Earnings Call Transcript - GTLS Q2 2022

Operator, Operator

Good morning and welcome to Chart Industries, Inc. 2022 Second 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 replay of today's broadcast will be available following the conclusion of the call and it can also be accessed through the Investor Relations section of the Company’s website. Before we begin, the company would like to remind you that statements made during this call that are not historical in fact are forward-looking statements. Please refer to the information regarding forward-looking statements and risk factors included in the company's earnings release and latest filings with the SEC. The Company undertakes no obligation to update publicly or revise any forward-looking statements. I would now like to turn the conference call over to Jill Evanko, Chart Industries CEO.

Jillian Evanko, CEO

Thanks Catherine and thanks everybody for joining us today for our second quarter 2022 earnings. As usual we will reference the supplemental deck that was included with the press release and can be found on our website under the Investor Relations section. With me today is our CFO, Joe Brinkman. Let’s start on Slide 3 where we are extraordinarily pleased to share our second quarter 2022 all-time records in orders — a whopping $887 million of them, backlog and sales, which you can see is broad based including records for all in hydrogen and water treatment. And not only do we post our third consecutive record order quarter, which is five record quarters out of the last six. This quarter was also our seventh consecutive quarter of record backlog of $1.95 billion. Additionally we are starting to see the strong backlog and price-cost actions take hold through the P&L with our second quarter also being our all-time record reported gross margin dollars and reported operating income dollars. We continue to see penetration of our FOAK solutions from process technologies through to cryogenic equipment in particular and what we refer to as the Nexus of Clean: Clean Power, Clean Water, Clean Food and Clean Industrials. This reflects the current focus on energy security, access, resiliency, which is complementing not offsetting energy transition — or said differently, the focus on sustainable solutions. Rather, these two are actually both needed and we’re differentiated in offering that. One of the ways we look at our differentiation is through our First-of-a-Kind orders, or as we call them internally, our FOAK-ing orders. In the quarter, we booked 23 First-of-a-Kinds, bringing year-to-date FOAKs to 51 as well as 85 orders with new customers this quarter bringing year-to-date to 169 new customer orders. Both the First-of-a-Kind and new customer metrics are on track to meet or exceed 2021, demonstrating that there is considerable further potential growth in our addressable market globally. To give you a sense of the First-of-a-Kind and new customers that we’re working with, here are a few examples of ones booked in Q2: an arsenic water treatment system for a travel stop, our first Earthly Labs Carbon Capture System for a brewery in Troegs, another order for Chart’s heaviest onsite cryogenic tanks to date from a U.S. space exploration company, and a feed study for supply of LNG bunkering systems for LNG ferries in the Greek Islands. We continued our trend of more consistent and frequent orders of over $1 million each with 61 of them booked in the second quarter, making this our fourth consecutive quarter with over 60 such individual orders. And finally, our partnerships and collaborations through memorandums of understanding and long-term agreements continued to grow. In Q2 we executed eight MOUs and agreements including two for LNG, three for carbon capture, two for hydrogen, and one for air-cooled heat exchanger master supply. One of the MOUs in carbon capture is with Wolf Carbon Solutions U.S. LLC, an affiliate of Wolf Midstream. Wolf and its affiliate are committed to the development of world-scale CO2 carbon capture, transportation and sequestration infrastructure. Wolf Midstream owns and operates the Alberta Carbon Trunk Line which has infrastructure that includes CO2 conditioning and compression and one of the world’s largest capacity CO2 pipelines where captured CO2 is currently being used for enhanced oil recovery with future access for the Wolf Midstream sequestration hub currently under development. Through our cooperation agreement, we will work together using our SES Cryogenic Carbon Capture Technology at mutually agreed upon host sites located along Wolf’s Mt. Simon Hub carbon pipeline system. Stage Three LNG Export Terminal. Total Chart content on the Stage Three project is over $350 million and the entire amount is currently in backlog as of the end of the second quarter. There are lots of things to like about Slide 4. Perhaps what I like most is that the midsize orders, orders $15 million to $40 million each, are across multiple applications, whether it’s space exploration, trailers, utility LNG, floating LNG or hydrogen. Now direct your attention to the far right column on the table on Slide 4. The message here is that we view all of this as providing high confidence in our multiyear momentum. In particular, because as you’ve heard me saying numerous times before: for us, we don't think of it as a calendar year or that the company stops at December 31st as many of these projects do cut across more than one calendar year. So this is important when it comes to second half 2022 financial modeling. While we will get some Big LNG revenue recognition in the year, all the projects shown in rows six through 11 have the majority of the revenue recognized in 2023 and beyond, again setting us up for a very high level of confidence in our three-year outlook that was previously disclosed. But this has also meant as a key piece of information, when looking at what is modeled into 2022 note that orders in rows nine through 11 do not have any anticipated 2022 revenue associated with them. So having five of our past six quarters set new records for orders has also resulted in an average order quarter, excluding Big LNG, of over $445 million in the last six quarters. This compares to the average of $250 million per quarter from 2016 through 2020. So while we'll not hit $450 million or more every single quarter ahead of us, we certainly anticipate continuing to book each quarter at a significantly higher level than the five-year 2016 to 2020 average. So let's move to Slide 6, where one of the questions that we've been receiving is whether we're seeing a softening in demand due to a potential recession. On Slide 6, you can see some of the order activity for the first few weeks of July. We continue to book orders for a variety of applications, 16 over $1 million each so far. Noteworthy to point out the railcar commitment for $6.5 million and our second water treatment order for India this year for $5 million. We're also beginning to see more orders for storage-related equipment. Just this week, we booked a $0.5 million order for tanks for this application. For example, we're also very delighted to be supplying equipment that supports Carbon Cure’s end-to-end carbon removal and mineralization solutions, which are essential to achieving our joint goal of decarbonizing the concrete industry. We immediately saw carbon capture and storage inbound inquiry increases since Wednesday evening’s press release about the U.S. Inflation Reduction Act. For example, in the first 18 hours after that release, we had six new leads come in, which is certainly more than normal in that period of time. Final point on this slide is that we currently have over 2,700 opportunities holding over $8.5 billion that are in our commercial quotation pipeline. I reiterate my earlier comment, the message here is that we view all of this as significant multiyear momentum. Slide 7 shows the second quarter financial summary. In addition to record orders, backlog and sales, this was our all-time record reported gross margin and record reported operating income quarter. Reported operating income as a percent of sales of 7.3% was the highest in the past year and when adjusted for one-time costs from deal integrations, startup capacity and restructuring was 9.9% also the highest in the past year. Reported gross margin as a percent of sales for the second quarter of 2022 was 23.4% and when adjusted for those costs mentioned was 25.3%. This gross margin as a percent of sales for the quarter is both our continued progress on pricing versus input costs, as well as the high shipment quarter of price-cost lagged backlog in our Cryo Tank Solutions (CTS) and Heat Transfer Systems (HTS) segments. The CTS segment had the most long-term agreement price indexing timed into the second quarter 2022 from a backlog perspective. And we shipped more than was originally anticipated heading into the quarter, or said differently, we shipped more in Q2 which was previously in our Q3 forecast thinking. So as mentioned in prior quarters, realizing the continued benefits of these price increases and cost control actions that we've taken sets up the second half of 2022 to continue to incrementally increase operating margin and gross margin, as well as both metrics as a percent of sales. And while not shown on the slide, an important metric is free cash flow. Second quarter 2022 free cash flow net of capital expenditures of $17 million was $18 million and adjusted free cash flow was $37 million. We continue to expect our full year 2022 adjusted free cash flow to be in the range of $175 million to $225 million even as we anticipate that we will strategically continue to hold higher-than-typical inventory throughout the year. While we move to the two red, yellow, green challenges slides to the end of the appendix, they are updated in the deck for our current perspectives on each category. The following four slides, Slides 8 through 11 demonstrate our margin improvement actions. First, more price increases had to be taken across the past five quarters than would have been typical in a normal environment. And we anticipate holding onto much of this pricing while giving the surcharge back to our customers when macro conditions abate for a period of time. Second, our higher margin businesses are also our fastest growing businesses and therefore we anticipate a margin mix benefit. Third, larger and more project work contributes to more consistency in our shops as well as more standardization opportunities. And finally, our productivity and automation activities are a strong focus for us. And we have numerous additional opportunities for this ahead on our roadmap. So turning to Slide 8, some of the leading commodities which are drivers of our raw material costs, including nickel and aluminum in the United States, are either at or below pre-Russia-Ukraine conflict levels. We expect this trend to continue throughout the third quarter of 2022. We are also seeing capacity as the mills are opening up, which along with new investments coming online sets our expectations that the United States market will be in a much more stable position for the foreseeable future. The metal producers in the U.S. are also swiftly switching to producing new material using scrap, which reduces reliance on foreign partners and reduces the impact of unpredictable geopolitical events. And while Europe is not as stable as what I just described for the U.S., we do expect EU raw material numbers to stabilize as they have in the U.S. as consumption and demand reduces. With all that said, we continue to take proactive steps to continue to have multiple suppliers, both globally and regionally, as well as thoughtful safety stock when to do, as you have seen us do over the past five quarters. As many of you are aware, we've taken three types of pricing actions over those past five quarters plus a surcharge. The three types of pricing are shown on the right hand side of Slide 9. In addition to maintaining our short bid validity timing on project quotations, we have implemented five separate base price increases over the past six quarters, and had three surcharge increases since implementing in the third quarter of 2021. This is in addition to the quarterly or semi-annual index-based adjustments in our LTAs with specific industrial gas customers. The LTA bucket has by far been our longest work through the lag of pricing costs in our backlog. And as I've commented already today, we burned off a meaningful amount of that in the second quarter 2022, primarily reflected in the CTS gross margin. We view this as a positive setup to the second half anticipated margin improvement. And note that all pricing and surcharges remain in effect to date in the third quarter and we expect them to throughout the quarter. I shared on the Q1 earnings call specific actions related to the delta between freight costs and our ability to pass that through to our customers. You can see on the left-hand graph on Slide 10 that we are net neutral for the first time in what we believe is in our history, but certainly at a minimum the past few years. The right-hand graph on this slide shows the global container freight index for the past three years, demonstrating the dramatic increase from June of 2020 to present. Just to compare, this delta of what we could pass through to our customers versus our own costs averaged a negative impact to our P&L of $1.5 million per quarter last year. One of the areas that I'm most excited about is our organic automation and productivity activities that are underway, but also the ones on the horizon. I've shown six on Slide 11. In that six are the dozens of automation projects that are happening around the globe in our facilities. These six projects are all 2022 impact. Three of them are fully implemented as of the end of June, while the other three will be complete by year end. Combined, we expect it will contribute over $1.1 million of productivity savings on an annualized basis. As I mentioned on an earlier slide, reported operating income as a percent of sales of 7.3% was the highest in the past year and when adjusted for one-time costs was 9.9%, also the highest in the past year, which you can see on Slide 12. There is also a gross margin as a percent of sales trend slide included in the appendix for your reference. Worth pointing out is that we continue to see areas of the business impacted by unusual costs and inefficiencies due to the not-yet-tempering portion of the macro challenges that have been well documented. Examples of this include inefficiencies and direct costs from forced measures or certain expedited costs from suppliers given long supply lead times, weather impacts to production, to name a few. We do not add these costs back to our adjusted profit or earnings per share, but we do quantify their impact, which for the second quarter was approximately $13 million. This gives you a sense that we would be at 13% margin if these were no longer an impact. I want to pause here and thank our Chart global team members who have been extremely agile in their response to our high demand, coupled with the macro challenges that I just described. For example, 11 of our manufacturing locations had 100% on-time delivery in Q2. And as of June 30th, we achieved our lowest total recordable safety incident rate in our history at 0.57. So moving on here to Slide 13, this is just a repeat of a prior add-back slide and is included only as a reference for you. And then quickly turning to Slide 14, this compares our second quarter to our first quarter of 2022 add-backs to earnings per share. I'm not going to take you through the detail; just message that this is consistent with what we have previously said and driven in part by year-one acquisition integrations concluding and in part by our organic startup and capacity coming online, which will have multiple activities related to in the third quarter. In the second quarter, we completed the Oklahoma to Beasley, Texas air-cooled heat exchanger relocation and restructuring. We substantially completed the SriCity, India capacity expansion and completed the U.S. repair Greenfield expansion. Based on timing of specific organic and integration activities, we expect the third quarter to be really busy as we bring projects related to capacity startup and new product lines in sight. Our reported earnings per share of $0.36 included negative net $0.22 from our mark-to-market adjustment, as well as one-time specific costs of $0.30. Adjusted EPS of $0.88 reflects our continuing execution of price increases and cost controls, while also including that drag that I mentioned from the high shipment quarter of lag backlog in CTS and HTS. Note that we did not add back the negative impact to sales or EPS this quarter from the foreign exchange rate changes and we anticipate that these will continue to be variable throughout the second half. We estimate the second quarter impact from the foreign exchange rate changes to be approximately negative $12 million to sales and approximately negative $0.05 to EPS. Now turning to Slide 16. Joe?

Joe Brinkman, CFO

As our demand continues to be broad based, we have four meaningful capacity expansions underway currently, a few of which we will discuss on the next few slides. Portions of the related capital expenditures are in our full year CapEx outlook of approximately $55 million to $60 million. Year-to-date through June 30th our CapEx is $29.8 million. It is worth noting that these expansions all have backlog seated to be first volumes when the capacity comes online. While some of the figures by project have shifted between years or amounts since our May 5th Investor Day CapEx outlook, overall across the next few years, we continue to anticipate spending approximately $200 million to $220 million on organic capital. Slide 17 shows the progress of our brazed aluminum heat exchanger line in our Tulsa, Oklahoma flex manufacturing facility. To date, all that remains on the original go-live date is our furnace being delivered next month, the core piece of equipment for our cores. Slide 18 shows our German industrial gas and hydrogen trailer main capacity expansion on existing property, which is underway with operation set to begin in mid to late 2023. We received our first order totaling more than $20 million, which will be produced in this expanded facility. On this side of the pond, Slide 19 shows the site of our future supersized tank facility, where we will manufacture large bulk storage tanks all the way up to 1,500 cubic meters or 400,000 gallons. These jumbos are used in a variety of applications, ranging from space exploration to biogas as examples and our $16 million orders received for these jumbos in the second quarter will be produced and water shipped from this location. We have included Slide 20 to further demonstrate the increasing demand for jumbo or supersized bulk tanks. These tanks are used across multiple industries, as you can see listed in the upper right-hand corner of the slide. The picture on this slide shows three more jumbo cryogenic tanks that were sent from our facility in the Czech Republic to Germany, home of a new 100,000 ton per day, bio-LNG plant. Each tank stores 1 million liters of LNG, which is enough to fuel more than 1,000 heavy haulage trucks with cleaner burning biogas.

Jillian Evanko, CEO

Slide 21 shows sales by segment and reported and adjusted operating income, while Slide 22 shows the gross margin information. Reported gross margin as a percent of sales in the second quarter was sequentially up more than 170 basis points in three out of the four segments when compared to the first quarter of 2022. Additionally, both reported and adjusted operating income as a percent of sales sequentially increased in three of the four segments also, each increasing more than 270 basis points compared to the first quarter of 2022. With the additional backlog shipped in the second quarter from CTS, we expect CTS margin to sequentially improve throughout the second half of the year. Our investments as shown on Slide 23, both organically and inorganically in our portfolio for the next are paying off in terms of commercial opportunities. In this week's news on the Inflation Reduction Act of 2022, which addresses the United States potential adoption of solutions through strategic investments that allow us to decarbonize, these investments and technologies are needed for all fuel types, from hydrogen, nuclear, renewables, fossil fuels, and energy storage, to be produced and used in the cleanest way possible, and certainly will further support the continued traction we have already seen in the commercial adoption of our Nexus of Clean offerings. We're also seeing much greater interest from businesses across industries in the technologies and funds that we were first investors in, including Cemvita Factory’s Gold Hydrogen, which is a novel source of carbon-neutral hydrogen produced from depleted oil reservoirs that are ready for plug and abandonment, extending the life of the wells that would otherwise be a significant burden, but now producing hydrogen in place of hydrocarbons. Chart also has a synthetic biology process that has a potential to create a new way to produce sustainable fuel for aviation, in which both United Airlines and Oxy Low Carbon Ventures are investors. Another example of this is our anchor investment FiveT Hydrogen Fund, which is now managed by and referred to as High 24. Just last week, Airbus joined the fund as well, another potential user of cryogenic liquid hydrogen equipment for the future of aviation. This is just one example of how the focus in the private sector continues to be on ESG and more sustainable solutions. Another example is the agriculture and food and beverage industry responsible for approximately a third of greenhouse gas emissions globally. The industry is working to abate these emissions and our technologies can help customers address multiple ESG activities. One example of this is City Brewing. They're a customer that has purchased food and beverage equipment from us and now water treatment equipment in the first half of the year. Now we're discussing with them our Earthly Labs offering. So like many of our customers, they have several locations which presents repetitive and multiple opportunities for us across the Nexus of Clean. These Nexus of Clean activities are primarily reflected in our Specialty Products segment. Slide 24 shows our continued growth in the segment with the second quarter posting record orders and backlogs, even when taking into account the very low each LNG vehicle tank orders this year-to-date. Specialty also had plenty of broad-based demand as you can see in the bullets on the right-hand side of the slide. What is also exciting in this segment is not only the more diversified customer base that we are continuing from more geographic areas, but also the various non-investment partnerships we've been able to put in place, including the eight that I referenced earlier. Our Heat Transfer Systems segment is seeing very strong LNG supply-side market demand, and obviously increased activity in Big LNG with multiple projects taking and expecting final investment decision. We are also seeing increased activity in new cryo plant builds, turnaround activity, expansion projects, and petrochemical and ethylene markets, as well as strong activity in our air-cooled heat exchanger business, which was one of the softest over the past few years. You can see the average order level for air coolers on the last bullet on the right-hand side of Slide 25. In terms of margins, second quarter 2022 was our first reported operating income positive quarter for HTS since Q1 2021, so upward from here. Our second half 2022 HTS segment margin is one of the most meaningful contributors to our anticipated second half sequential, total Chart margin improvement. This is driven by the projects already in backlog, as well as anticipated additional orders that are coming in the third quarter. Slide 26 is a slide to demonstrate our expanding LNG addressable market. We have previously discussed our LNG addressable market in three ways: Big LNG, small scale and utility LNG, which includes FLNG and regas opportunities, and third LNG infrastructure such as ISO containers, fueling stations and trailers. But from now on, we're going to speak to our LNG addressable market in four ways: these three, plus retrofit and refurbishment opportunities for which we are seeing increasing inquiries and activity. I'll come back to the retrofit and replacement shortly, but first let me point you to a few of the data points on slide 26. Rows four and nine are powerful when you look back to February of this year. We had no Big LNG or small scale or floating booked yet in the year. Since then we've booked $667 million of related orders, and that does not include LNG infrastructure or retrofits. Row two we feel is important to our continued expanded future growth. We commented about the potential for international Big LNG projects, potentially using IPSMR and moving to modular mid-scale from base load stick-built facilities. This picked up momentum in the second quarter and while I cannot comment on specific projects due to NDAs in place, we are very optimistic about IPSMR being selected for use in one or more of these projects in the coming year. We have these international opportunities for both land-based mid-scale modular, as well as floating LNG using mid-scale modular. Additionally, we mentioned on last quarter's earnings call that a major energy company had approved our IPSMR process technology for use in their projects. We're pleased to share that this week another international operator has also qualified our IPSMR for use in their work. And a key takeaway is the increasing opportunity set in all of the categories shown on Slide 25. So as you might imagine, over the past few months, we've certainly received numerous inbounds from the public and private sector on addressing energy security access and resiliency. Our numerous Regas options are a key part as shown on Slide 27. Our most recently introduced Regas offering is our modular, moveable and quick-to-deploy Regas solution, which we call the DAGR, the drop-and-go Regas. This amongst our other Regas equipment and technology has increased in demand since the focus has heightened. We also appreciate that many of these customers are looking for us to be the maintenance providers. For example, Italgas has deployed 26 LNG Regas units, and we also are the 24x7 maintenance provider for these systems. We're currently quoting dozens of these opportunities for customers in central Europe, in particular in Germany, where the alternatives to pipeline gas are being explored. Back to the LNG retrofit, replacement and refurbishment opportunities — we've had numerous jobs completed or underway year-to-date 2022, including related to removal and installation of fans and motors and numerous field service repairs. In the second quarter, we received the Southeastern utility customer's small scale LNG order for $26 million, which is also a replacement and an expansion project. The other opportunities in aftermarket are shown on Slide 28. This work is round the globe and includes opportunities in heavy hydrocarbon removal, nitrogen rejection units, vacuum-related pipe, and boil-off gas, just to name a few. Our second quarter 2022 acquisitions of Fronti and CSC shown on Slide 29 are very natural fits for our cryogenic expertise and focus on expanded differentiated capabilities, as well as growth in our repair and service business. Fronti fits with what we were just talking about across the LNG spectrum, as well as with their specialized vacuum insulated cold box and pressure vessel capabilities — a particular strategic fit for hydrogen and helium applications — while CSC brings a strong service footprint in the Nordic region with many overlapping customers to Chart. I'll wrap it up on Slide 33 with our current 2022 full year sales guidance in the range of $1.725 billion to $1.8 billion. Current associated adjusted non-diluted EPS guidance is in the range of $5.20 to $5.60 on 35.86 million shares outstanding increased from 35.83 million shares outstanding in our prior guide. We’re also forecasting a 20% full year tax rate compared to the prior guidance of 19%. Okay, here's the best part of this call. Wait for it. This is going to be the best part of the call and the best part of the day. This is for our analyst community. You guys were right. It looks like our analysts were already right in their modeling and so we're falling in line to our current guide, just reiterated. So there's considerations and assumptions in our guidance. I'm not going to step through them. They're in our press release and they are also on the slide in the deck. So you can read through the considerations and the assumptions that we have in our latest guide and we feel that we've taken into account the discussion of the not-yet-improving pieces and parts that we've laid out today. So to conclude this slide, given the second quarter activity, we're now even more confident in our 2023, 2024 and 2025 outlook, as well as opportunities ahead of us. With over $1.1 billion of backlog already for 2023 and beyond, we certainly have high confidence in our previously disclosed three-year CAGR on sales and adjusted earnings per share. Before I conclude and open it up for Q&A, I want to show Slide 34, which I want to say a personal thank you to our amazing summer interns from high schools and universities around the world. Take a moment to appreciate each and every one of our interns for their dedication this summer, and as part of our talent development, we look forward to having you back next summer or full time. So now Catherine, open it up for Q&A.

Operator, Operator

Thank you. Our first question comes from John Walsh with Credit Suisse. Your line is open.

John Walsh, Analyst (Credit Suisse)

Hi, good morning Jill, Joe and Wade. How are you?

Jillian Evanko, CEO

Hey, John, I’m doing great.

John Walsh, Analyst (Credit Suisse)

Excellent. Wondered if we could first talk a little bit about some of the visibility you have for the margin drivers in the second half versus the first half. So I heard kind of in the prepared remarks you got backlog, right volume. Maybe some of these frictional costs get a little easier, price costs. I don't know if you can quantify any of that, but we’d just love to hear your bridge on the margins H2 to H1.

Jillian Evanko, CEO

Yes, sure. So there's multiple components that go into that incremental increase in the margins. The CTS backlog burn off that we commented three or four times in our prepared remarks is a key part of that. Also the timing of the backlog in terms of these mid-level sized projects — so when I refer to these $10 million to $50 million sized projects we booked four of those the last week of December of 2021, where primary revenue is in the second half, in addition to some of these other mid-scale orders that were laid out on Slide 4 or 5 of the deck. So those are all kind of contributors based on the mix profile and less of this price-cost lag backlog. There are some other contributors in terms of the macro environment and we tried to account for offsets in our guide related to things like FX and so on. Probably the only thing I'd specifically point out is, we focused on CTS in the prepared remarks, but HTS in terms of the air-cooled heat exchanger business has really turned the corner in margin, both from organic automation and productivity improvements, but also really from the price-cost coming out of that lag backlog as well. So all of those things together with higher specialty mix give us confidence in that stair-step from 1H to 2H.

John Walsh, Analyst (Credit Suisse)

Great. And then I thought it was very interesting, this kind of fourth leg around LNG that you're talking about. I was just curious the genesis on why now did the installed base hit a certain age, did something change? And then how do we actually see it in the P&L? Is some of it showing up in repair and service and parts of it through HTS if it's a replacement? Maybe just help us understand how that fourth leg flows through the P&L.

Jillian Evanko, CEO

Yes. So I'll answer your first question twofold. Why now? I'll answer it for why now are we calling it out as a company and why now in the market. We're calling it out as a company right now because we've seen enough actual magnitude in terms of the order book to have it be meaningful enough to talk about separately. In terms of why this is happening in the market right now, there's definitely, I think since the Russia-Ukraine conflict has broken out, there is need for speed and utilization of existing infrastructure is a key driver in that. So it's not just greenfield and it's how do I get more gas faster. And that's allowing for capital decisions to be made around retrofitting and refurbishment. And I think the same applies to more traditional energy infrastructure as well. We're seeing a little bit of that in our HTS segment. In terms of where this flows through, it is split between RSL and HTS. So take as an example the Southeastern utility small scale replacement, that would flow through our HTS business because while it's a replacement for them, it's new equipment from us. Whereas if we have field service work, which I think year-to-date we've booked about $13 million to $14 million more related to LNG in this fourth leg, that would primarily roll through RSL.

John Walsh, Analyst (Credit Suisse)

Great. I'll pass it along for the fellow analysts. Thank you.

Joe Brinkman, CFO

Thank you.

Jillian Evanko, CEO

Thanks, John. Our next question comes from Eric Stine with Craig-Hallum. Your line is open.

Eric Stine, Analyst (Craig-Hallum)

Hi, Jill, hi Joe.

Jillian Evanko, CEO

Eric, good morning.

Eric Stine, Analyst (Craig-Hallum)

Hey, good morning. Maybe just following up on that margin question, I mean, obviously not providing guidance for 2023 and going forward, but I would assume we should think about continued margin improvement, given the higher utilization, given some of the easing of the material costs that you talked about. And also just maybe on price, maybe thoughts on you've obviously taken a lot of action, but ability you think to hold that, potentially if you do see those materials costs start to ease and if that's sustainable?

Jillian Evanko, CEO

Yes. I have a very high confidence in increasing margins continuation through 2023 and 2024, and that’s a function of some of the things you just named. It's a function of the high level of volume rolling through our shops, more standardization internally — what we call flexible manufacturing — so where we three to four years ago would make a product in a shop and now we're in the path of optimizing where we make what, and so pieces and parts across our manufacturing footprint go together in a much more seamless and optimized way. So those are some of the organic things that are happening. We do anticipate that we can hold onto a meaningful portion of the price. We, in fairness to our customers, will be giving the surcharge back when we see a trend on some of these higher costs abating. But that's why we designed the price surcharge the way that we did, so that there was a piece that we were going to price at some point anyway and so we had to accelerate that, and that's going to continue to be in our margin profile. So all told, I have a high level of confidence — if you look beyond 2022 into the further opportunities — to meaningfully improve by hundreds of basis points the margin profile that we have.

Eric Stine, Analyst (Craig-Hallum)

Got it. That's helpful. And maybe last one from me, just in the release I think you cited seven MOUs and one of them you announced with Wolf. Here on the call you're talking eight. So maybe you're breaking a little bit of news that you've added an LNG MOU recently. But if you could just go into detail a little bit more, I know maybe you're limited as to what you can share, but whatever you can share on those eight MOUs would be great?

Jillian Evanko, CEO

It’s funny you say that because I had somebody else reading the press release for a tick and tie and they read it as seven, and I was meaning to roll the prior sentence of talking about one plus seven. So it is eight. One was recent though, to your point. And I can talk about a few of them that are in the public domain and that I'm able to talk about. One on the hydrogen side of things is Black Tree, and that one is related to us being the exclusive provider of hydrogen equipment, as well as liquefaction for their projects going forward. On the LNG side, there's a couple that I can't use their names, but these are EU customers that have signed maintenance and long-term repair and service agreements with us. What we love about that is the linkage to the original equipment customer just gets stronger and stronger. So one of those was actually a repair and maintenance agreement of others' equipment and now we're seeing the reverse pull-through where we're getting original equipment sales as a result of that agreement. Then there's some carbon capture ones. We talked about the Wolf one today. There's a couple of others that are similar in nature. And this is on the large scale SES Cryogenic Carbon Capture side of things. Those are really specific where we're seeing the most action on carbon capture is on industrial applications; in almost all cases the reuse case. So meaning customers that in their product that they're manufacturing, they use CO2. So you can start to get the economics to work a little bit better at a larger scale. So that's the upshot of the agreements. More specificity can't be shared just given NDAs, but all positive with meaningful commercial opportunities behind them. Sometimes companies get out there and they've got MOUs, et cetera, that don't necessarily have immediate commercial opportunities. All of these have very soon commercial opportunities tied to them.

Eric Stine, Analyst (Craig-Hallum)

Okay, that's helpful. Thanks, Jill.

Jillian Evanko, CEO

Thanks Eric. Talk to you soon.

Operator, Operator

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

Ben Nolan, Analyst (Stifel)

Hey, Jill and Joe. So I've got to, if I can work a, in real quick first, just in terms of thinking about the macro, obviously the orders are fantastic and everything else. And you talked through the fact that so far you've not seen any slowdown, but I was wondering, especially in Europe, if it is a function of high energy prices and maybe the industrial economy slowing down a little bit, how are you guys thinking about specifically the CTS business servicing traditional industrial gas companies — is that, have you started to see any slowing or any signs of concern at all around that part of the business?

Jillian Evanko, CEO

We've not yet seen that. But I would agree with you it's something that we're watching very closely. I think a portion of it is the result of the recent focus on some of the other energy applications and the need for energy independence is also showing through the CTS segment, because in many cases, some of the tanks that flow through for those applications flow through CTS. The other piece that contributes to this is many of our CTS customers are global in nature. And so when they're buying, we don't always know the end geographic point for where the tank is going, but we haven't seen a slowdown in their behavior compared to typical or compared to what we've expected on a global nature. That doesn't necessarily mean that a particular region is lower and another region is higher, but nothing specific that points to that. If there was a risk factor which we feel like we've contemplated in the guide, I would say the EU CTS side would be where we'd be watching for that, but nothing yet.

Ben Nolan, Analyst (Stifel)

Okay, that's good color. I appreciate it, Jill. And then secondly, you talked about some of the big LNG developments and being improved by oil majors and or Total. And one of the things that we had seen, I guess, last week was that Exxon was looking to pivot their Mozambique project. And I know you can't talk about specific projects or whatever, but my question was, is it possible to sort of quantify where, where you think your market share has been for some of that Big LNG stuff on a global basis, not just in the Gulf coast and given what you're seeing, I mean, what's realistic from your perspective as to sort of where you might be able to push that?

Jillian Evanko, CEO

That's a really good point. Yes, certainly we're seeing — I think we added seven or eight new international opportunities into one of the categories on the Big LNG side. So generally speaking, international work for these projects to date we hadn't had any IPSMR adopted. We've had some equipment in those projects outside of the U.S. Gulf Coast which primarily when it's a base-load facility is going to be a spiral wound exchanger versus a Brazed Aluminum Heat Exchanger, so most of our equipment would be in pre-treatment historically. Now what we're seeing is a very strong movement in that international market toward modular mid-scale, and whether it's Mozambique specifically or regions off the coast of South Africa or off the coast of Europe or in Southeast Asia, all of those regions we're seeing potential customers and current customers looking at moving to the modular side. So if I globally said Big LNG share from a process technology side, it would be zero international right now. And yes, probably guesstimate 40% in the U.S. Gulf Coast, guesstimating, and combine both of those numbers meaningfully increase with both the qualifications, but also this market move towards modularity.

Ben Nolan, Analyst (Stifel)

Perfect, I appreciate the color and detail there, Jill. Thanks.

Jillian Evanko, CEO

Thank you, Ben.

Operator, Operator

Our next question comes from Chase Mulvehill with Bank of America. Your line is open.

Chase Mulvehill, Analyst (Bank of America)

Hey, good morning, Jill.

Jillian Evanko, CEO

Good morning, Chase.

Chase Mulvehill, Analyst (Bank of America)

Yes, so I just want to come back to margins and think about the progression in the back half. I know you've kind of talked about some of this at a high level, but maybe may, I don't know if you want me to do this, but I'm going to try, I'm going to try to pin you down on some margin numbers. So, obviously I think you've been talking about Q3 kind of having a noticeable step up and so just want to make sure if that's still the case? And then do we expect margins to step up again in the fourth quarter or do you have any kind of seasonality when we think about margins in the fourth quarter?

Jillian Evanko, CEO

So typically we would have some seasonality, but just based on how the backlog is flowing out on the project work, it will actually be this year at least sequential Q3 to Q4 increase. And also based on how the backlog flows out, you'll have a more meaningful Q4 — between Q3 and Q4, Q4 is going to be higher on both revenue and profit and margin percent of sales. And so you'll see a step up from Q2 to Q3, step up from Q3 to Q4. And I think your other comments are accurate as well around yes, a meaningful step up from Q2 to Q3.

Chase Mulvehill, Analyst (Bank of America)

In your guidance, maybe at the low end of your guidance applied for the back half, do you mind kind of giving us a gross profit margin percentage that you expected in the fourth quarter?

Jillian Evanko, CEO

Yes, somewhere in the low 30s, around 31% in change.

Chase Mulvehill, Analyst (Bank of America)

Okay, all right, perfect. And then, follow up question here. I mean, I think Ben kind of asked about potential slowdown in Europe, but we've been getting a lot of questions on just kind of the overall energy crisis and the potential for power rationing during the winter. So I guess there are a couple of questions for you. Number one, could you just kind of talk about your European manufacturing footprint and the energy intensity of that footprint? And then number two is, when you think about your supply chain, how reliant are you on Europe on your supply chain and kind of how are you managing some of this risk as we get into the winter?

Jillian Evanko, CEO

So let's step back to the first part of the question. We manufacture in our European facilities about approximately 22% to 25% of our total annual revenue on average. There's a couple of primary facilities in that number: the Czech Republic, Italy and Germany are the three primary locations in our EU footprint with more heavy revenues coming from the Czech Republic and Germany. With that said, we've seen, we actually have heightened our utility electricity energy input cost two quarters ago. We saw a little bit of that tempering. Some of that's a construct on just how the billing works and how the arrangement is. But we have continued to see certainly higher-than-typical cost side of things. From an input perspective, we're able to manufacture everything that we make in those facilities somewhere else. Now it would not be nearly as efficient as what we do in those locations, in particular, given the level of backlog and capacity we have open in other locations. But suffice it to say that if there was a long-term issue of being able to operate there, we could move things around to other facilities, which has been part of our strategy to make every product that we have in our portfolio in more than one Chart location — we're over 95% of the way there across the total portfolio. When you look at the supply chain side, we've worked very hard necessarily as a result of this potential issue in Europe, but really as a result of last year's issues in the supply chain to have multiple levers to pull in our vendor base. What I mean by that is, historically three or four years ago, we were looking to be on global supply arrangements. We still like those where they're applicable and where there's cost savings, but we also have backup supply on a regional basis. So we can go both directions on global or local. And we've already looked at and started to deploy other supply chains in anticipation that this could be an issue. But all that to say is that we don't expect any interruption in our manufacturing from this and what I just dialogued there anecdotally is all the reasons why, and all of the things that have gone into our thinking to prepare for that type of scenario.

Chase Mulvehill, Analyst (Bank of America)

Okay, it all makes sense. I appreciate all the color there and I'll turn it back over. Thanks Jill.

Jillian Evanko, CEO

Thank you, Chase.

Operator, Operator

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