Chart Industries Inc Q4 FY2021 Earnings Call

Good morning and welcome to the Chart Industries, Inc 2021 Fourth-Quarter and full-year 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 financial presentation was issued earlier this morning and can be accessed 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, March 3, 2022. The replay information is contained in the Company's press release. Before we begin, the company would like to remind you that statements made during this call that are not historical 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 like to turn the conference call over to Jill Evanko, Chart Industries CEO.

Thank you, May. Good morning, everyone, and thanks for joining Joe Brinkman and me today for our fourth quarter and full-year 2021 earnings call. As usual, I will refer to the supplemental presentation which can be found on our website. Starting on Slide 3, I'm going to give you our punch line takeaways for those who want the summary version in one or two minutes here. We're extraordinarily pleased to share that our fourth quarter of 2021 set new quarterly records in orders backlog and sales, resulting in full-year records for each of those as well. The fourth quarter was in line, and for some metrics, above our expectations that we had heading into the quarter, and we were able to accelerate some projects and burn off some lower margin backlog as well. Additionally, fourth quarter reported non-diluted earnings per share of $0.34 or adjusted non-diluted EPS of $0.73 was in line with our expectations and contributed to our record adjusted non-diluted full-year EPS of $2.84. For 2022, as well as the coming years, I would describe our perspective as very excited about our positioning in the markets we play and our complete portfolio of molecule-agnostic technology and equipment. For the first time, we are seeing all elements of LNG progressing quickly. I'm more confident in our baseline reiterated 2022 guidance, given the commercial activity and our pricing and cost actions. I'm also more confident than I have ever been previously that there will be upside to it given the pending big LNG potential work. Given the escalating fighting in Ukraine in the past day, our comments today remain intact. I'd also remind everyone that we're not a pure-play company in any end market or molecule. We are molecule agnostic in terms of a variety of applications ranging from LNG to hydrogen to traditional oil and gas, which is one of the greatest aspects of our business. If one or more of these end markets or applications is positively or negatively impacted by macro circumstances, others are likely to be impacted oppositely. Now, let's get into detail on each of these and our outlook. On slide 4, you can see that not only did we set records for the total company in orders, sales, and backlog, both in the fourth quarter and the full year, but that it was driven by very broad-based demand across our product categories and geographies. Additionally, the first quarter of 2021 marked the third time in 2021 that we set a new order record. Orders for the year were $1.68 billion, over 26% higher than the former full-year record orders. This resulted in a record backlog of $1.19 billion, of which approximately 80% is forecasted to shift in 2022. Every application within our Specialty Products segment had set a record for orders and sales in 2021, with each application having full-year order growth above 15% compared to 2020. Total Specialty Products full-year orders of $649 million represented a 132% increase over 2020. Food and beverage full-year orders were 49% higher than the full year 2020, and fourth-quarter 2021 food and beverage sales also hit record highs. We anticipate continuing record order levels in food and beverage in 2022 with ongoing restaurant footprint growth and specific projects, such as our national account, Chick-fil-A, undertaking refurbishment work to upgrade over 100 stores with our tanks beginning this month. Every product category within our Cryo Tank Solution segment had record sales and record backlog for the year. For the full-year 2021, we sold a total of 594 trailers, a nearly 65% increase over 2020. Additionally, orders for fueling stations set new records both in the fourth quarter and the full year, with 48 stations sold alone in the fourth quarter. Both broad base demand as well as these trailer and station trends have continued into 2022 so far with an additional 13 stations built in the first six weeks of this year, as well as an additional 109 trailer orders during that same 45-day period. These orders contributed to January 2022 being our highest order January in our history. We've seen very strong demand for rail cars recently from multiple customers, including one order in February 2022 for $6 million. Rail is another differentiated specialty products category for us. The fourth quarter and full-year 2021 were also our highest sales quarter and year in our history with $378.9 million in sales for the quarter and $1.318 billion in sales for the year. Fourth-quarter sales increased 21% compared to the fourth quarter of 2020, an increase of 32% when excluding big LNG revenue, which was $25 million in the fourth quarter of 2020. Generally, we were able to meet customer delivery expectations in the fourth quarter of '21 despite the supply chain logistics, inflation, and labor challenges I'll speak to in a moment. Much of the ability to keep up with shipments was the result of our strategic inventory build throughout the year. We purchased just under $100 million more material in 2021 than in a typical year. With our remaining safety stock, we feel confident in our ability to execute against our backlog. The sales progression throughout 2021 is shown on Slide 5, as well as adjusted operating income as a percent of sales. You can see that both the third and fourth quarters of 2021 had adjusted operating margin of approximately 8.7%. Pointing to the far right-hand side of the slide, you can also see that there was approximately $16.8 million that dragged our operating income in Q4. These were costs that were not adjustments to either our adjusted operating margin or our adjusted EPS figures. Without these items, adjusted operating margin would have been just over 13%. These items included logistics, transport, freight costs, inefficiencies from labor disruptions, and specific increases in material costs and expedite fees. With respect to labor, our COVID-19 absences were still meaningful in the fourth quarter, yet better than the third. These absences did not significantly impact our sales in the fourth quarter of 2021. Eight of our global manufacturing sites had 100% on-time delivery in the fourth quarter, which is worth noting given all the well-advertised challenges across all industries. I'd point out that we have had continued absence early in the first quarter due to COVID globally, and we've contemplated that into our guidance. We've taken specific actions to address each of these, some of which you heard on our third-quarter earnings call. The next pages in the supplemental deck address additional steps taken which will positively offset these challenges incrementally throughout 2022. This can't be accomplished with pricing alone, and so using our groupings of three that we like to do, we've taken pricing, cost reduction, and automation actions. While we did not adjust for the costs I just described, there were certain one-time or specific costs and gains that we do add back or reduce from our adjusted EPS, and you can see those on Slide 6. We added back restructuring and severance costs, the write-off of bank fees resulting from our October 2021 refinance of our revolving credit facility, deal and acquisition-related costs, and organic capacity and startup costs. We reduced adjusted EPS, in particular, by the gain booked in Q4 related to our original minority investment in Earthly Labs upon the completion of the full acquisition of that business in December of 2021, as well as the mark-to-market gains within the quarter on our equity investments. As previously indicated on the Third Quarter 2021 Earnings Call, we anticipate add-back amounts will reduce as we head into 2022 given the timing of acquisition integrations, in-flight capacity startup expenses, as well as not anticipating any further banking or financing charges or changes. Details of the reported non-diluted EPS of $1.66 for the full year and the record adjusted non-diluted EPS of $2.84 is shown on Slide 7, with detailed reconciliation included in the press release financials. So let's talk about why we have confidence in our 2022 outlook and also our confidence in pricing covering cost on new orders since the end of the third quarter of '21. Slide 8 shows our three main material categories on the left side of the page, all significantly above last year. The same point in time this year compared to the same point in time last year is roughly a 50% or more difference between those two periods. Therefore, pricing actions were and continued to be absolutely necessary in combination with these cost reduction activities that we're about to speak to. We priced in 3 categories as well, shown on the right-hand side of Slide 8. Standard pricing for book and ship products, which we've adjusted as we've witnessed costs change. Project-based pricing, for which we have meaningfully shortened bid validity timing to capture the most current material costs. Finally, the long-term agreement category, where we've worked with our customers to adjust pricing mechanisms to more accurately reflect current states versus the typical lagging mechanism, which were suitable in environments that are not hyper-inflationary. As I reflect on the fourth quarter and the first month of 2022, material costs and availability behaved materially as we had anticipated heading into each quarter. We took additional actions that I will go into on Slide 9. Before turning the page, nearly all of what you hear are challenges on this topic. Let me briefly point out a piece of positive news: we are seeing better availability in carbon and stainless steel recently. Carbon steel pricing has been trending down over the last 60 days. Additionally, the availability of containers and trucks has been improving, and container costs were down 13% from the end of Q3 to the end of Q4, 2021. If there is one slide in this presentation that should provide you with a level of detail that we're comfortable with coming out of the cost price drag as we burn off lagging backlog, it is Slide 9. In addition to the pricing actions you heard about in October, we implemented two additional price increases in the fourth quarter of 2021 and increased our temporary surcharges, which are expected to cover our additional costs on new orders. To open 2022, we took further price increases on specific product categories, and LTA mechanisms adjusted for certain agreements. Given the increases in transport and freight costs that are well-documented, we have eliminated free freight on volume discounts, and in order to keep product moving through our shops, we have implemented storage fees for customers delaying product pickups. As I said earlier, staying ahead of the inflationary environment and other class challenges cannot be accomplished with pricing alone. The second leg of this is organic cost-out actions, and you can see specifics on Slide 10. We have approximately $29 million of cost-out actions underway, with $14.5 million related to sourcing, $10 million operational through bringing outside work in, automating processes, robotic welding, and about $2.5 million by leveraging our Hyderabad, India Center of Excellence for certain functions and open roles. Some of the automation, productivity, and optimization projects in-flight require organic capital expenditure investment, and you can see specifics of that on Slide 11. In addition to our investments in augmented reality for welding training, robotics on certain product lines in our facilities globally, and 3D printing for jigs and fixtures, we are also investing in expanding capacity for high-demand products. The capacity expansion, coupled with our flex manufacturing approach, which has been underway for about 2 years now, aims to have each of our products being capable of being made in more than one location, as well as focusing certain facilities with specific skill sets on higher-value end products. There are numerous of these types of projects underway. So let me just speak to a few of them briefly. We're well underway on adding a 98-inch brazing furnace and associated brazed aluminum heat exchanger line to our Tulsa, Oklahoma manufacturing location. This will allow Bruce quarters to be manufactured both in Wisconsin and Oklahoma and provide flexibility for Specialty Products as well as big LNG. This line is expected to be complete around the end of the year. This is located at the same site as our expanded toward flex manufacturing, where we're conducting higher volumes for larger components such as skids for various product lines. And not only is that a volume facility, but we have our 3D printing capabilities at this site as well. Our Germany Trailer facility is very busy as you've heard, with the numbers that I shared earlier. We are expanding it onto the adjacent land that we own. This expansion not only allows for increased industrial trailer and gaseous hydrogen trailer manufacturing that we currently conduct at that site, but also will give us production capacity for liquid hydrogen trailers in the EU. Once the expansion is complete, the location will offer service and refurbishment of stationary equipment. Our Sri City, India expansion is also underway at our existing sites. Our India business posted record orders and sales in 2021, and demand is expected to continue to increase. As you've heard us discuss, our facility in Theodore, Alabama, which we acquired in October 2020 has set numerous records for production order intake, sales, and margin in 2021. We are leveraging a talented workforce and local talent pool, along with our 300,000-square-foot facility for additional product manufacturing, which is freeing up space in other locations. We accelerated certain capital investments into the fourth quarter of '21, resulting in full-year 2021 capital spending of $52.7 million. Fourth-quarter capital spending of $16 million included activity in our capacity expansions just described, as well as robotics. Consistent with our expectations, we generated cash from operations of $20 million in the fourth quarter, and when adjusted for one-time impacts, adjusted free cash flow was $34 million net of capital expenditures. Throughout 2021, we strategically decided to increase our on-hand inventory balance as a result of the significant increases in material costs and the already frequently discussed availability challenges. This decision resulted in lower-than-typical free cash flow for the year. We are pleased with this decision as we were and are able to meet our broad-based demand. While we continued to carry higher-than-typical inventory levels into this year, 2022, to meet this demand in an ongoing difficult supply chain environment, we still anticipate that free cash flow for 2022 will reflect the tempering of these challenges as the year progresses, as well as the timing of revenue recognition from our backlog. Our outlook for 2022 free cash flow is approximately $175 million to $225 million, excluding any free cash flow impacts from Big LNG work that is anticipated to be booked in the year but is not yet in backlog. Now let's turn our attention to the innovation that is underway: segment specifics in our 2022 outlook. Slide 13 shows our Nexus of Clean menu, full solutions including process technology and equipment for clean power, water, food, and industrials. The neat part of this menu is that customers can choose a total solution or treat it as an ala carte menu, picking whichever piece or part they need. As I said earlier, our equipment is molecule and technology agnostic, so it can work for a variety of needs. Furthering this full solution set and expanding our Carbon Capture in food, beverage, and cannabis applications, our Specialty Products segment has seen the completion of our acquisition of Earthly Labs in December of 2021, the world leader in installations of small-scale Carbon Capture. Through Earthly Labs, we booked our first winery install at Trefethen Winery, our first distillery, our first New Zealand installation, and our first UK customer. Not to be outdone, though, was our ChartWater platform, which consists of AdEdge and BlueInGreen process technologies combined with Chart equipment, which posted record orders backlog in sales in both the fourth quarter and the full year. We're beginning to see multiple water treatment opportunities in non-North American locations such as India, including a $6 million win yesterday. Specialty Products tends to be the segment with the most first-of-a-kind projects, and you can see that on Slide 14. There are 22 of these projects in the fourth quarter of 2021, contributing to 79 in the full year. On the right-hand side of Slide 14, you can see our 402 new customers for the full year of 2021, with 37% in EMEA and India, 29% in North America, 24% in China, and 10% in the rest of the world. This is another way to look at how broad-based the demand we are seeing really is. We pride ourselves on our leading innovation mindset and being the first to translate that innovation into actual products in orders. We're privileged to have, as a result of our acquisitions in the Nexus of Clean, all of the founders and CEOs of those businesses decide to stay in the Chart family. In order to harness that amazing intellect and entrepreneurial spirit, and start to leverage the inter-linkages among clean power, water, food, and industrials, we created a founders’ innovation team, which I won't reveal its internal nickname but can inform you that we are already seeing immediate impacts to the business as shown on Slide 16—this is just a subset of what's happening. For example, AdEdge is utilizing our Tulsa flex manufacturing facility and our Repair Service and Leasing 24-hour service capabilities, which resulted in a win of $1.4 million in reverse osmosis contracts just in January. Both AdEdge and Earthly Labs are selling water treatment to Earthly brewery customers in less than two months, and we have a new addition to our emerging leader program from the AdEdge team, introducing additional high-potential talent into the broader business. The founders’ innovation team is also working on next-generation technologies. Slide 17 shows one that the AdEdge team is working with hydrogen companies to design and implement into electrolyzer offerings. This is a containerized water treatment solution for ultrapure water for green hydrogen electrolysis. All right, so that's pretty interesting, but now you can ask me a technical question in Q&A on that particular application. For the technical stuff, I'm going to turn it over to Brinkman.

Thanks, Jill. Now, let's turn to a few data points for the four segments. Starting on Slide 18, you can see our hottest Specialty Products area: hydrogen. Fourth-quarter 2021 Specialty Products orders of $182.3 million included hydrogen and helium orders of $85.4 million, which encompassed a 15-ton per day hydrogen liquefier and 19 hydrogen trailers, with five of these sold for use in South Korea. For the full year of 2021, we received orders for 62 hydrogen trailers compared to a prior record of 26 ordered in 2020. This activity contributed to full-year hydrogen and helium orders of $282 million, a record year and a 640% increase over 2020. We recently announced the first-ever successful test of a fuel cell operating with liquid hydrogen, utilizing Ballard's fuel cell and Chart's hydrogen vehicle fuel system. We supported students at the University of Delft with their development of a Le Mans style hydrogen racecar. In the fourth quarter, we completed an MOU with a potential client for the development of more standardized and integrated hydrogen solutions. It is also noteworthy that the geographic spread of hydrogen customers is expanding, and we are at various stages of discussions with over 300 potential customers globally. We included slide 19 for information on some of the countries that are becoming more active commercially in hydrogen over the past 3 to 6 months. Another differentiator for our hydrogen product offerings is our ability to have certifications in various regions, with the absence of global hydrogen certifications. The China Group Code is a great example for the liquid hydrogen storage tanks. As a reminder, and as a result of this, we booked a $9 million hydrogen order in the third quarter of 2021 for a customer's project in China. What isn't reflected on the slide but worth mentioning is our Carbon Capture service. Our large industrial Carbon Capture offering, Sustainable Energy Solutions' Cryogenic Carbon Capture, has recently gained broader commercial acceptance. We are currently working with 199 potential and current customers for the SES offering. In the fourth quarter, we booked an order for a feasibility study using our CCC technology with International Flavors and Fragrances. Furthermore, the national oil and gas company in Colombia signed a contract with us to conduct a feasibility study in a flue gas stream for one of Ecopetrol's refineries. The results of this evaluation will be used by Eagle Petrol to estimate the feasibility of this technology in reducing CO2 emissions. We continue to believe that carbon capture needs to be a key component of this decade's initiatives to achieve both public and private sector 2030 carbon emission reduction targets. Moving to Cryo Tank Solutions, slide 20 focuses on Chart China. I mentioned the Group Code and liquid hydrogen tank order on the last slide, which exemplifies how our China business is evolving into a key supplier, both to our sites and our external customers. This location remains our largest intercompany supplier, allowing us to leverage our flex manufacturing capabilities that Jill described earlier. Note the numerous records set by the team on the left-hand side of the slide, including full-year 2021 record orders, sales, operating income dollars, and operating income as a percent of sales. Lastly, on the right-hand side of Slide 20, you can see some of the recent Chinese policies which indicate support for cleaner energy. We are well-positioned in the country to be a key participant in fulfilling equipment needs for these upcoming national policies. We continue to target 20% of total revenue in the coming few years from our repair, service, and leasing segment. Various drivers of that growth include the additional footprint we have in place, with 2021 being our first full year of having more fulsome repair and service capabilities and customers in Europe, additional long-term agreements, and increasing levels of onsite startup work. A significant driver of this growth has been the leasing business. You can see on slide 21 the substantial progress made in a short period on increasing our assets available in our leasing fleet, as well as more than doubling the number of customers with active leases in one year. Perhaps the most impactful is the revenue from leasing of $49 million in 2021, expected to grow in 2022. It is a very exciting time for LNG. Whether Big LNG, Small LNG, or LNG infrastructure, all of which are positives for us. We were actively involved in the startup processes at Venture Global Calcasieu Pass export terminal this past month. In the fourth quarter of 2021, we received another patent for our IPSMR process technologies, covering the process system itself. Additionally, IPSMR and IPSMR Plus have been qualified by another major international energy company, TotalEnergies. We continue to expect Venture Global Plaquemines Pass phase one to proceed to FID in the first half of 2022. This project is anticipated to include approximately $136 million of Chart content. In the fourth quarter of 2021, we received a $1 million first release on engineering work on this project, and yesterday, a second release of $9 million. Cheniere, for whose Corpus Christi stage three Project we anticipate will include approximately $375 million of our content, also released us an engineering work order in December 2021, and we expect a full notice to proceed in 2022 for this project. The Tellurian Driftwood Project phase one continues to progress towards their intent to proceed to construction in early 2022. We anticipate this will include over $350 million of Chart content, none of which is included in our backlog. We were awarded approximately $80 million of orders for three small and utility-scale LNG liquefaction projects with three different customers during the last week of 2021. This contributed to a total of seven liquefier orders in 2021, marking the record number of liquefiers booked in our history. We believe this is just the beginning of the small-scale trend. Our commercial pipeline of small, utility scale, and re-gas potential projects totaled over $1.5 billion. There was a line in our press release related to what we expect to be a constructive oil and gas spending environment this year. In recent months, we have seen an uptick in inquiries regarding process and upstream inquiries, and in traditional applications as well as new, energy-focused infrastructure projects. Additionally, bio-gas projects are gaining traction as their production costs are not impacted by direct market pricing. Back to you, Jill for Slide 23.

Thanks, Brinkman. Considering our record order in Q4 and full-year 2021, record backlog at year-end, as well as visibility to our strongest-ever commercial pipeline of potential work, we reinforced our anticipated 2022 full-year sales outlook range of $1.7 billion to $1.85 billion. This outlook does not include any additional or new Big LNG projects, although we do expect orders, as Brinkman just mentioned, in the first half of 2022. It does include the engineering work which began for two Big LNG projects in December. Associated adjusted non-diluted EPS is expected to be in the range of $5.25 to $6.50 on approximately 35.6 million weighted shares outstanding and assumes a 19% effective tax rate. We anticipate the first half of 2022 will include a margin drag, similar to what we described last quarter from historical levels due to ongoing macro challenges, but which will be increasingly offset as the year progresses by the positive impact from the actions we described on today's call, as well as one that we will continue to take as we respond to ever-moving macro situations. Slide 24 is important to your modeling. Our first quarter is typically sequentially lower than the prior fourth quarter. This is expected to be the same for Q1 of 2022. The timing of our first quarter 2022 sales are seasonally in line with the typical Chart year where the first quarter is the lowest of the year given the Chinese New Year and customer capital spend behavior. Sales are expected to sequentially increase throughout the year. Our historical revenue timing has typically been stronger in the second and third quarters, with the lower quarters being the first and the fourth. In 2021, we experienced steadily increasing revenues quarter-by-quarter through the year. We expect this trend to occur again in 2022, particularly given the timing of revenue recognition related to the four liquefaction orders that we booked in the last week of December 2021. You can also see the legal clarification in the last bullet on Slide 24 that the slide is not intended to convey specific quarterly guidance and we don't intend to provide quarterly guidance information on a quarterly basis. Right, before opening it up for Q&A, I'd like to provide an update on our latest information regarding the one specific pre-closing liabilities that we maintained related to the divestiture of the cryobiological business, which was completed on October 1st, 2020 with a sale to Cryo Port. This relates to the lawsuits concerning the Pacific Fertility clinic, details of which can be found in our previous 10-Qs and 10-K, including the additional information in our 10-K, which we intend to file later today. We have not reached a conclusion that losses in these cases are currently probable. However, based on further developments including the status of various lawsuits, preliminary discussions in an attempt to resolve these cases, and consideration of insurance coverage, we estimate that losses ranging from $0 to up to $50 million are reasonably possible. This is a current estimate, so the ultimate cost arising from this matter could be materially lower or higher depending on the actual costs incurred to resolve the claims in the lawsuits. We will provide updates in future quarterly filings to the extent any developments change. Additionally, registration for our Investor Day on May 5th of this year at the New York Stock Exchange, which is scheduled from 7:30 AM to 11:30 AM, Eastern Time, is now open. Registration can be completed online at the link shown on Slide 25 of the supplemental deck. So with that, May, let's open it up for Q&A.

Please limit yourself to one question and one follow-up. The first question is from Eric Stine at Craig-Hallum. Your line is now open.

Hi, Jill. Hi, Joe.

Hey, Eric.

Hi.

So maybe just starting on the orders. I know you're trying to stay ahead of it; the materials costs. You've got some storage charges. You mentioned storage fees, all of that. And still having a record order quarter and year in the face of that, I mean, are you getting any pushback on that from the market, or is there a level that you foresee that you think would start to impact order levels?

Generally, our customers are very reasonable and understand what the current situation is. It has not meaningfully impacted the demand as you commented in your question. We do see pieces and parts in terms of pushback; it depends on any particular situation or product category which we work to manage through with the customers. In some cases, this can mean moving delivery schedules around and replacing componentry with other components. So there's a lot of different moving pieces that go into how we handle this and how we price and the timing of such. At this point, we continue to move those prices forward and include additional surcharges where necessary. We've seen here that if there are lost businesses related to those pricing changes, that there are other customers willing to fill those slots.

Okay. That's great. And maybe just a follow-up on that. Obviously again, big quarter; do you see that as indicative? I know that it's continued in January. I mean, was there any aspect of that that maybe was up buy ahead of those price increases? Or this not be indicative that this level is sustainable, but that you see sustainable order strength going forward?

I would say my answer to the buying ahead at the end of the fourth quarter is no. That wasn't the case at the end of the second quarter last year. So they were different in terms of the reasons for Q2 being the former record while Q4 being the new record didn't really have anything in the fourth quarter to do with buying ahead of pricing. Most of that price was already taken in the quarter itself. There is definitely forward progress on particular projects, which I think drove these customers to act quickly. Our team was negotiating with a customer in Germany on Christmas Eve night, as they wanted to finalize designs and everything, because the timing of project implementation is very important to these customers. So we're seeing timing, delivery expectations, and scheduled deliveries being as if not more important to our customers than the pricing discussions and challenges that we have to have. Do I think that this trend continues? I would tell you I was surprised that January order levels were as strong as they were. I would've anticipated at least a breather after December. If you looked at the way the Q4 order intake went for those three months, December was the highest of the three months. I expected everyone to take a New Year's pause, and that did not happen. It's interesting; it's not any piece or part; it's widespread. I commented in my script regarding railcars, and this is another indicator that infrastructure capital spend continues. We're seeing multiple customers coming to us for railcars right now. Trailers and transportation and movement in infrastructure are very hot right now.

Okay, that's great color. Thanks, Jill.

We have our next question from the line of Ben Nolan from Stifel. Your line is now open.

Great. Thanks, Jill and Joe.

Hey Ben.

I wanted to get to Big LNG. I know we hate to talk about it. But just a few things. First of all, as it relates to Plaquemines and there was the limited notice to proceed. How much of that revenue hits this year versus next year, and then ultimately assuming some of these things do move forward, what's the right number to think about for the 2022 impacts versus what's a little bit later?

Let's start with the second half of your question. If Plaquemines moves to full notice to proceed for us, which would be the full order of $136 million on phase one in the coming two months here, I do anticipate that to be the case, then I'd estimate approximately $25 million to $30 million of revenue associated with that into 2022. You can then spread the rest across another seven quarters evenly. Regarding the limited notice to proceed, including the additional $9 million, this is a good indicator that the project is progressing as we expected. Included in that 25 to 30 is the $10 million I mentioned earlier, so that's how to think about that. Then, you can reasonably apply that math across other projects: If you book in March, you'll start to see revenue in September. You can use that same logic for these other projects.

Okay. That's helpful. And then switching gears for my follow-up. As it relates to the increased activity around U.S. oil and gas, just drilling and production and so forth. I know you guys are a little bit more midstream focused, and so there might be a little bit of a lag there, but assuming that we stay on this kind of pace, how should we think about sort of what – or is there a way to think about what the impact of that might be on growth in the heat exchanger business? I guess that's probably where it mostly is and relative to your what's already in your guidance.

Thanks for picking up on that. That was part of my opening comments around being molecule agnostic. We do indeed still serve the oil and gas markets as they need. We've built very minimal positive growth associated with this into our outlook because we haven't seen a lot of speculative buys, like in a historical up-cycle for oil and gas. With that said, as Brinkman briefly mentioned, we have seen an uptick in process upstream inquiries in some of the traditional applications over the last two months. I would say that there's not a lot of upside built into the current guidance. We are in a little bit of a wait-and-see mode, but if it progresses as you described, that could provide upside to what is built into our current guidance.

Okay. All right, I appreciate it. Thanks, Jill.

Thanks, Ben.

Next question is from the line of John Walsh from Credit Suisse, your line is now open.

Hi. Good morning and congrats on wrapping up a strong year.

Thanks, John.

I wanted to first start and maybe help us understand some of the margin dynamics as we look forward. I apologize if I missed it. Can you talk about what your kind of margin in your backlog looks like either on a year-over-year basis as you put some of these larger projects in first of a kind in there?

Sure. Just to be specific, looking forward, is that your question?

Yes, that's correct. As you work through that backlog, I believe in this quarter you mentioned that you managed some of the lower-priced backlog.

Yes.

How much of the margin improvement is already accounted for due to executing on the backlog?

Yes, and one of the questions I anticipate someone to ask is around the Cryo Tank Solutions gross margin in the fourth quarter. I referred to that as accelerating some of the backlog burn off. That is the segment where the majority of the lag is. So that's a positive to stepping out of this for 2022. I would say Q1 you'll still see us burning that off, and given the way a typical Q1 is from a revenue perspective, burning some of that off. I'd look at the gross margin there in the middle of 20%, and I'm not adjusting that. Let's just say 26% as we enter the first quarter, then step it up meaningfully into Q2 to 28% plus. The Q3 and Q4 projections depend on project performance and pricing, but we have high confidence that we priced it appropriately. We have the materials associated with that; again, as we bought a lot of that material in the fourth and third quarters, so the second half looks strong in terms of margin associated with backlog projects.

Great. And then maybe shifting gears to cash. Could you remind us your priorities if these big LNG projects hit? That's going to be a nice influx of cash. You obviously pulled forward some Capex spending. But how are you thinking about the balance between further M&A and maybe share repurchase?

Definitely. I'll go out on a limb and say that if I could have been buying shares even if we were in a close window, I couldn't have been buying shares in terms of share buyback, but I would have been over the last few weeks. With that said, our cash priorities are focused on the Capex we described on the organic side. Number one for us is continuing to automate and optimize our manufacturing to meet our expectations of continued demand. In terms of M&A, we are in an opportunistic mode; we feel great about the deals we've done and the portfolio we have now. This is the first time we've had what we want in our offering completely, and we don't have anything we want to get rid of. Thus, we can be very selective on the M&A side. Then, obviously, debt pay down with that cash. To your point, we'd have a higher free cash number assuming these Big LNG projects unfold as we expect them to in 2022. At that point, we'd be looking at other uses for the cash after investments for growth and debt pay down. Let us get there on the execution side, and then we'll consider other ways to utilize that cash if and when we have that conversation. But for now, our focus is on growth, automation, productivity, and debt pay down.

Great. Thanks for taking the questions. I'll pass it along.

Thank you, John.

Next question is from the line of Rob Brown from Lake Street Capital. Your line is now open.

Hi, good morning, Jill.

Hey, Rob.

My question is on capacity. If Big LNG orders start to hit, how are you on capacity? And I guess the Tulsa addition helps, but maybe where do you sit with capacities if you get these orders?

We're in very good shape on capacity for that; we’ve been planning for this for years. As you may recall, back in 2016-2017, we added the world's largest brazing furnace into our La Crosse, Wisconsin facility. In fact, we have the world's two largest brazing furnaces there. Our decision to put a 98-inch furnace into Tulsa adds some flexibility; we didn't opt for another world's largest because the 98-inch cores are more common in small-scale applications and hydrogen applications. Now, we have a good balance with the 98-inch furnaces in both locations and two larger ones for the Big LNG in Wisconsin. All told, even if all these Big LNG projects were to hit at the same exact time, we're ready for that and we've ramped up labor for it. We are capable of bringing on additional liquefaction projects into our backlog with our current capacity.

Great, excellent. And then in the Carbon Capture market, you're seeing some stuff starting to hit. How do you see that playing out over the next year or two? Do you see projects kicking off or is it still early development?

That's a really interesting question because I would have thought that the carbon capture market would be more commercialized to date. It hasn't been. In the last six months, we've seen these pre-FEED and FEED studies. As Joe just described, we booked one with the national oil and gas of Colombia—these are real projects. I anticipate we will be booking a full Carbon Capture industrial-sized project within the next six months. This is based on the timing of the way FEEDs usually take about 10 to 20 weeks to complete. Hence, I say within the next six months. I think it will start rolling a bit soon. I believe it would accelerate meaningfully if the 45Q were addressed in a broader-based manner at a slightly higher 45Q credit price. However, none of our industrial side clients are waiting for that. They are stating, 'I need to move forward, sustainability and ESG are crucial to our culture as well.' They can make the economics work even without 45Q. So I think, on the larger industrial side, it will progress. In various other applications, the 45Q remains significant in their decision-making.

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

Thanks, Rob.

We have our next question from Ian Macpherson from Piper Sandler. Your line is now open.

Hi, good morning, Jill, Joe.

Morning, Ian.

Joe, we're reminded this morning that energy security from the U.S. is probably at an increasing premium. We've talked about optionality around some of your three primary projects having accelerated phase two deployment as well. Do you think recent events amplify those probabilities? Or how are you thinking about Gulf Coast LNG? Is there more runway for the cycle beyond this year? What’s your advice on what's happening in Europe?

I think that question is spot-on. I believe that the current state of affairs could further accelerate what was already accelerating in terms of these phase twos. However, without going into a lot of detail on specific projects, we do expect that certain phase twos happen much faster than was previously designed. Perhaps more projects will progress more rapidly now given the current global situation. This unfortunate state of affairs could amplify the importance of energy security and infrastructure, which will greatly benefit the Chart business.

My others have been asked and answered. Appreciate all the color today. I'll pass it over.

Thank you, Ian. I appreciate you.

We have our next question from Andres Menocal, Evercore ISI. Your line is now open.

Good morning, Joe.

Hey Andres.

So I guess my first question and this is always interesting to me is what you're seeing in terms of the industrial gas customers? I know a couple of quarters ago it seemed like there's an inflection in demand from semiconductors and electronics. Just curious to see if you're noticing any change in customer behavior at a high level in terms of what we observed in Europe recently, given the margin compression from higher electricity prices? Is there a sense that maybe they're going to shift their buying behaviors away from Europe in light of that or anything related?

We have not seen that to date. I think that's a very good question to monitor, especially in light of what's happening in the macro environment. So far, we haven't seen that shift. What we have noticed is that different industrial gas customers are allocating more resources towards certain types of molecules. We've seen, obviously, hydrogen and helium grow in demand. However, I think we need to keep watching the geographic movements moving forward. We can operate on a global scale with our manufacturing footprint, allowing us to determine the best locations for production. It's also crucial to note that local supply bases have really benefited us. For instance, sending a tank from China to Germany cost us around $77,000 in 2019, whereas now it costs around $375,000. Hence, you can grasp the magnitude of moving pieces globally—localization is indeed a benefit.

Got it. Thank you. Very helpful insight. My second question is on India. The entire topic of energy transition has been a popular subject, especially with the recent Green Hydrogen policy. It appears to be favorable in some respects, particularly on the electricity side, as they waive some transmission charges, but it seems to be lacking in infrastructure development plans for hydrogen transportation and storage among a number of other items. What's your sense on that in terms of how this pertains to Chart and your footprint in the region and how that might benefit end market demand for your products?

We are very bullish on India across the spectrum. Right now, we see quite a bit of infrastructure being developed on the natural gas side; we expect that to continue with key customers that you would be aware of. We're heavily involved via the U.S.-India strategic partnership for these initiatives as well as with the Indian government in setting strategies. There’s a focus on not just cleaner power or cleaner energy, but also clean water. We've positioned ourselves well, and it's essential to localize manufacturing in India, which we've been doing post our BRV acquisition a few years ago; our facility is well-established now. From the water angle, the recent win for $6 million in water treatment projects is significant, as we're seeing the government pay close attention and allocate real funds. India is aiming to provide clean tap water to all households across 600,000 villages by 2024, and that's an investment of $50 billion. They have also indicated $65 billion will go into natural gas infrastructure between now and 2025. Real financial commitment is present, and I believe that the national hydrogen strategy unveiled recently will quickly transition to real project funding. Our position in India is strong, and I think we can expect significant opportunities ahead and not just in the later part of this decade, but also in the next few years.

Thanks, Jill. I'll turn it back to the queue.

Next question is from the line of Marc Bianchi from Cowen. Your line is now open.

Thanks. I wanted to discuss orders first, and the interplay between orders and revenue as we look beyond '22. You had a really strong order quarter here in the fourth quarter, and if I annualize that, assuming you maintain that level of orders for every quarter throughout '22, it just reaches the top end of your revenue guidance. So you’re kind of barely at one times book-to-bill in '22 if you replicate that really strong order number. What kind of orders do you expect in '22, and what sort of order number will we need to see to enable growth in '23, excluding Big LNG?

Understood. I comprehend your question, Marc; it’s a good one. What I would say is we are expecting—”and we started to see this in '21—but expect that trend to accelerate in 2022 around what we’d consider small and mid-scale project work. Said differently, while there are different definitions of MTPA size associated with small and mid-scale, we see projects in the $10 to $50 million range that used to be scarce but will happen more frequently in '22. So that is one of the main drivers for achieving orders exceeding one-time book-to-bill orders into revenue. The other side consists of liquefier projects that can range from $50 million to $75 million apiece. While these projects have increased, they are still not yet consistent, which is why we haven’t simply stated, 'Take the record-level and maintain that every quarter.' This is due to the inconsistency of these larger projects, but we are observing greater consistency in those middle-sized ones. To summarize, we need to see more frequent smaller and mid-sized projects alongside a few larger orders to drive growth.

Okay. I’ll adjust my model accordingly. On the hydrogen and helium front, I have a few questions. Firstly, why do we group hydrogen and helium together? If you could break down the hydrogen number, I'd be curious to know what that is. What's your growth outlook for that category for '23? Last call, we discussed a forecast of 40% to 50%, but given the strong fourth quarter, I’m not sure if there’s any risk of that opportunity being pulled forward.

We launched Hydrogen and Helium together because they are both extraordinarily cold, the coldest molecules. In addition, technology for both applications can be quite similar, allowing, for instance, a Helium cycle to generate liquid Hydrogen. The characteristics of how you handle them are similar, which is why we group them. Looking at the hydrogen and helium orders, the $282 million last year had about $50 million strictly in Helium. The remaining $230 million includes a portion that utilizes some Helium technology for Hydrogen applications, making it a bit complex in terms of separation. There's considerable opportunity in our pipeline; though we were surprised by certain orders in December, they have been backfilled by potential orders. Our order pipeline across these categories is the highest it’s ever been. As for your question regarding competitors like Plug, we're collaborating closely, and they envisage continuing to source from us alongside developing some of that capacity internally over time. The challenges in implementing such technology require considerable development and integration efforts, so we retain the expectation of them being a customer in both the near and medium term.

Great, thanks.

Thank you.

Next question is from the line of Chase Mulvehill from Bank of America. Your line is now open.

Hey. Good morning, Jill.

Good morning, Chase.

So I guess my question is on the guidance; a pretty wide range here. I think it’s about $45 million between the high-end and the low-end. So I guess, two questions. Number one, is there any particular segment that's driving the variability here? I mean, if so which segment? And then number two, a pretty wide range, would you care to push us towards the low end, the midpoint, or the high end of annual guidance?

The variability in that guidance comes primarily because it is early in the year, and we still need to determine the actual performance in terms of the large quantity of potential work in the first half from our commercial pipeline. The first half's order book will steer us towards the high end of the range, as there’s no pressure on our sales team to push bookings. However, I have learned my lesson about trying to guide you toward the low end to exceed expectations. I think we have strong confidence in our outlook, and we would not have reiterated that outlook simply based on fourth-quarter performance, which gave me more conviction. We are comfortable with where consensus sits today. Notably, among our approximately 20 analysts, seven or eight have already factored in some Big LNG within those figures, which we need to ensure is clear.

Okay. Perfect. And then looking at your 2022 order outlook; obviously, it's quite strong even when excluding Big LNG, and the Specialty Products had a significant increase in orders in 2021. How should we interpret the Specialty Product orders in 2022? Specifically, for Hydrogen and Helium orders, which totaled $282 million; how much are those expected to increase in 2022? Also, for the baseline or base business within Specialty Products, how should we view order growth for that in the upcoming year?

Certainly. Among the Specialty Products, the Hydrogen and Helium figures you mentioned contained about $150 million worth of liquefier orders. The rest of the equipment is anticipated to grow in double digits. We foresee the entirety of Specialty significantly maintaining double-digit growth. Peeling back further, we expect another year of record orders in food and beverage and approximately 20% growth in space exploration. The rail business is going to be especially active within the railcar side of specialty as demand continues to rise. Cannabis is also expected to reach record levels again with growth exceeding 20+ percent year-on-year. The Carbon Capture sector, as well as water treatment, are both on track for substantial growth. As we think through the liquefaction orders against equipment orders, we need to consider how feasibility can affect the timing of those orders. So while we expect these liquefaction orders to come through, the timing of their arrival may cause it to appear that order growth is more moderate.

Okay. I appreciate the color.

Thank you.

Next question is from the line of Pavel Molchanov from Raymond James. Your line is now open.

You were asked about the broader context of energy security, and I wanted to zoom in on your presence in Europe as it relates to green hydrogen and other aspects of the energy landscape. What percentage of revenue does that represent, and where is the manufacturing located?

So far, Hydrogen in Europe particularly involves mostly infrastructure projects. Our hydrogen liquefaction projects are currently in North America—both Canada and the U.S. The infrastructure work is mainly around Germany, the Czech Republic, France, and Italy concerning customers' use of that infrastructure. We manufacture gaseous hydrogen trailers in Germany, as well as handle liquid hydrogen operations here in the U.S. We have the ability to produce all of our products either in Europe or beyond, retaining flexibility. The critical question arises when evaluating whether customers would prefer to source from specific locations.

Price for natural gas in Europe has reached $25. And that's before the events of the last 24 hours, I suppose. Have you noticed an evident urgency on the part of European customers to, for one thing, reduce their reliance on conventional gas and to favor bio-gas or green hydrogen as a substitute?

We've certainly observed an uptick in bio-gas; that's been accelerating over the past six months. However, the behavior around shifting to green hydrogen hasn’t changed as those who aimed for that direction were already on their way a year ago and have maintained course rather than accelerating. Simultaneously, we haven't seen a slowdown on the gas side. Generally speaking, I wouldn’t say there’s been a material impact to date, yet your point is quite valid, and we’re paying close attention. For us, we can play that molecule-agnostic game; we’re capable of serving a range of applications, and we're prepared to do so based on customer preference.

Thank you very much.

You're welcome!

Next, Craig Shere from Tuohy Brothers. Your line is now open.

Hi. Congratulations on another great quarter.

Thank you, Craig.

Just one question for me. It was already asked about your capacity to meet the potential tsunami of Big LNG orders that could be coming in. But I'm a little more focused on the next 2, 3, 4 years in specialty. I anticipated you might have $1.3 billion in specialty revenue in 2024. Given where labor markets are and could possibly go, how confident are you that you can execute and deliver on everything the market may need?

I'm very confident given the completion of the investments that we laid out on some early slides in today's presentation; that's critical to this because you're correct to point out that enormous demand is ahead of us. We've discussed this at the Board level around the importance of ensuring we have capacity to meet demand. So we're completely all-in on these capacity expansion projects along with automation. I would say I'm less focused on labor shortages; my concern lies more with ensuring we have the right machinery in appropriate locations. A good example would be extracting larger skids from a shop where we need more room for another line—meaning, for instance, in New Prague, Minnesota where various hydrogen tanks are manufactured. We’re also going to conduct hydrogen tank production in Theodore, Alabama. By effectively managing these investments, we can meet future demand on the specialty side.

Do you consider this an ongoing process, or do you believe your planned investments this year and the recent ones made cover significant ground? Will you need to remain vigilant over the next two to four years?

I think that this year and next year, that's why we put the 2023 forecast on Capex on Slide 11 of the deck at $47 million. While we are not perfect in those projections, I believe we will be in a solid position. There will also be secondary projects underway, which I won't delve into but are meaningful. For instance, how to manage repair and service work effectively among combined shops and potentially outsourcing to a new shop that we already have established. Given all of that and the subtext, I feel confident about where we’ll be once we've completed the 12 projects highlighted on Slide 11.

Great. Thank you.

Thank you.

Vebs Vaishnav from Coker Palmer. Your line is now open.

Hey, Vebs, if you're there, can't hear you. Okay, May, I think that Vebs might have had a technical error or has dropped off. If there are no further questions in the queue, we'll conclude the call for today.

Thank you, ma'am. This concludes today's conference call. You may all disconnect.