCUS in a moment. First, on Slide 12. This is a page that has been used numerous times for Chart and exemplifies the further access that Howden provides to us in these high-growth specialty end markets, driven by sustainability, CO2 emission reduction and energy resilient tailwinds. These are not forward-looking figures. These are approximations of both businesses' current portion of revenue that serves these high-growth end markets. I'd point out the first row, which brings us tremendous access to aftermarket, service and repair, a very resilient aspect of the business across any cycle. Howden has 205,000 installed assets globally, with 2,000 under long-term service agreements. This is important as there also remains a large penetration opportunity ahead as well as applying that same profile and capability to the Chart installed base. Howden brings us access to electrification, as I mentioned already. Gaseous hydrogen, which comprises the majority of the projects that are currently underway or planned in the coming few years in the global market for hydrogen. Additionally, their industrial steam turbine business for energy recovery are small units designed to recover energy in many industrial processes and produce electricity. This automatically reduces the CO2 footprint and improves economics of Howden's customer processes. You can see the macro tailwinds listed on the far right column of Slide 12. Energy security, government net zero commitments, efficiency in aeration and wastewater, which is the most energy-intensive part of that process, decarbonization of steel manufactory, which includes -- manufacturing, which includes hydrogen and green steel also taking off right now. I'd note that steel represents about 7% of the world's carbon emissions, so being well positioned to help these customers address their CO2 targets is adding more access for Chart to these high-growth spaces. The list goes on, but let me get into some specifics about each of the expanded high-growth and ESG-oriented end markets. Moving to Slide 13. Howden's over 100 years of hydrogen experience complements Chart's nearly 60 years in hydrogen. And similar to Chart, Howden introduces new innovative products regularly into the hydrogen market. We'll get into the details of how Howden complements Chart's offering on the liquid side of hydrogen on the next slide as well as how they bring us access to gaseous hydrogen, which is a market that we at Chart have not previously had many offerings. For hydrogen, there is a continuous development of renewable energy projects, solar and wind, too. They all accumulate hydrogen as a way to cover the daily peaks in production that are typical of renewable power. Hydrogen gas then is transported to hydrogen refueling stations or to other end users. On the right-hand side of Slide 13, you can see a project that Howden was at the center of, the Haru Oni project in Patagonia, Chile. This e-methanol project is an example where hydrogen compression plays and there is no liquefaction. E-fuels are net zero fuels, and in this case, methanol produced by the combination of renewable hydrogen and CO2 captured via carbon capture and storage. Howden's compressors for hydrogen are key in this project to deliver efficient and safe green hydrogen from the electrolysis process. Overall, Howden's renewable hydrogen segment is up more than 80% year-over-year so far in 2022. Moving to Slide 14. You can see that Howden plays in all phases of the hydrogen value chain: production, transportation and storage to end use. This is a great product portfolio, including compressor solutions, which extends our ability to play. So as I mentioned already, we play heavily in the liquid hydrogen space, whereas Howden plays across all applications. This is a business that has an established history and has been focusing on many first-of-a-kind in renewables in 2020, 2021 and 2022. So I'll get into that in a minute. Now let's move to Slide 15 and 16. Slide 15 shows Chart and Howden solutions for the liquid hydrogen value chain, and Slide 16 shows the same for the gaseous hydrogen value chain. I won't walk through these details, but it is impactful to see the pure complementary nature of this. There are $240 billion of direct hydrogen investment through 2030 already announced as well as 534 hydrogen projects under development across that same period. Given that the majority are gaseous or gaseous and liquid together, this is an immediate increase in our addressable market access. And on the gaseous hydrogen side, we see the ability to pull through gaseous hydrogen trailers, as an example, to production locations that otherwise we would not have had a connection into. Both companies' similar cultures of innovation and strategic pivots to specialty end markets includes expanding partnerships and collaborations as well as getting in early with customers on first-of-a-kind projects. Some examples of Howden's first are on the left-hand side of Slide 16. Howden won a large e-methanol project designed to provide net zero fuels to Maersk. This was done with European Energy. And there are many more projects like this in the pipeline as the entire shipping industry is looking to decarbonize. Note that this is also synergistic with carbon capture and storage and is another way for us to play the marine market. Additionally, both Howden and Chart have capabilities in direct air capture, which also can be used for e-methanol. Moving to the second first-of-the-kind on Slide 17. There are many projects to convert traditional oil and gas plants and increase the percent of biofuels out there. An example is Shell's Red II Green, a project in the Shell Energy and Chemicals Park at Rotterdam, where they are converting an existing refinery plant into a biofuel. The plant will be able to receive vegetable oil as feedstock for renewable diesel. All these plants are modifications of the existing hydro-treating plants where Howden is a leading player. These hydro-treating units use gray hydrogen today, and many plants are planning to move towards green hydrogen instead. Shell at the same plant is now blending gray hydrogen with green, which is called Hydrogen Holland I, and Howden has won that contract as well. So moving now to the right-hand side of Slide 16. Like Chart, Howden utilizes partnerships to keep pushing the hydrogen economy forward and all renewables forward, not just hydrogen. Howden has established a partnership with Raven SR, which is a clean fuels company, transforming waste into clean hydrogen and synthetic fuels. This hits 2 very critical trends in today's society, waste management and circular economy. This also underscores an important aspect of both of our businesses, the ability to play across many different industries and applications and deploy our engineering expertise across the board. So quickly stepping through Slides 18 to 20, you can see the complementary nature of the 2 portfolios in marine, water and CCUS. We look forward to leveraging Howden's existing marine customer base to pull through our liquefaction plants for fuel production, onboard liquid hydrogen and HLNG fuel gas systems, storage and vaporization packages and onboard exhaust gas CO2 capture. Slide 19 shows how our water treatment process in bulk tanks that we currently have in the portfolio at Chart together work with Howden's equipment at our water treatment facilities. Howden's installed base of air compressors, which are applied to biological treatment units, those are the most common technology used today in water treatment plants, is treating water for approximately 10% of the world's population. And then moving to Slide 20. This shows how Chart and Howden worked together in an example of carbon capture and storage application. I'd point out that this applies to both small-scale carbon capture and large industrial carbon capture, so you just have a case study here on the small-scale side. Howden enables all technologies in CCUS, including amine, solid adsorption such as Svante and cryogenic. All of them need to boost flue gas through their systems and need to compress CO2 once separated, and Howden can do these unit operations. Like Chart in the CCUS market, while still early days, both companies' funnels of opportunities commercially are growing strong. So moving now to synergies. These plans were jointly developed between the Chart and Howden teams. You can see the main categories of the $175 million of year 1 post-close cost synergies on Slide 22. We have the ability to leverage material and other direct costs at double the volume with our supply base as well as bringing Howden's currently local supply on to Chart's global master agreements as well as Chart taking advantage of certain in-region supply strength that Howden has. We plan to in-source Howden compressors on certain projects and also in-source select third-party manufacturing processes, which have already been identified. We'll leverage both our India engineering teams, rationalize the back office functions, consolidate indirect spend, including agent commissions, insurance, IT systems and licenses and HRIS systems, just to name a few. Immediately upon closing, we will consolidate overlapping shops, including in Houston, Texas and Allentown, Pennsylvania, and consolidate the 2 Hyderabad, India back office buildings, while simultaneously selling underutilized, highly desired property. The list is deeper than this, but those are the main groupings and we believe there are upside cost action and opportunities. Moving to Slide 23. Howden's manufacturing and office footprint is a great match to our own. You can see the complement on the slide. I'm going to point out a few locations that are important to note. Our North American footprint will allow Howden to stage or assemble their larger equipment locally, thereby opening up expanded commercial opportunities in the United States and Canada. Howden's South Korean entity and location will help with many customers in the region's requirements for local presence. And South Korea, to point out, is a very early adopter of hydrogen. Similarly, having localized presence in Chile will help with commercial opportunities. Chile is a region that is expected to be a leader in green hydrogen and already have made great strides toward that. With a coastline that stretches 4,000 miles, Chile has access to water and an abundant and diverse renewable energy supply. Having a local presence will assist with early design and engineering work as well as customer penetration, and you heard that already, how Howden has done that with a hydrogen case study that we just shared. Having manufacturing presence in Africa will be an immediate booster to Chart's commercial pipeline of opportunities in the region. There are a few LNG plant and helium liquefier opportunities in the near term ahead with associated equipment coming up for bid, for which probabilities should be significantly improved by having local content. They are also floating LNG opportunities in the region as well in our commercial pipeline, and we anticipate liquefaction of flare gas in the West Africa region as one of the next advancements to supply gas to power options into Europe. Lastly, regarding Africa, we see tremendous opportunity in the region for water treatment. And having the ability to have a very quick non-U.S. Gulf Coast manufacturing location with immediate capacity on the water for a large cold box fabrication and assembly as well as jumbo tanks will help us shorten lead times and become more competitive on regional projects where sending these large units from the United States is too costly, in many cases, to be competitive on bid. So moving to Slide 24, we see commercial synergies of $350 million in year 3. There are a variety of commercial synergy opportunities, including what are shown on the right-hand side of the slide. So the ability, as I just commented, to fabricate cold boxes in multiple locations will give us access to multiple other customer projects than what we have had previously. This is extremely valuable to our floating LNG, non-U.S. opportunities in small-scale LNG. The access to the marine market is exceptional. I've commented already on the different types of products and solutions that we offer into that market, but we've been playing around the edges at Chart, not able to penetrate this -- what is a very distinct customer base that Howden has years, decades of experience with. The ability to localize the fabrication and engineering in India immediately adds opportunities for us further in water treatment. You've heard us talk earlier this year that we won 2 Indian water treatment projects, and this will allow us to further penetrate various different Indian state water opportunities. And the same goes for more content to Chart cement customers and vice versa for CO2 emissions. As I mentioned earlier on the call, our minority investments, as shown on Slide 25, made over the past few years, each came with commercial MOU or agreement. This creates the opportunity to, when one of these companies works on a project, not only have Chart content but add Howden content as well. Both teams have experience in and dedicated resources for successful integration planning and execution. And we are excited, actually thrilled, that Massimo Bizzi, Howden's COO, will take on the integration lead position for the combined business, as shown on Slide 26. Massimo joined Howden in 2018 and has multiple industrial, operational and presidential experiences at Koch, John Zink and Solvay. Both Howden and Chart have and will have dedicated integration resources reporting to Massimo, you can see that on the bottom diagram, and they will work closely with identified functional business leaders from each side to drive execution of the already identified synergies. Slide 28 demonstrates Howden's financial transformation over the past 3 years as well as a consistently high level of aftermarket as a percent of sales. With strong cash flow and not just accretive EBITDA margins, but the ability to further grow them together, the combined business is more resilient, more profitable, generates more cash and is forecasted to grow revenue double digit consistently across the cycle. So now moving to Slide 30. Sorry, I think we had a page numbering miss here. We reinforce then, on the next slide there, the aftermarket on the combined business. So that's something that's really important. And I think that is -- one of the questions we commonly received is around the cyclicality versus resiliency of the growth profile. And the combined business is actually far more resilient from a growth across the cycle, given this over 30% aftermarket as a percent of sales. So now let's move into the last section here on the financing overview starting on Page 31. So while we have a committed -- fully committed bridge in place, we are actively preparing to install a permanent capital structure with primary funding objectives centered around cost efficiency, flexibility and duration that will enable us to continue to drive growth and invest organically in the combined business. We're constantly in touch with our bankers. And based on the real-time feedback that we're getting, they and I are quite confident of having access to various sources of permanent financing in the near term that is optimal and cost-effective. We have a plan which envisions a mix of term loans and senior notes and are confident that we can access permanent debt financing well before our anticipated closing and that the combined company is an attractive story to debt investors based on our combined financial profile and market position, including our strong pro forma free cash flow generation. The first step in securing permanent financing is already underway with our launch of our current amendment to our existing bank group. While having up to $1.1 billion of equity in place in the form of the convertible preferred issued to KPS, we are going to actively monitor opportunities to utilize various options to reduce the funded debt amounts besides the KPS preferred and ideally both. We are working closely with JPMorgan and Morgan Stanley to determine optimal timing and refine the structure. They and we are confident about our pathway to install this permanent financing structure far in advance of closing. In addition to the financing markets, we have a number of tools at our disposal within the company to help optimize the pro forma capital structure. The first of which is the strong ongoing cash generation. On a pro forma basis, we expect the company to have free cash flow conversion of over 90%, which will be available for debt repayment. Additionally, as I mentioned last week, we have identified certain subsidiary businesses that have the potential to be divested that are not aligned with the core strategy going forward and also are easily able to be separated without impacting the synergies that we have laid out here today. We are aware that there are strategic -- strategically interested parties and we've had inbound as late -- as recently as last week about the potential purchase of these businesses. So I'd say that, in general, we would expect any potential divestitures to be accretive both financially and not impact synergies and be able to quickly turn from existing situation into cash to pay down debt. Taken together, we're confident in our market access, the attractiveness of the combined story to debt investors and our ability to put in place a flexible permanent capital structure in advance of closing, which is fully backstopped by the JPMorgan and Morgan Stanley financing commitments. To conclude, you can see the merits of this combination on Slide 32 -- Slide 33. It was with much conviction that we took this on and that we look to this combination to double our aftermarket, expand geographic and product depth, take advantage of the high-growth specialty markets with more content and play in additional ESG-oriented end markets. The synergies, combined with the immediate combined double-digit revenue growth and high-quality EBITDA margin as a percent of sales was a quick path to the low 20s as a percent of sales, provide a swift road map to year 1 execution. We look forward to sharing more information with you in the weeks ahead. And now, Cheryl, please open it up for Q&A.

[Operator Instructions] Your first question is from Rob Brown of Lake Street Capital Markets.

Jill, thanks for all this good information. I just wanted to clarify that the growth rate you sort of see on a pro forma basis of the business, I think you said double digits. Can you just clarify what drives that growth rate and how you see the combination growing, in particular, the aftermarket growth as well?

Yes. Yes. So the way that we look at the combined business, first of all, is that each of us is growing meaningfully faster than we were in the history of our respective businesses. And then put together not just from the synergies, but also from the penetration into the markets that I laid out on Slide 12 of the deck, that brings us to kind of in that mid-teens overall combined business growth rate. With respect to the aftermarket, this is an area that has the opportunity for significant growth ahead of us. So in -- just the base case in Howden's world, it's kind of around a 10% rate across the next coming years. We see the penetration that we can do further in the combined business and across our platform to be significantly higher than that. So I would estimate that to be certainly 15% and upwards.

Okay. Great. And then just coming back to the synergies a little bit. You have a pretty high level of confidence here. How much more could be done on the synergies at this point? And sort of what's the time line of getting those in the first year? Do you expect to sort of see activity fairly quickly there or sort of sense the time line to get the synergies?

Yes. So there's been a lot of work done already to identify the level of detail that we felt comfortable to be able to get to this number. And actually, our internal number, as you might imagine, is meaningfully larger than what we've included here. There's -- the majority of the synergies that we have identified are actionable immediately upon closing. And in particular, you've got the footprint because these are moving one shop into another. So we think those are kind of first quarter type of moves. In addition, the sourcing and the indirect, there's elements of that, that can be accomplished very early in the first quarter after closing, and then some of the longer tail moving things on to global agreements probably takes about 6- to 9-month type of period. Overall, this is a first 6 months to drive for the majority of these synergies in year 1, and then go also in addition to that for the upside that we have identified. So much work is being done and being worked on, but a good path was already identified before we signed the agreement for the transaction.

Your next question is from Sam Burwell of Jefferies.

Maybe just a high-level one. I mean, it goes without saying the initial reaction to the deal hasn't been good. So I just want to get a sense from you, where do you think the market is most wrong? I mean, are people not appreciating how synergistic the deal is? And the improvement of the gross margin, EBITDA, et cetera, are people a little bit too fixated on the top line growth element? And maybe on the financing side, I mean, do you feel that people aren't optimistic enough about your ability to obtain debt financing at low cost and favorable terms?

So I think that, first of all, the reaction was a perception around what the business used to look like. And the combination is extraordinarily compelling, as you can see that it is the playbook we have deployed over the last few years, the same playbook that Howden deployed, but we're doing it now at scale, and this brings us more than what we had done before. So if you looked at our acquisitions over the course of the last few years from a Chart perspective, what you would have seen was an acquisition that got us more access into one particular specialty end market. This gets us access to and further penetration in multiple of these specialty high-growth end markets. So that's one thing I think maybe was underappreciated or unappreciated coming out of the gate around the announcement. The quality of the financial combination also is something that we have high conviction in. It adds -- it's -- the irony being, there was, I believe, misperception that this is a cyclical business. It actually adds resiliency through a cycle. It gives us high-quality EBITDA margin, higher EBITDA margin as a percent of sales than us on our own. So the financial merits, the strategic merits are laid out here. In terms of the financing, I think that the fact that we have the firm commitment on the financing side from both JPMorgan and Morgan Stanley in the form of the committed bridge as well as them very real time telling us -- working with us on our action plan for the takeout permanent financing, including reinforcing the level of blended rate that they believe we can get in terms of the debt markets in that 7% to 8.5% range. I think there's maybe a little bit of a view that let's wait and see how that works out, but the conviction level from the multiple big banks that we're working with on this is high. So all told, again, we're -- we feel like this is an incredible strategic combination with specific steps on the execution side, both from a financing perspective as well as from an achievement of the synergies and the quick turn that we can get from a financial perspective right out of the gate.

Got it. No, that's all certainly very helpful. And maybe one follow-up quickly on the Howden side. I mean it's an entity that's grown a lot due to the roll-up and other bolt-on acquisitions over the past few years while KPS is owning it. So curious, has the integration process on all of those additions, is that effectively complete? And then Massimo, he's going to be joining the team and leading the integration effort. How long will he be with Chart for? Is that open ended or a year? Or any other details you can give around the plan for him going forward.

So the first part of the question is, yes, the acquisitions that Howden has completed, they have a very strong integration process, and those are complete. I'll reinforce that each of those acquisitions that were completed for them in the last few years were at or above what was the original return metrics that they had. So overall, the integration process that they have very similar and very strong to what we have. Massimo, we're thrilled that he's going to lead the integration and he's going to be a forever Chart guy.

Your next question is from Martin Malloy of Johnson Rice.

Thank you for providing additional information, it's helpful. Just on the financing side, is there any help you can give us in terms of the rates that you're -- the assumed rates on the senior secured or unsecured notes?

Sure. So the banks have been providing me with a lot of information around the mixture and combination of the permanent financing, and kind of the directional side is that 7% to 8.5% range is achievable at these levels, and that's also based on current debt markets are open and operating and there's precedent transactions that have been completed in that range. And that's not 1 or 2 precedent transactions, that's numerous.

Okay. And then in terms of accretion to EPS and timing of when that's achieved, assuming that the $1.1 billion of preferred stock is utilized, can you help us with when that might be accretive to EPS?

Sure. So just to indicate and reinforce the position on the preferred convertible, that is a backstop, just as the JPMorgan and Morgan Stanley committed bridges are. And the -- if it is in place, there's a variety of different levels that it can be in place at. So the up to is an important piece of the flexibility on the preferred. With that said, the accretion portion would be in -- certainly by the end of the first year, given the financial profile.

Your next question is from Ben Nolan of Stifel.

So real quick, hopefully, this doesn't count as one of my questions. But Jill, on the aftermarket, did you say that 15% is sort of how you envision the aftermarket growth? Or is that altogether, including a strong aftermarket growth?

Yes, we would envision the combined business certainly to be able to grow in that mid-teens range in that -- the aftermarket definitely in that range. The stand-alone on the aftermarket side is kind of 7% to 10% is what it's been running at. Then combine that with all these other high-growth end markets, we're comfortable and confident that the combined business certainly grows in double digits with the vision here and the tactical steps to have the combined business growing in the mid-teens.

Okay. So now on to my actual real questions, if it's okay. The -- I was curious, you walked through a whole lot of things about hydrogen and other, some of the high-growth areas that are -- as you guys have outlined now in the specialty market. And I know that it's probably early to have anything definitive as it relates to the TAM, but any sense as to what this does to the TAM, just maybe roughly on an absolute basis for that specialty business. And then along with that, how do you think about your market share? Does it move meaningfully? So in other words, is this more about gaining market share within the TAM or meaningfully growing the TAM?

So this is meaningfully growing the TAM and also gaining market share within the TAM. So it's both. So I'll take your -- that didn't count as an answer -- as question. Okay. So the TAM on hydrogen specifically in the renewables for 2022 to 2026 with Howden has estimated is $6.4 billion. And that's just specific to that category, which generally has very little overlap to our existing TAM, given the fact that they're strong in the gaseous hydrogen side of things. In addition to that, you have these other clean markets that the TAMs will expand in. And I would estimate that based on the figures that we've seen, and again, the time frame is a little bit different that we have to refine, so their time frame is the 2022 to 2026. But the TAM for the others are certainly in the -- up closer to the high single-digit billions on top of that $6.4 billion for hydrogen. So this is a near-term real access to addressable market for us. And just like we have seen, our TAMs continue to expand based on changes in the public and the private sector. We also see penetration further as adoption goes up in these areas. So big opportunities for us in highly complementary spaces of the Nexus of Clean with more TAM and more TAM penetration opportunities.

Okay. And then for my last question, and this is, hopefully -- I'm not trying to be adversarial here, you know me. But as you saw the response to the market in the last few days and last week, did it at all cross your mind, okay, should we pull the plug on this and maybe just backtrack? Or -- and if it did, why have you sort of chosen to -- what was the motivating factor to move forward? Or was this such a -- the deal was solid and just misunderstood and so you really never had any doubt?

I've never had any doubt. I've had strategic conviction, execution conviction in this combination. We've been watching this business for years now. And have this great opportunity to bring what -- I think probably the most misunderstood portion here has been that the strategic pivot that you all have watched us do in the last 4 years of taking our portfolio and hitting these high-growth end markets is the exact same thing that Howden has done. It's just been not in the public domain. And so it's my job to articulate what we have seen in these spaces and the highly complementary nature. So the short answer is, no, this is a great combination for the future. I realize that people have a view of the immediacy here, but this is -- it's our job to make an incredible industrial combination that hits every aspect of the energy transition of the Nexus of Clean that we have talked about over and over again and expand that opportunity with a more resilient and a higher margin profile of the combined business. So we are excited.

Your next question is from Connor Lynagh of Morgan Stanley.

Yes. We've covered a lot of topics here. So just one question for me. Can you explain a little further the sort of customer engagement and basically why owning versus partnering is the correct decision? Maybe you can walk us through an example of how that might better competitively position you on approaching a project.

Sure. So first of all, it's complementary content that these 2 businesses have. So while you could partner into these, that would have essentially no benefit to us because there's no opportunity for us to bring just a Chart piece of equipment. It has to go as a combined solution, which brings the 2 sets together to those end customers. The customer engagement portion also, we've seen -- I'll give you a couple of examples in these markets. We've had some small wins on the marine side. Marine, we've been working on penetrating organically ourselves. And this is an industry that has a core set of players that they have contacts that provide to them over years and years. And to penetrate that is hard to do organically. But if you go together with somebody who is well known in their world, but with a full solution, it's a much higher probability to win. Customers in renewables, they want a complete solution. We see that. We've seen that over the last few years where if you're in a situation where you've got to buy out a component and it is the longest lead time item, that can be the differentiator whether you win or you lose. So the combination, the engineering expertise, the complementary nature and then the access to these other markets, like even if we partnered with someone on getting to gaseous hydrogen, it doesn't get us gaseous hydrogen content. We need those products and those solutions to actually penetrate those markets.

Your next question is from Roger Read of Wells Fargo.

Jill, just maybe to understand since the aftermarket is a big part of the attraction of Howden and obviously what you had [indiscernible] forward. I was just curious, as you look at it, give us a little bit of a breakdown, if you could, on Howden's aftermarket, particularly China is a big part of this, not that China is a new market to you, but just trying to understand that. They've got exposure going back into the more conventional energy like coal and so forth, and then what you see moving forward there.

Sure. So China is not a huge current part of the aftermarket, service and repair business for Howden. Certainly, there's the opportunity to penetrate that region, given, like you said, these more traditional and coal applications. We see this as a global play, and that means across the existing footprint of installed base, not just for Howden, but across the board. We also are seeing, as a result of the energy security, energy access, whatever you want to call that macro trend that customers, even as they're doing new projects on whether it's LNG or renewables or hydrogen, are also spending money on upgrading, expanding or just keeping their current existing facilities up and running. So this concept of the retrofit and the refurb that I've talked about having come into play for us this year in the Chart business on the LNG side, this really expands that capability for us. The other thing I would point out on the aftermarket side is that we frequently, in the Chart business, get access to project opportunities that would be field service in the Middle East and in Africa. So places that we're deploying field service techs from the United States, and Howden has a global field service group that is obviously far larger than ours just given their aftermarket presence, but also in these regions that we could deploy someone in a matter of a day versus right now, it takes getting a visa or time to get them there. So having that breadth and that leverage to get out to a field service job on like a quick shift for a brazed aluminum heat exchanger is something that we see as immediately beneficial not just to the top line, but also to the bottom line.

So I guess let me follow up on that then. Part of the integration argument here then is you can use people that have previously been Howden people to do Chart aftermarket. I mean I'm just trying to think, like it's one thing to have a visa for somebody, it's another for that person to be the right person for the job. So is there that much interchangeability or interoperability within the 2 companies?

Yes. There's -- we have experience in -- across the board, they have experience across the board. There's obviously nuances to that answer, where if there's a specialty around like a particular kind of welder that is required for the job, that certainly is something we have to get into the specificity on. But these are people that are cross-trained across all products and working in industrial applications, it's very similar to what we do. We also have a plan to ensure that where resources that have those respective skills are cross-trained with each other, and that's something I think will be, again, immediately impactful. So not necessarily every single job can have that answer, but certainly there's overlapping skills and capabilities in their field service team to ours.

Your next question is from Ati Modak of Goldman Sachs.

You're outlining about $700 million to $900 million in debt paydown between close and 2024 to get to your high 2x leverage target. Can you walk us through the FCF components there? So between Chart existing business, Howden's contribution between '23 and '24, what are the annual adjustment expectations as of right now, the potential size of the divestitures that you're targeting? And then maybe touch on the potential contribution from LNG projects that aren't in your backlog over the next 2 years, to the extent that you can talk about that.

Sure. So from the cash profile of the 2 businesses and then you add the synergies there, that's the combination. Howden has a higher cash generation as a percent of sales than Chart does. And I think we've laid those at least as a percent, you can kind of back into that. And then for year 1, the $175 million of cost synergies goes to that. In addition to that, one of the things that I think your point is sitting right now as we look into 2023, the Chart, couple of the big LNG projects that we have in our backlog have milestone payments of over $230 million. Obviously, some of that goes to working capital. And so -- but that gives you a little bit of a parameter or bookend around the confidence in the cash that is coming into the business in that time frame. When you get into the divestiture side of things. There's -- without going into specifics of the businesses, but knowing that there's a couple that do not touch the synergy profile, that's estimated kind of the $500 million to $600 million range if we're able to execute on the ones we're talking about here. Obviously, that number isn't firmed up. And so you can use the estimate based on what you think you'd get. But there are hundreds of millions of dollars is my point on that answer that would immediately be utilized to reduce that leverage ratio. And maybe one other just general point that I think has been pointed out about Chart on an ongoing basis is we are a low ongoing CapEx user, and Howden is the same as we are in terms of percent of revenue.

Great. That's helpful. And then any guidance around the potential adjustments on an annual basis that you're talking about when you think about the FCF for '23 and '24?

Yes, there should be minimal adjustments. It would be around the cost to achieve the synergies in particular. We also -- and those costs to achieve, we've lined out kind of in the $12 million to $16 million range for the first year. We also anticipate that we're -- certainly in our business over the last 18 months, we have been holding safety stock from an inventory perspective. And that is something that we're starting to reduce that safety stock. And so you'll see that flow through the working capital as a percent of sales. Hopefully, that answered your question, Ati?

Yes.

Your next question is from Craig Shere of Tuohy Brothers.

So 2 quick ones for me. One, as far as the stability that the combined company brings, you focus a lot on aftermarket services. But I wonder to what extent the combined entity could materially increase your product leasing business, which has great margins and obviously repeating stability. And my second question, is there any prospect or 0 of lining up some agreed upon divestiture pre-close so that there's a better sense of how things are working before everything is finalized?

Yes. So -- and I think that's a good point. We stress the resiliency and the growth profile and the margin profile of the aftermarket service and repair. But what this will allow us to also do is take more assets into the leasing business and also take our assets across different geographies from a leasing perspective. So that's a great point to point out. And then I'd also say, like on the resiliency side and the growth profile, we tried to lay out here today the access to these higher-growth end markets related to macro tailwinds of CO2 emission reduction, the sustainability, even CO2 shortages, the list goes on of the ones we've been drumbeating over the prior few years. That -- this further penetrates us into that. And so with the multiple diverse end markets that are each in high-growth mode, that also adds the ability to have levers to pull and grow even faster as a combined business. And couple that with the fact that specialty tends to be, in both businesses, higher margin as a percent of sales, not as high as aftermarket. And then lastly, one of the things that I had been hearing is, hey, when the -- we're getting more project oriented in the Chart business, which is great from a midsize project and the big LNG project, but this adds the shorter book and ship to us and it adds the aftermarket piece. So all of that is -- adds to the capability and operational execution of this high-growth combination. So high growth and higher-quality EBITDA margin as a percent of sales and more scale, more access to high-growth end markets, with multiple different opportunities such as you laid out on the leasing side that I think, just what we've laid out here today, is truly a base case. And what we said last week, it is truly a base case. And there's so much opportunity ahead with the combined complementary nature of this business for energy transition, all of these clean end markets that it's a stellar combination of companies.

Great. And the potential, no promises, but the potential for any divestiture or news before close?

Yes, I avoided that one, didn't I? I wasn't meaning to, I just forgot. So let's put it this way.

So much to talk about.

Yes. I was rolling there. My passion for it. So I can't get into any specifics. What I can say is that there's -- the larger chunk of the opportunity of the businesses that I'm referring to is set up already in a way that it can be taken out of the current business and sold to someone. So it's not having to be carved out where you would normally see overlapping sites or overlapping personnel. This is a fairly already carved outable entity or business. There is the potential, and we will have conversations between now and closing to have a construct where immediately upon closing or very shortly thereafter, that we would get that cash in hand and turn that business out. I want to do it that way not only for the cash portion, but also for keeping the teams focused on the core parts of the business and not have, I don't want to be spending time integrating. Massimo is not going to integrate something that isn't integratable or it doesn't need to be integrated. So there's 2 reasons that we would like to have that outcome be that way. But again, I -- that's about the level of specificity I can give and confidentiality around any conversations that we could be having.

There are no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect.