Chart Industries Inc Q2 FY2021 Earnings Call

Good morning, and welcome to the Chart Industries Incorporated 2021 Second Quarter Results 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 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 Thursday, July the 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 statements. I would now like to turn the conference over to Jill Evanko, Chart Industry's CEO. Thank you. Please go ahead.

Thanks, Stacey, and good morning, everyone. Thanks for joining us today for our second quarter 2021 earnings call. Today I'm going to start by providing a picture of why we believe this decade is going to be the roaring 2020s for Chart. And also, why I continue to say that the metric to look at is orders, as this profitable growth story is not about 2021. It's about the coming years which we believe are going to be the perfect storm of industrial gas, LNG, clean energy, all happening at once. We're strategically positioned with an extremely differentiated product offering for this broad-based growth for the processes and equipment that we provide to a variety of different end markets. One of the beautiful parts of our business is that we aren't reliant on picking one winner in the clean energy transition. We benefit from all of them having a place. That's also the benefit of being molecule agnostic. So let me set the stage with the three key reasons or fundamentals as to why our business will experience significant or explosive growth. First, there are numerous macro tailwinds across the clean energy and industrial gas applications end markets. Second, we are experiencing broad-based demand with record orders in Q2, our third consecutive quarter of record order activity. And third, our recent strategic inorganic and organic investments set us up with the right geographic footprint, the right partners and access to significant commercial penetration globally in the nexus of clean, whether we're talking about hydrogen, biogas, carbon capture water treatment or clean food and beverages. The first driver that supports this growth are the global macro tailwinds, as shown on slide four of the supplemental presentation released this morning. There are four main areas that continue to drive our demand: increasing global economic activity, clean energy transition, government support for that transition and finally LNG activity. Let me take a moment to talk about broad-based global economic activity that is happening, whether CO2, food and beverage, even pockets of legacy oil and gas. I will pick one of these macro trends to go into, which is food and beverage, but there are similar data points for each market and application that we can share with you if desired. Restaurants reopened and this resulted in eating and drinking locations reaching $70 billion in sales in June alone globally. June represented the fifth solid increase in restaurant sales in the past six months. And as a result, Chart beverage sales continued to increase. In June, McDonald's, Chick-fil-A, Yum!, In-N-Out, Jack in the Box, QuickTrip, Target, Jimmy John's and theater group Cinemark and Regal ordered for new construction as well as retrofit from us. While clean energy transition, what can I say about this? This could take a day to walk through all the happenings in the market around the focus on clean power. Let me point out a few macro updates here. 90 countries representing 80% of the world's GDP are now committed to net-zero targets. More than 30 countries have national hydrogen strategies and have allocated $76 billion of government funding. In June and July alone, the U.S. Department of Energy announced funding and policy to enhance the energy transition. British Columbia and Ottawa in Canada announced involvement in clean fuel funds and the EU launched their Fit for 55 plan. Even Greece announced €44 billion of green funding. And a lot of times, the clean energy discussion centers around North America and Europe. China is emerging as a hydrogen leader and expects hydrogen to comprise 10% of its energy share in the coming three decades. And we're further differentiated in our global hydrogen offering with our group code China certification on our liquid hydrogen storage tank, which is really not easy to get. Additionally, India is surfacing with numerous actions around green hydrogen planning and we're well positioned as a founding member of the India hydrogen alliance with partners such as Reliance Industries and JSW. Don't forget that pressure is mounting on the private sector as well for sustainability and ESG. This is taking on many shapes and forms. And one kind of neat example is Tokyo hotels that announced the launch of their first hydrogen hotel. We'll come back around to LNG later in today's discussion. So how are all of these tailwinds translating to us? We booked $447.9 million of orders in the second quarter, a record high. This translates to an all-time record high backlog of nearly $1.1 billion and sets up 2022 very well, including very strong second quarter industrial gas orders, which, in significant part, is an indicator of our customers' confidence in 2022. I won't run through all of these as you can see them on slide five but to point out a few. Our specialty segment had record orders backlog and sales in the second quarter. We had 16 first-of-a-kind orders contributing to our record. Water treatment orders was a first of a kind for an odor treatment system for a significant brewery in the U.S. We also received our first order for a complete LNG station in the Czech Republic. And apparently, a lot of people are brewing beer and making wine these days as we booked first-time orders for nitrogen dosers with 13 different customers. 133 new customers placed orders, 63% of whom are outside of North America, another great growing trend that we're well positioned for outside of North America. Another way to think about this widespread growth is how many individual orders greater than $1 million in any given period. In the second quarter, we had 60 of them. Hydrogen orders of $81.9 million for our third consecutive record and included a helium liquefaction plant for a company in Russia as well as 22 liquid hydrogen trailers. We booked more overall trailer orders, so this is total mobiles in the first half of 2021 than in the full year of 2020. 338 trailers this year-to-date compared to 335 for the full year 2020 and 355 for the full year of 2019. And China continued its streak of records including record orders as well as shipping the largest bulk tank in our Chart China history. With our portfolio structured in a way that we can pull on multiple levers for this decade's anticipated growth, I thought now would be a good time to address many questions that have received about what a 2030 total addressable market could look like for our business based solely on what is in our portfolio today and excluding new product introductions that we anticipate to have across the coming years. Note that this is a product and market level bottoms-up build from our team and we have specific assumptions for each specialty area.

Our second quarter orders were significantly above our expectations and Jill has already described this broad-based demand. Sales and adjusted EPS were slightly above consensus driven by our team's continued execution. Reported gross margin as a percent of sales of 25.8% reflected one-time restructuring and start-up costs as well as material cost headwinds which I will talk about on the next slide. The one-time costs were primarily related to our start-up activities in our manufacturing locations where we are adding capacity such as setting trailer and tanks in Beasley, Texas. Opening our repair and service greenfield facility in South Carolina and creating flexible manufacturing in Tulsa, Oklahoma. When normalized for those, gross margin as a percent of sales was 29% and we expect that sequentially between now and year-end gross margin as a percent of sales will increase.

So let me chime in here. We're very pleased with our strategic and I'd call out specifically temporary decision to increase inventory. And I can tell you that many of my counterparts have indicated they've chosen Chart because we can hit their much needed deadlines and in some cases our normal competition could not because of material supply.

So on to the cost side. Second quarter 2021 costs of materials were negatively impacted. And although our agreements allow for surcharge of material escalation, this is typically three months delayed for pass-through. For other products and customers that do not have surcharge mechanisms, we needed to increase price. Price increases went into effect July 1 averaging 8% to 12% depending on product category.

Let's look at the segment results briefly since you can read the slides on your own and spend a little time in each segment areas of significant growth or key points as we head into the second half of the year. Starting on Slide 12, Specialty. I'd summarize this with a simple statement of just widespread demand for all specialty products as evidenced by record orders backlog and sales in the second quarter. Both sales and orders increased over 100% compared to the second quarter of 2020 and both increased sequentially compared to the first quarter of this year by over 30%. Additionally, gross margin as a percent of sales was consistent with prior quarter and will continue to be in the mid to high 30% range depending on the mix within the product category of sales. Slide 13 shows you our hydrogen activity which has been off the charts. In the second quarter, we booked nearly $82 million of hydrogen-related orders our third consecutive quarter of increasing in record hydrogen orders. The primary areas of current demand are for liquefaction hydrogen trailers and hydrogen storage tanks and vaporizers. Said differently, in the last six months alone we have booked $153 million of orders for hydrogen processor equipment. Also noteworthy is the fact that in addition to our trailers and backlog, we currently have formal proposals to our customers for over 100 additional liquid hydrogen trailers and are quoting as I commented earlier on 30 hydrogen liquefaction projects. I was with some business colleagues last week and we got started on a random conversation on unique places to go in the world and one guy says Oregon because it claims to have the second highest mountain and the second highest waterfall and the second this and the second that. And that's brilliant because no one can ever take the time nor do they want to prove whether the second is actually true. I tell the story because we at Chart don't want to be second. We want to be first and with the most offering which is why I'm excited to share more of our inorganic and organic activities that further differentiate our hydrogen offering. We received our first liquid hydrogen ISO container order in the first week of July and the liquid hydrogen ISO is now commercially available. Our organically developed hydrogen onboard vehicle tank will be commercially available in August and introduced in conjunction with our recently announced partners Hyzon Motors for which we executed a joint agreement for heavy-duty long-haul trucking this past quarter. And finally, our hydrogen test facility received its first fill of hydrogen and is actively being utilized by our customers for their hydrogen testing needs.

On slide 20, you can see our adjusted non-diluted earnings per share of $0.80 for the second quarter of 2021 which excludes the negative impact of our mark-to-market on our minority investments, in particular, this quarter driven by the share price swing in index. You will note that we have included both adjusted non-diluted EPS and adjusted diluted EPS.

Given our record backlog as of June 30 as well as visibility to anticipated broad-based demand we're sharing our first look for revenue for 2022 on slide 25. Our 2022 sales outlook is expected to be in the range of $1.6 billion to $1.7 billion and does not include any additional or new Big LNG projects although we bullishly expect between one and four of these Big LNG projects to move ahead to FID.

Thank you. Our first question comes from Rob Brown of Lake Street Capital.

Good morning, Jill.

Good morning.

First on the hydrogen trailer demand, could you give us a sense of sort of what's driving all those orders at this point, how sustainable that is and maybe kind of the price per unit on those?

Sure. I'll address your middle question first. The demand increase is expected to persist throughout this decade, and I believe we'll see continuous growth as we move from isolated projects to a more interconnected network of production sites and end users. Hydrogen transport plays a crucial role in connecting these production sites to the locations where the hydrogen is used. This is a key market driver. Additionally, we're observing a significant shift from gaseous transport to liquid transport due to the density, pressure, and pumping advantages that liquid offers, particularly for long-haul distances needed for heavy-duty trucks. Regarding current quotes, we are working on over 100 additional trailers to add to our record backlog as of the end of June. We have a diverse range of customers, which I find reassuring, as we are not overly dependent on a single customer for these orders. Our goal is to produce at least one trailer per week as we move into the second half of the year, but we expect to need the capacity to manufacture multiple trailers weekly to meet rising demand in 2022 and 2023. Typically, these trailers range from about $1.25 million to $1.7 million depending on size and configuration, with options like 28-footers or 53-footers. Using the middle range for an average selling price would be a reasonable estimate.

Okay, great. And then, on the margin improvement expected in the guidance, could you just kind of walk through how you expect gross margins to improve? And I guess how quickly can they improve? Because I think there's a pretty meaningful step-up implied in guidance and maybe just expand on how you can kind of get there?

Yes. And we had, as anticipated, negative swing in RSL's gross margin as a percent of sales in the second quarter, knowing that some of those shipments were around product mix that were at much lower margin than our typical RSL products. So that's going to be a key step-up from Q2 to Q3. Additionally, I was very pleased with our continued Heat Transfer Systems' gross margin as a percent of sales in the second quarter, especially given only having about $5 million of Venture Global Calcasieu Pass revenue. So, that's a good indicator to us around the product mix that we have in HTS and not having that step down, which I think was assumed in some of these other folks' outlooks. And then, CTS, we expect to continue at the record levels that they showed in the second quarter and Specialty stepped up a little bit from Q3 to Q4. And again, a big part of that step-up is Q3 to Q4 on the Specialty side given the liquefaction projects that we've announced and the timing of the rev rec being very, very heavily weighted into Q4.

Okay, great. Thanks. I’ll turn it over.

Your next question comes from J.B. Lowe from Citi.

Hi. Good morning, everyone.

Hey, J.B. Good morning.

My first question is regarding the outlook for 2022, which obviously factors in the acquisitions you've made. At the midpoint, we're looking at about a 17% increase in revenue year-over-year. I'm curious because the order numbers for Q2 were notably strong. Even if we assume that orders decrease by 20% quarter-over-quarter in the second half, we would still see year-over-year order growth of over 30% from 2021 compared to 2020. So, I'm wondering why you believe that if orders perform like this, 2022 wouldn't have stronger revenue growth than what is suggested in your guidance.

Yes. Let me address two parts of your question. First, regarding order activity in the second half of 2021, we do not anticipate it will mirror Q2 for several reasons. We don't expect to achieve record numbers every quarter, although I previously mentioned that, so I acknowledge my mistake. However, I believe we are looking at an order run rate that exceeds $320 million, which is an increase from what used to be a $250 million quarterly run rate. You can take that information and decide how to model it. Second, concerning the $1.6 billion to $1.7 billion forecast, I consider it conservative based on our current demand observations; it's still early for projections regarding 2022. I want to clarify for those focused on 2022 that we do not think the market's expectation of $1.6 billion at the low end of our guidance is invalid. We fully plan to update this as we progress. You know that we only provide figures we believe are very achievable. So, while we understand your call for a more aggressive range of $1.7 billion to $1.8 billion, it’s still a bit early for that kind of estimate.

Okay. Fair enough. The second question was about free cash. I see you've lowered the guidance to $150 million, and I understand the various factors at play. However, are you excluding the tax payment from the sale to CryoBio and also the full $70 million of inventory investment, which seems necessary to bridge the gap from the $150 million to the $200 million, and the $220 million guidance you initially provided? What are the main components involved in this? Looking ahead to next year, if some of the raw material shortages are resolved, I assume you still aim for that mid-teens free cash to revenue ratio. Is that correct?

That's absolutely fair. And, yeah, I wanted to try to use the word temporary on this inventory build because that's exactly how we think about it. And I would stress that I can't tell you how many customers have told us they've placed orders with us, because we said we can hit their delivery schedule. So I feel really good about that. I hate missing the free cash side of things, but it is temporary. So it's very safe to continue to assume that our normal years in that mid-teens as a percent of revenue from free cash flow generation. And then the first half of the question what we originally looked at, let's just take the $200 million point because it's a nice round number was like a $50 million free cash flow generation in the first half of this year and then a heavy $150 million in the back half, which again relates to milestone payments around some of these projects and the timing on those as well as that heavy in atypical historically second half shipment forecast versus first half shipment outlook. So those were the two big drivers so maybe that we wouldn't have gotten exactly to the $50 million, but somewhere in that range. We feel like if you normalize all this inventory build we had, we'd be somewhere around there.

Okay, fair enough. Thanks, Jill. Thanks, Merk.

Your next question comes from Andres Menocal from Evercore ISI.

Hey, good morning Jill. Good morning guys.

Hey, Andres

Good morning.

I really appreciate the presentation you provided and the helpful details. And I think that highlights Wade's skill set, although I'm unsure about his career in karaoke and singing but I do applaud his courage in putting himself out there. No offense Wade. So my first question pertains to the outlook for 2022, and I guess beyond in some sense. And this is just trying to get a sense of any escalations to cost or SG&A as you achieve the $1.6 billion of throughput in volumes and beyond or greater for next year. And I just remember a comment from last year following one of your cost-out programs that a majority of those costs would remain removed even as volumes return or few or surpass 2019 levels. So is that still a fair assumption in terms of run rate SG&A, or would the business need to invest or expand certain teams or facilities in order to meet those higher anticipated volumes?

It's still a reasonable assumption. We stand by that comment, and I recall that we could reach about $2 billion in revenue with a consistent cost structure. However, we still need to consider cost of living adjustments and similar factors, which should be factored in. But we don’t need to significantly increase our workforce to achieve this. I want to clarify that our investment focus is primarily on the CapEx side. As Merk mentioned, we're expanding capacity in our flexible manufacturing in Tulsa, increasing our operations in Beasley, Texas, and enhancing our Teddy Trailer lines, ensuring that each product line has multiple manufacturing locations. This is a key part of our strategy. The investments made in 2021 are aimed at enabling us to meet those demand levels, but they are not related to SG&A.

Okay, great. Thanks for clarifying that. And then my second question pertains to a comment you made around your industrial gas customers. So there definitely seems like there's a number of bright spots among the industrial gas majors right now, and it seems like the sector is experiencing some secular growth tailwinds in terms of electronics and health care. Maybe just one example is potentially providing third-party gas supply for semiconductor chip fabrication plants or what have you. So I guess my question is what end markets are you seeing strengthening with this customer cohort? And do you expect an uptick in their separation demand? And, kind of, related to that just how much of your market share do you think you'll be able to keep here versus prior cycles?

The industrial gas business is proving to be a unique and differentiated part of our offerings, particularly in relation to semiconductors. We are witnessing a significant number of new manufacturing facilities being built, which includes companies relocating from California to Texas. As these companies establish their facilities, we have access to numerous opportunities and many have already been secured. There is an increasing level of activity in this area. We are also observing growth among regional industrial gas players or independents that found their niche during COVID by supplying a specific molecule or two, and they are expanding their fleets in their regions, though not at the scale of larger players. Demand for ARCEP is likely to continue increasing, and I expect this trend will persist for several years rather than just for six to nine months. The same applies to the semiconductor sector, where corrections won’t occur within a quarter. Market share needs to be analyzed by geography, specifically in the US, Europe, and Asia, particularly China. We hold around 60-70% market share in the US for our product offerings, about 40-45% in Europe, and close to 15% in China and Southeast Asia, which is a strategic decision based on margin considerations.

Great. Thanks very much. I'll turn it back to the queue.

Your next question is from Eric Stine from Craig-Hallum.

Hi, Jill and Scott.

Hi, Eric.

Hi, Eric.

Good morning. So it's been quite some time, since you've been this bullish on Big LNG. It would be helpful for me if you could maybe just give an update whether things have changed in terms of size with the main three that you've talked about in the past?

Sure. So each one – and you're right. I mean, we kind of – I almost even didn't talk about it for a period of time there, because the customers weren't really doing anything. And I think May and June have been as active as I've seen in four to five years of what they've done what these bigger LNG export guys have done in progressing towards construction and FID. Tellurian their Driftwood project, which if you recall has IPSMR as well as our equipment on it. They're going to start with the two trains so the 10.4 million tons project. And that for us would be around $300 million-ish for that first phase. If you look at Cheniere Corpus Christi Stage 3, so that's a 7-train project, and we can't speak on their behalf on how many trains they're going to do, but a 7-train project for Stage 3 for us to be about somewhere between $250 million and $275 million, just again depends on the material pass-through and that type of thing. And then Venture Global Plaquemines, they're intending to start Phase 1 which is 10 million tons instead of the full 20 million. And that one is essentially a replica of Calcasieu. And I would anticipate our content is about $130 million on that project.

Got it. And then maybe just following up on that. And those are the three that, I mean, correct me, if I'm wrong but those are the three you've talked about in the past. And in the release today you talked about four that you think potentially go to positive FID in the first half of next year. Anything you can disclose on that fourth project what that is? Does it use IPSMR that sort of thing?

Sure. And maybe I should say, how I said one to four. I think that after COVID what you really see in Big LNG land is kind of eight or nine around the world that have a strong viability to continue on. And so I'd say four, I kind of said already half of the subset of these moves pretty quickly here. So that's one way to think about it. But there is – I was talking about Port Arthur as the fourth.

You were.

Yes.

Okay. Thank you.

And we would have content. That's all I can say here.

Your next question comes from Chase Mulvehill from Bank of America.

It's Michael Bell on for Chase.

Hey, Mike.

How you doing? I was just kind of wondering, I think Jill you had mentioned 30 hydrogen liquefaction plants that you all are bidding on right now in the prepared remarks. Can you I guess just walk us through what timing looks like on those kind of average order size, what you think market share looks like? And then is that a good run rate going forward?

Sure. And yeah, 30 you're right Mike was our comment there. These are $25 million to $55 million each type of sizes, and it really depends is it 10, 15, 30, 100 tons per day. So that's why it's a pretty broad range, but 25 would be at the very low end on one of these. They're less easy to predict as you can imagine like in terms of consistent order flow just, because they're pretty big capital decisions by the operators. But I would say that, it's a nice spread of customers within there. So my similar comments to the trailer side, where you're not heavily dependent on like okay one customer has to make a decision for 10 of these. So that's a good trend that we're seeing. We're also seeing them very globally. So this is spread US, Australia, Korea and the EU are kind of the main areas that we're quoting on liquefiers. I would say – so we booked three year-to-date so far. I think that there is the potential to book two to three in the second half. Again, I stress for the listeners that in our world a quarter shift means nothing. And so it's important that you understand how that works. And then lastly, I'd say in liquefaction in general in particular the actual liquefaction process there are very few competitors in the world and essentially three. And with that, it puts us in a really good spot. And in liquid hydrogen overall we would estimate our market share is probably upward of 60-plus percent.

Got it. That was all super helpful. And then just lastly, how comfortable are you guys with the price increases that you've talked about pushing through that – can those fully offset cost inflation pressures you're seeing? And then if you need to do you think there's more room to push another round of pricing through this year if necessary?

That's a loaded question, Mike. I can't say that I can predict what's going to happen on the material cost side in the second half. We've seen some tempering of that. The average pricing is kind of a generic overall average. The pieces and parts of how we price range much more dramatic than the 8% to 12% average we shared. And so I guess, I would say I'm pretty confident the team has done a good job in this, as it's not an unusual activity for us because nearly all of our agreements have in place a form of the mechanism to either surcharge or pass this through. But the volatility of material cost in the first half was far more dramatic than I could have anticipated, so I'm a little hesitant to say that we've got it covered for sure. But I do think that there's tempering in the market, there's becoming more availability. And if that is the case and continues that way, we're well covered. If it's not, then just like, listen every supplier we have is saying "Hey I got to increase my price and I'm happy to have that same conversation with our customers if that is the case." But we would only do that, if we truly felt like it was penalizing us and needed – we really needed to pass that through. So that will be a wait and see game time decision as we see the second half play out.

That’s perfect. Thanks. Thanks, everyone.

Thank you.

Your next question is from John Walsh from Credit Suisse.

Good morning. And if you don't have a karaoke team, I think, Wade should be up for captain.

We actually have a karaoke machine in our corporate headquarters along with the slushie machine and that's our onboarding activity, John.

There you go. Fantastic. A lot of ground covered. Just maybe one quick one and then another question on pricing. I think you talked in the prepared remarks kind of expectations back half for gross profit margin around RSL. But wondering if you could give us some commentary on the back half margins for Specialty products and how we should think about that ramp?

Yes. So Specialty is – in the second half I believe is going to prove out what our thesis here is, which is our higher growth products are also our higher-margin products. And so that's going to be a nice influencer on the overall margin. And so we expect that to be the case in Specialty in particular, as you see some of these more unique projects moving forward that are on the hydrogen side. And also even on some of the water side, these are capabilities that are pretty differentiated and customers need them and we can charge for them. So I'd step up Specialty sequentially with the biggest step-up being Q3 to Q4. So my same commentary around sales being, we expect Q3 to be higher than Q2 but not purely the significance of step-up from Q3 to Q4 and the same I would play into the margin profile. And that's driven in part by these larger projects that have been announced.

Great. Thanks. And then circling back on pricing. Obviously, thank you for that detail on the slide. I would assume that on the larger stuff, you talk about the pass-through via surcharges. But is there a way to think about how much of the portfolio. If you push through price because you have something unique, even in a deflationary environment, if we get to the other side of this, you'd actually be able to keep that price. Is there, I don't know, percent of revenue where you think you have that capability or maybe even just thinking about how much of the pricing is surcharge versus real pricing that you would expect to hopefully stick?

Yes. I would say just off-the-cuff answer, 85% of that pricing will stick and 15% is surcharge related. So that's definitely has the potential to be an additional margin booster that we don't have in 2022 or 2023 thinking right now. So yes, I think it's a very, very valid point John.

Great. Appreciate it and I’ll pass it for the time.

Thank you.

Your next question comes from Ben Nolan from Stifel.

Thank you. So, well I guess for my first one, I wanted to hit the 2030 TAM a little bit. Just in terms of – just to clarify a little bit, I mean when does that start? So it was sort of, what's the beginning point of the time frame there? And then the second part of that question is, I know that Jill in the past you’ve told me at least that on the previous TAM you thought 50% – that you guys could win perhaps 50% of sort of that total addressable amount. Does that hold for, let's say through 2030, or would you maybe change that percentage at all?

Yes. In the near term, over the next few years, we are looking at a $6.6 billion target, which is based on our detailed analysis of the market and expectations for the next decade. Growth will accelerate significantly in 2024 and 2025, with hydrogen being the largest component. We assessed the hydrogen market by considering the projected $500 billion in announced projects and their timelines, peaking around 2025 and 2026. Additionally, we examined the hydrogen market for transportation, including the anticipated production of 11 million tons of hydrogen per year by 2030. This all informs our projections, and mid-decade is when we expect a substantial increase towards our estimated $36.5 billion, largely driven by hydrogen. Regarding market share, I spoke with the team this morning about this exact question. The most conservative estimate suggested 50%, while the most optimistic forecast was 65%. If I had to choose, I would estimate around 60% market share due to the limited competition, as even new entrants will face challenges in handling this complex molecule.

I appreciate it. That’s great information. For my follow-up, I want to address the challenges companies are facing in finding, hiring, and retaining staff, along with the wage inflation we're seeing. Can you discuss whether this is something you are experiencing or if your team’s focus on engineering and technical roles provides any cushion against these issues?

Yes, I believe it's more the latter. We are not completely shielded from challenges in hiring, especially when it comes to finding welders in specific locations. However, we have our own welding team, a training program, and a weld council made up of our top welders from around the world, led by John Daubert, who is doing an excellent job. We have various internal initiatives aimed at retaining and developing our staff. Additionally, being flexible with key talent is crucial. For instance, if we come across a skilled engineer who prefers to live in Alaska and can perform their role from there, we are open to that. It's important to approach this thoughtfully. Ultimately, our compensation philosophy is to pay competitively while still delivering returns to our shareholders, and I believe this approach is effective. Regarding wage inflation, I expect it to continue at normal levels as we move into 2022, and we are not seeing any unusual spikes in our labor costs midway through this year.

One area where you might want to consider paying a little more is Wade after that. I appreciate the answers there. Thank you, Jill.

Thanks Ben.

Your next question is from Ian Macpherson from Piper Sandler.

Thanks. The first one has really been beaten to death, but I need to repeat it Wade. I'm so sorry that she made you do that.

No. The best scene was Wade saying, you kidding me, Jill? I'm like, no. No, really not. Don't you know that song? Yes, I know that song. Merk's going to do it with me. No he's not.

Good job anyway. Again just a detailed follow-up on the specialties TAM for 2030. So let's take 60% of it for grants for now and that is a cumulative number through 2030 or that is the year 2030 just to clarify that.

That's a cumulative number.

Yes. Okay. Okay. So you've said I think with the appropriate prudence that you're seeing some tempering on the inflationary and supply chain pressures, but you wouldn't stake too much confidence that it goes away completely in the second half. So let's say, it doesn't and we're still running pretty hot through the second half and into next year, which parts of your business do you think would be the most elastic and inelastic? Would Big LNG slow down if those project costs went up another 10%? I imagine, specialty would be the least sensitive. Maybe you could just maybe walk through those puts and takes?

I would say specialty and CTS would be the least affected by this due to the variety of applications. The customer sentiment regarding their schedules and timing is a key factor. In specialty, we have fewer discussions about price and more about ensuring there are no delays. Therefore, I would prioritize specialty as the least sensitive. On the other hand, Heat Transfers seems to be the most impacted segment if this trend continues. It’s not necessarily the larger LNG projects, which I’ll address shortly, but more related to the air cooler segment where, unless there’s an urgent need to retrofit or fix something, companies can postpone capital expenditure decisions for a few months. Regarding Big LNG, I believe it’s less sensitive to cost changes now compared to a year or two ago, as these projects have progressed past regulatory approval stages. Companies understand they need to start construction to participate in the global LNG market. Hence, I feel they have committed to the approved regulations and are focused on moving ahead. In contrast, smaller scale LNG projects are likely more sensitive to cost changes. This is somewhat anecdotal, so I apologize for that, Ian, but a deeper discussion would require looking into specific products.

Now that’s great. Thanks, Jill.

Thank you.

Your next question is from Connor Lynagh from Morgan Stanley.

Yes. Thanks. Just a question at a high level on these 2030 TAMs. So, there's obviously, a lot of divergence in market opinions about the opportunity set in hydrogen versus carbon capture. But if I look at say, the IEA's Net 0 report hydrogen, carbon capture, honestly, pretty similar order of magnitude through 2030 in terms of the investment that's expected. And I'm just curious, why in your mind is hydrogen such a more significant opportunity? Is it more related to where your content opportunity is best, or is it more related to customer conversations and market sentiment?

Yes. From our perspective, it's more related to the customer conversations and market sentiment in terms of how I think it's going to be there. And I don't disagree with the IEA's perspective. I think it's more on, how does it ramp through the next 10 years. So around hydrogen like these projects are happening and their spending. And I think that ramp that more significant ramp happens mid-decade whereas the CCUS side, the carbon capture side is still piddling around. I think. I don't that's not a technical term but figuring out kind of what we want to do where do we want to do a minor cryogenic capture how does this fit with what industries really work. So we built that ramp later into the decade in our addressable market size. If you kind of took it out into the 2030 to 2040 decade you'd probably see a little more parity between those two in our thinking. And the biggest two chunks of our over $5 billion for 2030 TAM and carbon capture are the large industrial post-combustion CO2 systems and the large utility post-combustion. So very little on direct air capture included in our thinking there.

Got it. Sort of unrelated question here but I was wondering given that it's becoming a more important part of the portfolio and certainly it seems like there's a fair bit of volatility at the moment in the margins can you help us understand the sort of big product or service categories within RSL and just how we should think about why margins move so significantly one quarter or the other what the big drivers in mix actually are?

Yes. So the way I think about it is three big buckets: cryo lease is one. So that's the leasing business. And that's had a little volatility in the last couple of quarters but it will very much kind of steady itself out now that we have the leases in place at a more material if so and immaterial to the total business but kind of more of that $5 million a month type of run rate. So I think that one is pretty steady. The second bucket is around aftermarket for the Heat Transfer side so that's both air coolers as well as brazed aluminum quick-turn fieldwork. That one is always will be volatile. Quick-turn fieldwork and Heat Transfer is highly profitable. And we always try to be really fair to the customers. But at the end of the day if this is something that they need in a week it costs money to get it there. And they're spending that money so that their downtime doesn't go out of control. It's a good trade-off for them in that sense. So that's something you will see volatility in. And then the last bucket is what we call PRS or parts repair and service. And that's your typical kind of refurb very, very steady. The most unique part of the second quarter driving that gross profit margin as a percent of sales down in RSL was there was a one-time shipment of a product that we had agreed to take last year as we were taking a defensive position in a certain product that we wanted to get us other business. And that's kind of flushed through now. So I would say you won't see that.

Got it. That's helpful. Thank you.

Thank you.

Your next question is from Pavel Molchanov from Raymond James.

Thank you very much. Kind of a short-term question first. We're watching cities like Mumbai, Delhi, Jakarta literally running out of oxygen. And you guys of course have a set of solutions for oxygen storage and shipping. So in the context of COVID how have you been dealing with this burst of demand?

Yes. We love your tracker too Pavel, so keep sending that our way. It's helpful as we think about that question. And the good news is, we have – we've continued to see that demand as you point out in particular in those locations that you just described. What we had done in November, December of 2020 was build additional inventory for medical oxygen-related applications in anticipation, unfortunately of another go-around of kind of the height or peak of COVID. So having that inventory on hand has been super beneficial of not having to change our manufacturing processes or lines or shifts. And we also have the capability in our global locations in particular in India, where the government has worked with us to have access to our ISO containers for oxygen. So it's continued – the demand has continued similar to as it has since the beginning of COVID.

Appreciate that. And I'll follow-up by asking kind of a bigger picture question on the large LNG opportunity. Let's suppose that, you're right and we get one or two big projects moving forward sometime next year. Do you think that will be the final round of LNG new build construction globally forever essentially?

You always hit us with the hard question, Pavel. I think it's a very valid question. I would be – I would say that, I think there's probably one more round after this kind of 2022 starting FIDs. But I think it's much smaller and it's probably a one-off or a two-off on those larger scale projects. I think you see this move toward the mid-scale and the small-scale the modularity. You're seeing a movement toward this hybrid concept so multi-molecule concept. So one or two cycles would be my speculation.

All right. Thanks, guys.

Hi, Walt.

Most of the questions that I have been asked, but I do want to ask a clarifier on the karaoke. Wade, was that taped previously or was that live for the call?

That was live, Walt.

He sat right here at the conference table. And he managed to do it, while the rest of us in the room were doubled over in laughter.

I wanted to ask a clarifier on the Teddy trailers. And if you could just go over those numbers again on what your production rates are right now. And you said, you hope to get to a production level sometime in the future, if you could just clarify that.

Yes. You got it. So I'll just run through a few of the stats on the – you can be throw away stats. In the second quarter, we booked 22 liquid hydrogen trailers, which will be produced in Teddy. We are tracking to in the second half be on a run rate of making one trailer per week. So, 52 a year would be kind of our exit rate coming out of 2021. And what we're working toward is doubling that in 2022, because we're already seeing demand for booking slots in the second half of 2022 and multiple customers looking for those same week deliveries. So significant ramp up, the good news is we have the space. We have the talent. We have the machinery. And so this is again just ensuring that we know we can hit the schedules. We have the material. We have the right suppliers. So I'm feeling really confident and we have an ops guy Shane out of our Georgia facility that just got promoted. And he is running that facility now and very process driven. So the ramp-up has been just amazing in the last couple of months under his watch.

Okay. Great. All right. Thanks for that. And then just a last one. Can you go over the M&A pipeline and expectations for any deals in the back half, or as you look out into 2022?

Yeah. It's a good question. So we constantly see new deals, especially as we've been fairly active over the last 12 months. So we had quite a few inbounds. We certainly pass on the majority of those after we evaluate them, but they give us a good sense of what's happening in terms of potentially disruptive technologies. So we did take a look at them. But in terms of the real active pipeline, there isn't anything that's out there that you'd say Jill do you absolutely need to get in order to achieve anything you've talked about going forward in this next year or these next years or this decade. And the answer in short is no. We needed Cryo Technologies. We needed LAT and we got those. And so we're feeling pretty good about it. So now we've kind of entered this opportunistic area. And one of the things that you see us kind of look at and we commented on previously is there are certain minority investments that we have that might make sense to own in full. Not all of them by any stretch but some of them. And we'd pursue those when the founders and owners are ready. And anything that would come up that we would want but is valued appropriately because I can tell you valuations are starting to get just out of our league. Things we don't want to even do and just doesn't jive with our balance sheet philosophy and theory of trying to stay sub-3 on that leverage even when we're most levered at any given point in time.

Okay. Great. Thank you.

Thank you.

Hey, guys. Thank you for taking my questions.

Hey, Vebs.

In the interest of time just two quick ones. We talked about gross margins increasing in the second half. Probably my thinking is maybe it couldn't go to 30% or something. But maybe if you can just help us think about how – where it could be by the end of the year? And more importantly, as we think over next few years as the revenues grow, where can we go in terms of gross?

Yes. Yes I think your assumption is spot on for – as we go into the second half that you could get to the 30%. In our high-end scenario, we got Q4 over 31% but that's our high-end scenario. So somewhere in that 29.5% to 30% in the second half is very, very safe assumption. Kind of full year we look at that gross margin as a percent of sales normalized for one-time items at that 29.5% to 30% on the full year. So you'd have to step up Q4 a little bit to get there. And as revenues ramp, we anticipate that total Chart gross margin as a percent of sales increases into the low 30%, which is really driven by the margin mix from increasing revenue on the Specialty side in particular.

Got it. Got it. And maybe I missed if you said like you talked about like second half orders or maybe could be like modestly below 2Q, but I didn't know if you threw out like a number. If you didn't that's fine.

No. That's okay. I didn't specifically give a number. The way that we think about it is if you look back pre-COVID, our regular quarter order activity would have been somewhere between kind of $225 million and $275 million per quarter. And now I am very, very comfortable saying that a regular quarter, quarter is over $300 million. And I expect my commercial team is listening and that means $400 million a quarter of commercial team. So I think you could say in the back half, but what we've assumed 2022 off of is in that $300 million to $350 million a quarter. And so if it's above that then you definitely step up 2022 shipments. But that's a safe assumption.

That’s helpful. Thank you for taking my question.

Thank you.

Good morning.

Good morning, Craig.

Jill and team congratulations on another great quarter. Touch about the TAM, just wondering in terms of annual specialty market revenue. If you could envision that segment by mid-deck call it 2024, 2025, exceeding this year's total company revenue. And given you see carbon capture hitting more in the 2030s, do you anticipate, when you get to $1 billion to $2 billion a year for Specialty market sales, that that could have very long legs, I mean on the order of 10 to 20-plus years of stable, if not growing order flow?

I'd answer that with two words and it would be hell, yes. I think the middle of this decade, the Specialty business is in line with what you just made your assumption on of. If it's ticking to over $400 million this year, it's certainly at the growth rate we're seeing in demand that is not – it's not an assumption I'd balk at. And I think most people know that I tend to err on the side of less than the 50% mark of practicality. And I'm a conservative, when I come to putting numbers like that out, but these macroeconomic tailwinds that are out there across the Specialty areas are just phenomenal and broad-based. And frequently, what I think is underappreciated about our business is that we aren't a pure play and that's a really good thing when you're looking at the hybrid that's happening in the world today.

Understood Jill. It's very helpful. And to your point about not being a pure play, we kind of talked about this before, but I wonder if you have any additional color you might wish to share. When we get to the point that, Specialty markets is bigger than the whole current company, obviously it doesn't make sense to call it just Specialty markets. And then resegmentation becomes a possibility, but then also splitting things off entirely and letting things be a stand-alone subsidiary or company becomes a possibility. Any thoughts on how to deal with this fast-moving disparate division?

Our goal is to capitalize on the market opportunities available to us and establish ourselves as the global leader in these areas to maximize our market share. This focus translates to execution for the Chart team, which is our top priority. We aim to ensure that we can have conversations about the distinct value of different segments, but our immediate focus is on executing our strategies. Internally, we have already begun taking steps to capture this market share. For instance, we've recognized the rapid growth within the hydrogen sector, prompting us to create a dedicated commercial team under our Chief Commercial Officer. This has allowed us to pursue numerous opportunities with a concentrated effort. As we progress, we will assess whether these segments could hold more value as independent entities, but we anticipate needing several years to solidify our approach before exploring that as an option.

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.