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

Good morning. This is Craig Shere with Tuohy Brothers, and we're very happy to have on the call with us today, Chart Industries' President and CEO, Jill Evanko. We are on a recorded line. Given compliance considerations associated with this call's proximity to earnings, I'll personally shoulder the entire Q&A session, and there will be no questions on pending quarterly results. What prompted this call was last week's Biden administration pause on U.S. LNG export project approvals and ensuing surprisingly GTLS-focused investor reaction and issuing for the late Friday, Chart press release reiterating base guidance through 2026 and noting already announced traction on 2 international LNG projects.

Accordingly, the majority of today's discussion will be around LNG. Jill, I'd like to start off focusing on the 29 projects included in your previously disclosed $8.5 billion commercial pipeline of potential big LNG opportunities. First, do you see this big LNG commercial pipeline notably impaired in any way post last week's Biden administration LNG pause? Second, are both the recent announced IPSMR award for 2 trains in a larger modular international big LNG project and the major foreshadowed international big LNG project award due late this year or early next, included in that $8.5 billion commercial pipeline, but excluded from your Analyst Day revenue growth guidance through 2026?

Well, first of all, Craig, thank you very much for having us today. Let me start at a high level about the Chart business. So as a reminder, we're molecule agnostic. We serve a variety of end markets and thereby, we're not dependent on any one molecule winning, any one market or a project to drive through our profitable growth targets. We also have the benefit that multiple pieces of our equipment that we manufacture are used in a variety of different applications. So we don't have to change our manufacturing capabilities to serve a variety of applications that range from LNG, as you suggest hydrogen water treatment, CCUS, oil, to name a few. I'd also hit on, and I think we'll come back around on this later, the addition of Howden into our portfolio has also reduced this reliance on any project and added geographic diversity as well as meaningful aftermarket service and repair into the portfolio. So let me get into specifics addressing the administration's LNG export approval pause that you referred to that was announced officially on Friday. We do not anticipate that this impairs our pipeline nor does it have a meaningful impact on our midterm outlook. There's a variety of reasons for this. So I'm going to walk through these. It's going to be a long answer, but I think all of these aspects are really important to address why we don't see this as having an impact on the pipeline. So at a very natural level that the U.S. is in exporting LNG, importing countries are going to get their gas from other locations. We serve those locations, as you mentioned, with our 4 pillars of LNG. A different way to look at it is, if not gas and the need for other sources of energy will be addressed. And in some cases, this could be a different type of clean energy. It could be coal, it could be oil or gas. And the need for molecules to get where they're going to and to where they need to be to support the energy transition is not going away. Our IPSMR technology in conjunction with our manufacturing capacity for the main equipment and with our partners is ideally suited to deliver the technology where and when it's needed to support this. And that's seen in that pipeline, whether it's land-based projects in Southern Africa, floating projects in Southeast Asia or scalable projects in Latin America. So moving into Chart specifically versus the macro perspective on it. As a reminder, we stated at our November 28, 2023, Investor Day that our medium-term financial targets do not include any additional big LNG projects that were not included in our September 30, 2023 backlog nor any awards related to the Department of Energy's $7 billion hydrogen hub investment. So let's break down the big LNG orders leading up to the September 30, 2023 backlog and how they relate to having non-FDA and FDA approvals, which is really the heart of the matter of this LNG pause. And this is all based on information that we've previously put in the public domain. There's a lot of details to build up to this. So if you would like to go to the source documents, reach out to Walsh or our IR team, and they could point you to the respective earnings releases, where the details are included. But in summary, across the past 5 years, from the first quarter of 2019 through the third quarter of 2023, we publicly shared each time that we won a big LNG award. We were able to cite the specific project operator names for many of them as well as our direct customer names, which is an EPC or other technology provider. So this is an important point as our customer that places the PO with us is not the LNG exporter themselves. We did have one award in the second quarter of 2023, where we were asked to keep the project confidential. So all the projects that we've announced through this time frame, including the confidential one, have given us a customer full notice to proceed and have made their payments as scheduled. So if you add up the big LNG award that we announced in that time frame, the total value of the associated announced orders was just over [$1 billion -- $155.7 billion]. And of that, the only one that we did not identify was the approximately $200 million one in the second quarter of 2023. So even if you assume that the project doesn't yet have the approvals, you can see that all other U.S. big LNG [indiscernible] have received all required approvals to proceed. So to add to that, since Investor Day and therefore, wouldn't have been included in our midterm outlook, we announced in December of 2023, multiple LNG awards. And as a reminder, in the third quarter of 2023, we announced that an international oil company has chosen our IPSMR technology for their big LNG international projects. And this isn't in our backlog. We expect that it will be added to backlog in late 2024 or early 2025. So to conclude there, in that summary is we've got really good line of sight. The backlog not impacted and fully in international projects, such as the one we announced in December and the one that we've been awarded the technology ahead of us later this year. Then I'd point you to some of the commentary from our customers, such as Cheniere about the implication of this pause. And Cheniere says that they're confident we will continue to secure all regulatory approvals for our expansion projects within our expected time lines as we have for more than a decade under multiple administrations. If they're reinforcing that we expect this pause to have no impact on the overall time lines for our expansion projects, including the CCL Midscale 8 & 9 project [indiscernible], which was in response to a reporter inbound. And our commercial pipeline for big LNG, as you shared. And as we shared at our third quarter 23 earnings call was $8.5 billion, comprised of 29 potential projects. And I think it's important to note that balance between North America and international markets in the pipeline in terms of dollar content. So I'd also point to the fact that there's multiple regulators that are pushing back on this, including you have commentary from center managing around the fact that he is Chairman of the Senate Energy and Natural Resources Committee plans to hold the hearing on LNG in the coming weeks to unveil the fact about the true state of play in the market. So all in all, we feel confident in the midterm outlook as we shared late day on Friday as well as the fact that we have provided full transparency around the big LNG projects that we've been awarded since 2019. So I'll pause there, Craig and see where you want to go with that.

Great. I'd like to dig a little more into those 2 projects you had alluded to that were foreshadowed and/or announced for international LNG awards that you noted were post Analyst Day and above and beyond the guidance given at that time. I believe that both those utilize a full IPSMR technology suite. So would it be unreasonable to guesstimate that combined, they could total the $300 million to $400-plus million. And given one announcement ultimately pertaining to 2 trains on a modular big LNG project, is it reasonable to think there could be further follow-on brownfield expansion opportunities on that same project? Finally, what are the prospects for a more systemic U.S. LNG approval pause spurring even more international project traction. And related to that, how do you see Chart content market share shaping up internationally for big LNG versus domestic?

Okay. So let me start by stepping back here over the course of the last 5 years that we have had numerous EPCs and operators that have validated, tested and approved our IPSMR technology for use or potentially use in their projects. And this includes not only U.S.-based EPCs and operators, but also international based. These include -- just as a few examples, Bechtel, Cheniere, NFE, [indiscernible], TotalEnergies, just to name a few of the over 20. It's starting to be soon in our order books. And like anything else, where we started IPSMR 5 or 6 years ago and through the validation process, we're now starting to see those awards come into backlog. And this is a positive at this point, obviously, given the global nature of the LNG markets and these recent U.S. developments as built-in resiliency to situations like this. We shared previously to your question about content and dollar content that typically a project using our IPSMR technology plus equipment, we'll have more Chart dollar content than one that only uses our equipment. And this is the case for the project that we announced in the third quarter, which we haven't yet booked for the big international LNG project, the one that we said we expect to book in about a year, late '24, early '25. And then we also if you kind of step back and look at the one around the 28th of December announcement, the 2 trains of the international project, you're spot on, Craig, that it is reasonable to think that further trains could be added to this project in the future. And that's something that's important around as you comment the evolution of the pipeline becoming more and more international related and the fact that the international projects are moving toward modularity. So if you look at -- I think what you're kind of getting at in this question, if you really want to kind of peel back and get to the heart of the matters, if you wanted to assume that there is a delay in the one big LNG project through the third quarter '23 that we didn't identify due to customer confidentiality, that would be approximately $200 million as we shared. But since then, with these international announcements that in the case of IPSMR would have, by nature, more Chart content that you see kind of the resiliency again of our medium-term outlook. So finally, yes, I said this before, but I think it's worth reiterating that balance in that $8.5 billion pipeline for big LNG is not heavily weighted -- more heavily weighted to North America's balance between North America and international in terms of dollar content.

Great. And digging a bit further into the U.S. environmental considerations inherent in last week's announced LNG approval pause. Can you opine on the comparative emissions of your IPSMR technology versus traditional liquefaction technologies and prospective chart upside associated with perhaps more systemically curing LNG with carbon capture.

Absolutely. So I'm going to answer this kind of in 3 parts. The first part being, let me just address something that I've heard being referred to about modular design LNG, which is at just inaccurate period. We've seen some articles, heard people discuss environmental issues and failures due to modular design. So my answer here is actually a very technical distinction, but is a very important one. And what has been discussed out there on this topic is actually related to the horizontal heat recovery steam generator or HRSG. And HRSG module, which is that piece of equipment, in the case of what I've heard and read about is actually being confused with modular liquefaction design and fabrication. So there's no design or quality issues with the liquefaction. The problem that we've heard or read about is with the HRSG and the power plant and not the liquefaction plant. All right. That was pretty technical. Let me just move on to piece 2 here, the directly to answer your question about emissions and modularity. Modular LNG actually utilized the smaller train sizes, smaller piping and equipment sizes than baseload plants. So this needs smaller gas and liquid volumes, which can result in reduced flare loads and lower emissions, which we've tested out and had multiple simulations run on IPSMR. Also from Scope 1 emission standpoint, there's no sacrifice in CO2 equivalent emissions going from competing large training technologies versus modular solutions that incorporate IPSMR. And then our IPSMR process, which is designed with brazed aluminum heat exchangers, as you know, it really is around eliminating blowdown of refrigerants and shut down or said differently, allows to restart without venting or flaring. So there's actually emission benefits in the cases of using IPSMR. And then the third piece of the answer really goes to the potential integration of CCUS and LNG. In the case of pretreatment, CO2 for CCUS is removed in pretreatment unit in LNG facilities. And this chart has equipment to purify, liquefy and transport CO2. CCUS can also be used in LNG facilities for Scope 1 emissions. That's around capturing a relatively high purity CO2 stream, again, off of the pretreatment systems with the incoming feed gas to the facility. And we -- again, we have scope in that whole cycle of CCUS. And then on a broader note, if the question is pushing towards Scope 1 emissions associated with operating a plant inclusive of the primary CO2 emissions coming from combustion, then Chart would have a play for CCUS addition to that plant as well. You've heard some operators already talk about the addition of CCUS or the potential addition of CCUS, and this can come in a variety of different forms. And again, if that is the direction that some of these operators go, we would have a meaningful chance to play in that additional end market there.

And before the Howden acquisition, Chart had already materially expanded both its geographic and end market diversity. And of course, as you've already alluded to, the Howden deal puts this trend on steroids. One aspect of this was the ability to start manufacturing certain big LNG equipment internationally, just as years of global energy company IPSMR betting, we're reaching a conclusion, as you just addressed. Given this backdrop, should your big LNG order book become increasingly global, how do you see this impacting manufacturing margins and associated equipment delivery costs?

Yes. As you point out, Craig, we've worked hard over the past 6 years to not be relying on any one end market or any one big LNG project. This is a great example of why we've taken numerous steps, Howden being one of them to achieve this, whether moving the business to over 30% in aftermarket service repair, which I think everybody is aware what the number we posted before is over 42% gross margins. We've taken steps to ensure that we have a physical presence around the world to be close to our customer base, which is important as you point out that not only does it give us access to more customers and more projects that we would have been priced out if you were shipping large equipment from the United States to them, but it also gives us the chance to really be efficient in terms of our own cost structure. We've deployed our flexible manufacturing strategy, which is where we made nearly all of our products in more than one of our in-house locations and then moving toward offering a fuller solution by bringing the technologies in-house. So all of this, therefore, gives us the optionality on how we utilize our footprint. One of those activities underway throughout the Howden integration in these first 10 months of our ownership has been to in-source certain activities, save equipment to be closer to our customers, use each other's local resources to win projects and serve them. And we see this as continuing. A good example of this in terms of integration was the Middle Eastern oil and gas when we had last summer, which we wouldn't have achieved without physical Howden presence in the region. And we've seen also through this geographic diversity, the ability to bring existing equipment into new end markets. We just had an example of that earlier today and hitting a new end market at the first of a kind with an existing piece of the equipment that was in our portfolio. Now I think this is also a good place for me to comment on a couple of things that are maybe a little tangential to the question itself. The first is around the manufacturing footprint that we have and our ability to be flexible in terms of making the same equipment that goes into a variety of different end markets. And when we talk about brazed aluminum heat exchangers, quarters and cold boxes, where we are winning or losing is not on price, it is on lead time. And you were very active and busy in our [indiscernible]. So we don't see any impact from timing shifts or anything like that having an impact on manufacturing absorption. And then the other is just a good place for me to reiterate our financial policy and focus on debt pay down as our #1 priority. We've shared this in nearly all of our prior presentations, and this financial policy is unchanged. We continue to have debt paydown as our #1 focus and the financial policy that we've shared previously, but I'll restate it and reiterate it here is that we will not do any material cash acquisitions nor any share buyback until we are at our target net leverage ratio range of 2 to 2.5. So we're just restating that and making sure it's clear, then we specifically asked not to talk about outlooks or anything like that, but that's not changed, and that's still our focus.

Very good. And Jill, you've long noted that big LNG is -- but 1 arrow in your quiver, which also includes small-scale LNG, floating LNG, retrofits, storage and transportation equipment and even truck fuel tents. To what degree, if any, do you see these additional notable LNG end markets impacted by a U.S. LNG project moratorium? And how would you -- how would the aggregate of these additional LNG-related markets stack up against big LNG, both in terms of contribution towards midterm guidance and prospective commercial upside?

So I would definitely refer back to my earlier comment about importing countries of LNG are going to find other sources, if not the U.S. and/or other energy sources. And therefore, we would expect our other 3 [pillars] of LNG, which as a reminder for everybody, we've got the big LNG category, small scale floating, LNG infrastructure and service and repair to continue to be in demand. What you've seen over the last few years is an increase in frequency and geographic diversity for small-scale and floating in particular. We see more activity in regions like Southeast Asia, regions around Africa as well. And as of a couple of years back when the Russia and Ukraine conflict broke out, more activity on the regas side and the ability for storage and transport in Europe specifically. So the frequency and more commonality of small-scale and floating has already been accelerated and has the capability to continue to accelerate in these non-U.S. locations as well as in U.S., although most of small sale in the U.S. you've seen is related to peak shaving, in particular. It's also important here to note that in the U.S., particularly, and this would really relate to Category 4 service and repair for LNG. We had previously shared that we've started to see some optimization work being awarded to us for existing LNG export facilities. So these are existing brownfield where operators are trying to either reduce downtime or get more LNG out of existing trains, and that can be through a variety of different activities, whether that's retrofitting certain pieces of equipment or whether that's addressing the challenges of heavy hydrocarbons and the input gas where our NRU or nitrogen rejection unit capabilities are really well suited. So I think you're going to continue to see a lot of that activity happen. And again, the consistency in the case of the last couple of years increasing frequency on the smaller-scale activities. And then the last piece, which is more of a speculative comment, but not necessarily out of the question, is the acceleration of projects that do have all of their permits in the U.S. So all the FDA and non-FDA approval but they have specific dates to achieve their first export buy, and this can be for both big and small operators. So that can be an interesting dynamic ahead of us here where folks that -- the pool might become smaller and might get accelerated based on the expiration of existing permits as well.

Very good point. Beyond LNG, Chart has a number of repeat low-risk and fast-growing business lines from aftermarket services and repair as you've already alluded from water, food and beverage and much more. Outside of big LNG and hydrogen, how would you characterize the size and growth of the rest of Chart's operations?

Yes. So let me start with our aftermarket service and repair business because I think, again, this is something that's important and was strategically in action that we wanted to get to was having that more heavily weighted aftermarket service repair as a portion of our business. So currently, we said just over 30% of our total business in aftermarket service repair. As we've shared previously, we expect that to continue to grow in double digits. And I'll refer to my year-to-date third quarter '23 comments that we made on the third quarter earnings call with respect to repair services, leasing segment or RSL, where sales increased 15.5% year-to-date compared to year-to-date third quarter of 2022. So just tangibly, this is happening, and we're seeing that traction in the aftermarket service repair business, which as many people are well aware is consistent across the cycle. Water treatment is another market that I think is important to point that has numerous tailwinds, including another U.S. government involvement and the EPA PFAS requirements. Through the third quarter, we had started to see some of that Treatment-as-a-Service and PFAS backlog increase. And then food and beverage space exploration molecule by rail, biogas, mining, nuclear, amongst others, really give us the ability to serve numerous high-growth markets with our existing manufacturing capabilities and capacities. Two particular end markets that we called out at our Investor Day in terms of later in the decade, accelerating total addressable markets for hydrogen and CCUS. I did comment in response to your first question about the fact that not only did we, in our midterm outlook at Investor Day, not include any additional big LNG that was ahead of us, but we also did not include any awards related to the Department of Energy's hydrogen hub investment. And we see -- and the reason we did that, by the way, was because some of the stuff is hard at times. And that was the case for the hydrogen hub because there's a series of steps that have to happen. But we do see that trend continuing, and we continue to see private and public sector in the hydrogen investment piece. And this is an area that we play both on the liquid side and the gaseous side for hydrogen. So again, I think it's important to point out the diversity of these end markets in which many are high-growth end markets. And the fact that however you think about the energy transition, there is a world out there where outside of the Western Hemisphere, there's many locations that don't have access to energy power at all, let alone clean energy or power. And so this is going to have to be served. And through this molecule agnostic play, we stand to benefit given how we serve this breadth of end markets.

Great. In my last question, I did try to carve out hydrogen in conjunction with LNG or big LNG in a nod to growing clean energy investor concerns. ESG has certainly lost some of its luster of late and a number of pure-play clean tech companies are now facing notable liquidity issues. Despite such trends, are you as confident today about achieving that mid-teen revenue growth CAGR through 2026 is when first presented such guidance 2 months ago? And if so, what catalysts or mile markers should investors watch for to ameliorate their anxieties?

Absolutely, in terms of the confidence and hence, why we reiterated our midterm financial targets just a few days ago. I would say it is interesting that this administration not only has caused LNG export approval, but just a few weeks back, they recently came out with stricter than expected 45V requirement. And I think that plays to your comment of maybe lack of us to review on clean tech in particular. But again, that's my last answer is that you can't restrict everything here. There has to be some forward progress if the energy transition is going to continue. And I would say the other things to look for around here around this particular question that I've said over and over again that we are not -- and our outlook is not dependent on government stimulus or funding. I think that's really important, and that's something that's very different than some of the clean tech companies you refer to that have faced liquidity issues. So that's important. And I would -- as a side note that we are extremely careful with our customer base and ensure that we're paid upfront with any customer that has a particular requirement from us, and we're careful with that vetting process. And then lastly, milestones, things to watch for are really around, I think, more private sector investment, what non-U.S. countries are doing around hydrogen, in particular, electrification is another good example. And you're seeing a lot of that action start to happen, in particular, in countries in Southeast Asia. And that's a point that we had, gosh, I think it was during the Investor Day, where we pointed out that our hydrogen, not only commercial pipeline, but existing footprint is in, I believe, we said over 25 different countries. And so that's an important thing that our hydrogen commercial pipeline is also not -- is balanced between North America and international opportunities.

One aspect of investor anxiety is simply politics. Can you comment on the degree of bipartisan U.S. support for hydrogen, carbon capture, water and other environmental regulations and subsidies? And given the increasing geographic breadth of Chart's operations, how well positioned would you be to shrug off any U.S. clean energy policy pivots? And finally, am I correct in recalling that midterm guidance did not presume notable uncontracted tailwinds from the Inflation Reduction Act, Bipartisan Infrastructure Bill and as you've already alluded to, the hydrogen hubs?

All right. So let me start with the last part of your question first. You are absolutely correct that those medium-term financial targets did not include any of the references that you just gave that could occur ahead. And it really tied to multiple things you don't want to get stuck in that we had included that, and we don't know the timing of it. The commercialization timing obviously hasn't been spot on over the last few years around the deployment of the IRA as an example. So that was the emphasis as to why we did not include those, but we definitely see those as future opportunities if and when those specifics of the public sector policies get sorted out. So now to go back to the first part of your question, I'll start by saying that I don't think you're going to actually see any extreme pivot, but always good to plan to do so. Regardless of your political views, the American public and industries, I believe, are looking for consistency in the messaging and deployment of policy to avoid [indiscernible] of every 4 years kind of potential changes. But obviously, that's not the case because here we sit and are having this conversation. So we really worked to build a business and portfolio that's resilient regardless of administration or policy. I think we've touched on numerous reasons today during our conversation up until now, whether that's the aftermarket piece, the ability to serve dozens of end markets without changing our manufacturing, visibility to outlook, demand as of the end of the third quarter, the stronger visibility on our backlog than we had typically had previously our supply chain diversity, less reliance on top customers, more new customers and number of customers, the balance between our North American business and our international business and subsets that this foundation under all of this is we have a great and talented team to execute on it. So all in all, I think we're going to have an interesting year ahead given the U.S. election year. But our business is set to be resilient to these types of changes. And we have a great number of large opportunities ahead of us across a variety of different end markets.

Thanks, Jill. That covers all the questions we had for today. It was very timely and informative. Call participants can now disconnect.

Thank you, Craig. Thanks, everybody.