Good morning, and welcome to the Chart Industries, Inc. 2024 First Quarter Results Conference Call. The company's release and supplemental presentation were issued earlier this morning. If you have not received the release, you may access it by visiting Chart's website at www.chartindustries.com. A telephone replay of today's broadcast will be available approximately 2 hours following the conclusion of the call until Friday, May 31, 2024. 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 the 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 over to Ms. Jill Evanko, Chart Industry's CEO. Thank you. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining Joe Brinkman, our CFO; and me to walk through our first quarter 2024 results. For all periods referenced, all metrics are pro forma for continuing operations of the combined business of Chart and Howden, unless otherwise noted. Starting on Slide 5 of the supplemental presentation, the first quarter is typically our lowest quarter of the year, and this year is expected to be no different. What is different is that the first quarter of 2024 was stronger than our typical Q1 across the board resulting in setting first quarter records for orders, backlog, sales, reported and adjusted gross margins, reported and adjusted operating margin, reported and adjusted EBITDA and associated EBITDA margin. To summarize, orders were up 4%, organic sales up 18%, reported EBITDA up 73% and reported gross margin up 260 basis points. We'll discuss comparative financial metrics on the next slide, but a few standout items. First quarter sales of $950.7 million grew 17.4% or 18.3% excluding a foreign exchange headwind in the quarter. Also, Q1 2024 sales were our second highest sales quarter ever in our history, which is rare for a Q1. It also sets the stage for sequential growth in 2024 as we have not yet had a full quarter of Teddy 2, our Theodore Alabama jumbo cryogenic tank facility and our Tulsa facility CapEx that is still in progress. Reported gross margin of 31.8% was an increase, as I mentioned earlier, of 260 basis points compared to Q1 '23. This was also our second sequential quarter with gross margin at or above 31.8%. And all quarters, since we closed on the Howden acquisition, have been above 30% reported gross margin. This as well as seeing the P&L benefits from our synergy actions taking hold, drove adjusted operating margin of 18% and adjusted EBITDA margin of 22.3%. Similar to gross margin, this is the second sequential quarter where adjusted EBITDA margin has stepped up to be at or above 22%. And since the acquisition of Howden, each quarter has been at or above 21.5% adjusted EBITDA margin. Strong end market and Chart-specific demand continues, resulting in record backlog of $4.33 billion. Demand is also reflected in our increasing commercial pipeline, our highest ever at over $22 billion, up from approximately $21 billion prior. We have identified more synergy opportunities, open production at Teddy 2 and so in turn, there's an increase in our commercial funnel for marine, space and rail, and water treatment traction. We're also seeing broader content on international LNG projects to name a few contributors to this increased commercial pipeline. First quarter 2024 orders of $1.12 billion included record Repair, Service and Leasing segment orders, which increased 10.5% compared to Q1 '23. We also saw first quarter stronger demand than typical in our European industrial gas end market. We're seeing that strong start already through April. All of this resulted in a 1.18 book-to-bill, which is expected to continue to be above 1 through the year. The strength in terms of Q1 versus typical Q1 is also a contributor to us reiterating our full year outlook for 2024. Slide 6 shows the first quarter '24 versus pro forma first quarter '23. I'd point you to the far right-hand column, which is the year-over-year changes in each metric. On the prior slide, I commented about the 18% adjusted operating margin. This is a 620 basis point increase compared to last Q1. Both reported and adjusted EBITDA margin grew more than 550 basis points as shown in rows 10 and 12. And adjusted diluted EPS of $1.49 reflects a higher first quarter 2024 tax rate than is anticipated for the full year as we continue to expect full year effective tax rate of approximately 20%. Finally, free cash flow was negative $136 million, which included $47 million of CapEx, with $24 million of that related to our Teddy 2 facility. This free cash flow was in line with our internal expectations and included specific first quarter cash outflows that are shown on Slide 7. As we shared on our fourth quarter '23 earnings call, the first quarter always has specific cash outflows that occur once a year, and there were other specific cash outflows related to the 2023 divestiture fees and the Teddy 2 manufacturing facility CapEx payments. As you can see in rows A through G on the table on Slide 7, there were $219 million of specific first quarter cash outflows outside of working capital and normal course CapEx. Approximately $165 million of these are not expected to repeat in the second quarter of 2024. On the bottom left-hand side of the slide, you can see that we continue to opportunistically optimize our balance sheet, and we recently completed an amendment to our revolving credit facility with very strong bank support. This extends our RCF maturity date to 2029, and we received other favorable changes to terms and conditions. We continue to reiterate our financial policy as shown on the bottom right of the slide until we are within our target net leverage ratio range of 2 to 2.5. As I commented, there were about $165 million of specific cash outflows across five items that will not repeat in the second quarter. Turning to Slide 8, you can see our outlook for free cash flow in Q2 is approximately $175 million. It's clear we need to be explicit to align outlooks on free cash flow based on quarterly information, and therefore, we are providing the next quarter's outlook, and we'll do the same for the third quarter at the end of the second. Our Q2 cash outlook is driven by the nonrepeating Q1 cash outflows as well as items shown on the lower left-hand side of the slide, including sequential improvement in working capital. We anticipate the receipt of the project payments in Q2 of approximately $125 million across our top projects and additional collections, obviously, beyond those globally. We also expect lower and final sequential CapEx related to Teddy 2. We did have $6 million of Q1 CapEx for our Tulsa facility to increase capacity and throughput on the brazed line there and $2 million for our GOFA trailer facility expansion in Germany, all of which have existing backlog that will flow through these locations in the second half of 2024. And finally, we have no second quarter semiannual cash interest payment. To date, second quarter 2024 cash generation has started strong. Turning to Slide 9. A few points on the segment results. Starting with Cryo Tank Solutions, or CTS. First quarter CTS orders of $159 million decreased about 4% when compared to the first quarter of '23, driven by a large railcar order booked in the first quarter of 2023. The increase in CTS orders sequentially from the fourth quarter of 2023 is what is important today in our outlook, as we see continuing pickup in demand in global industrial gas as well as having completed certain large customer long-term agreement renewals in March and April of '24. Additionally, the first quarter general industrial orders within CTS were the highest in our history. First quarter CTS sales of $160 million increased 13.6% when compared to the first quarter last year. This is very strong year-over-year growth, given that typically CTS grows in low to mid-single digits. Reported gross profit margin of 20.5% is back in its normal range coming off of the 2021, 2022 lows from material price/cost lags. Next Heat Transfer Systems or HTS. First quarter '24 HTS orders of $237 million decreased about 30% when compared to the first quarter of '23, primarily driven by specific large project bookings in the first quarter of '23, including big LNG. March 31, HTS backlog was about $1.7 billion and does not include the IPSMR international big LNG award from an IOC that we expect to book in early 2025. First quarter '24 HTS sales of $254 million had an associated reported gross margin of 27.6%, a 160 basis point increase compared to the first quarter of '23, and sales increased about 35% for HTS. Moving to RSL, which is a gem of a segment when you look at margins in particular. First quarter '24 RSL orders were a record at $334 million. Orders increased 11.1% and associated sales of $301 million increased about 15% when compared to the first quarter of '23. It's also worth noting that we have had orders and sales growth above 10% consistently each quarter in RSL since we closed on the Howden acquisition. We're seeing a lot of demand, in particular, in APAC, for upgrades to refineries for environmentally friendly equipment. Reported RSL gross profit margin of 46.7% was another RSL record and gross margin in RSL has been above 43% each quarter since we closed on Howden. And finally, Specialty Products segment. In the first quarter of '24, Specialty Products orders were $391 million, which increased 40.5% compared to the first quarter of '23 and decreased about 2% when compared to the fourth quarter of '23. The sequential decline was primarily driven by a decrease in marine projects as we had a very strong fourth quarter '23 marine bookings. We expect marine and maritime bookings to increase throughout 2024 as we now have the Teddy 2 capacity. We'll come back to marine and heavy-duty sustainable transport applications in a few slides. Returning to Specialty. In Q1, we had our highest ever order quarter for carbon capture utilization and storage or CCUS in our history driven by increasing activity in larger-sized projects for us, in particular, in Earthly Labs. First quarter '24 sales of $237 million increased 6.7% compared to last year and sequentially increased just over 10% compared to the fourth quarter of '23, driven by timing of project revenue and the start of Teddy 2 preproduction. Reported gross margin in specialty was about 25%, and this was lower than we expect for the rest of the year due to specific project mix and first-of-a-kind project in the first quarter. We do bring first-of-kind projects in as there are multiple volume opportunities ahead as well as aftermarket associated with the new build. On Slide 10, we're showing the historical last 12 months or LTM pro forma trends. A key takeaway from this slide is that despite potential quarterly variances due to customer timing, the trend lines are all positive. I'd also point out that there was no significant drop-off in our order book even when considering $620 million of big LNG orders in 2022. This is another way that shows the diversity of our end markets and the resilience of our aftermarket business. We've grown sales to $3.7 million on an LTM basis from $3.3 billion in 2022 and we've taken our gross profit margin to 31.6% on LTM from 27.8% in 2022, and we feel that this is just the beginning as our demand remains robust. Our backlog and commercial pipeline are both benefiting from key macro tailwinds, of which 4 of the main ones are shown on Slide 12. First, starting in row 1 is global energy access. This is not only access but security, stability of energy and the fact that the world uses energy in everything we do. We continue to expect natural gas and LNG to be a part of this. Our customers are telling us this. The proof, though, is in our backlog with a variety of global gas-associated orders. Let's spend a minute on some things happening in the LNG market. You have the Cedar LNG project moving ahead with Chart content, multiple LNG players buying their own ship fleets and a lot of infrastructure being built globally. Beyond natural gas and LNG, hydrogen continues to have public and private support, and we're seeing this across multiple types of orders, ranging from liquefaction to storage to end use, including recently receiving a duplicate of our largest liquid hydrogen storage order in Europe to date. We also have strong visibility to the second quarter and the rest of the year, in particular, in our hydrogen pipeline. Moving to row 2. As we stay in our nexus of clean. Clean power, clean water, clean food and clean industrial are all intertwined. This is the case with the macro driver of clean water scarcity and it's getting more and more attention, particularly with the recent U.S. EPA designation of PFAS as hazardous substances. It's also important to note that in certain countries, clean water is a major political platform for government officials and clean water touches clean power when speaking to green hydrogen as an example. In a couple of slides, we'll discuss our Chart water offering and the associated commercial opportunity. So moving to the third row as discussed in item 1, there's growing demand for energy. It is in part being driven by artificial intelligence and data centers, which need electrification, energy storage, backup solutions and cooling. All these applications fit our offerings very well, inclusive of CCUS, specialty compression, fans, and air coolers, just to name a few. We have specific near-term commercial opportunities in these applications for data center heat rejection, power generation for baseload and peak shaving, and energy storage. Just this week, the U.S. DOE's H2@Scale initiative announced that a hydrogen demonstration facility has launched in Texas to provide power to the Texas Advanced Computing Center, or TACC, and please recall that we are one of the partners in H2@Scale. The fourth row on the slide is the need to address existing and build new infrastructure combined with a focus on decarbonization, especially in heavy-duty transport applications. This is supported, again, by both the public and private sector including the Biden administration's March 25 announcement of $6 billion of awarded spend via DOE for demo projects to reduce GHG emissions in heavy industrial applications. The private sector is progressing as well with collaborations to study and develop low-emission trucks, trains, ships and airplanes and is one reason we're very well positioned with our Teddy 2 tank facility to serve these larger applications, in particular, in liquid hydrogen. So turning to Slide 13. With our Teddy 2 facility and total solution offering globally, we're able to serve much larger heavy-duty transport applications including aerospace, space exploration, additional rail and onboard marine and the associated onshore infrastructure for liquid hydrogen. One such example is our new partnership with Energy Observer, specific to the Energy Observer 2, a liquid hydrogen cargo ship under development. The aim is to build an integrated hydrogen ecosystem, reducing the overall cost of liquid hydrogen and promoting its use in maritime transport. The establishment of a low-carbon maritime energy hub combined with low-carbon hydrogen production and the installation of port infrastructures is essential to achieving these objectives and we'll partner on associated equipment and technology, both with Energy Observer and our other partners. Another example is our recently executed MoU with GasLog LNG services to study the development of a commercial-scale liquid hydrogen supply chain, leveraging GasLog's latest development of a liquid hydrogen vessel and our extensive experience in cryogenics and large-scale liquefaction solutions for the global distribution network and infrastructure. Our commercial pipeline for marine LNG, base exploration and rail for our Teddy 2 facility is over $400 million. Since we officially opened the facility a month ago, we have added an incremental $80 million to the commercial pipeline for this facility of potential opportunities. As you can see on Slide 14, we have solutions and products that serve the macro tailwind we discussed in water, treating contaminants, including PFAS, arsenic, biological processes to name a few. Currently, in our commercial pipeline, we have 65 opportunities for PFAS. Specifically, 11 of those are new since the beginning of this year. As we've stated numerous times over the past year, there have been many benefits of the Howden addition to our business. One of the top on the list is the expanded aftermarket opportunity, as shown on Slide 15. RSL is 32% of our total revenues in the first quarter and with sales growth of 14%, consistent order growth over 10%, we're set to have this high-margin business become a larger part of our mix in the medium term.

I'll now hand it over to Brinkman to talk about 2024 and our medium-term outlook.

Thanks, Jill. On Slide 16, to round out the key drivers section, we show our main supply chain inputs. Generally, these have normalized from the highs we saw in 2021 and 2022. Carbon, stainless, and aluminum are all relatively stable and each near their lower points over the past three years. We continue to watch very carefully given the Red Sea situation, yet have not seen meaningful cost changes from it to date. Turning to Slide 18. With the foundation of the macro and specific key drivers we just went through, and based on our first quarter 2024 results being in line with our internal expectations, we reiterate our outlook. Slide 19 is an update to a slide we introduced in early November 2023 for considerations when you're modeling our 2024. Under positives, we have begun certain production in our Teddy 2 facility, so that is tracking well for 2024 revenue based on existing backlog. Additionally, we have approximately 63% of our next 12 months outlook covered in backlog, and we are seeing a trend towards larger project sizes, especially for Howden content. As stated on our Q4 earnings call, we surpassed our year 1 Howden cost and commercial synergy expectations earlier than originally anticipated. We are well underway on additional year 2 synergies. In the middle column, it is worth noting that while we are not dependent on the U.S. IRA to achieve our financial targets, we anticipate the 7 hydrogen hubs having potential incremental benefit to our backlog as they are deployed. When you think about our year and how the quarters play out, there are a few items to consider, including, but not limited to, further synergy realization timing in the back half of 2024, Teddy 2 revenue sequentially ramps throughout the year, specific larger projects that came into backlog in Q1 of 2024 will be later in the year revenue and into 2025. You can see our return on invested capital targets on Slide 21. Our medium-term outlook for our ROIC is mid-teens coming from a jumping off point of the last 3-year average of approximately 8%. We have made significant organic and inorganic investments to position our company for growth and are in the early days of reaping the associated benefits. Howden is accretive to our ROIC, and we now have less cyclicality with a shift to a higher portion of our business in aftermarket service and repair. On Slide 22, we again reiterate our medium-term financial outlook as we had previously shared in November 2023 and reiterated in January 2024. We have multiple contributors to achieving these, including our full solution mix is broader than just LNG and hydrogen, as you've heard today, and we play across the entire value chain globally. We now have a higher mix of aftermarket and services revenue and an incredibly large, diverse and global installed base. Price/cost continues to be a positive driver for us. Volume, productivity, and other Chart business excellence activities continue, and we have a midterm target of mid-30s for our gross profit margin on an LTM basis; we are at 31.6%, up nicely from a year ago and well on track to reach our 2026 targets. And last but certainly not least, we are benefiting as the industry is moving to a modular approach and IPSMR demand is going international.

Thank you to our entire one Chart global team who delivered a record first quarter while continuing to deliver year 2 synergies in the safest way possible, with a total recordable incident rate of 0.52 and 70% of our locations around the world having had 12 months or more without a recordable incident. Keep the momentum, team, safety with stakeholder orientation, strong work ethic, and giving back to our communities and operations. So thank you again to the One Chart global team. Please open it up for Q&A.

Your first question comes from the line of Martin Malloy from Johnson Rice.

First question, I wanted to ask about the RSL segment, where you've shown several quarters of growth in the order outlook. Can you discuss the potential for further growth and the factors affecting this? Is it primarily about processing more equipment through the service centers acquired from Howden and monitoring the equipment in different ways? Please elaborate on that.

Absolutely. And thanks for starting with RSL. I mean, as I commented in the prepared remarks, it really is a gem of the segment, double-digit growth in orders and sales throughout the time we've had Howden. There's still quite a bit of runway here. One of the things that we're doing as part of our year 2 synergy activities is we've created a global revenue operations team led by one of the aftermarket leaders of Howden that is going to pull together all of the remaining installed base from Chart legacy, and we're going to drive what we did in year 1 through that. There's dozens of other actions well underway to continue to take advantage of the runway that exists here, ranging from the digital uptime installed base. We did have our first digital uptime connection in Earthly Labs with a real brewery this past quarter. And so there are opportunities like that as an example. In terms of drivers impacting the margin in the first quarter, we had a very strong mix in the Americas. In China, RSL, we had very strong manufacturing operations efficiencies and so we see that opportunity continue ahead. In terms of drivers of the demand and why are we continuing to see this double-digit demand, the first thing I would say is because of the global footprint that we have and the ability to serve the world versus just North America and a little bit of EU like we had in Chart legacy is really a key contributor. We're also seeing a real strong push in many of our new build customers toward decarbonizing their existing facilities and locations, in particular, in the mining segment where the need for, again, clean air, hotter, deeper mines is driving some retrofits happening there. And then lastly, we are seeing some repair service retrofit activity on existing facilities in LNG as well.

Okay. Great. And then for my second question, I wanted to talk about the water side and the new EPA regulations and kind of what it means to Chart in terms of the scope that you're potentially able to sell into a municipal water plant?

Yes, this is an interesting situation. We believe the new EPA regulations will act as a catalyst for our business. Remember, we have acquired additional Water Technologies and BlueInGreen over the last four years to enhance our capability to treat various contaminants. The added water technology specifically targets PFAS. We have seen an increase in our commercial pipeline, but it may take some time for this to be reflected in the order book and activities. Private-sector companies are working to understand the implications for them and the steps they need to take. The fact that we have attracted 11 new opportunities out of a total of 65 in our commercial pipeline since the beginning of the year indicates that people are at least considering and discussing this issue. I see this as a medium-term catalyst for us, and we are well-positioned to capitalize on it. We also observe numerous international opportunities, particularly related to arsenic, and our treatment system is well-suited for that. We have received some significant international orders over the past 12 months, with a promising pipeline ahead. While water constitutes only a small percentage of our overall business, the potential for growth is exceptional, and there are no macroeconomic factors that would hinder that growth.

And your next question comes from the line of Marc Bianchi from TD Cowen.

I wanted to start with the orders. We had solid orders in the first quarter, but it didn't appear that any significant items were contributing to that. The question is whether this represents a good baseline level of orders to consider, with the potential to add large items later. When I look at the year-over-year progression, last year included some large LNG orders. Excluding those, the growth rate seems to be around 20%, which feels quite strong for a baseline. Could you discuss the outlook for that baseline level and what the expected growth rate should be?

Thank you, Marc. We had a strong quarter for orders, particularly for a first quarter, which is not typically characterized by such broad-based activity following Q4 spending. This indicates robust demand. Our business is seeing more frequent medium-sized orders as we target high-growth markets that are solution-oriented or project-oriented, rather than relying solely on LNG or hydrogen. I want to highlight that we anticipate strong hydrogen order activity in Q2, so I expect that trend to persist. Historically, we focused on large LNG projects as our primary indicator, but now we are seeing more consistency in medium-sized projects across various markets. To directly address your question, I expect this solid demand to continue. Looking back at the last seven quarters, six had orders above $1 billion, which informs my perspective on our ongoing book-to-bill metrics. In Q1, we did see significant LNG activity; however, we were pleased that our orders increased by 4%, especially when considering our performance relative to industry peers and the strong fourth quarter we experienced.

Yes. I also wanted to ask about free cash. If you're projecting $175 million in the second quarter, that means approximately $40 million for the first half. To reach the midpoint of guidance, you'd need to generate $550 million in the second half, which represents a very high conversion relative to what consensus anticipates for EBITDA. It seems there are some exceptional items expected in the second half. Could you elaborate on what those might be? Are there any one-time cash inflows expected that could support this outlook? Is there any seasonality to consider, and what should we expect in terms of the run rate conversion of EBITDA once we move past the current issues with Howden?

Certainly. To address the first part of your question, I will break it down. We experience typical quarter-to-quarter fluctuations in working capital, accounts receivable, and accounts payable. There are no unusual changes in working capital except for the fact that inventory levels remain stable. We have clear visibility on our capital expenditures (CapEx) timeline, and specifically for the second half of 2024, we expect a decrease in CapEx compared to the first half. Additionally, I want to highlight some points from Q2 regarding project milestone and payment for work completed, rather than for materials purchased. We have outlined a few of these for the second quarter. As projects increase our backlog in Q4 of 2023 and Q1 of 2024, we expect that this, along with the typical CapEx reduction, will significantly contribute to higher cash flow in the second half compared to the first half. Regarding run rate conversion, we aim for free cash flow to be a percentage of sales in the mid-teens.

And your next question comes from the line of James West from Evercore.

We had a strong performance in the first quarter, with good order levels compared to our global industrial peers, who are experiencing a decline in orders. I wanted to point that out. My first question is regarding carbon capture utilization and storage (CCUS) and hydrogen, specifically what you're observing in demand and which of these technologies you anticipate will gain traction first. There has been considerable back and forth about whether hydrogen or CCUS would lead the way, but it seems both are starting to advance simultaneously. I'm curious if you agree with that perspective and if that is what you are witnessing in terms of demand.

Yes. Thanks, James, and first of all thanks also for the callout on the absolute first quarter metrics. You're extremely pleased with those. When you look at CCUS and hydrogen, I think you summarized it perfectly in terms of what we're seeing, where they both seem to be increasing in activity and, in some cases, together. Our first quarter being our highest order quarter ever in CCUS is an indicator of that. You know better than anybody that I've been talking to CCUS for four years, and it's just been a little bit slow to get rolling. But now we're seeing real projects. And what I would say that's super interesting from our view in our portfolio that we're seeing the Earthly Labs offering, which we call small scale, is now what was originally $0.5 million orders, we're now getting $1 million to $5 million orders because the size is increasing. So it's the scale is increasing. And yes, I think that you're going to see that continue to be a key part of all of this. Then you start getting down the path of like the data center stuff and how CCUS correlates with that. And there's an immense amount of opportunity associated with the need for CCUS with respect to data centers. Hydrogen, we've seen hydrogen be fairly consistent. I was very pleased with the fourth quarter and the first quarter hydrogen activity mainly setting aside the absolute dollar amount and number of projects. The fact that it is truly going global, like we're truly seeing real projects with real money behind them, ranging from compression for heavy industrial in Europe to the liquid hydrogen storage tanks in Europe. That one is interesting to me, too, because historically, Europe has been gaseous mainly and now we're starting to see some liquid infrastructure coming into play. But we highlighted the Energy Observer because you're seeing now a correlation of hydrogen, liquid hydrogen for heavy-duty transport and the onshore infrastructure. So good momentum. The thing that we do watch carefully is the fact that you have a lot of people that want to do projects in hydrogen and not all of them get to FID. And so ensuring that there is funding available, financing available for these types of projects is something that we watch carefully. We believe the hydrogen hubs in the United States will likely begin to support the projects they'll initiate later this year or early next year, leading to deployment of orders into the supply chain.

Right. Okay. Okay. Got it. And then maybe just a quick follow-up for me on the margin. The margin performance was excellent in the quarter. And curious, and I know you guys aren't stopping here, you're going to take that margin higher. But how much more room do you think we have to go with respect to margin? And have we seen the full benefits of Howden and the increased aftermarket and the margin yet? Or is there still some, I guess, easy pickings to see here in margin performance?

We have a medium-term goal of reaching mid-30% gross margin, and we're progressing well towards that. There's a lot more growth ahead. While the first year with Howden was positive, we are now in a phase where we need to focus on optimization. Initially, we targeted easier gains, but now we are concentrating on refining processes. For example, we've had the chance to combine some of our internal regions, leading to savings by reducing the number of entities we operate. There’s definitely more potential for improvement. Additionally, as we increase our project and full solution business, even though there might be fluctuations from quarter to quarter, it positively impacts our margin over a longer timeframe. We're also seeing larger project sizes, especially with Howden. According to one of our Howden presidents, we've never had so many projects in our commercial pipeline that exceed $5 million. Historically, a $5 million project was significant, but now that size is becoming more common. This presents us with plenty of opportunities. Finally, our RSL aftermarket has performed exactly as we hoped regarding margin, growth, and stabilizing against cyclicality from large LNG projects or similar.

And the next question comes from the line of Ben Nolan from Stifel.

I have a couple. The first, I wanted to go back to the RSL and appreciating that it's probably an area where you're capturing some of the most synergistic benefit from the Howden acquisition. But what I think it's a little over 1/3 of the revenue mix now, it's growing at a pretty good clip. Longer term, what do you think, Jill, is a fair assumption for what RSL will be out of revenue after things settle out? I mean, could it be half of what you do or 40%. Just curious how you're thinking about where we land.

Thank you for the question, Ben, and for bringing up RSL. As I mentioned, it has performed as we anticipated, and in some instances even exceeded our expectations. There is still a significant opportunity ahead, and I am very enthusiastic about it. What excites me the most is the unique opportunity we have on the new build side. This is important because historically, we have leveraged such opportunities to either lead in innovation or facilitate market development, anticipating considerable volume for the new builds. Additionally, with our established presence in the aftermarket, we can now also pursue first-of-a-kind opportunities that show potential for aftermarket repair services. Ideally, I envision our revenue split for RSL to be around 45%, and considering the growth trends, that would guide us towards a longer-term forecast.

Okay. No, that's helpful. And then the other question is, we have seen some elevated pricing for things like aluminum and carbon steel. And I know that, that was an issue a couple of years ago. You guys took some steps to, at the time, ensure that you could pass through those costs. Could you maybe just talk through a little bit how that stands and if there is an element of whether we should see increased pricing in lockstep with increased cost of goods sold? Or is there any risk of a timing gap or anything like that?

Yes. As we've discussed before, the pricing mechanisms we have in place protect us well from fluctuations in carbon, steel, and aluminum costs. For projects specifically, we can lock in costs at the time of order or very shortly thereafter. This gives us very little exposure to market swings. As mentioned in the deck, carbon steel and aluminum prices have mostly stabilized. Although aluminum has seen a slight increase recently, it isn't a major concern. Therefore, we are well positioned to pass any increased costs along in our pricing.

Okay. And just to clarify, about how much is the cost of those commodities in the cost of goods sold. I assume most of it's labor, but just to frame it.

I would say it's less than 20% of the cost, Ben.

And your next question comes from the line of Roger Read from Wells Fargo.

Yes, I would like to ask Joe about the medium-term targets, particularly regarding improving gross margins and EBITDA margins, where we saw some progress in Q1. Within the orders and backlog you have, you mentioned the importance of disciplined price and cost in achieving these goals. How is that developing? What visibility do you have on the orders and backlog to confirm that this approach is effective? Additionally, how does this relate to productivity now that you've had Howden for a year?

Yes. Firstly, regarding the visibility of increasing EBITDA and margin over time, we have over $4 billion in backlog, which covers 63% of our next 12 months. We have good visibility on the price and cost dynamics, so we understand how our margin will progress moving forward. Additionally, as we mentioned earlier, with each passing quarter, we are realizing more cost synergies that are reflected in our results, creating positive margin trends. Furthermore, our Chart Business Excellence initiative is consistently generating additional cost advantages. Therefore, we are very confident in our medium-term outlook.

One other point to that is the increasing mix of RSL just naturally helps us there.

Yes, definitely.

Yes, that business has been stable, reducing some of the seasonality you mentioned. I want to address another question. You had to explain many one-time factors in Q1. Regarding margin improvement, how will that affect cash flow generation and free cash flow as we move forward? During the merger, different figures were suggested, but it was mentioned that there would be 80% conversion to free cash flow from cash flow. I don't expect that every quarter, but how should we approach free cash flow conversion? It seems like 95% to 100% is strong, yet we haven't observed that in the first few quarters following the Howden deal. I'm just interested to know how to view that, including interest expense payments and other seasonal items.

Thank you for your question. It's an important one. As I mentioned earlier, we've recognized the need to provide clearer guidance on what the upcoming quarter looks like, especially as we enter our first full year with the combined business. We're committed to enhancing visibility into our expectations. Your observation about reaching our medium-term goal of over 95% cash conversion is quite valid, and we understand that getting there will require a gradual approach. The metric we aim for accounts for various factors, including interest expenses and seasonal fluctuations we discussed previously in Q1. While we have a route to achieve our targets, it's essential to note that our improving EBITDA margins support this plan. We also expect to continue reducing our debt, adhering to our goal of a net leverage ratio of 2% to 2.5%. In the short term, around mid-2024, we anticipate being in the high 2s, but there is a clear path ahead. Achieving this will depend on consistently improving margins, reducing debt, and leveraging the growing synergies we are identifying that will drive these results.

Yes, I would like to add that, as we mentioned earlier, we are concluding a substantial capital expenditure phase with $47 million spent in the first quarter. For the entire year, we anticipate expenses to be around $120 million. We are wrapping up significant expenditures that are necessary to convert our backlog and increase throughput, which will drive sales. Additionally, the proportion of capital expenditure relative to sales is expected to decrease towards the end of this year and into 2025.

Okay. Appreciate that. Yes. I mean, like James said earlier, right? I mean, the order trends backlog for you all are much better than what we're seeing from others. So next step, the conversion, right? But thanks, and good luck.

Thanks, Roger. Appreciate it.

And your next question comes from the line of Eric Stine.

Could we revisit the topic of carbon capture? I know you mentioned it earlier, but I want to compare it to how you've discussed it in the past. You previously considered hydrogen to be about 12 to 18 months ahead. Given your comments this quarter, do you believe this is moving toward a more consistent and predictable business? Or do you think it will still experience fluctuations before that happens? How are you approaching this topic, and how does it compare to the development of hydrogen?

Thank you for highlighting that. As one of our long-time followers, you're aware that we've been discussing this for 4.5 years. Although it took longer than we expected, we are pleased to have introduced the technologies when we did, as it helped us establish early FEED and pre-FEED relationships with various stakeholders, some of whom will proceed. It's becoming increasingly real and tangible. We have considered how to discuss carbon capture and water as a percentage of our total business, as they are becoming sufficiently significant metrics for you to reference. We didn't include that this quarter, but we are close to being ready to share it. This is a qualitative observation, but I believe we are beginning to see global traction in carbon capture. In recent years, the focus on carbon capture has shifted from individual demonstrations to broader applications. Our solution, Earthly, gained immediate traction due to its cost-effectiveness and ease of installation, addressing CO2 shortages. The larger-scale implementation has taken more time, but we now have both our existing pipeline and a growing pipeline related to discussions on artificial intelligence and other energy-intensive activities. I see this as a relatively near-term catalyst. While I initially thought it was 12 to 18 months behind hydrogen, I believe it is accelerating. It seems to be catching up, having initially lagged by about three years, but we are witnessing a quickening pace. With record orders in carbon capture in Q1, we have a solid foundation heading into this year. Lastly, regarding carbon capture, we have reached our highest backlog at the end of the first quarter, which has more than doubled since last year, reflecting the strong performance.

And your next question comes from the line of Rob Brown from Lake Street Capital Markets.

Just wanted to follow up on the year 2 synergy kind of effort on, I guess, the cost side. What's sort of the key areas you're focused on? And how do you see that playing out for the rest of the year?

Yes. It's interesting because as we mentioned during our Q4 earnings call, we have already exceeded the initial cost and commercial synergies, and we plan to continue this momentum into years two and three. As I stated publicly, we will inform you once we reach $1 billion in commercial synergy orders, and we are certainly on track to achieve that milestone in the upcoming quarters, possibly even in the next quarter. On the cost side, year one primarily focused on easily attainable improvements, such as addressing our supply base and consolidating facilities where possible, which was limited. Now we are moving into areas like entity rationalization, allowing us to optimize costs while also benefiting from tax savings and effective tax rate advantages, which Joe mentioned in his remarks. We are also looking into tangible cost reductions, such as streamlining audit fees where we previously had multiple auditors for statutory purposes. There are many initiatives underway, and we will continue optimizing our processes. Additionally, as we become more familiar with the businesses, we are leveraging the talent we have to generate new cost synergy ideas. As of today, we are on track to meet our year two targets based on the original acquisition model for both cost and commercial synergies.

And your next question comes from the line of Pavel Molchanov from Raymond James.

You flagged the Chinese LNG orders. And I remember a decade ago when PetroChina was your biggest customer of the whole company. Are we seeing another LNG transportation boom in China? Or is this caused by something else?

We are definitely seeing LNG transportation infrastructure. I'm not sure I call it a boom yet, though, perhaps like a recovery, taking advantage of lower natural gas prices. But this is very broad-based, so it's not concentrated with any one particular customer. So we're seeing multiple orders related to, in particular, the LNG trailer side. So I think it's reflective of having been lower the last couple of years but also reflective of the fact that LNG natural gas is everyone's view. Well, let's say, I guess I can't speak for everyone. But broadly, our customers are saying it's going to continue to be a key part of their mix, their infrastructure and their energy source. So I think we'll continue to see that infrastructure for LNG, in particular, on transport, and ISOs movement import terminals, that type of thing.

And your next question comes from the line of Manav Gupta from UBS.

Can we get more details about the order with Element Resources or renewable green hydrogen? Also, could you provide more information about the collaboration with GasLog LNG Services? Since both are related to hydrogen, I'm assuming you can share more on those.

Thank you for the question. I want to highlight that Element and GasLog are excellent examples of the wide range of hydrogen applications in various locations. Element is ahead with its project in Lancaster, California, focused on liquefaction. Recently, they announced the acquisition of additional land for future expansion, indicating strong progress. This is a reflection of the growing U.S. hydrogen economy, particularly in California, and we expect to see similar developments across the country. There are more opportunities ahead with Element Resources, which benefits from disciplined leadership with extensive oil and molecule experience. As for GasLog, we are still in the early stages without a specific order yet, it's a partnership. We began to notice at COP 28 in December 2023 that the focus is shifting toward large-scale liquid hydrogen infrastructure, especially for marine transport, which previously centered around ammonia. The exciting aspect is that the onshore infrastructure for heavy-duty transport can integrate across industries. Currently, we are conducting studies with GasLog for marine applications and also working with companies in aerospace and other sectors. These efforts are likely to converge, creating significant future opportunities. Additionally, GasLog is part of a partnership that shows how Europe’s previously siloed hydrogen market is evolving toward longer-distance and heavier transportation decarbonization, which involves liquid hydrogen.

And your last question comes from the line of Ati Modak from Goldman Sachs.

Jill, you spoke a lot about carbon capture today. So keeping up with the theme. It seems like Earthly Labs is getting a lot larger, which is great to see. But I initially thought SES was the driver in the quarter given its industrial scale. So curious on any color you can provide on that order in particular and how close we are to increase commercialization and orders in SES going forward?

Yes. Thanks for the question, Ati, and good point. What we've done internally and haven't really shared kind of the sausage making externally, but the Earthly and the SES teams work very closely together. So you're seeing kind of Earthly scale up in SES' expertise at the larger end help them in their application and SES gaining quite a bit of global traction. We did cite the Graymont agreement. There's numerous others that we're not able to speak to publicly just under NDA of work that's being done. We're definitely seeing that in the UAE in particular, so good near-term opportunities there for SES and other kind of end market I'd point to for SES is on the line cement side of things. Really quite a bit of traction there toward commercialization. So yes, your point is extremely valid, right? Initially, SES was for kind of this is going to be our large scale. We've learned a lot about what end markets that have the money to do this and that it makes sense for them to do. And while we refer to Earthly and SES separately, it really is kind of one carbon capture solution that goes to different applications. And maybe my last comment on SES/Earthly or our carbon capture end market starting to see biogas also come into play there, which was a pull-through from Howden's equipment and customer sets to pull our technology through. So that's getting some legs as well. We've had a few orders there.

There are no further questions at this time. Ms. Evanko, please proceed.

Thank you very much, and thank you to everyone for your time today. We look forward to providing updates as the quarter goes on, and I appreciate you attending our call this morning. Thank you. Have a great day.

That concludes our conference for today. Thank you all for participating. You may all disconnect.