Chart Industries Inc Q1 FY2022 Earnings Call

Good morning and welcome to the Chart Industries, Inc. 2022 First 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 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 Friday, May 6, 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, 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 statement. I would now like to turn the conference call over to Jill Evanko, Chart Industries CEO.

Thank you, Liz. Good morning, everyone. And thanks for joining us today for our first quarter 2022 earnings call. With me today is our CFO Joe Brinkman. But you won't hear from him verbally as he has a cold, so his voice is pretty rough. We're going to try to save it for next week's investor day, which is next Thursday, May 5. So you're stuck with me today. But as usual, I will refer to the supplemental presentation, which can be found on our website. Starting on slide three, the quarter included our sixth consecutive record quarter of backlog, our highest ever quarter of orders, and our continued progress of closing the gap of pricing and cost which has demonstrated through our sequentially improving margin profile, as well as our continued completion of various acquisition integrations and capacity extension projects. You will see this reflected in our addbacks to earnings per share. Excluding the mark-to-market gains and losses of our inorganic investments net of FX, are down 42% when compared to Q4 2021. But first let's walk through what's happening in our markets. Demand for our products, in particular LNG and other energy solutions and equipment accelerated as a result of the Russia-Ukraine conflict that began February 24, our last earnings call. We have seen an increase in actual orders, as well as inquiries from both public and private sector entities surrounding the need for infrastructure to access molecules to support energy security, independence and resiliency, all with the backdrop of the requirement for alternative sources of supply and continued focus on sustainability. We continue to hear from various entities that the conflict has spotlighted the need for construction and action now to address these themes. Slide three provides some examples from the past 45 days of actions taken by governments and private industry to support this energy independence, resiliency, security and sustainability. These themes were in part reflected in our record orders of $636.8 million, record backlog of just about $1.5 billion, but perhaps more meaningfully reflected in our growing pipeline of commercial opportunities, the largest pipeline we have ever had. On slide four, you can see that these records were not just driven by one segment or product category on the left-hand side of the chart. Two of our four segments as well as the total company posted all-time record backlog in the first quarter. Several product groupings within those segments also ended with record backlogs. Total company backlog increased over 50% when compared to the same quarter in 2021 and Cryo Tank Solutions, Specialty Products and Heat Transfer Systems backlogs were each up 49%, 55% and 77%, respectively. We'll talk through orders and sales in the next few slides. But before we get into those specifics, let me take a moment to share a few other noteworthy highlights from our first quarter, some of which are shown on the right-hand side of the slide, a few to point out specifically around the hydrogen side of the business. While much of the past few months have been around immediacy of natural gas and LNG, there has not been a slowdown in the focus and action surrounding more sustainable and ESG-oriented answers. For example, we completed a memorandum of understanding with a major industrial gas customer for liquid hydrogen equipment globally, which adds to the continued expansion of our hydrogen installed base in a variety of different geographic regions. Additionally, we see China as a meaningful future hydrogen region, with an announcement in March from their National Development and Reform Commission that China aims to produce 100,000 to 200,000 tonnes of green hydrogen a year and have 50,000 hydrogen-fueled vehicles by 2025. We executed a letter of intent with Greenstone Renewables to be their exclusive liquefaction technology and equipment supplier for their 100% renewable solar hydrogen production project. We have not yet booked an order associated with this but expect to do so later this year. We became a founding member of Cemvita Factory’s Gold Hydrogen Synthetic Biology process. You can see some early successes through their collaboration with United Airlines and Oxy Low Carbon Ventures for commercialization of sustainable aviation fuel. As an aside, we are hearing more about sustainable aviation fuel which is another opportunity for us. While the end product is an alternative liquid fuel, there are situations where the hydrogen needs to be stored and transported from the production site to the sustainable aviation fuel producers' plants. We're currently quoting on 30 different hydrogen liquefaction projects with 30 different potential customers. And these 30 are part of the 419 potential customers we are currently working with for liquefaction, storage, transport, and end-use hydrogen solutions. Just as a point of reference, two years ago this month, we were talking with approximately 30 potential hydrogen customers. One year ago this month, we were talking with 214 of them. We've increased the number of individual customers that we have sold hydrogen technology or equipment to by 70% in the past six months, further evidence that there continues to be ongoing support of hydrogen as a key part of the energy transition. Now turning to slide five, you can see our $636.8 million of all-time record orders. When backing out the $228 million of big LNG orders received in the first quarter, we booked over $400 million of non-big LNG orders, which included a new Fortress Energy order for FastLNG2. We're very excited and proud to continue our work with NSC on their FastLNG unique expeditious and creative solution, and we kicked off April with a letter of intent for Fast. EMEA & India. First quarter of 2022 orders were a 9% sequential increase over the fourth quarter 2021 and the strongest first quarter of the year in the history of the region. It is rare in our Cryo Tank Solutions segment to have a sequential Q4 to Q1 increase in orders; that is the case this year. And we do expect additional success in the later quarters this year. We also booked 65 individual orders each greater than $1 million in magnitude, twice as many of those as we booked in Q1 of 2021, making this our fourth consecutive quarter with this metric being over 60 individual orders per quarter. All of this contributed to our book-to-bill ratio of 1.8, or excluding the big LNG orders of 1.15 in the quarter. I just shared our record orders and backlog which is included on slide six. Sales of $354 million was our highest first quarter sales in our history, an increase of 22.7% when compared to the first quarter of 2021. All four segments sales increased more than 14% over that same period, with Specialty Products leading the way on a year-over-year increase of 39%. Slide seven visually shows our continued progress on pricing and cost actions reflected in our first quarter 2022 reported gross margin as a percent of sales of 23.6% and adjusted gross margin as a percent of sales of 26.1% when excluding restructuring and organic startup capacity costs. This demonstrates our progress in incremental and sequential quarterly improvement in our margin profile. I will also note that we continue to face in the first quarter additional headwinds that we do not adjust for in either gross or operating margin. Some of these we anticipate to continue throughout the remainder of the year, such as additional logistics, transport and freight costs. Others we anticipate will improve in the second half, including China COVID impacts, electricity and gas costs in our European shops as weather improves, and manufacturing inefficiencies of previously outsourced products brought in house as we leverage the synergies from our recent acquisitions. And still others were truly one time in Q1 such as inefficiencies from robotic cell repair, which is now completed, and the repair of our collapsed storm sewer in Minnesota. You can review slide eight specifics on your own, but the takeaway is that our addbacks excluding mark-to-market net of effects were sequentially 42% lower in the first quarter than they were in the fourth quarter of 2021. We continue to complete acquisition integrations. We do not anticipate refinancing costs this year, and some of our organic capacity comes online throughout 2022. Note that we will continue to have mark-to-market adjustments each quarter. Our first quarter of 2022 reported non-diluted EPS of $0.28 included a negative impact of $0.11 from the quarter’s mark-to-market of our inorganic investments net of tax, as well as operational one-time costs related to restructuring, start-up capacity and deal integration totaling $0.26. When adjusting for these items, adjusted non-diluted EPS was $0.65 as shown on slide nine. Our analysts were debating our first slide in the appendix which we thought was a great recommendation from one of our analysts and is intended to make the walk from reported to adjusted with dollars much easier. So moving to slide 10. This is the first of two slides that you have seen for the past few quarters providing our perspective on direct business impacts from the six biggest challenges in our current operating environment. Material cost and availability is by far our highest ongoing concern, and we focus our discussion on the three main material inputs in our business: aluminum, stainless and carbon steel. Throughout 2021, we strategically decided to increase our on-hand inventory balance as a result of increases in material costs and frequently discussed availability challenges of materials. Given the uncertain supply chain and material cost environment that worsened as a result of the Russia-Ukraine conflict, we've chosen to continue to strategically build safety stock of key raw material inputs, especially given our ability to source these globally while attempting to procure them at lower cost points in the market. Because we did build safety stock last year, we are able to monitor pricing and purchase at better entry points based on the material price indices. Cost per ton does vary by the hour. So we've taken advantage of those entry points the past six weeks to buy at non-peak levels. In some cases, we had put in place the option to buy and pay at current month's fixed costs. We did this in the United States for stainless steel in early February at the prior month's fixed cost, which has proven to be a near-term success. Considering the surcharge on this particular supplier, stainless is up 57% now compared to February. Like most companies, we are not immune to the well-documented supply chain disruptions, yet there's nothing meaningfully new to discuss on this topic, as shown on row two. Row three is the continued Force Majeure we are under from our United States gas suppliers to our manufacturing plants. This started with nitrogen in the southeast in August of 2021. And now helium is the challenge across the U.S. We have not had a month without being under Force Majeure from the supply base since August of 2021. And while we have a variety of alternatives that are in play and underway, it still creates inefficiencies for us. We expect that the situation will improve in the summer yet we are planning for the worst case of continuations throughout the remainder of the year, which is included in our current outlook. On slide 11, I'm going to skip to row six as rows four and five are currently in decent shape. Chart China exceeded their first quarter 2022 forecasts even when faced with a week of COVID-related lockdown where no production could be done. The team gathered a small group of our assemblers and was given clearance to ship yet the team had to stay 24 hours on site for that time period. So congratulations and thank you to their Chart China team for their efforts. Also, we anticipate the second quarter to have some logistics headwinds in our China facility, less specific to our shop, but more so as a result of port congestion, the worst that has been in six months in the South China hubs as well as growing backlog at Shanghai. We're touching COVID restrictions and the risk of additional sourcing challenges given the situations in particular in Q2. It is worth noting though, that we do have other options globally on sourcing and shipping. Slide 12 is the same information that was shown on the last earnings call, 2021 pricing actions taken. We've included it here just for sequential reference. So now moving on to slide 13, what actions we've taken year-to-date 2022. As you've heard, material costs and other hyperinflationary trends continued throughout the first quarter. We continue to update pricing based on market conditions and our three main categories of pricing mechanisms are shown on the right-hand side of slide 13. In the first quarter, we had our long-term agreement index adjusted price updates, all standard price lists had pricing adjustments, specific regions had increases based on material cost in that region. Our 15% market conditions surcharge was in effect the entire first quarter 2022 for non-contract customers, and we increased the surcharge after the material cost changes did not temper but rather increased. An example of one of the variety of macro headwinds that we have been improving through specific actions is shown on slide 14: the delta between freight costs and our ability to pass that through to our customers. The left-hand graph on the slide shows the global container freight index for the past three years, from January of 2021 to January of 2022; you can see the dramatic increase in freight costs of over 300%. And that comes on the heels of the prior 12-month cost increase of over 200%. Now turning your attention to the right-hand graph, which is our delta between freight cost and freight we pass to our customers, you can see that the first quarter of 2022 was the smallest gap, or said differently the best quarter we've had in the past six quarters of closing this gap. This comes as a result of standardizing our approaches to cost pass through and eliminating free freight on volume discounts. So coupling the cost-out activities and pricing actions with our capacity expansions will allow us to continue to profitably grow. On slide 15, you can see our anticipated CapEx for 2022, which is unchanged from our prior guidance in the range of $50 million to $55 million for the full year. The green boxes are updates today. The first is that we have completed our vacuum insulated pipe manufacturing lines in our European shop. The second is our first quarter 2022 CapEx spend of $12.6 million. And finally, we plan to share our next series of CapEx projects for 2023 through 2025 that are invested in next week. Now, we don't always time our capacity expansion perfectly. We came pretty close with the timing of our newest Brazed Aluminum Heat Exchanger furnace being online. An update is shown on slide 16. This line is scheduled to be fully operational in the first quarter of 2023. This adds flexibility for a variety of core sizes as well as adding a location that's close to New Iberia, Louisiana for ease of transport of the brazed cores to our water-adjacent cold box facility. Also making great progress is our Sri City, India expansion on slide 17, primarily for tanks and potentially trailers, already partially in use as of this month, expected to be 100% operating in July of this year. It adds another level of flexibility for us in the region for India manufacturing as well as for export. And we'll utilize it as we expand our water treatment business in India. As a reminder, we booked record orders in India as a whole last year. Now let's look at the progress by segment as well as some specific wins in our Nexus of Clean starting on slide 18. As I mentioned previously, each segment's sales were up 14% or more when compared to the first quarter of 2021. And the record Specialty orders from 2021 are starting to convert to sales as well. Both reported and adjusted gross margin as a percent of sales sequentially increased not just for Chart as a whole, but in each of our four segments compared to the fourth quarter of 2021. So slide 19 is our menu of Clean Solutions that you've seen on numerous occasions for the Nexus of Clean: Clean Power, Clean Water, Clean Food and Clean Industrials. While much of the past two months has been around immediacy of natural gas and LNG, there has not been a slowdown in the focus and action surrounding more sustainable and ESG-oriented answers. That's the second time that I've said that exact sentence in this call to date. And that's really important because we're seeing multiple different and insular types of focus on ways to solve for the energy discussion that we've been having in the macro environment. So we're pleased that we inorganically completed the acquisitions and investments that we did in late 2020 and throughout 2021. As we're seeing numerous opportunities across these inter-linkages of clean options. And you can see some of those examples on slide 20. L.A. Turbine had the highest order quarter in five years, while Earthly Labs had historically record-high orders, including orders with 12 new customers. These 12 new customers contributed to our total 84 new customers in the first quarter. Water Treatment sales grew over 500% from Q1 2021 to Q1 2022 and sequentially grew 21% over the fourth quarter. Despite the water treatment shop team members being hit hard by COVID the first part of this quarter. One of the very exciting parts of the Chart water business from my perspective is seeing the cross selling between our core Food & Beverage customers, Blue & Green and AdEdge’s water customers, Earthly Labs, small-scale carbon capture for breweries, wineries, and distilleries and our larger-scale Carbon Capture business SES. One example is Blue & Green sold the largest industrial sale in our history for a containerized ASU unit to International Flavors & Fragrances, or IFF. Blue & Green introduced IFF to SES and they did a paid engineering study for our cryogenic Carbon Capture technology for large-scale industrial manufacturing. Since Earthly Labs joined us in December of 2021, and coupling up Food & Beverage water solutions and small-scale Carbon Capture, we've had 28 cross-selling opportunities between these businesses already with total order potential greater than $40 million if each comes to fruition. This month, we launched our sustainable brewery solutions package, an all-encompassing approach to beer brewing operations. That includes rain harvesting, water treatment & reuse, carbon capture and storage, and dosing. This is a perfect example of the Nexus of Clean. Industrial Carbon Capture opportunities continue to increase. In January of this year, we had 199 potential SES cryogenic Carbon Capture customers. As of the first week of April 2022, we had 252 and have sent 148 proposals out and were under 81 NDAs for SES large-scale Carbon Capture technology. This past quarter, there's also been an all-at-once interest in our gas-by-rail offering as seen on slide 21. We saw orders come in for argon rail cars with a pipeline of more to potentially follow in a large commercial pipeline of LNG rail cars on the horizon with commercialization taking hold in other geographies. We're uniquely positioned to serve the gas-by-rail industry. We expect to increase the size of our addressable market for this offering in the coming months if the commercial pipeline continues as it has this past quarter. Slide 22 addresses why we are seeing more LNG opportunities. We shared last quarter that was the first time in our history where the three facets of our LNG offering were all increasing at the same time: those three being big LNG, small utility-scale LNG and LNG equipment. This quarter’s macro environment, as I laid out at the outset of the call, coupled with a few charts specific wins is driving the opportunity even higher. You can read the macro bullets on your own, but let me add a little bit of color to the right-hand side of the slide. Modular midscale approach to export terminals is gaining traction beyond the U.S. Gulf Coast, including in regions such as South Africa, which is different than before when larger grassroot process opportunities were typically solely North American. IPSMR and IPSMR Plus continue to receive qualification by LNG operators including international companies, most recently qualified by TotalEnergies for their upcoming projects. Couple this with our ongoing differentiation via many international patents and our latest process patent which we had announced on our last call. Our process lends itself to retrofitting for increased gas output in brownfield locations, and IPSMR efficiency leads to lower CO2 per tonne of LNG. So our heavy hydrocarbon removal process handles the extreme gas compositions while maximizing LNG production. And finally, IPSMR is proving to be an ideal solution for floating LNG. So now turn to slide 23 and you can see the increase in our real commercial opportunity pipeline. Three main contributors: first, the resurrection of more big LNG projects. Second, the addition of specific international liquefaction opportunities and third, the increase in potential floating projects. Export terminal projects that were either considered dead or at a minimum a longshot are now back with fervor. For example, just yesterday, the Magnolia LNG project for which we will have content. This is a project that's already FERC and DOE permitted and received DOE approval for an increase to Magnolia LNG’s authorization to an additional 0.8 million tonnes per annum. This trend in general is reflected in the doubling of the number of reasonably possible projects to move to the order stage in the next two years. I'd also point you to the second from the bottom row on the lower chart, showing the doubling of floating LNG projects in our bid pipeline. And while the order potential size of small-scale LNG hasn't dramatically increased, the number and dollar amount of projects that we think move ahead this year certainly has. Some of these opportunities in the coming few months could drive the potential to reach the higher end of our guidance range, as shown on slide 24. Our anticipated 2022 full-year sales outlook is in the range of $1.725 to $1.85 billion, with associated non-diluted adjusted EPS of $5.35 to $6.50 on approximately 35.83 million weighted shares outstanding. The weighted shares outstanding number is an increase from our prior guidance, which was 35.6 million shares. All of this assumes a 19% tax rate. Our current sales outlook includes approximately $25 million to $40 million of big LNG-related revenue in the year. We want to reiterate again that our sales timing is expected to sequentially increase throughout the year with big LNG revenue, primarily in the latter part of 2022. And I'd say latter half; we debated semantics on that, but suffice it to say that there's nothing meaningful from big LNG revenue in Q2. The range provided here today is for the second half. Recently, key customers from our HLNG vehicle tank products lowered their 2022 purchasing forecasts as a result of the macroeconomic challenges in the vehicle industry, citing specific second quarter 2022 impacts. We do anticipate that this is timing into 2023 as the vehicle industry works through their supply challenges. There are specific opportunities I mentioned on the last slide in our commercial pipeline that, if booked as orders in the coming few months, could drive our outlook toward the higher end of the range. As we said previously, we do anticipate the first half of 2022 will continue to have a margin drag from historical levels from the ongoing macro challenges but increasingly be offset as the year progresses by the positive impacts from the actions that I've laid out today. Now with big LNG orders booked and anticipating additional big LNG orders later this year, our 2023 through 2025 outlooks all increase meaningfully. And perhaps this is the biggest modeling takeaway of the call. As I mentioned earlier in the call, we made the decision to continue our strategic safety stock inventory build and in turn this resulted in lower free cash flow for the first quarter of 2022. It allows us to meet our customers' ongoing delivery timeliness and record demand levels, thereby continuing to secure additional business. Even with these challenges and this strategic decision, our net cash used by operating activities was only negative $22 million, and when adjusted for unusual items was positive $8 million. This included an increased inventory in the first quarter of 2022 driven by the strategic sourcing decisions we made to add the safety stock, the increases in material costs and the purchasing of material for our larger projects that were booked in the fourth quarter of 2021 and the first quarter of 2022. So even considering the inventory headwinds, we do continue to anticipate that with the payment schedules for big LNG projects working in backlog and some of the other working capital activities on the horizon that our full year 2022 adjusted free cash flow will be in the range of $175 million to $225 million. This month, we did release our third annual sustainability report, which we're very proud of highlighting the meaningful progress we have made toward our 30% carbon emission reduction target by 2030 as well as all progress on all of the elements of our ESG activities. I encourage you to read the entire report, as I obviously can't cover it all on this call. But I'm going to point out just a couple of notable items. Last year, we reduced our GHG intensity metric by about 14%. Last year, we instituted an ESG component to our short-term incentive awards. And we've maintained that metric-driven target for this year's awards too. And in summary, we contributed to five of the United Nations Sustainable Development Goals. Part of ESG is safety as our number one priority, including as of the end of March 2022, having our lowest ever 12-month total recordable incident rate. Many of you — how easy is it for competition to enter these very attractive applications and markets that we play? I've shared on new entrants that cryogenics is not easy, not the process, not the technology design or manufacturing of these types of solutions. One such reason is that it has to be done with safety as the number one priority given the high pressures, flammability and other varying characteristics of handling these molecules. Our biggest safety advocate at Chart, and I would go so far as to say in the cryogenic industry, is Tom Drube, one of our very own engineering fellows and Vice President of Engineering. This month Tom received the distinguished Charles H. Glasier Safety Award for 2022, which is presented annually by the Compressed Gas Association to an individual in recognition of their safety leadership in the industrial gas industry. We are very proud to be on the same team as you, Tom. Thanks for all of your safety work. And now let's please open it up for Q&A.

Operator: Our first question comes from John Walsh with Credit Suisse.

Hi, good morning and congrats on the quarter.

Thanks, John. Good morning.

So I guess kind of the first question. Appreciate the detail around that big order pipeline increase for the big LNG projects. Given how strong you're seeing demand, can you talk about any changes you're making, in terms of maybe the percent you get as an upfront payment, anything around favorable pricing terms, anything else that you're able to kind of highlight there, given the strong demand backdrop?

Definitely. And I would say generally speaking on these larger projects as a whole historically, given the size of them, the ability to run them through our shops where shops are set up and the absorption impacts, they are higher than our average target gross margin. And that's based on the 30% historical high rates. In terms of the current state of affairs, we've been very conscious around ensuring bid validity timing with respect to material cost, which is an important piece of ensuring that we maintain the appropriate margin levels ourselves. And then in conjunction with that, given the difficulty of getting material and the higher prices of it, working with those operators, either directly or via the EPC to ensure that they understand what that material cost looks like and when is the right time to buy that is which in turn does change that cash flow profile for us to be more tilted toward the front end. I would say that as a whole, on all of these projects we were never upside down on cash flow with respect to material. And that continues to be the case maybe with a little bit more wiggle room up front now just to give us some flexibility to be able to appropriately purchase materials. And that same discussion applies fairly similarly on the smaller scale side too; there could be some exceptions on the smaller scale side, just depending on what project it is, or if it's a new application. And then in terms of pricing as a whole, we were very transparent with the customers on these big projects about the material cost environment that we're in. And so it's not us trying to grab a massive share of additional price. It's, hey, this is the cost of materials right now. And if you need to get started now, this is the amount that it has to be. So I'd say as a whole, we've been able to all in all, maintain, if not improve a little bit, both the cash and the pricing side.

Great. And then maybe just as a follow on to that, you're talking about better margins as we go through the year. If we kind of isolate price cost, either on a dollar basis or a margin impact, can you help us understand how that improves as we go through the year? Thank you.

So — meaningful, there's two pieces of the answer to that question. There's obviously many more than that. But let me summarize it in two pieces. Two being, the backlog burned off of the lag from last summer and the second and third quarter of last year. And then the second being the timing around some of these midscale, small scale and larger projects, which we had a chunk of, and those are the types of projects that had material bid validity. And so we were able to really get a meaningful mix as those start to take hold in the second half. So I'd step Q2 up moderately. But really, the biggest increase is going to be Q2 to Q3. And then we'll see that that level exit the year, maybe a little bit better in Q4; that'll really just depend on how some of the bigger LNG projects' revenue recognition between Q3 and Q4 plays out. But the most material stuff on the margin profile side on gross margin as a percent of sales will be Q2 to Q3.

Great. Thanks for taking the questions.

Thank you, John.

Our next question comes from Martin Malloy with Johnson Rice.

Good morning.

Hey, Martin.

Hey, I was wondering if maybe you could expound a little bit in terms of what you're seeing for demand on the LNG equipment related equipment once it gets to the other shore, the downstream LNG equipment, and in particular, what you're seeing in Europe. I know you mentioned in the press release from a European government organization, I think it was tens of millions of dollars worth of equipment orders; I assume that was LNG related. But maybe you could just help us with the magnitude of demand that you're seeing for the regas, transportation, storage type equipment.

Yes, great point. I would say that on the order you referenced, the European government order is around trailers; so again, around transport. We have seen an increase in inquiries around regas terminals in Europe for each of the individual countries that you've seen in the news looking to gain some more independence from an energy perspective. We haven't seen a material increase yet in orders with respect to regas terminals; where we're seeing more of that activity is on the infrastructure side itself. If I need a near-term solution — for example, I can get gas here, but now I need to move it — ISO containers are a great example and we're starting to see an uptick again in ISOs. Fueling stations is another area where we continue to see a high level of inquiry. So building the infrastructure once the gas gets there is definitely continuing to pace. Inquiries have increased on the regas side, and so more to follow on that. I think we're just starting to see that happen. The biggest discussion: there's two parallel paths of discussion happening in particular with the EU Member States. One is I have to make sure I solve for next winter. And two is I better get moving on a longer-term plan. And so we're seeing that manifest itself both through the equipment side on natural gas, but also through some of these alternative energy discussion points. So it's not that they've completely thrown the sustainability focus away. They still have to solve for both in parallel.

Great, thank you. And as a follow up question, I think on the last call you talked about gross profit margins approaching around 30% exiting the year. Is that still a good target?

Still a good target. I think we characterized it as exiting the year. And that just really goes to my answer to John's question around some of that bigger projects work. Is it Q3, Q4? So it's very fair to still state that as the target.

Great. Thank you.

Thanks, Martin.

Our next question comes from Chase Mulvehill with Bank of America.

Hey, good morning, Jill.

Good morning, Chase.

I guess first question, I'm going to stick on the LNG theme. Obviously, you've had some pretty strong LNG orders so far this year, and those probably continue. You've talked about the three larger orders on your Stage Three, Plaquemines and Driftwood this year. But if we look past this, and you've probably had discussions and ongoing discussions, could you talk about the timing of more big LNG orders here in the U.S. and maybe, I don't know, size in MTPA, or anything you want to kind of frame for us once we get past these three orders?

Yes, that's a really good point. Let me address with some specificity. Lorenzo of Baker Hughes commented 100 to 150 MTPA coming, starting construction in the next couple of years. We would concur with that general estimate. From there, some of these projects might actually fall in the middle there, but let's just talk about them after those three. We're seeing various different size MTPA projects. Some of them are add-ons to existing projects in the United States; those add-ons are in the range of two to four MTPA to existing sites. We're seeing the potential for a U.S. project maybe in the eight MTPA range. Outside of the U.S. there are projects that have the potential to move ahead. You've got CP2 (Cameron Phase 2) that certainly is one that moves ahead in the coming couple of years. And then you've got other projects on the U.S. Gulf Coast ranging in the 10 to 15 MTPA range. So you could guess their names. The second tranche of projects I mentioned might start in 2024; they may get started in 2024, and that second tranche is also pretty big. That is different than what we had previously believed where there might be a hiatus in the middle of the decade. Now we view this as projects continuing to stack on themselves without that hiatus. So the second tranche is meaningful as well.

Okay, that makes sense. Can I quickly follow on: you said an MTPA for an international project. Would that one be modular as well, or would it be a larger stick project?

It would be modular as well. We're pretty excited. There are a couple internationally that have changed direction now to modular midscale from their original thought process, and we're pretty far along in those discussions.

Okay. And then a quick follow up on Specialty Products: you talked a little bit about the softness in the first quarter. Could you provide an outlook for the rest of the year as this segment recovers, especially on the margin side?

Specialty continued in terms of demand as we had expected it to be in the first quarter. The demand side is in line. When you look at hydrogen orders at $30 million, that's all equipment, so that's actually a pretty good quarter when you're talking all equipment and no liquefaction. We expect specialty to continue to grow sequentially and build off the starting point there. From the profit side, the first quarter really the biggest impact on specialty was HLNG vehicle tanks. We had to rejigger capacity due to changed forecasts from vehicle makers related to semiconductor shortages. We expect that to sequentially step out as the year continues with gross margins increasing sequentially every quarter, with the second half stronger than the second quarter because of the timing on our liquefaction revenue, both helium and hydrogen. We expect the second half to be back in the mid-30% gross margin range for that business.

Okay. Perfect, I'll turn it back over. Thanks, Jill.

Thanks Chase.

Our next question comes from Eric Stine with Craig Hallum.

Hi, Jill.

Eric.

Good morning. Can we talk about any details you can provide on that hydrogen agreement with the industrial gas company? I'm interested as you've kind of seen a little bit of a shift from the first movers to now the really big players getting into it. Maybe details on that agreement, anything you can share on potential outlook in that regard?

Yes, that was a very big win for us. We're really pleased; any of those types of agreements are very good. When you get a customer that is well established in handling and building larger scale hydrogen, that's even more impactful to our hydrogen outlook. We can't disclose the customer's identity, but this covers a wide variety of geography from the U.S., Asia — including where we expect China hydrogen to expand — Europe and North America, including Canada. It covers all the equipment that we provide, and that includes brazed aluminum heat exchanger cores, which is a really big win for us. Historically, we didn't typically serve these larger customers on the brazed side; there were incumbents like Sumitomo and Kobe. Since Sumitomo had challenges a couple of years back, we've taken this market advantage to get our offering tried in the field. That ability has proven that our brazed cores perform well. So this is a win for scale, speed and projects that are funded and happening now. And it's a win for us on getting our equipment into more geographies, all of which require specific equipment certification on the hydrogen side. Having that or being partially on the certification process is another differentiator for others trying to enter that space.

Is it fair to say there were other agreements like this out there, given your place in the market and what you just talked about on the heat exchanger side?

It is fair to say that we have a variety of agreements at various stages on hydrogen, on Carbon Capture, on general products. And now we're starting to see that step up a little bit on the water treatment side. So yes, it's very fair to make that statement.

Got it. Maybe just turn to big LNG. I thought it was interesting that Plaquemines Phase Two order came earlier than you probably thought. Given the acceleration of size and timing of this, and that this cycle probably goes longer, what are you seeing in terms of the advantage — you've got scarcity of production capacity — driving those potential orders your way?

Yes, I concur with that summary. It was a surprise to us as well to have that come our way earlier in the year. I think the size of these and the continuation of them without a typical mid-decade hiatus means you will see a steadier state of construction over the coming decade. We got pretty close on timing of capacity extensions, which has been beneficial in our ability to take on more of these projects of all sizes. Another advantage is speed: we've done so many of these that we can do them in very short lead times. And if the lead time we quote isn't short enough, and a customer says they need it sooner, we're able to make that happen. That's the biggest differentiator. Coupled with our expansion, it gives us confidence to serve specialty markets requiring brazed aluminum heat exchangers for helium, hydrogen or biogas. It's the combination of experience, proven products and available capacity that allows us to be flexible and meet customer schedules.

Okay, that's great. Thanks, Jill.

Thank you.

Our next question comes from Ben Nolan with Stifel.

Hey Jill. I wanted to get to something that didn't come up much, but seems like it should be increasingly a thing as we're seeing a lot of oil and gas development and drilling and rig counts going up. An area that has been nascent for a little while is the air-cooled heat exchangers and developments on gas processing. Are you starting to see any green shoots there at all?

Yes. It is a little early to make a broad statement, but in short, yes, we're starting to see green shoots on those more traditional applications, whether it's petrochemical or natural gas processing. Last year my metric was quoting activity increasing; now I'd say order activity is increasing. These projects are moving quicker from quote to order. We've seen that in our order book over the last couple of quarters. The VRV shop in Ornago has seen a couple of bigger projects in the 8 to 12 range for these types of applications. So this year, we could see that as an increase versus our conservative current outlook.

And then as a follow up, you mentioned 30 hydrogen liquefaction projects you're quoting on. Any sense of how you see that playing out over the course of the year relative to where you were?

We had not originally anticipated a hydrogen liquefier order in Q1; we expected equipment orders. I would be disappointed in our commercial team if we didn't have a liquefier booked in Q2. I think you'll see more activity in the second half of the year as more projects get funded and go into construction. Realistically, I think you get one in Q2, and then two or three in the second half.

Perfect. Appreciate it. Thank you.

Thanks Ben.

Our next question comes from Robert Brown with Lake Street Capital.

Good morning, Jill. Just want to follow up a little bit on capacity given the demand growth. When do you see capacity constraints and when would you have to add capacity? Or do you feel like you're pretty good for the next couple of years?

Our strategy on capacity expansion is to have three to four meaningful capacity expansions in flight at any given moment. We have a very detailed plan on that which we'll share some of next week. You see the staggering of how we have India coming online midyear this year; the Brazed Aluminum line coming online early next year; the trailer expansion in Germany will come online mid next year. We look at demand profile and whether we have base-load volume to support expansions. For example, the Germany trailer facility expansion already had base-load volume and with the European government order it becomes a sub one-year payback. Typically these expansions take about 12 months if they're rooftop. Our next tranche of expansions: one to two will kick off later this year — one on the energy side and one on the tank side — and that will allow us to meet more specialty demand and continue to take on some small-scale LNG. We use a step approach to timing these projects to execute flawlessly and still deliver on time. You will see that continue through 2025 in our planning horizon.

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

Our next question comes from Marc Bianchi with Cowen.

Hey, thanks. And thanks for slide 28. Made the morning go a lot more smoothly for me.

Yes, I was going to call it the Marc slide. But we didn't know if you'd appreciate that or not. Thank you for the suggestion.

Pointing out my inability to do math. So we've got like $25 million to $40 million of big LNG revenue baked into the revenue guide for this year. If I stripped that out, we're kind of like $1.7 to $1.8 billion for the non-big LNG revenue this year. I'm curious how you see the order outlook ex-big LNG maybe on a book-to-bill basis versus that $1.7 to $1.8 billion?

I think our expectation in Q2 is that we would be certainly in the 0.5 range on book-to-bill and then it steps up in the second half with more of these small-to-mid projects that are non-big LNG liquefaction projects. You'd expect that to be closer to 1.1 to 1.13 book-to-bill in the second half.

Okay, super. And then just a steer so everybody is not over their skis on the second quarter: I'm thinking maybe revenues up in the ballpark of 10% and you get 100 basis points of margin expansion on gross profit. How do you react to that?

I will give my legal disclaimer that we will not give quarterly guidance. I think you are spot on.

Okay, great. I'll turn it back. Thanks.

Thanks Marc.

Our next question comes from Tom Hayes with Northcoast Research.

Thanks, Jill. Good morning. I was wondering about the Food & Beverage line. What really is going to push that forward in 2022?

Yes, it's interesting because the Food & Beverage market includes a lot of different products that go into that market. When we talk Food & Beverage specifically, that excludes Earthly Labs small-scale carbon capture because we capture that through the Carbon Capture side, but you're still hitting Food & Beverage customers. Let me answer in two parts. The first is traditional Food & Beverage — our tanks and our dosers for national account applications, like Chick-fil-A — those products see franchise and infrastructure build this year. Q1 was really good for Food & Beverage in the order book, which was surprising. We see that continuing to increase as the year unfolds. On the Earthly Labs side, since they joined us, this is a prime application for many customers we already have, so we're able to quickly cross-sell. We're starting to sell larger units (the LM) which is about six times the cost of the smaller unit; we sold the first of those last quarter and are seeing abundant interest. So Food & Beverage growth will come from both traditional tanks/dosers and Earthly Labs carbon capture/water treatment cross-sales.

Great. Appreciate the color and looking forward to the meeting next week. Thank you.

Thank you, Tom. I look forward to it.

Our next question comes from Ian Macpherson with Piper Sandler.

Good morning, Jill.

Hey Ian, good morning.

The Greenstone Renewables LOI was exciting enough to be a headline item. Can you expand on that opportunity? How big is that project for you over time? What are you doing and what's the duration?

I included it as a headline because it's an exclusive arrangement with us. I see it as a multi-plant opportunity. While we're focused on the one we expect to potentially move to order later this year, I like the exclusivity for a company planning multiyear build-out. The initial plant is expected to be in the $35 million to $40 million headline price range for a traditional hydrogen liquefaction plant at 12 to 15 tonnes per day. We expect the ability to replicate and gain efficiencies across multiple plants, improving the margin profile over time.

Thanks. On slide 23 you highlighted the big LNG pipeline more than doubling in number of projects and increasing potential revenue. There's concern that EPC capacity could be a bottleneck to prosecute that activity. Do you agree with that? How do you view potential EPC or labor constraints?

We would disagree with the notion that EPC capacity is the primary critical path. The capacity is generally fine, and charging equipment long lead times are not the limiting factor. The modular move helps dramatically because modular reduces onsite labor needs versus stick-built. EPCs are still willing to bid and execute; you may see some tension depending on the EPC and project, but they seem to be figuring it out. Fab yard capacity might be a constraint in some cases; we've seen interest in using multiple fab yards to spread the workload rather than rely on a single fab yard. Overall, modularity and multiple fab yards mitigate capacity risk.

That's great. Thanks, see you next week.

See you next week.

Our next question comes from Pavel Molchanov with Raymond James.

Thanks for taking the question. Back to Europe and specifically green hydrogen: in the 60 days since the war started, have you noticed any substantive shift in the level of private sector or governmental awareness of green hydrogen as a displacement to Russian gas?

Anecdotally, yes. There's been an increase in conversations and urgency on green hydrogen in Europe and other geographies. Organizations are moving from hypothetical plans to action planning sooner, not necessarily translating to orders yet, but accelerating the conversation and planning stage.

Understood. A housekeeping question: the last four months is the longest period while you've been CEO that Chart has not done another M&A deal. Is that deliberate?

It is deliberate. We had a 12-month window starting late 2020 to get deals done that fit our portfolio at disciplined valuations, and we completed a number of those. Since then, we've been selective and passing on deals that don't fit our valuation or strategic criteria. We're also focused on absorbing and integrating the acquisitions we completed, which is important to realize synergies. We went live on JD Edwards in Q1 at both Cloud Technologies and AdEdge, which helps integration. Deliberate, but not permanent: we continue to evaluate opportunities that fit our profile and could still do accretive deals at similar headline prices to what we've done in the past 18 months. Next week we'll talk through three or four key areas we're still opportunistically looking at.

Very clear. Thanks again.

Our next question comes from Atidrip Modak with Goldman Sachs.

Hey, Jill. Can you talk to the competitive landscape and your position, particularly with the IPSMR technology as you think about the modular LNG trains expectation going forward? What kind of market share do you think the process technology could have?

IPSMR differentiation is particularly strong on heavy hydrocarbon removal, retrofits, floating LNG and for smaller plot sizes where modularity is important. IPSMR and IPSMR Plus can be retrofitted to increase output; in some cases, IPSMR can generate more gas in the same space for the same CapEx and OpEx versus others. We're pleased with traction internationally. Other technologies are also very capable, so we expect a mixed market. For modular midscale (excluding base load), IPSMR has the potential to capture 40% to 50% market share in that space. On small scale, we believe our potential market share is meaningfully higher because there's less competition.

And how are you thinking about capital allocation between organic, inorganic investments and potential return of capital over time?

Right now, organic and inorganic investment for profitable growth is the priority. We're doing more organic capacity projects, and inorganic remains opportunistic and disciplined. We expect that as we get paid for big LNG work, we'll accelerate debt paydown and move toward sub-one leverage. At that point, the board would consider returning capital to shareholders. For now, investment for growth and debt reduction are top priorities.

Thanks. I'll turn it over.

Thanks, Ati.

Our next question comes from Craig Shere with Tuohy Brothers.

Hi, I want to pick up on Atidrip and Pavel's questions. On the big LNG projects, what proportion would you say are actively considering Chart's full IPSMR technology suite? Internationally, can you provide color about growing Chart content opportunity per international order versus a year or two ago? And finally, do you see the increased 2023 to 2025 opportunity in LNG completely additive to the prior hydrogen outlook or could the hydrogen outlook be deferred as traditional energy independence takes precedence?

When looking at projects 5 MTPA and above, roughly 60% of potential projects would be in conversation for IPSMR. Some have incumbents whose process is installed, which makes displacement harder; risk-adjusting that, you'd see a somewhat lower effective percentage. International opportunities are additive compared to a quarter ago and are similar in size to U.S. Gulf Coast work if we win IPSMR on those projects. On hydrogen versus LNG: we believe hydrogen is additive, not a displacer. Many of the 419 hydrogen customers have nothing to do with LNG. Some LNG players may contemplate hydrogen, but retrofitting an LNG facility to add hydrogen is not a near-term step that will slow LNG construction. So we expect both to progress; how their timelines cross over time is uncertain, but we view hydrogen opportunities as largely additive this decade.

How easy would it be to retrofit or add a 10% hydrogen blend to a large-scale facility?

It depends on many factors. We have looked at this for multiple customers, mostly on the smaller scale side. In many cases you can design in points for future blending — in some cases up to 25% or 30% hydrogen. There would be metallurgy and equipment considerations — compressors, piping, interconnections — so it would require coordination among multiple vendors. It's realistic and something you will likely see more of, but not a 2022-2024 dominant trend.

Great, thank you.

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