CHART INDUSTRIES INC Q1 FY2024 earnings call

Management Statement and Operational Highlights

• Strong Q1 Performance: First quarter 2024 was stronger than typical Q1, setting records for orders, backlog, sales, gross margins, operating margins, EBITDA, and EBITDA margins. Sales were $950.7 million, up 17.4% or 18.3% excluding foreign exchange headwind.
• Synergy Benefits: P&L benefits from synergy actions were taking hold, driving adjusted operating margin of 18% and adjusted EBITDA margin of 22.3%.
• Backlog and Commercial Pipeline: Record backlog of $4.33 billion and commercial pipeline over $22 billion, up from ~$21 billion prior.
• Teddy 2 Facility: Open production at Teddy 2 and ongoing CapEx at Tulsa facility, with sequential growth expected in 2024.
• Macro Tailwinds: Benefiting from global energy access, clean water scarcity, growing demand for energy (including AI and data centers), and need for decarbonization in heavy-duty transport.

Segment Performance

• Cryo Tank Solutions (CTS): First quarter orders were $159 million, a decrease of about 4% compared to Q1 2023, driven by a large railcar order in Q1 2023. Sales were $160 million, up 13.6% year-over-year. Reported gross profit margin was 20.5%, back in its normal range.
• Heat Transfer Systems (HTS): Orders were $237 million, a decrease of about 30% compared to Q1 2023, primarily due to specific large project bookings in Q1 2023. Sales were $254 million, up about 35% year-over-year. Reported gross margin was 27.6%, a 160 basis point increase compared to Q1 2023.
• RSL (Repair, Service and Leasing): First quarter orders were a record $334 million, up 11.1% compared to Q1 2023. Sales were $301 million, up about 15% year-over-year. Reported gross profit margin was 46.7%, another record, and has been above 43% each quarter since the Howden acquisition.
• Specialty Products: Orders were $391 million, up 40.5% compared to Q1 2023 but down about 2% compared to Q4 2023. Sales were $237 million, up 6.7% compared to last year. Reported gross margin was about 25%, lower than expected for the rest of the year due to specific project mix and first-of-a-kind projects in Q1.

Guidance

• Reiterated full-year outlook for 2024 based on strong Q1 performance.
• Q2 free cash flow outlook is approximately $175 million, driven by non-repeating Q1 cash outflows, sequential improvement in working capital, project payments, and lower CapEx.
• Medium-term outlook includes mid-teens ROIC targets, mid-30s gross profit margin on LTM basis, and continuing synergy realization.
• Anticipates incremental benefit from 7 hydrogen hubs in the U.S. for backlog.

Risks

• Supply Chain: Red Sea situation could impact cost changes, though no meaningful impact seen to date.
• Funding: Availability of funding for hydrogen projects is a concern as not all projects get to FID.
• Margin Timing: Potential timing gaps in realizing margin improvements, though medium-term targets are set.

Question and Answer

Q: Talk about the RSL segment, its runway, and drivers.

A: RSL is a high-margin segment with double-digit growth. It benefits from global footprint, decarbonization push in existing facilities, and repair/service retrofit activity. A global revenue operations team is driving synergy activities, and digital uptime opportunities exist.

Q: Discuss water side and EPA regulations.

A: EPA regulations are a catalyst. Chart has water treatment capabilities to target PFAS and other contaminants, with a growing commercial pipeline.

Q: Talk about orders, base level outlook, and growth.

A: Strong Q1 orders, with robust demand continuing. Medium-sized orders are more frequent across end markets, and good line of sight on Q2 hydrogen order activity.

Q: Margin performance and future margin room.

A: Margin was excellent in Q1. There is more room to grow, with optimization of entities, larger project sizes, and RSL contributing to margin stability.

Q: Carbon capture and its development.

A: Carbon capture is becoming more repeatable. Q1 orders were a record, backlog is increasing, and it's seeing global traction with larger-scale projects emerging.

Q: Year 2 synergy efforts.

A: Focus on entity rationalization, tax savings, and audit fee optimization. Tracking to meet year 2 synergy targets.

Q: Chinese LNG orders.

A: Seeing LNG transportation infrastructure development, not a boom but reflective of LNG being a key energy source.

Q: Hydrogen orders with Element Resources and GasLog LNG Services.

A: Element Resources has a liquefaction project in California, and GasLog partnership is studying a liquid hydrogen supply chain for marine transport.

Q: Carbon capture orders with Earthly Labs and SES.

A: Earthly and SES teams collaborate, with Graymont agreement and traction in UAE. Biogas is also contributing to carbon capture orders.