Chart Industries Inc Q1 FY2021 Earnings Call

Good morning and welcome to the Chart Industries, Inc. 2020 First Quarter Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. 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 today's call until Thursday, April 29, 2021. The replay information is contained in the company's press release. Before we begin, the company would like to remind you that statements made during this call that are not historical facts 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 your speaker, Ms. Jill Evanko, Chart Industries' CEO.

Thanks, Laura, and good morning everyone. It's fitting that we’re sharing our results on my birthday and the first day of the Global Climate Summit, as we see increased demand for our products in the clean energy revolution. We’re excited to report a strong start to 2021. In the presentation released this morning, you can compare our results to the first quarter of 2021 and 2019. Except for sales, our results exceeded our first quarter expectations. While the presentation speaks for itself, I want to highlight a few points. If I had to choose one metric indicative of our future success, it would be orders. The indicators for 2021 show we are on track for a great financial year, but this is just the start of a decade that I believe will bring substantial growth. This growth is driven by hydrogen, the competitiveness of LNG, effective energy transition tools, the initiation of carbon capture, and the increasing demand for hybrid molecules as the industry recovers and invests in infrastructure. Orders totaling $417.2 million in Q1 were the highest in our history, excluding BigLNG, driven by broad demand, including recovery in certain end markets and ongoing demand for our clean products, following macro trends and larger liquefaction orders for both LNG and hydrogen. Furthermore, we received 32 orders over $1 million each during the quarter. This consistent record order activity led to a record backlog of $934 million, with or without BigLNG. This is the second consecutive quarter of record orders and backlog, positioning us strongly for the remainder of 2021. Both reported and adjusted gross margin as a percent of sales were the highest in four years, with reported gross margin as a percent of sales at 29.1%. Adjusted for one-time costs, it was 29.9%, reflecting a 140 basis point increase from a year ago and over 500 basis points from two years ago. This illustrates the growing mix of our higher margin specialty, repair services, and leasing segments, which made up 41.1% of our total first quarter revenue, the highest ever. As a reference, our specialty revenue as a percent of total revenue for 2020 was 34.1%. Gross margin significantly contributed to our adjusted diluted earnings per share of $0.80, even with lower than expected sales, which includes $0.06 from our investments. This represents nearly a 200% increase compared to the first quarter of 2020, reflecting ongoing strong operational execution across our segments. Although sales slightly dipped below expectations in Q1 due to timing shifts to Q2, we remain optimistic. Sales of $288.5 million were affected by revenue recognition occurring in April for shipped ISO containers and other products that were in transit as of March 31, along with $5 million from the Venture Global Calcasieu Pass project that shifted to Q2 based on revised schedules. Comparisons to Q1 of 2019, which was not impacted by COVID-19, also show the positive financial effects of our portfolio's strategic changes on our order book, top line, and margin. Focusing again on the key metric for our future growth—orders—when excluding BigLNG, orders increased over 34% since the first quarter of 2019. Moving to specialty on slide four, our specialty segment achieved record backlog orders and gross profit in Q1, with record sales in HLNG vehicle tanks, food and beverage, and water treatment. Gross margin improved sequentially from Q4, benefiting from favorable sales mixes in the cannabis and space-related sectors, coupled with improved operational execution in some factories. Everyone is eager to discuss hydrogen, which also saw record orders and gross profit in Q1. We’ll delve into details on upcoming slides, but let me share an impressive data point: in addition to our hydrogen orders already in backlog, we are engaging with 214 hydrogen customers under 54 non-disclosure agreements. This is a significant increase from just over 30 customers involved last year, with only four NDAs at the time. You are familiar with slide five; in Q1, we have been expanding our investments and commercial agreements to introduce Chart products to more customers, projects, and regions, particularly in specialty. The bottom section of the slide outlines our year-to-date activities, each of which has generated commercial opportunities and orders. As we discuss slide six, we will explore how these initiatives have broadened our addressable market for specialty products. The addressable market on slide six reflects our best internal estimates for the next three to four years, based on our existing processes and equipment. It does not include new products in development unless noted or additional benefits from potential commercial partnerships. The acquisition of Cryo Technologies enhanced our near-term hydrogen addressable market by $800 million and introduced a $250 million helium liquefaction component to our overall opportunity. The combination of Cryo Technologies and Chart provides extensive content for the liquefaction process market, with project values ranging from $15 million to $100 million each. Our strategic materials investment in a commercial MOU expands our total addressable market by $150 million as well. We will provide more details about hydrogen on the next slide. However, we should not overlook the emerging carbon capture market for our carbon and direct air capture processes, supplemented by our robust heat exchanger offerings and our February 2021 investment in Vontae, which offers a unique combination of process technology and equipment with low capital expenditure and high purity. Our $15 million investment in Vontae, representing just under 10%, comes with a commercial MOU and collaborates with leading ESG investors such as Temasek, OGCI, Chevron, Mitsui, and others. The proposed U.S. infrastructure plan also emphasizes building CCUS facilities and expanding the 45-Q tax credit, reinforcing our belief that carbon capture presents a significant market opportunity for our products and technologies. This is driven not just by developments in the U.S. and Canada, which recently upheld the national carbon tax, but also by our global pipeline of various carbon and direct air capture projects currently in quotation, spanning regions from the Middle East to Norway to Mexico. We now have over 80 projects at various stages in our commercial quotation pipeline compared to just 20 six months ago. We see this as a critical market for the next decade. Our recent acquisition in Clean Water, which introduced blue and green water treatment technology, complements our tanks to provide a comprehensive water treatment package. Since finalizing that acquisition in November 2020, we’ve generated $5.5 million in orders that include both blue and green technologies alongside Chart equipment. Anticipating President Biden's American Jobs Plan to allocate over $100 billion for improving the U.S. aging water systems, we expect demand for our clean products and technologies to accelerate significantly. Three specialty areas that have received less attention in the clean energy conversation are cannabis, gas by rail, and food and beverage. Each of these markets is experiencing growing demand driven by both macro trends and product-specific tailwinds. Recent legislation legalized recreational marijuana in New York State, making it the 15th such state, now covering 43% of the U.S. population. We expect demand to continue growing as public policy favors the botanical market and as cannabis production and packaging scales up. We supply this market through distributors serving restaurants and convenience stores, many of which are expanding to meet increasing demand. In Q1, orders for our Orca CO2 delivery trucks rose, indicating growth expectations from our customers in this market. The gas by rail sector, one we’ve prepared for since 2014 with a unique offering, is gaining traction in both the U.S. and Europe. In Q1, we booked a 10 Argon railcar for a European project and shipped the first LNG by rail tender car tied to a $22 million order that remains in our backlog from December 31, 2019. Our customers indicate that rail will continue to gain traction, and we are optimistic about expanding our $200 million addressable market, as orders typically come in groups rather than individually. The food and beverage sector, consistently reliable but heavily impacted by COVID last year, has shown recovery since late 2020. This trend continued into early 2021 with new restaurant openings. For instance, we received food and beverage orders from major national customers such as Chick-fil-A, Yum Brands, Jack in the Box, Kwik Trip, Buffalo Wild Wings, Jimmy John's, Regal Cinemas, and Cinemark, all in the first quarter. Month-to-date in April, our beverage daily order rate is higher than any month since February 2021. I often receive inquiries about whether our hydrogen addressable market, illustrated on slide seven, could expand significantly in the next five to ten years. The answer is affirmative. Every day brings more confidence that hydrogen will be integral to the clean energy landscape. What will drive an increase in our market size? There are two main factors. The first is ongoing public sector investment. For instance, the Tokyo Olympic Torch recently commenced a 221-day relay promoting hydrogen-powered legs to raise awareness about hydrogen as a cleaner fuel and future green energy source. Industry coalitions are also pushing hydrogen forward; last quarter, we became one of 11 founding members of Hydrogen Forward and co-led the India Hydrogen Alliance with Reliance Industries to advocate for hydrogen as a fuel and complement renewable sources in that area. On April 9th, the White House released its fiscal year 2022 budget preview, emphasizing increased funding for carbon reduction technologies and methods that include carbon capture, hydrogen production, and direct air capture. Recent market analyses suggest the global liquid hydrogen market could exceed $50 billion by 2027, propelled by rising electric vehicle demand and liquid hydrogen's usage in manufacturing sectors like LED display and semiconductor production. Remember, we have been designing and producing liquid hydrogen products for over 50 years. The second driver for increasing our total addressable market involves our organic and inorganic investments. We are moving closer to market readiness for our liquid hydrogen onboard vehicle tank, which we plan to launch in the third quarter at ACT Expo. Our current $2.3 billion total addressable market does not factor in potential developments for hydrogen pumps or equipment that may arise through our investment in the FiveT Hydrogen Fund, which is set to launch in early 2022. Furthermore, we have actively engaged in the Chinese group code for liquid hydrogen storage tanks, a lengthy process we expect to finalize this quarter. Recently, the Secretary-General initiated work for the liquid hydrogen mobile equipment code in China and invited us to join the preparation led by the China Standards Committee. We're excited to contribute and expand our hydrogen mobile equipment certifications and capabilities in our Chinese manufacturing offerings. Before we increase the hydrogen market size for Chart, we want to show progress against our current total addressable market, which you can see on the right side of slide seven. Within less than a year of the hydrogen surge, we’ve already secured over $100 million in orders. Notably, our orders more than doubled from Q3 2020 to Q4 2020 and more than tripled from Q4 2020 to Q1 2021, with sequential increases recorded. The diverse types of orders encompass hydrogen storage tanks, fueling station equipment, and liquid and gaseous hydrogen trailers, among others. Slide eight highlights one of my favorite aspects of our quarterly reviews because it showcases our continued evolution into various applications for our products. There’s strong demand for new and unique first-of-a-kind projects from both existing and new customers; we welcomed 105 new customers in Q1, with 72 being outside North America. We've also highlighted significant existing customers on this slide, demonstrating their loyalty as they seek innovative solutions. For example, Chick-fil-A switched to a larger tank to meet growing CO2 demand, and one of our major industrial gas customers ordered 10 Argon railcars. Bango is a great example of our growing penetration in the cannabis market, while CALSTART is an exciting partnership, recently awarded a grant from the California Energy Commission to develop a hydrogen fuel cell powered tugboat design aimed at decarbonizing the marine sector. I won't cover the others as you can see for yourself on this slide. Slide nine introduces our second high-growth segment: Repair, Service, and Leasing (RSL). We continue to grow our RSL business through investments in the leasing fleet and strategic repair locations, yielding immediate returns, with 44 new leases signed in Q1 2021 compared to just five in Q1 2020. February marked our first month with leasing revenue exceeding $1 million, growing 250% from February to March. RSL is poised for an extraordinary and record second quarter due to shipment timings that shifted some orders from Q1 to Q2. The repair and service aspect of our business continues to gain traction in Europe, evidenced by our long-term agreement with Gasum for their LNG fueling station network in Finland and Sweden. Q1 2021 more accurately represented a typical quarter for RSL concerning orders and gross margins compared to Q4 2020, which saw an unusually high rate of rapid repairs and installations. We are accepting customer equipment at our new Greenfield repair and service facility in Carolina and expect to initiate repairs at that site in June. Slide 10 focuses on our traditional business: Cryo Tank Solutions (CTS). As of the end of March, we held a record backlog of $245.8 million in CTS, up about 11% from Q4. Record orders and sales in CTS mobile equipment during Q1 2021 supported this growing backlog, aided by record trailer orders both in units and value. Our sales outlook for CTS throughout 2021 has improved significantly. Strong Orca unit orders in Q1 signal robust Perma sales for the remainder of the year. We regard increased industrial gas customer activity and independent distributor engagement as key signs of recovery since pre-COVID levels. One of our top five industrial gas customers placed a record order with us in March 2021, and we expect customer activity to increase as COVID-19 restrictions ease. The first quarter demonstrated a particularly strong performance for independent industrial gas customers, with one independent placing more orders in Q1 2021 than all of last year. Our operations in China also contributed to our strong first quarter, achieving record backlog and sales while generating positive operating profits. You can see notable achievements outlined on slide 11. Previously, I expressed caution about our China business, anticipating just a small income. However, current developments led Sherry and her team to support my optimism regarding sustained strength in the China market, coupled with significantly higher operating profits. Additionally, global ISO container demand remained high as the New Year began. We secured orders for 121 ISO containers in Q1 and shipped 99 units, with expectations for demand to rise throughout the year. Slide 12 illustrates the 15% year-over-year increase in Heat Transfer orders resulting from the recovery in the petchem market, particularly driven by our first LNG liquefaction order this year for New Fortress Energy's FastLNG project. Numerous small-scale LNG potential orders are in the pipeline. The chart on the lower right of slide 12 depicts ten potential projects currently not included in our backlog; we anticipate many will advance to orders with either Final Investment Decisions or notices to proceed by the end of 2021. Note that these projects span diverse geographic locations, reinforcing LNG's essential role in the global energy transition, especially in regions moving away from coal and diesel toward accessible solutions like LNG. Additionally, many LNG operators are adopting various carbon reduction measures, and we are collaborating with them to integrate flexibility in their facilities for cleaner alternatives moving forward. Our ACS equipment is desirable for applications ranging from carbon capture to biogas. Traditional operators are increasingly pursuing green initiatives through upgrades and retrofits, illustrated by our bookings of two green diesel projects with traditional hydrocarbon clients in Q1. We haven’t included BigLNG in this slide primarily due to space constraints; however, we still expect at least one BigLNG order in the next nine months. The Phase 1 projects we are involved in, such as Venture Global Calcasieu Pass, Corpus Christi stage three, and others, represent over $750 million of potential pending orders. Speaking of BigLNG, the anticipated decline in revenue from Venture Global Calcasieu Pass led to lower heat transfer system gross margins as a percentage of sales from Q4 to Q1. Excluding BigLNG, gross margins as a percentage of sales saw sequential growth from Q4 to Q1. To summarize, we are no longer dependent on one or two major projects. Our margin profile and growth potential have diversified effectively. Merkle will now share more insights on this topic on slide 13.

Thanks, Jill. The strength in gross margin coupled with our SG&A cost control resulted in reported diluted earnings per share of $0.63, 10.5 times higher than the first quarter of 2020. When adjusted for one-time costs, primarily related to inorganic transactions and new facility startup costs, as shown on line one, adjusted EPS was $0.80, up 196% when compared to one year ago. The $0.80 includes $0.06 of earnings from the mark-to-market this quarter of our strategic investments.

The damned if you do, damned if you don't slide is back on page 14. This is our walk from 2012 sales to our current low end of the sales guide for 2021 full year. Our current full year 2021 sales outlook is $1.36 billion to $1.41 billion, up from our prior guidance of $1.32 billion to $1.38 billion. The prior loss to the low end of the range is included in the appendix of the presentation on slide 19 if you need that for reference. The highlighted yellow boxes are what has changed since our prior outlooks. Starting at the top with a specific project box for heat transfer systems, this number is built up differently than last time. Previously, we had $47 million. This is based on two anticipated small scale LNG projects. Now, this includes the 2021 portion of expected revenue for New Fortress Energy's FastLNG project, as well as current year expected sales for a petrochemical project that's already underway. Additionally, we have included one small scale LNG project that we would expect to be booked in the second quarter, resulting in approximately $10 million of second half revenues. This morning, we executed a letter of intent for the supply of technology and equipment packages for a confidential liquefaction project in the northeast United States. The award, which is valued in excess of $20 million for us, includes innovative and environmentally conscious design aspects. The project is subject to final regulatory approvals and final investment decision which are expected in the coming weeks. Beyond that, there are no additional small scale LNG or other specific projects built into the low end of our guide, although we do expect more to come into the order book this year as I mentioned on the HTS slide, but these would primarily benefit a little bit later in the year and then 2022 revenues. The next change is an increase from zero year-over-year growth in mobile equipment to an increase of 4% driven by the first quarter trailer order activity that I talked about on CTS. We hadn't previously included any growth due to specific mobile equipment sales in 2020 that aren't repeating. But the start of this year has given us confidence to increase this, which will be reflected in the second half of 2021 revenues. Third, we have increased our hydrogen outlook based on the actual backlog as of the end of the first quarter of 2021. Specialty products in particular hydrogen are still on the newer end of customer behavior. So, we did not build a significant amount of second quarter orders into the outlook at the low end. Note that we do include $30 million technologies revenue in the full year forecast. This was based on the first half 2021 expected helium liquefaction order. Well, it's been a busy morning because also this morning we received the letter of intent for credit technologies helium liquefaction large scale helium plant for one of the largest independent oil and gas producers in Russia. The scope of our supply for the minimum 5 million liter per year helium plant includes equipment, commissioning, and startup and the order is expected to be greater than $40 million. In keeping with our strategy to be clear, we do not have construction responsibility on this particular project. And finally, the last few highlights I'm glad relate to HLNG over the road vehicle tanks. As I said on our year-end earnings call, if HLNG order levels continued as they were in the second half of 2020, that number would grow. And so now it reflects that and the eliminations is simply accounting around where what is made in our respective manufacturing locations. Do remember that full year 2021 sales include $21 million from Calcasieu Pass revenue, of which there's only $5 million remaining in backlog, as well as the $30 million that I just touched on for Cryo Technologies. There's no additional BigLNG revenue included in our outlook. And this year, we expect the first half of 2021 to be lower than the second half from a sales perspective based on the lead time of our backlog, which brings us to the rest of our full year 2021 guide on slide 15.

Jill just told you about the sales guide and we anticipate associated full year non-diluted adjusted earnings per share to be approximately $3.65 to $4.15 on 35.5 million weighted average shares outstanding, up from our previous estimate of $3.50 to $4 per share. Our assumed effective tax rate is 18% for the full year of 2021. One of the questions that is top of mind for many companies, including us, is around material price increases. While we have seen price increases in nickel and stainless steel, we have strong protections in our customer agreements for material pass through. In some cases, these are immediate and in other cases, there is a three to six month delay. We expect the second half gross margins to reflect pass-throughs and this will positively impact CTS in particular. The first quarter of 2021, free cash flow was negative $3 million after $11.5 million of capital expenditures. This was in line with our typical first quarter FCF seasonality being the lowest quarter of the year. This year, in particular, the first quarter FCF was impacted by the following three factors. First, the timing of the ISO container revenue recognition that shifted from Q1 to Q2 2021, which will directly and positively impact FCF in the second quarter 2021. Second, strength in March 2021 orders for HLNG vehicle tanks and beverage equipment drove an increase in inventory in the first quarter of 2021. These products typically have a four to eight week lead time and therefore, the end of quarter inventory levels reflect materials built to support that timing. Third, the necessity to have material available for the on-time delivery of our remainder of the year shipments and strong orders for longer lead-time products, such as trailers and railcars, will contribute to our anticipated strong second half 2021 FCF. We expect FCF to sequentially increase each quarter this year given the shipment forecast for the remainder of 2021, and we are increasing our expected full year 2021 free cash flow outlook to be between $200 million and $220 million. Included in this outlook is $40 million to $50 million of capital expenditures, which the details are on the right-hand side of the chart. These are all organic investments to expedite growth, profitability, and flexibility in strategic areas of the business and the change from our prior guidance.

As many of you are aware, our business is also unique in how we approach ESG, as shown in part on slide 16. Not only are our ESG priorities embedded in our own culture, we also are positioned to help our customers achieve their sustainability targets in a number of different ways, whether that's through reducing the amount of plastic used in packaging to lowering greenhouse gas emissions by enabling the transition toward cleaner fuels. Two weeks ago, we released our updated sustainability report, which included metrics from 2020 as well as certain go-forward targets. I would just point out a few to encourage you to read the full report. With safety as our highest priority, our team members achieved our lowest total recordable incident rate in history in 2020. Our culture of diversity and inclusion is supported by a global DNI committee made up of more than 50 team members from around the world, advancing community involvement, education, and training among many others. We have set a target to reduce our carbon intensity by 30% by 2030 and have specific initiatives in place to help us meet this goal. Last year, we made progress towards achieving our targets by reducing GHG intensity by almost 6% year-over-year. In 2020, Chart reduced Scope 1 and Scope 2 emissions by 8.5% and 8.9% respectively, while reducing total energy consumption by 15.9%. With these jumping off points, we have introduced our carbon neutral target by 2050 as well as including an ESG component to our short-term incentive targets for 2021, directly tying executive compensation with ESG goals. On the right-hand side of the slide, you will see a few examples of measurable outcomes that we help our customers accomplish, contributing towards a greener and cleaner environment. With that now, I'll turn it over to Nora to open up for questions.

Thank you. Your first question comes from Ian Macpherson with Simmons. Your line is open.

Good morning. Thanks.

Hey, Ian.

Jill, the growth in specialty products is clearly impressive. I also wanted to delve into RSL because you don't have the typical growth comparisons for the first quarter regarding your orders or the sequential revenue growth that guides us towards your full year outlook. Could you provide some insights on what you anticipate for orders in the second quarter? Specifically, is it more about the repair, service, or leasing business that you believe will drive growth from the start of the year into the latter part?

Yes, there are several factors contributing to RSL's performance. Going back to the first quarter of 2020, we had a one-time repair order for a customer in Saudi Arabia. Excluding that, we have two main drivers influencing our current position. The first is our leasing business, where the number and size of leases we've booked over the past two quarters will begin to impact revenue in the second, third, and fourth quarters. Initially, we didn't have the necessary fleet available, so we had customers ready for leases while we worked on building the fleet to meet those demands. Expect to see revenue from these leases rise significantly in the second half of the year, especially starting in July. The second driver relates to the repair side of our business, which is influenced by our new capacity and strategic location in South Carolina that will commence repairs in June, as well as our industrial gas customers who are focused on repairing specific products to reintegrate them into service. We have a clear view of what this will entail, and while I can't disclose specific customer details, the growth forecast aligns well with our overall guidance.

That's perfect. Thanks, Jill. For a follow-up question just for clarity's sake, I was going to see if we could get the bridge from your Q1 adjusted EPS to the new upwardly revised full year range? Just what would be the adjusted Q1 earnings that that's comparable apples-to-apples with the $3.65 to $4.15 for the full year?

Ian, I don't quite understand your question regarding the specifics.

We're adjusting for tax rate and basic share count, etc., with the full year rate. So, just wanted to translate that to what the Q1 comparable EPS is?

So, we did not adjust our tax rate or our share count in our guide compared to our actual, so maybe that's a better one for us to take offline and I'll have Greg shoot you an email with that. I'd say if I was back of the enveloping of the $0.85, but let's get you a specific answer on that.

No problem. Thanks, Jill.

Your next question comes from the line of Eric Stine with Craig-Hallum. Your line is open.

Hi, Jill.

Hey, Eric.

Hi, Eric.

Could you provide some insights on the large-scale helium project, specifically regarding the pipeline and the geographic distribution? Is the size you mentioned typical for projects of this nature?

It's an intriguing market, and we actually engaged in it 40 years ago before it fell off our strategic focus. The capabilities we developed through our Cryo Technologies partnerships aligned well with their liquefaction technologies. Helium has unique molecular characteristics regarding quality and pricing. When a customer has access to a helium-rich site, it represents an opportunity. We see potential for two projects per year in our pipeline, which would exceed our short-term targets for helium liquefaction. While our helium pipeline isn't as strong as our hydrogen pipeline, there is significant potential to secure a project each year. The typical product sizes range from 25 to 50, depending on specific details. For the project we signed a letter of intent for today, we specified a minimum of five, with the possibility of achieving greater efficiencies that could expand the project's scope. Additionally, the customer’s choice of plant size could allow for further scaling. Regarding geography, most helium liquefaction activities are concentrated in specific regions worldwide, although it is also utilized in other processes within the U.S. Approximately 70% of these activities occur outside the U.S.

Got it.

The second part of your question about geographies – most of the helium liquefaction we see is in unique regions of the world with a high concentration of helium reserves. It's important to capitalize on these locations due to the molecule's unique qualities and pricing structure.

And maybe just the last one for me. Turning to the vehicle tanks, there's clearly strong performance in Europe. You mentioned the new regulations in Austria, and we are aware of the toll exemption in Germany, which has contributed to that. Are there any other regulations in different parts of Europe that you think could further accelerate growth from what you've observed so far?

Actually, outside of Europe is where we see a growth accelerator for the second half of this year from an order book standpoint. In particular, there's one customer in Japan that I think is going to move ahead on this. There's the mine haul type of trucks, which are in Russia, in the Middle East, and probably the most active for us has been on some of the LNG bus activity in terms of our quotation pipelines. A lot of activity is occurring in South America as well. Some of that's regulation-driven, and others it's just over the course of time. Customers are finally getting to the point where they are eager to take action because it's available and cost-effective.

Okay. Thank you very much.

Thank you, Eric.

Your next question comes from the line of Rob Brown with Lake Street Capital. Your line is open.

Good morning, Jill, good morning, Scott.

Hey, Rob.

Hey, Rob.

Question is really on the carbon capture market, you talked about a pipeline expansion there, could you give us some further comment on the pipeline? When do you sort of see that turning to orders, is that really more of a 2022 order timeline?

I hope my commercial carbon capture team is paying attention, because I'm committing them to one of these projects set for 2021, which is not at the lower end of our guidance. I believe this will start happening in the near term, although we are still at the demonstration scale for the project size. For projects where there is already a pipeline of orders and larger scale carbon capture work, it just takes a few years for construction and pre-work to get the plant operational. The extended pipeline has seen significant activity. The concept of carbon and direct air capture has gained considerable attention in the past three months, attracting a variety of customers interested in this as part of a comprehensive solution. We are often discussing how this can integrate into a total solution and identify three categories of customers involved in this. One category is addressing carbon emission challenges from their current assets. The second is focused on direct air capture, and the third is exploring how to incorporate this into a closed loop system.

Okay, great. Regarding the leasing business, what do you envision its growth potential to be over time? And how significant of an asset base could this represent for you?

Yes, the leasing business is definitely growing. Right now, our fleet is about $10 million worth of assets, and we're continuing to build those assets. As I mentioned earlier in the call, we receive orders and then build the fleet. We don’t have any idle assets, which is a unique position for us. We are currently in a scale-up phase. The answer to your question will depend on whether this growth continues. We expect that number to grow, assuming we maintain our focus on standard equipment, mobiles, and ISOs, which allows us to redeploy effectively. We've seen an exceptional response from customers, which has been surprising as it’s not only been from the United States but also from Europe. We plan to capitalize on this aspect of our business. I want to emphasize that these are long-term leases, typically five, seven, or ten years, with interest rates attached, and they involve standard equipment. We believe this business will continue to grow rapidly, and this year we've forecasted the leasing segment to grow by 15% to 20%. From a sales perspective, we expect the orders to grow at a much higher rate than sales this year.

Okay. Thank you. I'll turn it over.

Your next question comes from the line of James West with Evercore ISI. Your line is open.

Good morning, Jill.

Hey, James.

So, with the hydrogen customer base expanding rapidly as it has this year, I mean, those are just impressive numbers. Are you seeing any trends in what the hydrogen customers are going to be doing with the hydrogen? Is there more on the mobility side, more on power storage, or energy storage or more power source to decarbonize heavy industry? Anything noticeable?

Yes, we are observing the use of hydrogen in mobility as well as a power source. It's quite a diverse array of applications being developed for it. Additionally, there is a practical approach emerging regarding the various types of hydrogen. The focus has shifted to meeting immediate needs and finding quick solutions rather than exclusively aiming for the ideal green option, which takes longer to implement. Over the past three to four months, there has been a noticeable increase in urgency. End users are demanding hydrogen, and producers need to supply and transport it rapidly. This urgency is reflected in our hydrogen transport pipeline, evident in both our backlog and quotations.

Okay, that's actually really interesting.

They still have an intention to go green over time.

Okay. Understood. Thanks.

Thank you.

Your next question comes from the line of J.B. Lowe with Citi. Your line is open.

I have a question regarding the liquefaction equipment you provide for hydrogen and helium, and I assume also for LNG. What is the competitive landscape for those products? I'm interested in understanding the opportunities in hydrogen and helium. Do you have any market share targets in mind? Is that a good way to gauge your outlook? Is there proprietary technology in your equipment that your competitors lack? I'm trying to get a clearer picture of the competitive situation.

Great question, and I completely understand what you're asking. Currently, we have a very unique and differentiated process along with a set of equipment that is quite difficult to replicate. After acquiring Cryo Technologies, we often encountered them as competitors in bidding for liquefaction projects, particularly in hydrogen. While there are other companies involved in liquefaction, including some of our customers, the process is complex and time-consuming to develop, and it must function effectively. Frequently, customers who choose a competitor eventually return to us because their liquefaction projects, whether for LNG or hydrogen, do not meet the required specifications, efficiency, or output that we provide. Our equipment and processes are unique. Clients have the option to select a full-service solution or an à la carte approach with individual components. Additionally, the manufacturing equipment we utilize is highly specialized and not easily replicated. For instance, there are only four companies globally capable of producing Brazed Aluminum Heat Exchangers, and we are the sole manufacturer in North America. This illustrates our market positioning. Given the limited competition, particularly for our comprehensive solution, we have a strong advantage.

Thank you. I have another question regarding China. Can you remind me if you previously had manufacturing operations there? I believe you had shifted focus away from China due to low profits. What has changed? You mentioned some details in the presentation, but how has profitability improved, and how are you currently addressing that market?

Well, that could take a long time to answer on what's changed. We've consolidated our manufacturing footprint; we now operate primarily out of one large facility in China. This gave us a lot of efficiencies being in oneside and the appropriate layout. We did a lot of cost actions and in review. I think it was ignored and now there's attention to it, that was a good thing. But I think most impactful is the management team that we have in place now. Early last year, we made a change, and the lady that is running the business has a really good handle on the details. After 19 years with Chart in various different roles, it makes a huge difference. Leadership makes a big difference. You're going to see records coming out of China. It's going to be a key part of our portfolio for standard product.

Perfect. All right. Thanks, guys. I'll turn it back.

Thanks, J.B.

Next question comes from the line of Connor Lynagh with Morgan Stanley. Your line is open.

Thanks. Good morning.

Hey, Connor.

I wanted to stay on that market share topic, because it's been a consistent point of questions from investors. So the numbers optically are very high. I'm wondering if you could maybe sort of define what you’re viewing as the addressable market? Excuse me, that you're taking that share off? Basically, the question is, put differently, how big is your content within an overall project? Because I think there's maybe some discrepancy in how we're thinking about total addressable market versus how you guys are sort of defining it here?

So, if you're talking about hydrogen, specifically, the answer is really wide. If you're talking about liquefaction projects, our content is going to be a significant portion of the project itself, meaning 70%. If you're talking about a storage tank that goes into a larger facility that's producing the molecule, it's going to be a very small percent of the total. If you get into a fueling station, you're talking anywhere from 1.2 million to 2.5 million, but as a percent of the total, that's 25% of the cost of the fueling station. You'd have to break it down into the eight bullets that are comprising our bottoms-up addressable market, which we're happy to do. We can do that with you on our call this afternoon.

Yes. Sure. I mean, basically, the point I'm driving at is, you're not defining your share, as 60% to 70% of that total project is 60% to 70% of that percentage of the product that you would be bidding for, correct?

You got it. Exactly.

Okay. Understood. And then just another common question that we get is, you know, with this type of growth, you guys are looking at in some of these specialty markets, you know, I guess, how would you frame for investors the capacity that you have to grow? Obviously, a lot of this is sort of manufactured, I guess, if you're going more on some of the process solutions, it's a little bit less capacity intensive. But how would you frame the need to expand your capacity to meet that growing need?

We're making good progress on that already. We don't need to add any more capacity from a facility perspective. The engineering side of the process is critical. We have enhanced our manufacturing capacity by adding the Teddy Trailer facility, now known as Teddy Trailers and Tanks, in Theodore, Alabama. This facility provides us with 300,000 square feet located near water, which is significant for handling larger equipment. We will shift a lot of our overflow tank operations from Minnesota to Theodore. Additionally, we have been utilizing our 500,000 square foot facility in Tulsa to set up various production lines, which we refer to as flex manufacturing. This will provide us with substantial flexibility regarding lead times and capacity. We are already well underway, with our first production lines running. While I can't disclose details about other product lines due to competitive reasons, we do not need to increase our facility capacity beyond the investments we made in 2020 and the completion of our repair facility in South Carolina.

Got it. Appreciate all the context there. Thanks.

Thanks, Connor.

Your next question comes from the line of Pavel Molchanov with Raymond James. Your line is open.

Thanks for taking the question. I hate to start with a dark topic, but you guys have manufacturing and corporate assets in India, which just has 300,000 daily infections. How are you managing around that issue in terms of the workforce and the lockdown risk?

Yes, as you are likely aware, we are currently experiencing another wave of COVID infections. Over the past year, we have implemented a flexible workforce strategy. We have a team closely monitoring the situation at our facility. If anyone needs to quarantine, we have contingency plans in place for key roles. To date, we have not observed any significant negative impacts in India. Each facility has its own solutions for managing this situation. Our leadership team has done an outstanding job ensuring that we provide weekly COVID testing and allow remote work when necessary.

Understood. Follow-up kind of a housekeeping item in the guidance you talked about share count of 35.5 million, and I assume that basic shares your fully diluted number, given where the stock is at I think includes the convert. So that's what 5 million shares extra, is that right?

Yes. Yes, you're in the range there. And then once you take the hedge offer, that you take another two off of that for the hedge against the converts, next to about 30 additional.

Got it. So, will the fully diluted share count from Q1 basically continue to roll forward?

Yes, basically.

Very clear. Thank you.

Thanks, Pavel.

Your next question comes from the line of Martin Malloy with Johnson Rice. Your line is open.

Good morning.

Hi, Marty.

Hi, Marty.

I wanted to follow-up on the earlier question about manufacturing capacity. With the order trends that you have and what you've outlined for your order outlook, could you talk about utilization and absorption of fixed costs and how that might impact margins? I'm just thinking back to previous margin outlook where you talked about going from 11% in 2020 up to the high-teens in 2023. Is there upside potential to that as the utilization increases?

Marty, you had to go there? Yes. Yes, the answer is yes. That's also something that we think through, and know well on a facility by facility basis. We try to share that with our customers in the way that we priced so that we can win more and more orders. It's definitely upside to what we've said previously, if this continues to grow at the levels we're seeing right now.

Okay. And then just on the cryogenic hydrogen pump, I'm sorry if I missed this in the prepared remarks. Any update in terms of the testing there and outlook for commercial introduction this year?

We have kind of three things that we're developing organically on the hydrogen side. The first is the onboard vehicle tank. In that one, we're going to demonstrate that and show that in August at the ACT. So that's moving on all cylinders ahead. The second is the liquid hydrogen pump. That one was really hard to do; the team's done an exceptional job in a very short period of time, and it's in the test phase right now. The goal would be to have that out in commercial production before the end of the year. The third is the hydrogen test facility itself up in Minnesota, and that's well underway. The equipment is there; the construction is nearly complete and we're welcoming our customers to come anytime to that test facility.

Great. Thank you. I'll turn it back.

Thanks, Marty.

Your next question comes from the line of Marc Bianchi with Cowen. Your line is open.

Thank you. I wanted to go back to surprise, surprise hydrogen, and talk about the order profile. So very, very strong orders in the first quarter, very strong improvement from the fourth quarter. We know there's a large plug award in there. I'm curious how you see that developing over the course of the year? Should we be building off of this first quarter level? Could you achieve the first quarter type level at some point later in the year? Just how are you thinking about the progression?

Yes, we see it just as you described. There were some liquefaction orders included in the first quarter figures, along with an additional 17 liquefaction projects currently in the bidding process. Our team anticipates securing around three to five more hydrogen liquefaction orders for the rest of the year, with each order typically valued between $25 million and $40 million. The timing for these orders is uncertain, but I would expect to see some of them in the second quarter, leading to a strong third quarter for liquefaction orders. Additionally, there is significant demand for hydrogen transport slots, and given the lead times, companies are reserving these slots quickly. Consequently, you might see several liquefaction orders come through, and with a steady growth rate, it's conceivable to reach multiples of 70 for the entire year.

That's very helpful context. Separately, just maybe dialing into the second quarter a little bit more energy on the RSL going to have a really exceptional second quarter, could you talk to the other segments, just from a kind of revenue trajectory and margin trajectory, just maybe if you want to rank them or however you want to just share with us some more detail on the second quarter progression?

For sure. RSL has shown some benefits from shifting timing from Q1 to Q2, with its gross margin remaining in the mid-30s. In terms of Cryo Tank Solutions, we anticipate a slight increase in sales from Q1 to Q2, with a more substantial increase projected for Q2 to Q3. We also expect an increase in gross margin as a percentage of sales from Q1 to Q2 in that sector. As for Heat Transfer, we predict it will be flat, though it may dip slightly due to the Calcasieu Pass project, where we had approximately 15 in the first quarter and around five in the second quarter, assuming the schedule remains as updated. Thus, that segment is likely to be flat or slightly down, and we expect to see a decline in gross margin in that area, influenced by the composition of the large LNG project. On the specialty side, we see the most significant profit increase from Q1 to Q2 among all four segments, with gross margins also in the mid-30s. There’s potential for improvement there, as we sometimes don’t capture all absorption benefits. However, with the current sales levels, we should see some gains in specialty. Overall, while I don’t want to offer guidance, we aren’t concerned with the current consensus, even as we update our forecasts, which should not worry us either.

Great. Thanks so much, Jill.

Thanks, Marc.

Your next question comes from the line of John Walsh with Credit Suisse. Your line is open.

Hi, it's for John. Good morning.

Hey, good morning.

So, the one question that we had is around sort of your cost controls. Obviously, you sort of call that out in your prepared remarks. But can you give us more color about how you see sort of corporate costs come back for the balance of the year?

We have it flat for the rest of the year. There are a couple of offsets in that. In the first quarter, you get some stock option changes and costs there, then you have, as the year rolls out, elements around the short-term incentive accruals and the bonus plan. We have also built in some headcount additions to both engineering and sales, but we get some offsets through as inventory rolls out some of those movements to reserves and so on. Generally speaking, we've modeled the rest of the year from an SG&A perspective pretty similar to the first quarter.

Thank you, that's very helpful. I have a clarification question regarding your sales guidance revision. It appears to be primarily influenced by specific organic project-driven factors, rather than involving any mergers and acquisitions.

Correct. That's right. It was driven by specific projects. Some of those projects were quoted by Cryo Technologies and Chart. While this relates tangentially to mergers and acquisitions, it didn't come from the backlog of the acquisition itself. They were specific project wins by Chart.

Okay. And just to follow-up, these were like new projects, these are not like upsizing of an existing project?

All new projects. All of the first quarter's bookings were, that were specific projects were new projects and the increase to the guide was from new projects.

Thank you very much. I'll pass it over.

Thank you.

Your next question comes from the line of Greg Lewis with BTIG. Your line is open.

Realizing that the call is running a little long here, I just had a question around special your oxygen. Clearly, last year that was a nice benefit to the business. Just as we think about specialty, it almost seems like if that's coming off that it actually looks even better than expected, is there any kind of way to unpack that what that piece of the business did last year around demand or around COVID? And I'm assuming, I guess, surges, etc. but I'm assuming that numbers going to come way down this year, is that kind of the right way to think about it?

You're absolutely right in your thinking. Just to share a quick data point that may or may not be useful, from Q4 to Q1, there was a decrease of 4.3 million in medical oxygen related orders sequentially.

Okay. Any idea what it was for the full year of 2020?

We did not modify our tax rate or our share count in our guidance compared to our actuals, so we can discuss that further offline, and I will have Greg send you an email with that information.

Perfect. Thank you very much, Jill.

Thank you.

Thank you for taking our questions, and thank you for your participation today. This concludes today's conference call. You may now disconnect.