Earnings Call Transcript
Chart Industries Inc (GTLS)
Earnings Call Transcript - GTLS Q1 2025
Operator, Operator
Good morning, and welcome to the Chart Industries 2025 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 two hours after the call ends until May 8, 2025. The replay information is included in the company's press release. Before we begin, I want to remind you that statements made during this call that are not historical facts are forward-looking statements. Please refer to the information regarding forward-looking statements and risk factors included in the company's earnings release and latest filings with the SEC. The company undertakes no obligation to update publicly or revise any forward-looking statements. During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, Chart has posted reconciliations to the most directly comparable GAAP financial measures on its website. We have also provided a supplemental slide presentation to support our comments today, which can be accessed in the Events and Presentations section of Chart's website at www.chartindustries.com. I would now like to turn the conference over to Jill Evanko, Chart Industries' CEO. You may begin.
Jillian Evanko, CEO
Thank you, Ludy. Good morning, and thank you for joining our first quarter 2025 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. When compared to the first quarter of 2024, orders of $1.32 billion increased 17.3% and included the addition of Woodside Louisiana LNG Phase 2. Woodside Louisiana LNG is utilizing our IPSMR process technology and associated equipment for their project. As of the end of the first quarter of 2025, LNG makes up approximately a quarter of our backlog. Sales of $1 billion organically grew 6.6%, and three of our four segments had an increase in sales. Our gross margin of 33.9% marked the fourth consecutive quarter of gross margin above 33%. By leveraging our 14.1% SG&A, we achieved a 190-basis point expansion in adjusted operating income margin, reflecting the last two years of cost synergies from the integration of Howden dropping through to operating income. Adjusted EBITDA of $231.1 million was 23.1% of sales, an increase of 80 basis points. Reported adjusted diluted earnings per share was $0.99 and adjusted was $1.86, an increase of 38.8%. Free cash flow was negative $80.1 million due to the customary uses of cash for our first quarter, yet still represented an improvement of $55.6 million when compared to the first quarter of 2024 free cash flow. The March 31, 2025, net leverage ratio was 2.91, and we reiterate our target net leverage ratio of 2 to 2.5 expected to be achieved in 2025. Looking ahead, we continue to see positive demand trends as we start the second quarter with growth across the majority of the business, and we'll share more information on that as well as on anticipated gross impact from tariffs for which the team has been very nimble to address and take mitigating actions to date. We also reiterate our full year guidance outlook for 2025, and we'll share specifics around that shortly, given our strong backlog as well as aftermarket service repair being approximately a third of our business. The first quarter 2025 order activity demonstrated continued broad-based demand. Examples of this activity are shown on Slide 5. I already mentioned Woodside Louisiana LNG Phase 2 being booked in Q1. Note that Woodside anticipates Phases 3 and 4 that are not yet in our backlog, each of which is the same content as Phase 2. First quarter 25 orders in space exploration, HLNG vehicle tanks, nuclear, and marine were each greater than the full year 2024 orders in those end markets. Highlights for the quarter include booking the first serial run order for HLNG vehicle tanks with Volvo Aker, Abra's aluminum heat exchanger order with Honeywell UOP, multiple tank and heat exchanger orders with a space exploration customer, multiple railcars with a large industrial gas customer, and an order with Naon EDA for three regas plants in Europe. Additionally, RSL orders were strong and included a carbon capture retrofit for a coal-fired power plant. As of now, despite the many uncertainties associated with global tariffs and general economic conditions, we are not seeing demand decline. Our commercial pipeline remains robust at approximately $24 billion, even as we convert larger projects in that pipeline into our backlog. We have a meaningful pipeline also of potential large global LNG work that we believe has a significant likelihood to come into backlog in 2025, given natural gas and LNG demand and the current U.S. administration support for LNG. Additionally, aftermarket is holding up strongly across all of our regions to date. Even with the strong orders in Q1 for nuclear, marine, and space we've already in April booked over $54 million for these three end markets. Yesterday, we booked an order for nuclear application for power generation in Europe which will utilize a series of our distillation recirculation and storage solutions. Our customers' latest feedback for specific end markets reflects expectations for continued positive trends in marine, metals mining, energy, natural gas, space exploration, nuclear, data centers, aftermarket, carbon capture, and hydrogen specifically in Europe. Generally, water treatment, general industrial, LNG vehicle tanks, and food and beverage are in line with our original expectations that we had coming into 2025. Finally, we are watching uncertainty in the industrial gas and hydrogen market, specifically in the Americas. We were pleased to see industrial gas orders via our CTS segment increased sequentially by 10% from Q4 '24 to '25. In total, we anticipate that our second quarter 2025 orders will be higher than our second quarter 2024 orders. Data centers and AI continue to be a driver for the growing energy demand globally. Our existing portfolio of heat rejection, cryogenic storage, water treatment, and digital monitoring solutions, as shown on Slide 6, support data center customer needs. We continue to see this end market as an area for near, medium, and long-term addressable market for us. Since adding a dedicated data center commercial team member a couple of months ago, our pipeline of potential customers in this space has grown to over 50. We are in discussions about partnerships to utilize our solutions with two specific companies beyond our existing customer base. And the next 12 to 18-month commercial pipeline for data center specifically has expanded to approximately $400 million of opportunities. Now Joe will take you through Q1 specifics.
Joseph Brinkman, CFO
Slide 7 is a summary of the first quarter compared to Q1 2024, and we will cover these in more detail starting on Slide 8. Slides 8 and 9 show our key financial metrics compared to the first quarter of 2024. From left to right, on Slide 8, sales increased 5.3% with a headwind from foreign exchange of 1.3%. Adjusted operating profit grew over 16%. Adjusted operating margin of 19.9% reflected further productivity actions, favorable project mix as we execute backlog, and benefits of increased efficiencies in our new manufacturing lines. Additionally, Q1 was the first quarter since 2022 of Specialty Products gross margin above 30%, and we continue to leverage our SG&A on more throughput. This contributed to adjusted EBITDA of over $231 million, an increase of nearly 9%. We continue to take costs out via productivity initiatives and improved throughput via our Chart business excellence as we track to our medium-term 2026 goal of mid-30s gross margin percentage. Turning to Slide 9. You can see gross operating and EBITDA margin expanded on both a reported and adjusted basis. In particular, we are continuing to leverage SG&A as we deliver more volumes to our shops, which is reflected in the 190-basis point improvement in adjusted operating margin. Turning to Slide 10. First quarter free cash flow was negative $80.1 million, driven by typical first-quarter cash outlays, including our senior secured notes interest payment, timing of insurance costs, and bonus payments, among other seasonal items. As a reminder, the senior secured notes interest payment of approximately $79 million occurs in the first and third quarter of the year. Our capital expenditures for 2025 are anticipated to be in the 2% to 2.5% of sales range, and we continue to focus on improving working capital. Our CapEx is related to capacity for compressors and productivity and automation for more throughput in our shops. First quarter 2025 working capital, defined as net accounts receivable, net inventory, unbilled contract revenue, accounts payable, customer advances, and billings in excess as a percent of last 12 months sales was 16.3%. In February 2025, we shared that we signed a letter of intent which is substantially similar to the previous arrangement. We do not expect any balance sheet or cash impact with respect to such option prior to 2028 We remain committed to and reiterate our financial policy as shown on the right-hand side of Slide 9. Until we are within our target net leverage ratio of 2 to 2.5, we will not do any material cash acquisitions or share repurchases. We reiterate that we anticipate ending 2025 with approximately $3 billion of net debt and achieve our sub-2.5% target net leverage ratio in 2025 and based on full year 2025 free cash flow generation between $550 million and $600 million.
Jillian Evanko, CEO
So let's move to Slide 11 to discuss our Q1 25 segment results. Starting with Cryo Tank Solutions, or CTS. First quarter 2025 CTS orders of $152.6 million decreased 4.2% when compared to the first quarter of 2024. It is important to note that CTS orders, as I mentioned earlier, increased over 10% sequentially versus the fourth quarter of 2024, resulting in the first sequential quarter increase in CTS backlog in a year. CTS' first quarter 2025 sales of $153 million declined 4.1%, yet grew 2% sequentially versus the fourth quarter. CTS first quarter 2025 adjusted operating income margin of 12.7% improved 220 basis points and reflects operational efficiencies as well as improved long-term agreement constructs. Moving to Heat Transfer Systems, or HTS. First quarter 2025 HTS orders of $220.7 million declined 7% when compared to the first quarter of '24. HTS end market demand, including traditional energy, LNG and data centers, all remain robust as does our commercial pipeline, and we anticipate larger orders in these end markets for the balance of 2025. HTS sales of $267.3 million increased 5.4%, driven by conversion of LNG and data center backlog. HTS adjusted operating margin in the first quarter of 2025 was 25.5%, a 460-basis point improvement compared to the first quarter of 2024 as SG&A remains consistent even as we deliver higher volumes. In Specialty Products, for the first quarter of 2025, orders were $487.7 million and increased 24.6% when compared to the first quarter of 2024. This included record orders in nuclear, space exploration, marine, and HLNG vehicle tanks that I described earlier. Specialty Product sales of $276.1 million increased 16.7% when compared to the first quarter of 2024, driven primarily by backlog conversion in hydrogen, water treatment, and power generation. Specialty Products adjusted operating income margin of 18.9% grew 560 basis points compared to Q1 '24, driven by backlog conversion, greater efficiencies, and leverage of SG&A. Contributing to this was Specialty Products gross margin of 30.3%, the first quarter that we achieved gross margin in specialty above 30% since 2022. Finally, Repair Service & Leasing, which is a very strong segment for aftermarket service and repair. RSL first quarter 2025 orders of $454.6 million grew 36.1% when compared to the first quarter of 2024, driven in part by a retrofit order for a coal-fired power plant. RSL sales grew 1.3% compared to the first quarter of 2024, which was driven by the timing of certain projects and field work being scheduled for post Q1. RSL adjusted operating margin of 32.4% decreased 270 basis points when compared to the first quarter of 2024 as a result of lower spare sales in Q1 2025, which we attribute to timing. We expect and continue to expect looking ahead, RSL gross margin to be in our normal mid-40% range for the year. So continuing on with some more detail on how we plan to continue to grow RSL, which is a third of our revenue approximately and half of our operating profit. So let's look at Slide 12, where you can see some of the statistics from the first quarter of 2025. We expanded the number of service and framework agreements by 10.7% since the end of 2024. And we have continued to leverage our e-commerce tools to drive more spares using our website Chart Parts. Specifically, orders on the website increased 9% in Q1 '25 when compared to Q1 '24. In addition to growing our installed base coverage globally, we see more and more opportunities for global coverage for screw compressors and axial fans in Asia Pacific as well as recip compressors and steep turbines in the Middle East. The Howden Screw Compressor brand is well known for reliability and quality, and we are gaining installed base coverage with customers that are managing critical processes. Retrofits of existing brownfield facilities is another area that we're seeing more interest from customers such as we saw with our fans retrofit at Cheniere's Sabine Pass facility and also a growing pipeline for more nitrogen rejection unit opportunities. We've received very favorable feedback on our newly developed digital LNG dashboards, which utilize digital uptime with a customer in Europe testing these at their LNG fueling stations, which were purchased from us as new builds. We see this area in application as well as in geography as a large meaningful opportunity for us in aftermarket service and repair, in particular, on mobility applications. These are just a few examples of the many ways within our own control that we can expand the aftermarket piece of our business with our capabilities for the supply of equipment, extensive service network, and LTSA solutions for our long-term partners, another reason that we're thrilled to have approximately a third of our business in the RSL segment. On Slide 13, you can see our gross annual estimated impact from tariffs on the left-hand side is approximately $50 million. With 8 months remaining in 2025, this would mean a remainder of the year gross impact of estimated approximately $34 million if none were mitigated based on known tariffs as of yesterday. Our team has remained very agile and has taken several steps and has further steps underway. I'll share a few of these, which are certainly not all-inclusive. We're leveraging our in-region sources of supply and our global sourcing for best costs where possible, taking advantage of our flexible manufacturing footprint across the globe, continuing to deploy Chart business excellence and focusing on cost structure and productivity. We're passing through certain cost increases and getting exemptions in certain regions for specific products. For example, for specific aluminum parting sheets, we have an exemption until September of 2025 to import material duty-free. We are ensuring that we have more than one supplier for every input, which supports our in-region supply chain strategy. In our book and ship business, we issued a price increase in early April. And as a reminder, we are the only manufacturer of brazed aluminum heat exchangers in the United States with the world's two largest brazing furnaces. We also have a strong air cooler and fan manufacturing footprint in the United States, as well as the world's largest shop built cryogenic tanks in our theater, Alabama facility, where this week, we shipped two of our large space exploration customers their 1,700 cubic meter tanks. Specific to steel and aluminum, most of our steel is sourced domestically and is not directly impacted. To the extent that U.S. market pricing goes up for domestic steel, we anticipate that we can pass that along to many of our customers. And then finally, with specific actions to tariffs, we do purchase project-based materials at the time of order as a general rule. And so we have largely locked in our cost on steel and aluminum for existing backlog. Though we have not yet seen it in our results, we do recognize that we face an uncertain global environment for the remainder of 2025. Currently, we reiterate our anticipated 2025 outlook as shown on Slide 14. Setting tariff-related uncertainty aside, we have not seen any material changes in the business. Our full year 2025 sales are anticipated to be in the range of $4.65 billion to $4.85 billion. Our full year 2025 anticipated adjusted EBITDA range is $1.175 billion to $1.225 billion. As we have previously mentioned, our second half of 2025 will be higher than our first half of the year. This is driven by the timing of specific project revenue and service work in our backlog. Examples of this include, but are not limited to, timing of revenue on the nitrogen rejection unit that we booked a few months ago, Woodside Louisiana LNG timing of revenue, specific mining projects that were booked in the first quarter, and the timing of the larger backlog for space exploration and marine that came into our backlog in Q1. We continue to anticipate achieving our leverage ratio sub of 2.5 in 2025. As Joe described earlier, we are committed to our financial policy as we focus on operational cash generation for debt paydown to achieve that range. As shown on Slide 15, once we are within our target net leverage ratio range, we will evaluate allocating capital in a conservative way in the categories shown on the bottom of the slide. These include high ROI organic capital expenditures for value creation, including but not limited to, expanding our aftermarket footprint and capabilities, machine automation for additional throughput, and innovation related to R&D activities. Additionally, we will consider other ways to return to shareholders, inclusive of potential share repurchases, which we consider an investment in our company, and it creates value when buying stock at a discount to fair value. We will also evaluate potential bolt-on acquisitions that focus on repair and services area, specific technologies, and high-pressure low-temperature capabilities. All of these, as shown on Slide 15, are underpinned with our commitment to a simplified balance sheet and capital structure. And finally, to conclude our prepared remarks, I would like to thank our global One Chart team members for all of their continued efforts that drove our first quarter results. Ludy, please open it up for Q&A.
Operator, Operator
Your first question comes from Scott Gruber with Citigroup. Please go ahead.
Scott Gruber, Analyst
Yes, good morning. A couple of questions here. So first, I'll just start with kind of the number one inbound we've got Chart over the last month or so. It was just your exposure to China. Are you able to discuss the major sales verticals into China? I think it's tanks and maybe some mining equipment, etc. Where are you fabricating the equipment? And overall, your ability to shift any U.S.-based fabrication destined for China to other locations?
Jillian Evanko, CEO
Yes. In China, we primarily manufacture cryogenic tanks and some trailers related to power generation on the Howden side. The two main sectors we focus on are industrial gas and power generation. We import a minimal amount from other regions, especially the United States, for intercompany activities and material inputs. This is reflected in the gross tariff number shown on one of the slides. Recently, we have secured certain exemptions for specific codes in China, which has reduced our gross exposure by about 40% in the last week. Therefore, we are mainly focused on industrial gas and power generation manufacturing in China, with some inbound materials as I mentioned.
Scott Gruber, Analyst
I appreciate that color. And then it does look like the overall tariff impact is rather modest because of the manufacture for China. But are there other moving pieces that are helping you offset it and keep the overall EBITDA guide for the year? Is there a segment where you see margins maybe a little bit stronger than you originally anticipated or revenues across certain segments? Just some color on what gave you the confidence to hold the EBITDA in light of the tariffs and risk around the general economic slowdown.
Jillian Evanko, CEO
Yes. Let me begin by highlighting a key aspect of the business that is important to understand: on the new build side, we rely heavily on our backlog. We've focused on this for the past five to seven years. Another important factor is our aftermarket service repair business, which has evolved significantly compared to three years ago. These elements provide us with better visibility in our operations. Regarding tariffs, I've shared some of the actions we're taking to mitigate their impact, and our team has been diligently working on this. Our in-region supply strategy is crucial for maintaining manageable costs, and it was informed by the lessons learned during the 2021 supply chain crisis. Additionally, our flexible manufacturing strategy, where we produce most parts in multiple locations, is designed to keep us close to customer projects, particularly for larger equipment, giving us a competitive edge. Over the years, this flexible manufacturing approach, combined with regional supply, has been effective in addressing current challenges. Looking at other factors that boost our confidence in maintaining our guidance, I can't emphasize enough our commitment to the aftermarket service repair sector, which continues to grow, and our margins align with our 2025 expectations. We see various opportunities to expand this segment further. I'm also pleased to report Specialty Products gross margin exceeding 30%, which we haven't seen since Q3 of 2022. This achievement reflects our efforts to improve efficiencies, particularly with our expanded specialty shops like Teddy 1, Teddy 2, and Tulsa for specialty baseload heat exchangers. Lastly, as we increase our IPSMR LNG content, leading with technology and related equipment gives us clarity on project timelines as they enter our backlog. We remain very optimistic about the natural gas sector.
Operator, Operator
And your next question comes from the line of Saurabh Pant with Bank of America. Please go ahead.
Saurabh Pant, Analyst
Hi, good morning Jill and Joe. Jill, maybe I want to just continue with that line of thinking from Scott. I know the guidance is unchanged, which is fantastic to see despite the uncertainty, right? But I think if I'm looking at the slide there correctly, you are assuming that general economic activity remains stable, right? And that's where a lot of people are concerned about a lot of uncertainty then maybe walk us through what could be potential risks for you from a macroeconomic standpoint or maybe talk about backlog coverage, obviously, your RSL business, right? Just walk us through how we should think about the potential scenarios.
Jillian Evanko, CEO
Absolutely. Thanks, Saurabh, for the question. What I would point to is not only, again, the backlog-driven business, the aftermarket service repair, and the visibility that that lends to us, but also the diverse end markets that we serve are really kind of proving out to be supportive where if we're seeing some caution in end markets such as industrial gas. I mean, certainly, we signaled that in China back in the third quarter of '24. We didn't really see it get better in the fourth quarter of '24. We had softness in general in our thinking around industrial gas. So while Q1 does not make a trend, we were pleased to see sequential order growth in Q1 versus Q4 in the CTS segment. But that's a watch market for me. I would say, I think this is not new news, right? But hydrogen in the Americas, in particular, is an area that we anticipate to be impacted by the uncertainty that we're all describing here. But outside of that, I mean, just the fact that we started the year with more orders in space exploration, nuclear, marine, and HLNG vehicle tanks in Q1 than the entire year of '24, and '24 was a strong year. That gives us, again, some more confidence around as we see the rest of the year through backlog into the guide. So the diverse end markets and the two end markets I just named would be the risk areas. We'll watch those very carefully. We'll also be watching very carefully if we see anything meaningfully different in terms of cancellations of projects in backlog in the first quarter. The only meaningful cancellation we had was on a hydrogen project out of the backlog. So that has, again, not been a trend so far. And then the last part of my answer, I think, which is important is just as we think about the low end and the high end of our outlook, the high end will require certain larger projects that we anticipate coming in, in the first half to do so and to release almost time schedules for manufacturing that we would anticipate based on what the customers are telling us now. So that's, I think, an important thing to when I'm answering your question around uncertainty, that would be the other thing for us that we're watching as the second quarter unfolds.
Saurabh Pant, Analyst
Thank you, Jill, for that insight. I wanted to follow up on the diverse end markets you mentioned. It's encouraging to see the data center opportunity highlighted in your presentation. If I recall correctly, Joe, during our discussion in London, you mentioned a $500 million opportunity for the next three years. Now you're indicating it has shifted to a $400 million opportunity in the next 12 to 18 months, suggesting much of this chance has moved forward. Could you elaborate on that and share where else, beyond air coolers, you are noticing this opportunity accelerate?
Jillian Evanko, CEO
Yes, thank you for the question. You recall accurately that our original estimate for the addressable market over three years was about $500 million. Now that we have focused our efforts in this market, we are discovering more opportunities for our existing products and solutions. The $400 million figure is a concrete number based on the customer pipeline and discussions over the past 60 days. It's encouraging to see that growth, particularly with our air coolers and what we refer to as Finfans. This includes our air cooler heat exchangers and the range of fans we offer, like the Tuf-Lite IV, which has a unique sweeping blade design that is particularly effective in high-wind applications, such as those in the Gulf Coast region of the United States. This fan is well suited for certain applications in data centers. We are also exploring many opportunities in cryogenic cooling as energy requirements rise with AI projects and learning. In some situations, our cryogenic cooling solutions are very appropriate for these applications. Additionally, we consider our carbon capture and water treatment solutions as adjacent opportunities that also benefit this market. So far, the main interest has been in cryogenic cooling, air coolers, and fans.
Operator, Operator
And your next question comes from the line of Marc Bianchi with TD Cowen. Please go ahead.
Marc Bianchi, Analyst
Thank you. I have another question about the tariffs and their impact, Jill. It seems that this doesn't reflect any mitigation efforts. Could you discuss the chances of mitigating that? How is this addressed in the guidance? Is the guidance taking into account any benefits from mitigation efforts?
Jillian Evanko, CEO
Correct, Marc. The figure we provided represents the annualized growth impact we project for the year. We're currently in the fifth month, so this is just a mathematical projection for the remaining eight months. This doesn't take into account any of the mitigation efforts we've mentioned, many of which are already in progress. We're actively addressing this situation globally with all teams involved. We have clear visibility into the contracts we have in backlog, how they are structured, and our capacity to pass costs onto customers. I noted some exemptions we've received so far. Additionally, the estimated $50 million annual gross figure includes considerations if the 90-day pause is lifted and the 10% returns to a higher rate. Overall, we believe we are making substantial progress in mitigating these tariffs, which gives us confidence. While I can't share specific details due to customer confidentiality, we are confident in the actions we've taken so far and believe we can manage within our guidance range. We will continue to assess our mitigation efforts, and we have seen positive developments thus far.
Marc Bianchi, Analyst
Okay, great. Yes, I would just say that the number is definitely much smaller than many people are expecting. As we head into the second quarter, along with some of the disruptions that people anticipate, it doesn't seem like you're projecting that for the year. However, as we move through the second quarter and into the latter half of the year, is there anything different we should anticipate from a seasonality standpoint? Typically, we've observed that revenue increases by about 10% from Q1 to Q2, and we usually see a couple of hundred basis points of improvement in EBITDA margin during that time. Is there any reason to believe that this won't be a reasonable base case assumption?
Jillian Evanko, CEO
No reason to assume '25 is any different than the last couple of years in terms of seasonality.
Marc Bianchi, Analyst
Is there anything regarding cash flow that we should be aware of? You mentioned the typical payments that take place, but are there any concerns related to tariffs or similar issues that we need to highlight from a cash flow standpoint?
Jillian Evanko, CEO
The two things, well, the three things, I guess Joe commented on the semi-annual, is semiannual twice a year?
Joseph Brinkman, CFO
Yes, twice a year.
Jillian Evanko, CEO
I never get that right. We have a couple of raw materials that we're planning to purchase in advance during Q2 to take advantage of the exemptions we have. While this isn't significant, I just wanted to share that information. Additionally, our typical tax payments tend to be highest in Q2 and Q4.
Operator, Operator
And your next question comes from the line of Eric Stine with Craig-Hallum. Please go ahead.
Eric Stine, Analyst
Hi, Jill. Hi, Joe. So you called out a number of these end markets where '25 is better or first quarter better than all of '24, great color on the data center business, so probably in the category of that you view that as a sustainable business where it's matured to the point where you have pretty high confidence. Just curious on the other ones, I know business can be lumpy and Jill, you've been at this for a while. I mean as you look at these other end markets, where is your confidence level that they've kind of reached a different level for you in terms of being a business that you can count on, that you see growth, and it's kind of just moved beyond that really lumpy kind of startup of end markets?
Jillian Evanko, CEO
Thank you, Eric. You've been with us for a while and witnessed the evolution of our business. It's truly been a journey, and I'm glad we can discuss it today because we have put in significant effort to move away from being overly reliant on one or two projects, which took some time. It's encouraging to have better visibility on our new build backlog across various end markets and to see more significant aftermarket service repair opportunities. Earlier this week, I spoke with our four presidents to gauge the situation in their regions regarding aftermarket services, and they all reported that it is performing well, which is a positive sign. The diversification of our end markets and increased content in our projects have also played a crucial role in our development. For example, three years ago, our space exploration business was around $10 million annually. However, as we shared in February, we had already booked $60 million in space exploration orders, and as of yesterday, that figure has risen to approximately $95 million year-to-date. These end markets are increasing our content and driving technology leadership. I also want to highlight the impact of IPSMR, our LNG liquefaction process technology, which has introduced more consistency and opportunities in the LNG sector. Overall, I believe we are at a stage where we can see significant advancements that make our business look very different from how it did 8 to 10 years ago.
Eric Stine, Analyst
No, that's great. Regarding repair service and leasing, I understand you are focused on ensuring that this business remains stable. However, I remember that in previous periods of economic uncertainty, the repair service and leasing sectors often thrived since customers tended to prioritize maintaining their existing assets rather than purchasing new ones. I’m curious if you see a potential opposite trend if conditions were to worsen or become more uncertain. What are your thoughts on that?
Jillian Evanko, CEO
It's definitely a more uncertain time, and I agree with your perspective. We see value in aftermarket service repair, particularly in the RSL business. The current situation, where new builds or capital and operational expenditures are delayed, leads customers to focus on retrofitting and essential maintenance to ensure their operations run smoothly. This is crucial for ongoing plant productivity. Additionally, our Howden Digital uptime preventive maintenance software has garnered significant interest; it promotes a proactive approach rather than a reactive one where customers rush to order emergency parts. The drivers of RSL are varied, and there's much interest in optimizing existing processes. For instance, we discussed last year how retrofitting fans can enhance productivity at existing facilities, and we expect this trend to continue. We're particularly enthusiastic about our recent order for retrofitting a coal-fired power plant, which utilizes our innovative FCS cryogenic carbon capture technology.
Operator, Operator
And your next question comes from the line of Ben Nolan with Stifel. Please go ahead.
Benjamin Nolan, Analyst
Hey Jill and Joe, good quarter. So my couple of quick ones are: number one, just from a macro perspective on the LNG side, just paying attention to this every day, it feels like there's been a pretty material acceleration of activity maybe since the first of the year, but certainly even in this last month. I'm curious if you're seeing the same and how you're thinking about the development of potentially big LNG orders, I don't know, and then through the rest of the year or into next year?
Jillian Evanko, CEO
Yes, I agree with your observation. We are indeed experiencing an acceleration. Our energy team has informed me that all of our customers are looking to take advantage of the supportive environment for LNG and natural gas. This is evident as several projects are advancing significantly, and it’s encouraging to see off-take agreements being established for these projects. Specifically, I want to highlight that we anticipate our potential orders for LNG in the next 12 months to reach around $1 billion. This figure is significant and does not include the ExxonMobil Mozambique Rovuma project, which we know will use our IPSMR technology and equipment but is not yet in our backlog. This potential order pipeline consists of several global LNG projects, and it continues to grow. Additionally, we've noticed an increased interest from customers regarding our nitrogen rejection unit offering, as they assess their gas composition in projects or explore options for midstream and upstream applications to support their downstream clients.
Benjamin Nolan, Analyst
The color is very helpful, and I appreciate it. Switching gears a bit, I noticed you might be changing how you refer to the RSL business as aftermarket service and repair. Perhaps it has always been that way, and I just didn't catch it. I'm curious about the leasing aspect in that context. Is that something you still plan to focus on, or how do you view leasing as part of that segment of the business?
Jillian Evanko, CEO
Yes, leasing is still an important aspect of our business. Internally, we sometimes switch between terms and occasionally refer to everything under the aftermarket umbrella. It's more of a semantic choice on my end. However, leasing remains a vital offering for our customers, and we continue to treat it as a standard product. There is no change in our leasing strategy. As always, we operate within our financial policy and will not venture outside of it to create a large leasing fleet on our balance sheet.
Operator, Operator
And your next question comes from the line of Arun Jayaram with JPMorgan Chase, please go ahead.
Arun Jayaram, Analyst
Yes, good morning. Jill, I was wondering if you could elaborate on the potential for more chunky orders in HTS. I just want to see if you can expand on your commentary on HTS.
Jillian Evanko, CEO
Yes. So what I was really trying to convey there in that commentary is that orders while down from Q1 '24 to Q1 '25 and HTS by about 7% and doesn't really reflect what we're seeing commercially in the market where some of these are just timing like can always gamma $20 million to $50 million order into March 30 or 31 and maybe comes in, in April type of thing. So that was really the genesis of what I was trying to convey with that comment, is that we continue to see bullishness in the broader HTS end markets, but also that we do have a strong pipeline of these chunkier projects. Chunkier for us can be anywhere from kind of $20 million at the lower end to in that pipeline that I was just referring to in my last answer of LNG specific, the largest beyond what we booked with Woodside Phase 2 would be approximately $140 million or so. And there are a couple of those in that pipeline, and then there's a handful of the $20 million to $70 million.
Arun Jayaram, Analyst
That's great to hear. The margins in the first quarter exceeded our expectations significantly. You mentioned some of the historical seasonal patterns earlier. Could you elaborate on the margin performance in the first quarter and your outlook for the remainder of the year?
Jillian Evanko, CEO
Yes. I would say that RSL met our expectations regarding HTS with the data center conversion and the LNG backlog. The more IPSMR backlog we have in HTS, the better it is for us. This is currently a driving factor, and we expect it to continue to be a key driver in the coming years. Regarding CTS, I’d say that it performed slightly better in terms of margin than we expected, which is due to the specific product mix in that segment. We appreciate orders like the railcar order that came in, as they are favorable for us. Larger tanks are also a beneficial addition. Lastly, specialty has been a consistent focus over the last 24 months, and we need to return it to the 30% mark. We've invested in addressing some inefficiencies, which took a bit longer to have an impact, but I believe we are at a turning point, and Q1 showed that. Looking forward, we have stated our goal of achieving mid-30% gross margins in the medium term, and we believe we are on that path.
Operator, Operator
And your next question comes from the line of David Anderson with Barclays. Please go ahead.
David Anderson, Analyst
Hi, good morning, Jill. A couple of questions around the aftermarket business or RSL. You had a really strong quarter in orders this quarter, much more than we've seen in the past. Can you just tell us what was kind of incremental on that quarter? Was there anything kind of unique or kind of existed kind of building up? Just kind of help us understand a little bit what's behind that?
Jillian Evanko, CEO
Yes, absolutely. Thank you, Dave. I appreciate you highlighting the contrast between the aftermarket and our performance. First, I want to express our satisfaction with the results within RSL, particularly in leasing, retrofit/service, and spare parts. It was encouraging to see both retrofit service and spare parts orders increase from Q1 of last year to Q1 of this year. This is significant as it shows that the growth is not solely driven by one factor. We had a strong performance in the Americas during Q1, which we expected, and it materialized, which is positive because the Americas represent a major market for us. Additionally, it is the region among the four we monitor that currently contributes the least percentage of revenue from sales, indicating that we are gaining market share. The demand for retrofit services was broad-based, with two notable projects: one being a service project in South Africa related to mining and the other being a retrofit for a utility customer in the CCUS sector. Yes. In China, we primarily manufacture cryogenic tanks and some trailers related to power generation on the Howden side. The main areas of focus for our manufacturing in China are industrial gas and power generation. We import a very small amount from other regions, especially the United States, in terms of intercompany activity and material inputs. This is reflected in the gross tariff number shown on one of the slides, and we have recently obtained certain exemptions for specific codes in China. As a result, we have seen our gross exposure decrease by about 40% in the last week due to these exemptions on inbound materials.
David Anderson, Analyst
So I'm just caring curious. So Howden came in, I guess, what, about two years ago, so we didn't really see how the aftermarket business performed during COVID or some other kind of demand changes out there. You highlighted industrial gas is kind of one of the watch markets. I'm just curious how you're thinking about some of the potential risks in aftermarket. I guess intuitively, if you have kind of economic uncertainty, I would think maybe some of your customers would push out say, a retrofit or we kind of delay some of this spending. Is there any concern that, that could happen? Or counter to that is are you just seeing kind of this build out of your backlog that kind of offsets any of those potential concerns?
Jillian Evanko, CEO
Yes. Let me address the first part of your question regarding the aftermarket performance in the private sector, which has been quite stable. The only notable exception for Howden occurred in the summer of 2020 when site access was restricted, causing a temporary shift in work from Q2 to Q3. However, overall, the aftermarket has remained consistent over the five years prior to our acquisition. As for potential uncertainties, I'm optimistic about our backlog in RSL, as it provides significant assurance regarding our current outlook. While it's possible that some customers may choose to postpone facility retrofits, we believe that our global service network and spare parts availability will mitigate those risks, essentially balancing each other out in our perspective.
Joseph Brinkman, CFO
Yes. I would add that the installed base of Howden equipment is essential for their applications. In a downturn, that equipment will continue to receive maintenance because the consequences of neglecting it far exceed the maintenance costs. As Jill mentioned, we observed this during our Howden due diligence; it isn't a cyclical segment.
Operator, Operator
Your next question comes from the line of Walter Liptak with Seaport Research. Please go ahead.
Walter Liptak, Analyst
Hi, good morning. Congratulations, guys. And I enjoyed that last discussion about Howden; I think diversity is your strength.
Jillian Evanko, CEO
Thanks, Walter. We really appreciate that observation, and I couldn't agree more.
Walter Liptak, Analyst
Okay, great. I'd like to revisit the conversation about mitigation and inquire about the increases in selling prices compared to surcharging. Have you started implementing any of these, particularly concerning steel? If you are primarily using surcharges, how might that affect the gross margin and the expectations for gross margin this year?
Jillian Evanko, CEO
Thanks for the question. To summarize, we categorize our business pricing into three main types. The first is project-based pricing, which includes various mechanisms for change orders. This aspect of the business is fairly insulated. The second type involves long-term agreements, mainly in the CTS segment, where the pricing mechanisms are designed to avoid disadvantaging either party. From our experience during the last supply chain crisis, we recognized the need to manage the timing of these mechanisms more effectively, and we have made improvements since then. The third category pertains to our book and ship business with the price book; we implemented a price increase earlier in April for this segment and are monitoring it closely. Overall, we believe we are undertaking several positive initiatives that will not significantly affect margins as we assess them today.
Joseph Brinkman, CFO
One thing I want to add on our tariff exposure. One thing to remember is we don't manufacture finished goods in other regions and then bring them into the U.S. and have tariff exposure on the whole value of the equipment. We're largely manufacturing in the U.S. for the U.S. market. And so our exposure is on the raw material side. And in every case where we source those raw materials internationally, we also have domestic sources. So we can pivot between the international raw material sources and the domestic raw material sources as the economic situation changes, like tariffs. So not importing finished goods for resale and having exposure on the whole value of the finished goods is one important aspect of our tariff exposure.
Walter Liptak, Analyst
Okay. Great. And with that April pricing, that was a price increase, not a surcharge. Is that right?
Jillian Evanko, CEO
That was a price increase, correct.
Walter Liptak, Analyst
Okay. Great. Okay. And then am I thinking about it right to think that there could be a gross margin impact from some of this? Or does this just sort of kind of still play in maybe even positively into gross margin targets?
Jillian Evanko, CEO
I wouldn't say positively at all. However, I believe the potential growth impact is manageable on an annual basis. This is based on our current understanding, and our team has done an exceptional job being agile and addressing these challenges. Additionally, some members of our executive leadership program are involved in this daily, and we are closely monitoring everything. Our aim is to use these mitigating actions to ensure there is no significant effect on gross or operating margin.
Operator, Operator
And your next question comes from the line of Rob Brown with Lake Street Capital Markets. Please go ahead.
Robert Brown, Analyst
Hi, Joe. On the specialty gross margins were improving nicely in the quarter, what's sort of the opportunity there? Where do you think you can get those to?
Jillian Evanko, CEO
Yes. Thanks, Rob. Thanks for recognizing that, too. It's kind of been a long hole to get through some of this stuff, but we really needed to get that capacity in play given what we're seeing in terms of demand. I'd be happy if this year, it hangs around the low 30s. If we can consistently be 30% plus in the next nine months or eight months, I'm going to be pleased with that. What I think it should be is closer to like 33%, 34%. But in terms of 2025, we still have some efficiencies to gain in order to get to that. But in terms of the project mix and the technologies and capabilities and some of the unique manufacturing capacity that we now have, that should be ticking closer to that 33%, 34%. But I don't want to get out over my skis for what it could look like in '25.
Operator, Operator
And your next question comes from the line of Martin Malloy with Johnson Rice. Please go ahead.
Martin Malloy, Analyst
Good morning. Thank you for taking my questions. The first question I had was on nuclear. I was just wondering if maybe you could talk a little bit more about the scope of potential award for Chart, whether it's upgrade projects on existing large nuclear facilities or maybe some of the newer SMR designs, what you potentially could sell into those areas.
Jillian Evanko, CEO
Thank you, Marty, for the question. We are enthusiastic about our involvement in nuclear, helium, and data centers, all of which relate to energy intensity and energy security. In nuclear, we engage in a few areas. Retrofitting existing systems mainly involves smaller-scale projects for us, like fan upgrades, which are stable but not large. These projects typically come from expected industry players. The second area is in small modular reactors, which are still in the early stages of development, particularly in Europe, and involve smaller companies exploring their options. We have strong capabilities in Howden compression that can support this sector. The third area encompasses nuclear and helium, where we currently serve clients and have a growing pipeline for helium circulation. This area, including helium liquefaction compression, presents the largest opportunity for us in the near to medium term. Our pipeline grew threefold in the first quarter, making it a trending topic in both Europe and North America.
Martin Malloy, Analyst
Great. And for a follow-up question, just wanted to ask about with respect to Chart water. Are you all doing anything in terms of oilfield produced water pretreatment or cleaning it up even further for beneficial reuse?
Jillian Evanko, CEO
No, not specific to that application. Most of our water treatment is oxidation, oxygenation, and PFAS.
Operator, Operator
And there are no further questions at this time. I would like to turn it back to Jill Evanko for closing remarks.
Jillian Evanko, CEO
Thank you so much to everyone for joining us today, and we look forward to keeping you updated across the coming few months and quarters ahead. Have a great day, and thank you again to all the Global One Chart team members for all you do every day. Take care.
Operator, Operator
Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.