Chart Industries Inc Q3 FY2021 Earnings Call

Good morning, and welcome to the Chart Industries Inc. 2021 Third 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, October 28, 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 in fact are forward-looking statements. Please refer to the information regarding forward-looking statements and risk factors included in the Company’s earnings release and latest filings with the SEC. The Company undertakes no obligation to update publicly or revise any forward-looking statements. I would now like to turn the conference call over to Jill Evanko, Chart Industries’ CEO.

Thanks, Gigi. Good morning, everyone. And thanks for joining us today for our third quarter 2021 earnings call and update to 2022 outlook. With me today is Joe Brinkman, a Chart Industrial gas veteran, and now our CFO, who will take you through the quarterly results later in the call. Today’s discussion is twofold and similar to what you’ve heard from other companies. First, the near-term macro challenges that we faced in the third quarter, their impacts on our quarter and what actions we have and continue to take in order to manage through it and come out with a structurally higher margin profile, amidst what we expect to be record-setting years ahead. And second, the continued strong broad-based order activity we’re seeing for which all indicators suggest underlying demand for our products will continue. So starting on Slide 4 of the supplemental deck that was released today. Our third quarter 2021 orders of $350 million demonstrated continued demand across the business. And we’re significantly above our expectations coming into the quarter, which were around $300 million, considering that we did not expect nor did we get any large liquefaction orders within the third quarter. This quarter’s order level was 33% above the third quarter of 2020 and brings our year-to-date order levels 53% higher than the first nine months of 2020. Additionally, Specialty Products orders grew over 100% this quarter versus the third quarter of 2020, and over 150% for the year-to-date timeframes. Cryo Tank Solutions has also shown impressive growth in these periods, growing 35% for the quarter and 53% for the nine months. Third quarter orders contributed to our fourth consecutive record backlog quarter, with backlog now over $1.1 billion. Stepping up our confidence in our 2022 outlook, as well as now seeing a trend to quarterly consistency at this higher level of order activity...

Thanks, Jill. Slide 8 shows certain organic structural costs and capacity actions. What you see on the slide captures two goals. The first to operationally reduce costs and the second to ensure we have the appropriate capacity in the appropriate locations to meet our customers’ lead time demands. On the left-hand side of the page, you can see a subset of our cost reduction actions taken or underway in the third quarter. This is certainly not a comprehensive list. We have consolidated our Tulsa air cooler production to our Beasley, Texas manufacturing location, creating a flexible manufacturing facility in our Tulsa location, which is in various stages of starting up depending on the product line. Adding the flexible lines in Tulsa gives us access to skilled talent and allows us to move bottleneck production from other locations. For example, our move of vacuum insulated pipe and sub-assemblies from New Prague, Minnesota is complete and the associated benefits are anticipated to begin in the fourth quarter of 2021. The same Beasley location is set to house our Houston repair and services business, which over the course of the next few months will consolidate from our stand-alone Houston repair site...

Slide 10 does not mean that we’ll be giving quarterly guidance going forward, but rather we wanted to provide more specificity about the coming quarter. By way of background on how we thought about the fourth quarter, our team has built in some additional contingency in the sales and earnings outlook for the fourth quarter, compared to how we would normally guide, assuming that the supply chain shipping and freight challenges might not improve. On Slide 10, you can see the walk from our prior approximated internal sales forecast to the low end of our prior outlook range for the third and fourth quarters and that’s shown on row one. And the larger moving pieces in rows two through nine, which are not wholly comprehensive, but consolidate the largest movements, including timing of Heat Transfer System projects and backlog and notices to proceed. These updates result in our updated low end of the sales range for the fourth quarter of 2021 of $370 million, the range is $370 million to $390 million for the fourth quarter. As mentioned, this is entirely due to projected revenue timing shifting to 2022, none of which is lost revenue. Our new guidance results in expected 11% to 13% sales growth for the full year 2021 compared to 2020.

As of September 30, 2021, our net leverage ratio was 2.99. On October 18 of 2021 we closed on our refinance, which improves terms as capacity spreads maturity of our instruments and reduces costs as shown on the left side of Slide 22. This $1 billion sustainably linked revolver increases our borrowing capacity on the revolver from $83 million to $430 million, eliminates 50 basis point floor on U.S. dollar borrowing, saving approximately $2.3 million annually at current borrowing levels and removes the cash hoarding provision from COVID-related restrictions.

We think about it in terms of the specific projects that we have been, I guess, awarded but not yet booked and then walk it from there around how we build up our opportunity set. I think what we’re seeing and how I answer the question is, yes, there’s eight to 10 global projects that have gotten to the point where we think they’re going to move ahead over the coming few years. And that is a much smaller number than what you had pre-COVID because you had a lot of projects at various different stages and trying to grab pieces and parts of that whatever your MTPA forecast is. So that’s been a good thing for the industry, because I think it’s really honed in on those who are going to move to construction.

Our first question comes from Ben Nolan from Stifel. Your line is now open.

Yes. Thanks. Hey, Jill.

Hey, Ben.

Combine two in here quick and then turn it over. First should be a quick one on the Corpus Christi Stage 3. Is that number bigger than it used to be in terms of your content? It seems like it is just curious if there was some extra content that was maybe sold into that. But then the other question is a little bit more thematic in that obviously, it was a little bit of a challenging quarter. There were some things that you didn’t expect that really nobody expected that had an impact here. But given your 2022 outlook, just trying to get a sense of what the wiggle room is there and do you feel like if things inevitably do sort of don’t go exactly according to plan, if there’s enough room in your numbers such that it’s already accounted for.

All right. Thanks, Ben. So let me pull off the first answer around the Corpus Christi Stage 3. The number is bigger than it was previously. And I would say also that this is the first time, which increases my confidence level, that the respective operators of the three projects that I described on big LNG all were comfortable with us putting our level of anticipated content out into the public domain. So that’s a positive.

Thanks, Jill. I think, from a macro perspective, we’ve seen continued demand in both our specialty products as well as our Cryo Tank Solutions, and we’re optimistic about the underlying demand for our product lines as we move into 2022. The projects that we have lined up already give us good visibility going into next year.