Chart Industries Inc Q3 FY2024 Earnings Call

Good morning, and welcome to the Chart Industries, Inc. 2024 Third Quarter Results Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. The company's release and supplemental presentation 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 two hours following the conclusion of the call until Sunday, December 1, 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 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 Jill Evanko, Chart Industries CEO. Please go ahead.

Thank you, Joelle. Good morning, and thank you all for joining our third quarter 2024 earnings call. Joining me today is our CFO, Joe Brinkman. We will begin on Slide 4 of the supplemental deck that was released this morning. Results shown are from continuing operations. When referring to any comparative period, all metrics are pro forma for continuing operations of the combined business of Chart and Howden. Pro forma excludes the following businesses that were divested in 2023: Roots, American Fan, Cofimco, and Cryo Diffusion. In the third quarter of 2024, we generated $200.7 million of net cash from operating activities and, after $26 million of CapEx spend, had free cash flow of $174.6 million. This cash was used to reduce net debt and resulted in our September 30th net leverage ratio of 3.04x, meaningful progress to our net leverage ratio target of 2x to 2.5x as well as our 2025 year-end net-debt goal of $3 billion. In a few slides, we will discuss further balance sheet optimization plans. When compared to the third quarter 2023 pro forma, orders increased 5.4%, sales of $1.06 billion increased 22.4%, reported gross margin of 34.1% increased 350 basis points, reported operating income of $178.5 million was $235.9 million when adjusted for items primarily related to the Howden integration and headcount restructuring. As a percent of sales, adjusted operating margin was 22.2%. Adjusted EBITDA of $260.7 million was 24.5% of sales. Our adjusted EPS was $2.18, which would have been $2.48, absent a $0.15 negative EPS impact related to foreign exchange in the quarter and the delta of our Q3 tax rate of 26.5% to our originally assumed 20% rate, which was another negative $0.15 impact. The tax rate was impacted by our geographic profit mix. Year-to-date, through September 30th, sales increased 19.6% when compared to year-to-date September 30th, '23 pro-forma, and operating margin increased year-to-date by 510 basis points. Year-to-date through September 30th, all segment sales grew compared to year-to-date Q3 '23, all segments gross margin increased and all segments SG&A as a percent of sales declined, reflecting operational improvements as well as earlier-than-anticipated cost synergy achievement. In the third quarter, we surpassed our original year three, which was 2026, target of $250 million of annualized cost synergies. Slide 5 is a summary of the third quarter compared to Q3 '23, and we will cover each of these in the coming few slides. So, moving to Slide 6. Our third quarter orders of $1.17 billion grew 5.4% compared to Q3 '23. You can see some specific order examples booked in Q3 on the page, including a variety from traditional energy to hydrogen to marine to LNG. Siemens Energy ordered multiple air-cooled heat exchangers for a variety of energy projects, including Cass County Power Station and Turtle Creek. HD Hyundai Heavy Industries placed orders for exhaust gas recirculation or EGRs for marine ship engines. IGAT, part of SIAD Group, placed an order for a diaphragm compressor for their green hydrogen plant in Italy. We received an order from ThyssenKrupp for process fans to be installed in a new cement line at the Mountain Cement plant in Wyoming, USA. And axial and jet fan contracts were awarded to us by Spark NEL for the North East Link tunnels in Australia. We currently have over $23 billion in our commercial pipeline of opportunities. Each quarter this year, we had approximately 39% of our installed base of covered sites placing aftermarket orders with us. That is good traction, yet we have room for more coverage, especially as much of the concentration is still primarily related to Howden legacy. We recently released enhancements to our customer aftermarket online digital portal, including customer outage timing, additional capabilities for part configurations and an updated tank sizing application. We also have customers that have committed work to us that are not yet in backlog, totaling $1.95 billion of commitments. A few examples of these include for LNG, ExxonMobil, as we released a few weeks ago. On behalf of Mozambique Rovuma Venture, the operator of the Area 4 concession in northern Mozambique's Rovuma Basin, announced its decision to select our IPSMR liquefaction technology and equipment for the Rovuma LNG project. And since that announcement, Viability Gap Plc., N Gas Tanzania Ltd., and Tanzania Petroleum Development Corporation have chosen to partner with us to utilize our IPSMR process and associated equipment for their small-scale LNG project. And for hydrogen, Renergy Group Partners LLC has chosen to partner on their green hydrogen plant in Egypt, which is anticipated to produce 450,000 tons of hydrogen per year. We also executed a collaboration agreement to work with PETROJET, Egypt's largest state-owned construction company, to advance hydrogen projects across Egypt. Nuclear is gaining traction. We serve the nuclear space with our fan offering for traditional nuclear facilities as well as supporting SMR technologies with our gas circulators, fans, turbines, and air coolers. To start October, we received nuclear orders from both EDF and Axima. Moving to Slide 7. Our third quarter 2024 had sales of $1.06 billion, an increase of 22.4% compared to Q3 '23 and an increase sequentially of 2% when compared to the second quarter of 2024. This is the first time in our history that sales sequentially increased from the second to the third quarter, reflecting continued efforts for throughput improvements, LNG project activity and specialty products projects moving to construction phases. Three of our four segments had record sales in the third quarter. We had a busy Q3 with many weather events, yet continued to focus on deliveries and other continuous improvement actions. While we did have early-in-the-quarter impacts from Hurricane Beryl in our Texas shops, we were able to recover that within Q3. Our shops fared well through Hurricane Helene with only a few days' disruption from power outages, yet we still have more opportunity to improve throughput and have more continuous improvement efforts to take hold ahead. Some examples underway include: Kaizen events globally using our Chart Business Excellence, or CBE tools; optimizing assembly locations in our facilities, such as moving kettle work to Allentown, Pennsylvania to increase other activities at our New Iberia, Louisiana shop; similarly, we are putting skid work in locations with larger and more capacity. Another example is an addition of two testing stations in our air-cooler manufacturing facilities. And these are just a few examples as we believe we have more throughput improvement opportunities ahead of us. The middle of Slide 7 shows adjusted operating income of $236 million, an increase of 53% when compared to Q3 '23. All four segments reported operating income and margin increased compared to Q3 '23. This resulted in adjusted EBITDA of $260.7 million, which does not include adjusting for negative foreign exchange headwinds of $9.3 million in the quarter. On Slide 8, you can see the increases in gross profit margin, reported and adjusted operating margins, and EBITDA margins. All four segments had increases in gross, operating, and EBITDA margin when compared to the third quarter of 2023. Segment-specific information is shown on Slide 9. Starting with Cryo Tank Solutions, or CTS. Third quarter 2024 CTS orders of $126.2 million decreased 17.5% when compared to the third quarter of 2023, primarily driven by the third quarter of '23 having had one order for over $19 million for railcars, which did not repeat. In the third quarter '24, we did see slowing demand in China, in particular, in industrial gas, which is primarily reflected in CTS. Sequentially compared to Q2 2024, CTS orders were down 20.6% as the second quarter had a large LNG regas skid order for over $20 million and also we saw the slowing demand in China in the third quarter. Third quarter 2024 CTS sales of $162.5 million increased 4.6% when compared to the third quarter of 2023. Sequentially compared to Q2 '24, CTS sales were down approximately $3 million. Reported gross profit margin of 25% in CTS increased 280 basis points compared to the third quarter of 2023 and 480 basis points sequentially, driven primarily by project mix and operational improvements. CTS margins are typically in the low-to-mid 20%. Now, moving to Heat Transfer Systems, or HTS. Before I start on Q3 specifics, I want to take a moment to discuss the LNG market and the growing adoption of our modular IPSMR technology. We already discussed Exxon's Mozambique utilization of IPSMR and wanted to share that recently, two additional projects have shared with us their decision to use IPSMR for their LNG liquefaction facilities. Interest in IPSMR continues to grow as it is an accepted and validated solution for many projects. So, back to the third quarter, HTS orders of $424.7 million increased 151% when compared to Q3 '23, driven by multiple and various LNG and traditional energy equipment awards. These also contributed to a sequential increase of over 50% compared to the second quarter of 2024. Third quarter 2024 HTS sales of $256.2 million were a record as we execute on LNG and other project backlog. Q3 '24 sales increased 12.5% compared to Q3 '23. Sequentially, compared to the second quarter of this year, HTS sales increased 8.2% as we continue to execute on delivering our backlog and work on further throughput improvements in our shops. HTS Q3 gross profit margin was 29.8%, an increase of 340 basis points compared to Q3 '23, driven primarily by project mix. Sequentially compared to the second quarter of this year, HTS gross margin improved based on higher volumes, project mix, and operational improvements. We anticipate HTS gross margin to be in the mid-to-high 20% consistently going forward. Moving to Specialty Products. Third quarter 2024 Specialty Products orders were $237.8 million and decreased approximately 49% when compared to the third quarter of 2023 as the third quarter of 2023 included larger hydrogen-related orders. Larger project timing for orders can vary between quarters, in particular in Specialty Products and HTS. We received customer commitments on certain projects that we did not book in Q3 given timing of paperwork and for one project timing of their FID. We anticipate that we will receive orders for approximately two more larger specialty projects in the fourth quarter of 2024, one in hydrogen and one in mining, which already has been verbally awarded and terms and conditions are underway. Sequentially compared to Q2 2024, specialty orders declined 44%, driven by the second quarter's record orders in carbon capture, metals, mining, water treatment, and strong globally diverse hydrogen and helium awards. Third quarter 2024 Specialty Products sales of $283 million were a record for the segment and increased 25.9% when compared to the third quarter of 2023, driven primarily by increasing throughput and progress on specialty projects within the quarter. Sequentially, compared to the second quarter of '24, specialty sales increased 2%. Reported gross profit margin of approximately 26% increased 60 basis points compared to Q3 of last year, yet decreased sequentially when compared to the second quarter of 2024. The sequential decrease was due to the third quarter 2024 expenses incurred at our newly opened Teddy2 facility in Theodore, Alabama, related to a supplier's machinery startup challenges at our site and therefore, associated inefficiencies on specific space exploration-related projects, which we do not anticipate repeating ahead. And finally, for the Repair, Service and Leasing segment, or RSL, third quarter '24 RSL orders of $377.9 million increased 16.5% when compared to the third quarter of 2023, driven in part by a larger aftermarket sale of equipment. Sequentially, compared to Q2, orders grew 21% or about $65 million, driven primarily by our Q3 $10.5 million order for Power Africa power station spares and the larger RSL equipment sale. Third quarter 2024 RSL sales of $360.5 million increased 36% versus Q3 of '23. Sequentially, Q3 sales were flat to Q2 '24, which had large field service work and also reflects typical summer timing being slower in field service outages. Reported RSL gross profit margin of 47% was driven by the larger-than-typical aftermarket equipment sales. Sequentially to the second quarter of 2024, RSL gross margin declined from 49%, which was unusually high and driven by the large field service work in Q2. Now, Joe will discuss cash, balance sheet, and our '24 and '25 outlooks.

Third quarter 2024 reported net cash from operating activities of $200.7 million, plus capital expenditures of $26.1 million, resulted in $174.6 million of free cash flow. Our September 30, 2024 net leverage ratio was 3.04x, as shown on Slide 10. We reiterate our financial policy that until we are in our target net leverage ratio range of 2 times to 2.5 times, we will not do any share repurchases or material cash acquisitions. The strength in Q3 cash reflects our ongoing cash culture efforts, Chart business excellence, coordination of milestone billing, and increasing operational throughput. As we have previously indicated, we are coming off a period of heavy CapEx spend for capacity. Our CapEx spend is now normalizing, and we expect normalized CapEx to be between 2% and 2.5% of sales. Net working capital defined as accounts receivable, inventory, accounts payable, unbilled contract revenue, customer advances, and billings in excess as a percent of trailing 12-month sales improved to 16%. As a reminder, we had our semi-annual unsecured interest payment of $79 million in the third quarter that will not repeat in the fourth quarter. Additionally, the fourth quarter has multiple milestones scheduled for collection, and tax is typically a tailwind to free cash flow in Q4. We continue to look to optimize our capital structure. We anticipate our 2017 seven-year convertible note to settle at maturity in November 2024 with a principal of approximately $259 million paid in cash and the premium settled with equity. Note that the share count will change upon settlement, which is contemplated in our outlook. Moving to Slide 11. Our full year 2024 sales outlook is approximately $4.2 billion to $4.3 billion with anticipated full year 2024 adjusted EBITDA of approximately $1.015 billion to $1.045 billion. This reflects a year-over-year 18% to 21% sales growth range, which, as Jill described in her comments, reflects our year-to-date sales growth and margin progress. The sales growth at the lower end of the range is based on our confidence in what we have been able to consistently achieve year-to-date and backlog coverage. Achieving the higher end of the range will depend on larger project timing and further operational throughput actions already underway, which will continue into 2025. Our associated anticipated full year 2024 adjusted diluted EPS is anticipated to be approximately $9 based on an anticipated tax rate of approximately 22%. Free cash flow is anticipated to be approximately $400 million. Our 2025 sales are anticipated to be in the range of $4.65 billion to $4.85 billion, and anticipated adjusted EBITDA between $1.175 billion and $1.225 billion. We have strong backlog coverage for 2025 and also have line of sight to additional larger orders that we anticipate closing in the coming months. We anticipate our 2025 adjusted diluted EPS to be approximately $12 to $13 on a tax rate of approximately 22%. Additionally, we anticipate ending 2025 with approximately $3 billion of net debt based on full-year 2025 free cash flow generation of approximately $550 million to $600 million. We look forward to sharing additional details of our 2025 outlook at our Investor Day on November 12th.

Thank you. We will now begin the question-and-answer session. Your first question comes from Eric Stine with Craig-Hallum. Your line is now open.

Hi, Jill and Joe.

Hey, Eric.

Hey, Eric.

Good morning. Regarding the 2025 guidance, I understand it has been a recurring focus of yours to better integrate the project-oriented nature of your business. Could you elaborate on your thought process? Joe, I know you've mentioned the backlog coverage and visibility into new orders, but could you share your reasoning on whether you adjusted this guidance? What factors contribute to the low end and the high end of your projections? That would be very helpful.

Sure. Joe, please feel free to add your thoughts. Eric, we have made significant efforts to apply our insights from recent developments, and this is reflected in our outlook for 2025. We are confident in this projection, especially considering the current backlog coverage, which is stronger than typical. About 61% of our 9/30 backlog is expected to convert within the next 12 months. We believe we have successfully integrated all the lessons learned over the past few quarters into our 2025 plan, which was our objective. Regarding the upper end of our growth range, which is around 12% from the high end of 2024’s forecast, this is largely tied to further conversions of our existing backlog. We also anticipate some movement in new orders in the coming months, particularly larger ones, which could help us reach that higher end. This was our rationale for incorporating everything we have learned, especially when it comes to shifting projects between quarters as our business has evolved into a longer-cycle operation.

I don't have much to add to that, Eric. As Jill mentioned, it's important for us to understand the factors that influence revenue fluctuations between quarters and factor that into our forecasting moving forward.

Okay. And when you talk about new potential orders that come in, I mean, I would assume if those are LNG orders, then those would have to be early in the year and that would probably at best have a late impact in the year. I mean, is that how we should think about it that this would be more skewed to some of the other segments in terms of those order opportunities impacting '25?

Yeah. No, that's the right way to think about it, Eric.

Okay. All right. Thank you.

Thanks, Eric.

Your next question comes from Marc Bianchi with TD Cowen. Your line is now open.

Hi, thanks. I wanted to start with the order outlook. Jill, you mentioned a $23 billion pipeline and nearly $2 billion in commitments not reflected in the backlog. Looking at the third quarter, you had strong performance in HTS, but there was some weakness in specialty. Could you provide context for the $23 billion and $2 billion in commitments? Where did those figures stand recently, and how have they changed? Additionally, what are your thoughts on order progression in the fourth quarter and into early 2025?

Thanks, Marc, and good morning. Overall, we observe solid demand and a strong pipeline across the majority of our end markets, excluding China. The international acceptance of IPSMR with the Exxon Rovuma LNG project has recently contributed to that pipeline. The more our technologies and solutions are implemented in the field, the more we see the pipeline expanding. Currently, we have nearly $2 billion in commitments, with approximately $1.5 billion allocated to HTS and the remaining $450 million to specialty. Since our previous discussions about the $1.5 billion in HTS, we have added a few smaller projects to this total. Another growing opportunity for us is in data centers; we recently secured our second quarter order of air-cooled heat exchangers for this sector, and at the beginning of October, we received another order related to data centers. This contributes to the $23 billion pipeline, which is separate from the $1.95 billion in commitments we mentioned that are not yet booked. In terms of specialty, I’m assessing whether there’s structural weakness in these end markets or simply timing issues. For the third quarter, it seems the specialty weakness was purely a matter of timing. Regarding mining orders, we have one verbally awarded that's over $40 million, and several potential projects in the hydrogen sector ranging from $20 million to $35 million. These orders, financing decisions, and final investment decisions can take longer than expected. Some of those in the $1.95 billion specialty commitments could have been bookable under our policies, but we were not comfortable enough with their financing status to include them in our backlog. At the moment, the only structural concern in our end markets relates to China Industrial Gas.

Okay. And would you anticipate that fourth quarter book-to-bill could be greater than 1?

Yes, 1 or greater is our outlook.

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

Thanks, Marc.

Your next question comes from Ben Nolan with Stifel. Your line is now open.

I appreciate it. Thanks. I wish there was only one. So I'll start with this one or I guess I'll end with this one too. As you think about the fourth quarter, just there is normally an uplift in the fourth quarter. I think in guidance, you're calling for roughly a, I think, $150 million of incremental sales. Can you maybe talk through, maybe segment-by-segment how that plays out? Like, where are you expecting the uplift in 4Q to reach your updated guidance?

Yeah. So if you look at 4Q sequentially, Q3 to Q4, historically, we'll do between 10% and 15% on average of an increase and then year-over-year really varies. If you looked at our year-over-year for Q4 of this year, the lower end is a little bit lower as a percent than what we have been doing in the last few quarters and the high end is pretty consistent with what we've been doing in the last few quarters. When you look at the segments themselves, we're continuing to see strength and throughput in HTS, Specialty and RSL, and CTS, I would just say is consistent. So that's the way to think about that on a relative basis of growth sequentially. And maybe one other quick add here on RSL is that we did have larger field service work in the second quarter and we had a larger-than-typical equipment sale in the third quarter in RSL. So, those were pretty strong quarters in that respect. And as we head into Q1, right, in 2025, Q1 is always our lowest quarter of the year, and we don't anticipate anything different for 2025 in that respect.

Got it. Okay. I appreciate it. And if I could sneak in just a super-fast, I think Joe, you said 16% was the unbilled revenue as a percentage of sales. What should that be on a normalized basis?

That was working how we define working capital as a percent of sales, which includes accounts receivable, inventory, accounts payable, unbilled revenue, and customer advances. So that 16% reflects an annualized sales figure. We will provide more specific details during our Capital Markets Day on November 12th. In the last 18 months, our performance for this metric has typically ranged from the low 20% to the high teens in the combined business.

Okay. I appreciate it. Thank you.

Thanks, Ben.

Your next question comes from Martin Malloy with Johnson Rice. Your line is now open.

Good morning.

Hi, Martin.

Hey. RSL putting up another good quarter here. Just from a high level, can you maybe talk about where you are in terms of putting equipment onto maintenance service contracts or your digital offering, kind of the runway here for growth in that segment, how you look at it when you look out two or three years?

Thank you, Marty, for acknowledging that. We're very satisfied with the aftermarket portion of our business. Over the last few quarters, it has contributed 34% to 35% of our total revenue in RSL within this segment, along with strong gross margins. However, we want to ensure that expectations regarding the RSL gross margin are grounded. We have significant opportunities to penetrate our installed base and expand our digital uptime offering. Currently, we are mainly focused on Howden legacy assets, and integrating various digital offerings across the Chart legacy assets will take time. That said, we are just getting started on this journey. We still have a long way to go. In terms of long-term service agreements (LTSAs) and framework agreements, we've seen positive growth in their numbers year-to-date in 2024, similar to what we experienced in 2023. We’re gaining traction in this area. Ideally, I would like to see an increase in the current uptake, which is over 39% to 40% of customers with an installed base making aftermarket purchases each quarter. This is encouraging, as there is still a lot of potential in the aftermarket business, and I'm excited to see what we can achieve there.

Great. Thank you. I'll turn it back.

Thanks, Marty.

Your next question comes from Pavel Molchanov with Raymond James. Your line is now open.

Yeah, thanks for taking the question. So based on the updated guidance, the trajectory of revenue recognition in 2024 is pretty balanced, almost 50-50. Do you expect next year to be more back-end weighted or less back-end weighted?

We anticipate that the first quarter will continue to be our lowest performing quarter financially, as it has historically been. However, we expect to see a more balanced distribution in 2025 due to our backlog coverage, particularly in new builds. Generally, RSL maintains a steady performance, although Q3 often slows down a bit, particularly due to summer outages, excluding any larger equipment sales. We have strong visibility on new build project solutions, but I want to emphasize that Q1 remains our seasonally weakest quarter, albeit with a less steep increase heading into Q4 compared to what we've seen in the past.

And given that we are four days away from the US election, I have to ask, is there a certain amount of revenue in 2025 that hypothetically could be at risk if the hydrogen or carbon capture policies in Washington were to change?

The short answer, Pavel, is no, but I appreciate the topical question given how close we are to the election and the various different factors dependent on party. We're very well-positioned regardless of the outcomes due to the fact that our equipment and solutions serve many different molecules. However, I would note that we considered not including what could be pent-up demand in our 2025 outlook. There may be potential for a little upside, but we did not take that into account in what we've shared. But no, we don't believe there's any risk to our 2025 projections based on either outcome of the election.

Appreciate it.

Thanks a lot.

Your next question comes from Manav Gupta with UBS. Your line is now open.

Good morning. It was great to see the deleveraging process restart strongly. My quick question here is, you highlighted some parts in the opening comments, let's say we have a big uptick in the nuclear cycle driven by power demand, can you help us understand the ways in which GTLS wins from that? Thank you.

Thank you, Manav. Thank you also for the comment about deleveraging. We're very, very focused on that and we'll continue to be. When you look at nuclear, it's definitely become more active, I would say, in our commercial pipeline. It's not something that we're serving new. It's something we always have. It's just a matter of how much interest there is; there has been and we're definitely seeing an increase there. There's multiple different ways that we play with nuclear. We do serve the traditional utility companies with our CTS applications, so with tanks related to that. We serve the general nuclear space across the board with fans. And now we have the ability to support SMR technologies with gas circulators and air coolers in addition to the fans. And that's, I would say, the fans and the tanks are primarily what we have seen to date. And also, recently a little bit more of an uptick in spares and aftermarket for nuclear. Now what we're seeing is the smaller SMR companies coming forward with various different technologies and that's what we're quoting on right now. So it's a small percent of our total currently, but if this does become a bigger part of the energy transition for lack of a better description, we're very well-positioned to play with equipment. We do not have process technology for nuclear.

Thank you. I'll turn it over.

Your next question comes from Rob Brown with Lake Street Capital. Your line is now open.

Good morning, Jill.

Hey, good morning, Rob.

I just wanted to clarify the gross margins for the Specialty segment. Do you think you can achieve better margins, considering that some of the figures were one-time occurrences in the quarter, as you grow that business?

Yeah. I mean, I was disappointed in the third quarter, but at least we can pinpoint to what caused it. Where we see this is in the 30-plus, low-30s is where kind of in the near-term type of timeframe, however you define near-term, but I would say in the next sort of five quarters type of timeframe, it should be running in that level. We'll also see a little bit of benefit from the more throughput that we get on specialty just naturally by design. But more than anything, it's getting out of startup inefficiencies and this particular one was unfortunately outside of our control, but it was fact and it was a drag on our margin in Q3 in Specialty.

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

Thanks, Rob.

Your next question comes from Craig Shere with Tuohy Brothers. Your line is now open.

Hi, thanks for taking the question. I want to dig a little bit more into Manav's nuclear question and your comments around SMR. So a couple of things. One, that most recently, there's been a couple well-advertised TRISO SMR data center opportunities that were announced. Obviously, this is going into the early 2030s. But wanted to, one, get a sense if the type of reactor technology has an impact on your ability to ultimately service gas circulators, fans and such. And then another thing that's come up is relating to data centers is that they use a lot of water, and you're in the water business. And so just wondering if this whole broader economic driver has a multi-segment opportunity set for you.

Thank you, Craig. This is a great example of how we can continue to serve new and emerging end-markets without changing our traditional equipment and product lines. Starting with nuclear, we are able to support both conventional and new small modular reactor (SMR) technologies. Recently, we've seen activity with X-energy, a company that's gaining recognition in this space, and we're also witnessing an increase in our commercial pipeline in Europe related to nuclear opportunities involving various SMR technologies. This aligns well with our core offerings, particularly the Howden portfolio. In terms of water and data centers, the opportunities are quite expansive. For data centers, we've discussed air coolers that address not only water usage but also heat rejection in areas where water access is limited. On the water treatment front, there are significant secular trends that present advantages for our offerings since we can address a wide range of contaminants. Although we haven't fully connected these opportunities yet, I believe it’s still early in determining how hyperscalers and data center providers assess their locations and capacities. We feel very well-positioned to capitalize on these prospects without needing to alter our manufacturing processes. More details on how we engage in both new builds and aftermarket opportunities in these end-markets will be shared at our Capital Markets Day on November 12th.

Thank you.

Your next question comes from Walt Liptak with Seaport Research. Your line is now open.

Hi, thanks. Good morning, everyone. Jill, I wanted to ask, you guys made a comment on free cash flow, about the cash culture and I know you guys have been focused on cash flow for a while, but was there a change? What does that mean? And then as a follow-up, there's some special cash flow actions, I guess that you're taking in the fourth quarter. I wonder if you can quantify those. And then, in the 2025 cash flow, are there any special kind of one-time actions?

Thank you, Walt. We are pleased to see the results of our integration efforts reflected in our cash performance for the third quarter. The cash culture we describe is similar to what we refer to as Chart Business Excellence. It is ingrained in our organization, and we have made a concerted effort to ensure its sustainability by having various parts of our organization collaborate. This includes our project management team working with the commercial and operational teams to guarantee that milestones in our contracts are achieved. The engineering team is also focused on ensuring that these milestones are completed on schedule. While some of this may seem elementary, these efforts are essential to our cash culture. We encourage everyone in the organization to treat the company’s finances as if they were their own and to focus on areas where they can make an impact, whether that's traditional trade working capital or finding alternative ways to generate cash. Additionally, BR mentioned the importance of normalizing capital expenditures as we approach 2025. We have come out of a period of significant spending and now expect CapEx to be around 2% to 2.5% of sales. Regarding your second question on actions to generate cash, we previously discussed non-operational actions we are exploring to improve our portfolio. We are examining a potential product-line divestiture, but it would need to be at the right price if we proceed. We also have actions in place to repatriate cash from our balance sheet. Brinkman is handling this, and you can expect some of that cash to be back by Q4.

Yeah, we will be pulling back some cash from more restricted countries in Q4 and use that for debt paydown.

So, those are just a few examples of what you're describing. However, I think the main takeaway here is that our goal of establishing a cash culture has been to make it sustainable without relying on any non-operational factors to achieve the target net leverage ratio range. We are pleased to see that progress beginning to take hold for the first time in the third quarter.

Okay, great. Are those non-operational things in the 2024, 2025 free-cash-flow guidance?

They are not.

Okay, great. Okay. Thank you.

Thanks, Walt.

Your next question comes from Alexa Patrick with Goldman Sachs. Your line is now open.

Hey, good morning, team. On the hydrogen side, you announced an MOU for a 30-ton-per-day liquefier. Can you talk a little more about the demand in the market today? And then is 30-ton-per-day becoming more common or is 15 still what you're seeing? Any conversations around that outlook would be really helpful. Thank you.

Thank you for the question, Alexa. Regarding liquefaction, we are noticing an increasing number of companies looking to scale up significantly. These are reputable companies, not just the ones considering 30 tons per day, but those with solid balance sheets exploring options for 100 tons per day. Currently, none of these projects are in our backlog, and we do not expect them to appear in our order book, even through 2025, due to the development time required. The market trend is clearly leaning towards larger projects to achieve greater scale and a more integrated hydrogen infrastructure, moving away from the hub-and-spoke model to a direct connection from production to end-use. It's still early in this transition, but that is the direction we're observing. Additionally, we are seeing increased interest in the storage, transportation, and end-use sectors, with more companies looking to expand beyond California and the United States. Canada has shown strong support for hydrogen initiatives, whether through CIB or other funding efforts, and I believe Canada will become a leader in developing hydrogen infrastructure.

Okay, that's very helpful. Can you share more information about the mining project award expected in the fourth quarter? Any details regarding the size of the award or any insights you can provide?

Yeah. It's approximately $40 million. It's for a project that is an international project, a non-US project, and it would be primarily a Howden Legacy Equipment.

Okay, that's helpful. I'll turn it over. Thank you all.

Thanks, Alexa.

Your next question comes from Sherif Elmaghrabi with BTIG. Your line is now open.

Hi, thanks for taking my question. I really want to piggyback on that last one about hydrogen. Is there an upper limit to what hydrogen liquefaction tech can do in terms of capacity? Like we talked about 30 tons per day, but you raised the point that, for example, what hydrogen could do could be 10 times that size in the back half of the decade. And can you speak to the medium-term trajectory for Specialty margins as we see more hydrogen liquefaction, compression, storage comprised more of specialties mix? Thank you.

Thanks, Sherif, and for the questions. There is technically no upper limit to our capabilities. We are collaborating with a partner, which we have not named, that is considering a capacity of 300 tons per day in the medium-term, specifically in the later part of this decade. We are certainly capable of achieving that, although it necessitates different engineering development. This is all based on our existing technology. It comes down to scaling and achieving efficiencies. We've carried out extensive research to determine the most efficient operations at 60 or 70 tons per day. Numerous factors influence this, but we do not have a scaling limit; it simply depends on customer demands. Currently, the project in Egypt is by far the largest we have encountered, with another undisclosed partner also aiming for 300 tons per day. Both projects are international. In terms of the medium-term outlook for specialty, certain areas are more mature, like mining, where we are very well positioned. Mining customers have consistent behaviors. Other aspects of specialty, particularly hydrogen, water, and carbon capture, are expected to grow significantly later in the decade. Whether it's our projections or those of others, the latter part of this decade is anticipated to see accelerated growth. Therefore, we expect specialty to continue a robust growth trajectory in the medium term for all the reasons we've discussed.

Thanks you. That's great color. I'll turn it over.

Your next question comes from Saurabh Pant with Bank of America. Your line is now open.

Hi, good morning, Jill and Joe.

Good morning, Sohrab.

Good morning.

Hey, Jill. Maybe I wanted to go back and touch a little bit on the fact that post-Howden, you continue to become more and more project-oriented versus more individual product-oriented. And obviously that has an impact on cash, milestone payment, timing of free cash flow, and all of those things. But can you maybe talk to how you are managing that transition internally from a project management standpoint, your organizational setup standpoint, anything that you're doing internally to just position the organization to better handle projects going forward?

Sure. After Howden, we now generate 30% to 35% of our revenue from aftermarket services, compared to about 13% to 14% previously. This shift indicates that the new-build solution set accounts for a smaller portion of our total revenue. In response, we have established a unified global commercial team, engineering team, and project management team. These teams collaborate with regional operations to enhance throughput. Specifically, to improve cash flow and project solutions, we focus on upfront customer engagement and milestone timing. Our project management and key account managers work closely with operations to ensure effective execution. Additionally, we emphasize discipline to ensure that these efforts are consistently applied on an hourly basis, not just weekly. Together, these strategies are designed to support the sustainable cash generation we expect to achieve.

Okay, perfect. I got it. Okay, Jill, that's all I had. I'll turn it back.

Okay. Thanks, Saurabh.

There are no further questions at this time. I will now turn the call over to Jill for closing remarks.

Thanks, Joelle, and thanks everyone for joining us today. We look forward to hosting you on November 12th at our Capital Markets Day, and thank you to all of our Global One Chart team members for all of your ongoing efforts. Have a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.