Q3 2022 Chart Industries Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Good morning, and welcome to the chart Industries, Inc. 2022 third quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.
The company's release and supplemental presentation was issued earlier this morning and can be accessed by visiting charts website at Www Dot chart Industries' Dot com a replay of today's broadcast will be available. Following the conclusion of the call and can also be accessed through the <unk>.
Mr 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 .
You may begin.
Thank you Kevin and thank you all for joining us today for our third quarter 2022 earnings call. We're very excited to share with you today, what we believe to be a momentous third quarter not only did a number of records that were set but also an important point for our high confidence in our strong outlook for 2023, which included the anticipated growth of over 10.
5% NGL.
We're at 50% and earnings per share.
The numerous records in the third quarter included all time record backlog sales reported gross margin reported operating income reported non diluted EPS and adjusted diluted EPS.
Well orders of $729 million is not a record it is our second highest in history and second consecutive quarter of commitments about $700 million.
With me on the call today is our CFO Joe Great then as usual, we'll reference a supplemental deck that was included with the press release and can be found on our website under the Investor Relations section.
Let's kick off on blackboard the presentation with the slide many of you have become familiar with our indexes of clean coal solutions offering.
Process technology and equipment for clean power Coldwater clean food and clean industrial applications.
This offering is becoming more and more pertinent to the global environment in particular as you look at current challenges and opportunities and macro and geopolitical conditions as shown on slide five the three.
Three main categories shown on the left hand side of the slide which are in no particular order.
Second to remain a tailwind to our business for the coming decade LNG.
LNG is a pragmatic and available energy source of countries around the world seek energy independence and security.
G shortages and the continued focus on sustainability, both in the public and private sector sure.
Everybody adoption of U S inflation reduction or the I R E in mid August .
We'll spend some time throughout today's discussion on these topics and how they are manifesting themselves in our order book as well as why do we expect them to drive continued double digit growth in ourselves this decade.
And E tail winds are also starting to coalesce together for example, we've been talking all year about D. O two shortages driving demand in our earthly labs, offering which sells for immediate access to beverage grade 99, 9% purity C. O two captured in our processes beverage, making and now we're seeing the IRA bring together more demand on the <unk>.
Mall skill as well as the larger scale six U S needs, which covers both macro tailwind to entry on this page more examples of that shortly.
Hydrogen is one of the markets and applications that is and will continue to benefit from the macro trends just described I'm not.
Going to walk you through all the data points on slide six in summary in one year. The difference in direct hydrogen investment announced is up 50% and projects that are or will be under construction in the next eight years is up over 134%.
Many countries have adopted national hydrogen strategies, including the U a E recently announcing that they are engaged to work on one.
We've continued to see growth and more consistency in hydrogen demand for our products and solutions over the past few years and what we had originally anticipated with third quarter of 2022 hydrogen related orders of $102 $4 million, bringing our third quarter year to date 2022 above our full year 2021 hydrogen orders of two.
$282 million.
In the third quarter, we received the purchase order for a hydrogen liquefaction facility with associated water treatment for a project in West, Texas with clean Energy Holdings.
They've also signed a letter of intent with us which is not booked as an order or in our backlog yet for processing equipment for the additional three phases of their project with the same content as the first phase for each.
This is another indicator that this trend in hydrogen is not slowing down.
Also in the quarter, we received the $6 2 million dollar order for a hydrogen systems and equipment from European Shipyard, who with chart is working closely with a large European cruise line on hydrogen powered vessel.
A $5 $8 million order for two of the first transportable fuel stations for hydrogen fuel cell trucks and liquid hydrogen tank orders for a major industrial gas customers liquefaction plant in Europe .
Importantly, this is another example of the global adoption of liquid hydrogen and I'm thinking back historically Europe was predominantly focused on gaseous hydrogen and now we're seeing as movement more towards liquid for certain applications.
Well not yet booked we also received a letter of intent from one of our industrial gas customers for our hydrogen liquefaction plant, which we expect to move to order in 2023.
Our hydrant sales of $118 $7 million. This year to date through September has been supported by our Theodore Alabama trailer in paint shop, which we affectionately called 30 trailers and text you may recall, we purchased in October of 2020 for $10 million purchase price at the time. The most trailers produced in that facility was nine.
And a year and now we can produce more than one a week by way of comparison year to date 2021 through September 30 trailer sellers sales were $5 $2 million and this year for that same period, there are $41 $75 million.
Some of this might be attributable to the inflation reduction act, which that hydrogen sees the U S and water in further motion. The IRA includes $300 billion in spending for energy and climate change with multiple areas of the IRA directly supporting investments being made by our customers in those same areas.
We believe that the IRA will drive more project to happen sooner, which in turn increases our opportunities in the near term and this decade across or an excess of clean.
You can see some statistics supporting this on slide seven we've touched on hydrogen order activity already but worth noting that as at the end of the third quarter. We had a pipeline of 658 hydrogen customers and potential customers sequentially up 20% compared to the end of the second quarter and up 83% compared to the end of 2021 our walk.
Water treatment business was already growing setting new records throughout 2022, and while we can attribute some new inbound inquiries to the IRA we think that the international trends and the adoption of water treatment are a key driver to our year to date commercial pipeline additions of $131 million.
The area that we believe will be most swiftly and positively impacted by the IRA is carbon capture.
We've seen a meaningful increase in inbound interest in our U S offering since the IRA was approved than before it including a pipeline of 363 customers and potential customers up over 142% compared to the end of 2021.
New inbound opportunities in our small scale earthy labs business totaled $9 2 million in the 75 days following the eyrie announcement compared to new opportunities in the 60 days prior to the IRA the five $5 million to $6 million.
In the third quarter, we also booked orders for Ses cryogenic carbon capture solutions with a customer in Saudi Arabia, as well as with European Energy infrastructure company.
And perhaps most interesting in terms of changes for six U S. Since the IRA was past isn't the anecdote that I have shared with some of you throughout the quarter. So we had more inbound inquiries in the first 24 hours. After the IRA was announced and we have ever had in any 24 hour period.
But rather that pre I early reads for seats U S were about 17 and a half per month on average and post I R. E leads are now $32 four per month.
As a result of continued and consistent order activity as well as the Iras that I just described adding more certainty to this decade opportunities, we're increasing our specialty products total addressable market as shown on slide eight in the near term by approximately $2 billion into $49 3 billion through 2030.
Also note that in addition to the areas discussed under the IRA impacts, we're increasing our 2030 Tam for gas by rail and space exploration applications.
We're uniquely positioned in gas by rail for a variety of molecules.
Additionally, we're in multiple discussions with existing and new potential customers about using not just our tanger cars rail, but also we have work underway with customers on the onboard liquid hydrogen tank for utilization and not just heavy duty commercial vehicles, but also gonna locomotives.
Private space exploration trend continues and it's becoming a global market.
As you're aware, we're expanding our Teddy L down the site for Supersized tanks and are the only company in the world that can build 500 cubic meter cryogenic storage tanks.
See the build of each one of the Tangerine is on slide 41 in the appendix if you're interested.
So moving to slide nine this shows each of our three quarters this year and the orders that comprise our over $2 billion of commitments in the first nine months of the year.
We received full notice to proceed on the remaining 12 cold box systems for venture Global's Plaquemines Phase II project in the third quarter for $91 $8 million, which brings year to date big LNG related orders to over $620 million.
This marks three consecutive quarters that we have booked big LNG work. The first time. This has happened in our history as well as an indicator that LNG is going to be less cyclical across the coming years than in prior cycles.
Our commercial pipeline of potential orders overall currently in discussion for order placement in the next two years or 24 months is greater than $95 billion and so far in the month of October demand continued across the business with 17 orders through two days ago. This past Wednesday, each greater than $1 million.
With a very wide range ranging from states exploration to regress to refurbishment of a cold box multiple air coolers LNG fueling station a large bulk tank order just to name a few.
Also noteworthy is that our doser business had its biggest month of the year in October in terms of all in terms of orders and we still have a few more days to go to this month.
With over $2 billion in orders the first nine months of 2022 and five of our last seven quarter setting a record average quarterly orders, excluding big LNG in 2021, and 2022 are over $470 million as you can see on the right hand side of slide 10.
This compares to the average of $250 million per quarter from 2016 to 2020.
And as I said at the end of the second quarter. As a reminder, that we're not going to hit $470 million or more every single quarter ahead, but we do anticipating anticipate continuing to book each quarter at a much higher level than our pre 2021 historical average.
So we are definitely pleased to be multiple historical records. This quarter and this trend continued as you can see on slide 12, as I mentioned at the outset of the call Q3 was an all time record backlog sales reporting gross margin reported operating income reported non diluted EPS and adjusted non diluted EPS quarter.
There are numerous other records across the business segments and individual sites too many to name, but I am going to touch on a few including the fact that our Sri City, India team posted record sales R. V. R. V team, which you may recall, we purchased via an acquisition at the end of 2018 hit their best ever gross profit gross margin <unk>.
Operating profit and operating margin and departure parents service piece of ourselves did the same.
Also worth pointing out is our reported operating margin as a percent of sales was 10, 1% has already been achieved three other times this past decade.
We'll discuss that more in a moment.
An important and critical part of our business is our number one priority of safety, we achieved our lowest safety total recordable incident rate in Q3, and I'm proud to share that 79% of our sites have had no safety incidents in the trailing 12 month period.
On Slide 13, you can see our third quarter 2023 results with the Green box and earning historical highs our third quarter 2022 orders were the second highest in our history.
With all of our top three historical record quarters occurring in 2022.
This contributed to our eight consecutive quarter of record backlog of $2 254 billion backlog is now a 100% higher than one year ago.
Both heat transfer systems and specialty had record backlogs as of the end of the third quarter.
Not only is this the first time, we have surpassed $2 billion in backlog the composition of our backlog has varied which gives us further confidence in our growth outlook, we're presenting for 2023 and beyond.
As shown on Slide 14 reported gross profit was an all time record and that translated to 25, 4% reported gross margin as a percent of sales.
When adjusted for unusual items it was 27, 3%.
And in line with our anticipated sequential margin improvement to exit the fourth quarter 2022 at 30% gross margin as a percent of sales or more.
We also continued to face headwinds in the macro environment that we do not add back to adjusted gross margin adjusted operating margin or adjusted EPS. Those you can see listed on the side of the slide 14.
I will get into segment gross margin specifics in a moment, but as a tier three of our four segments reported gross margin as a percent of sales increased by more than 170 basis points sequentially compared to the second quarter 2022, with H T S increasing over 700 deaths.
The third quarter of 2022.
Only the fourth time in the past decade that we had reported operating income as a percent of sales of 10, 1% or more in.
And adjusted operating income as a percent of sales from 12, 6% as shown on slide 15.
Reported operating income.
Of the 10, 1% was the highest since the third quarter of 2020 as well.
All of these activities rolling through our record reported EPS and record adjusted EPS of $1 15, and $1.49 respectively shown on slide 16.
We reduced the addax shown by our mark to market benefit as well as our restructuring and release, an RSL net of cost as we concluded restructuring activities in that segment.
The third quarter of 2022 was our last quarter for integration related costs from our acquisitions of at Edgewater technologies as well as L. A turbine as each hit their one year anniversary and the chart family.
We did not add back the negative impact to sales or EPS from currency headwinds or FX rate changes and we do anticipate that these will continue to be variable in the coming quarters.
We estimate the third quarter 2022 impact from foreign exchange rate changes was approximately net negative <unk> <unk> to EPS, when letting translation and transaction.
I won't spend time on slide 17. It is included as a visual of the progress we have made operationally across the past year. The left hand side is our reported EPS walk from Q3 2021 to Q3 2022, and the right hand side is our adjusted both reflecting continued progress in operational margin improvement execution.
The next section of our presentation provides an update on the operating activities that support our sequential margin increases as well as continuing to meet the ongoing demand across the business with targeted capacity expansion starting on slide 19, the top row and bottom left graph relate to our main input material costs you've seen these graphs.
Previously and the good news is that input costs were similar to the second quarter 2022, yet the backdrop is still continued geopolitical and inflationary uncertainty.
Gas and energy prices are a key driver in component availability and cost in particular in the EU and while recent prices have been declining there's still over five times the 2019 standard price.
We havent continued to proactively fortify our supply chain channels, both globally and locally to reduce the associated risks.
You can see examples of these commitments in our press release.
Bottom right hand graph on slide 19 shows the global freight index, you can see that while it's trending in the right direction, it's still like material input costs above the historical run rate.
We've now had two quarters in a row, where net neutral on freight cost as a result of pass through to customers.
By way of a quick comparison in 2021, we averaged about $1 $4 million of additional cost on freight per quarter through the P&L.
Despite the ongoing and well discuss supply chain challenges I would like to congratulate our global team members to continue to drive improvements in our shops and this quarter, we had 12 of our manufacturing facilities with 100% on time delivery.
And none of what I just mentioned is new in terms of operating in uncertain environment. So we continue to look for ways to differentiate our business in the four main categories shown on slide 20.
First pricing, we've completed multiple price increases over the past 15 months, including additional actions taken in the third quarter of 2022 and planned across the next six months.
Second cost control a fundamental operating principles in the business and we continue to look for productivity and automation projects, which Joel will talk about in a moment.
Third furthering collaborations and partnerships in particular in specialty products and finally building on chart specific differentiators such as our ability to help our customers very early in their design phase for first of a kind projects and being a first mover on receiving certification for equipment in places like Korea, and China, which we believe will be an important differentiator.
<unk>, our specialty markets moved from regional to global across this decade.
In the third quarter 2022, we executed eight ml use of which two included master supply agreement, which you can see on the left hand side of slide 21.
For related to carbon capture and C O two equipment to for hydrogen and one each for liquefaction in LNG further demonstrating the breadth of our solution offering and penetration across the Mexico Queen.
One of the master supply agreements, which for LNG equipment with young Chang and shell petroleum, while another was with a major beverage company for carbon capture and storage technology and equipment.
Our 79, new customers this quarter were across a broad region geographies, 43%, North American, 37% Asia Pacific and approximately 20% in Europe and the Middle East.
One of our favorite topics first of a kind orders were <unk> 17 in the third quarter also comprised of geographic and application breadth with which you can see on the right hand side of slide 21.
We kicked off our first feasibility study for carbon capture with bio based food ingredients with bio Veritas, we booked an order with Firefly for space exploration application and we welcomed a new customer in Asia Pacific for food and beverage equipment.
Certifications globally, and regionally and cryogenic equipment as I commented our key differentiator, we received numerous new certifications during the middle of the page and this included approvals for specific product lines in Australia, Canada and Korea.
Now I'll turn it over to Joe Brakeman on some operational productivity and capacity expansions in place.
Thanks Jill.
Ongoing organic productivity and automation projects are constantly in flight with a few new examples to share this quarter as shown on slide 22. These six projects are just a sample of the multiples we have underway and you.
Should give you a good sense of how they help with margin improvement as well as capacity in some cases take the middle top row, which in our chart China facility.
As a W. Welder was integrated into the other end of the original Mig welder arm to achieve two welding processes for the same equipment, which significantly improves the plant capacity and efficiency.
By way of comment these types of projects have enabled <unk> to consistently break records with the third quarter of 2020 to their highest gross margin and operating income quarter since 2014.
Another example is shown on slide 22 is in the bottom row middle where we are implementing a bellows machine for autumn automatic rotation of a vacuum insulated pipe during the welding process. This process. This includes this improves well time by 68% and generates with one machine over 53000, a year can say.
We are very excited to receive our breathing furnace after a year in the making into our Tulsa, Oklahoma flexible manufacturing facility in the quarter, which you can see an actual photo on slide 23, we will begin pulse Braves activity in the fourth quarter, which is right on schedule and supports more capacity for a variety of different end.
Applications that use braised aluminum heat exchangers, whether it be LNG hydrogen helium or <unk>.
As a reminder, for our expansion in theater, Alabama, along mobile Bay as shown on Slide 24, we have already we already have the space exploration order book to go through this expanded location for which the Buildout is progressing on our original timeline.
And on Slide 25, we have a similar situation in our Gulf of Germany trailer facility.
Where we are expanding on our existing property and have a baseload order of $22 million that will be delivered out of the expanded location. In 2024, we anticipated production will begin either late third quarter of 2023, our early fourth quarter of 2023, and the expansion, which is also set to have a newer area for service and repair.
I'll now turn it back to Jill to quickly run through segment performance starting on slide 27.
Thanks, Joe HTS delivered a superb third quarter and we expect these types of strong results to continue into the fourth quarter of 2022, and the full year of 2023, given our record backlog levels continued recovery in our air cooler business operational excellence capacity expansion and the macro tailwind of LNG LNG LNG.
A few items to point out about the third quarter and HTS <unk>.
Excluding big LNG orders increased 59% sequentially, including 27 individual commitment each over $1 million demonstrating that there is not a customer concentration and HTS like there used to be.
The charts on the left show the continued execution and completion of capacity and restructuring to have each of our products made in more than one location you can see the sequential material gross margin and operating margin improvement in the segment driven by the started seeing our newer projects mixed backlog turn to revenue. These projects as we have discussed previously range from the bigger LNG work too.
Small scale and floating LNG as well as various more traditional medium size orders all of this sets up the combination of longer timeframe revenue recognition on big LNG with a nice coupling of sub 18 months Rev. Rec on the 10 to 40 million dollar size projects.
This combination is expected to continue across the coming years.
I'd be remiss to not comment on the fact that the strong growth in the HTS segment and improving margins are supported also by our recent acquisitions of cryo technologies, and frontier fabrications, which give us more capacity to meet customers' delivery timing.
As we look ahead, the fourth quarter of 2022 and full year 2023 are set up well and HTS specifically the increasing air cooler margin continues well first production is expected to begin in Q4 under our extended new Iberia, Louisiana rooftop.
HTS is also a key contributor to our strong end of the year cash flow outlook with over $100 million large cash milestone payment receipts scheduled in the fourth quarter.
The third quarter of 2022 marked our third quarter in a row, where we booked big LNG purchase orders totaling over $620 million. This year to date, we anticipate at least one more big LNG project release in the coming nine months and you can see on slide 28 that the momentum continues not just in big LNG, but also small scale in floating LNG.
I think slide 28 is pretty powerful it shows that this decade is going to have plenty of LNG activity, even considering what has already moved to S. I E. It.
It also demonstrates the traction that Ips of Martin Midscale technology is gaining in the market as a whole.
I'm going to point out a couple of things on slide 28 reel one.
Which is a big LNG project pipeline of what could move to S. I D. In the coming years. This shows the same number as last quarter 24, and remember that we booked one order in the third quarter. So obviously, a new one came into the pipeline, which is also reflected in a row three for the size of our potential book of business.
Row, two shows our international opportunities for Ips EMR.
And I commented previously that multiple international oil companies have qualified our technology for potential use in their projects.
And then lastly on the slide.
Categories that are sub 5 million tonne per annum on the bottom table our pipeline for this bucket of LNG is as robust as it has ever been.
So we've included slide 29 in the deck since Ips M. R is gaining more traction through the movement toward smaller trains and also the receipt of the validation, but I already commented on one of the questions. We commonly receive is what differentiates <unk> from other options. So we've included this as a pseudo cheat sheet to look at the power cost.
Savings potential to increase production multiple different ways that Ips and margin benefit of project and then I'd also point to the bottom of slide 29, where we discuss our heavy hydrocarbon removal system and nitrogen injection technologies. These systems are becoming more important with varying gas compositions and in the third quarter of 2022.
Q2 orders for studies on these systems to be potentially installed and big LNG projects.
Moving to slide 30, specialty products, which typically is volume and mix movements between quarters had lower than anticipated sales driven by the timing shifts of two particular projects revenue recognition.
Not only did the project mix shift negatively impacts reported gross margin as a percent of sales for specialty which was 31, 6% for the third quarter. We also had low continued low volume in the higher margin H LNG vehicle tanks, and one large customer freight revenue was had a de minimis associated margin and we finalized our year one integration.
<unk> for outage in L. A turbine.
Looking ahead, we expect specialty products to grow sequentially in all metrics ranging from sales to gross margin to operating margin with multiple levers across the segment contributing including water treatment operations now in house and specific space and hydrogen project revenue to be recognized in Q4 2022 that were pushed.
In the third quarter.
While the Cts segment is certainly not a bright shiny thing we're definitely pleased with the third quarter performance shown on slide 31, which marked a key milestone in uptake for margin in the segment.
While sales declined sequentially from Q2, driven by the combination of the polling of shipping lower margin backlog as we explained on our second quarter earnings call and foreign exchange impacts Pts orders increased 13% sequentially, which is a question we get regularly asked about demand.
This increase in orders to 120 plus million dollars shows that demand continues with orders like record 226, ISO containers ordered in the quarter.
As well as industrial gas customers continuing to predict mid single digit growth for 2023.
For Cts Q3 marked our first sequential gross margin as a percent of sales improvement in a year and as we look ahead, we anticipate that trend to continue sequentially into Q4 and into 2023.
Slide 32 shows our RSL segment for both the quarter as well as a very strong outlook ahead.
<unk> posted third quarter record sales gross profit and operating income.
Charts on the left hand side of slide 32 demonstrate the conclusion of our restructuring activities and ourselves and the jumping off point for further incremental expansion in this segment.
The sequential sales decline from Q2 to Q3 was driven by timing of International field service work that moved to Q4 due to the visa requirements of the word came in basically at the end of the quarter and a large fan aftermarket sale in the second quarter.
Future is really bright for ourselves with our expanded European footprint through CSC, and our United United States strategic locations being leveraged by our LTA customers. We anticipate a strong fourth quarter of 2022 with winter temperature changes, yielding more field service work more interest from our EU customers in leases for trailers in particular in a store.
<unk> order start to Q4 with faster turn work anticipated later into the quarter and into the first quarter of 2023.
So turning to slide 34, our outlook for 2022 for sales in the range of $1 six 5 billion to $1 $71 billion with associated adjusted non diluted EPS in the range of $5 to $5 25.
On approximately $35 eight 7 million weighted shares outstanding with an assumed tax rate of approximately 17%.
The change to our prior sales guidance of $1 75 billion to $1 $8 billion is driven by currency headwinds and timing of specific project revenue recognition, which is typical in our business. We're pleased to share that our adjusted non diluted EPS outlook remains at or above $5, which demonstrates our third quarter and expected fourth quarter execution of March.
Improvement actions.
Anticipated full year free cash flow of approximately $175 million is driven by the large milestone payments I commented on an H T. S. And then more inventory reduction anticipated as our fourth quarter is expected to be our highest sales quarter of the year.
Our net leverage for the third quarter of 2022 was $2 nine to the first time, we are below three times since the second quarter of 'twenty one.
And then slide 35, which is really the point here and our high level of confidence as we look ahead to the full year of 2023 sales in the range of $2 1 billion to $2 2 billion, which includes only big LNG projects that are in backlog as of the end of September 2022.
Associated adjusted non diluted EPS is anticipated to be in the range of $7 50 to.
The $8 50.
On 30 587 million weighted shares outstanding assuming a tax rate of 19% for the year, we anticipate.
Eight associated free cash flow in the $250 million to $300 million range for the full year 2023.
I want to spend a moment on the buildup from backlog to our outlook range sales on the table at the bottom of slide.
35.
I would point you to real four which is our outlook of $2 one to $2 $2 billion in sales note that this does not include any new or additional mid size or large projects that could come into the order book between now and the end of the first half of 2023, which would have the potential to have revenue associated with them in the year.
On line five of the table you can see that if one or more mid or large sized projects comes into the order book between now and the end of Q1 'twenty three we would anticipate recognizing between 50 and $75 million more of revenue into the full year 2023.
So before we open up for Q&A I want to take a moment on slides 37 through 39 to thank our global one chart team members for their embracing of our key themes safety is our top priority customer orientation strong work ethic and giving back.
Congratulations to our entire team for hitting our lowest ever T. Our IR within the third quarter for being acknowledged as the women's business collaborative company its purpose and a finalist in three categories of the 2022 S&P Global Energy Awards.
Finally on slide 39, I'd like to personally thank each of our welding Council team, who continue to give extra effort can be part of the council, which allows us to lead and cryogenic certifications and performance and now Kevin. Please open it up for Q&A.
Ladies and gentlemen, if you have a question or comment at this time. Please press star one notch tone telephone we will pause for a moment, while we compile the Q&A roster.
Our first question comes from Eric Stine with Craig Hallum. Your line is open.
Thank you Alejandro.
Hey, good morning.
Good morning.
So maybe first question I know in the release, you talked about Big LNG pipeline $5 7 billion and I'm. Just curious your thoughts on that I mean, you've got a number of things in play and obviously not all those projects move forward, but.
You've got an outlook for a longer cycle than you've seen in the past, but you've also got increased urgency given the macro backdrop. So as you think about that you think it's.
These things flow gradually over that longer cycle do.
Do you think they are front end loaded.
How are you thinking about that going forward.
Yeah, it's definitely looks different than it ever did in the history of LNG and that's evidenced by the fact that we booked big LNG orders in each of the first three quarters of this year, which shows that there is marching towards certainty on S idea across a variety of projects.
What I would anticipate that it does continue across a longer period of time and kind of stair steps its way versus being completely front end loaded to give you a little color on kind of our expectations on these projects and timing on S. I D.
While we haven't included it in our 2023 outlook, we do anticipate that we should get released in late Q1 early Q2 on a an equipment related order for a separate project thats not currently in backlog.
We're also working as I commented on two particular potential NR use which are add ons to existing facilities or two projects that are moving to S. E N.
Are you content for us is somewhere between kind of $75 million to $90 million per and are you at on I'd anticipate that just given the changes in gas composition and the needs for and are you or Hh sees that we'd see an order sometime in 2023 related to that we also anticipate to see in Ibs M. Our.
National order and that could be either small scale or it could be a larger project in the year in the upcoming year.
And lastly, I'd say that are.
There's multiple projects that have come into the pipeline that even ones that werent kind of considered on hiatus or deceased before this year. There is new projects starting to come into the pipeline for customers that currently have existing projects that have moved to <unk> or about to move to <unk>.
So we like that continuation of the utilization of the same.
Equipment, the same design in that really.
It adds to this look across the coming decade of more consistency for these larger projects.
Yes.
No that's great color. Thank you and then maybe just.
On floating LNG.
And then can you talk a little bit about that obviously, when it's big LNG I know you recognize that.
<unk> got about a six month lag and when you recognize it over two to three years when it's floating.
Just given the potential size of those projects a little bit lower in terms of dollar amount or actually it could be quite a bit lower I mean, how do you think that those are how should we think about those flowing.
From <unk>.
Project Board till.
<unk> starting to recognize how long you would recognize that.
You have a floating very interesting and as an overarching rule you can take any of these floaters and they're typically going to be Rev. Rec sub tiers or sub 24 months and there's kind of a subtext to that which is depending on the size or the construct of these projects. So if you take for example.
The fast and if these first projects those are 12 month type of book to delivery. Then there's other projects that have a more design work that's not already completed and that would put you kind of at that 18 month, Mark, but certainly faster from award to recognizing there.
Revenue in that sub <unk> 18, or sub 24 month period than a larger than a larger scale project, we like that mix of floating and small skill in conjunction with the big LNG because you do get these multiple levers to pull and it also is it's like frosting, it's like prostate cases cause.
Not a baker, but ive seen people do it through you know through a layer one on and then later to AWN and does build upon itself, which youre starting to see as our backlog continues to grow we're starting to see multiple projects in these $10 million to $50 million size ranges. In addition to a few of these.
$200 million to $500 million projects. So we like that combination it leads to a nice margin mix and it also leads to more consistency through our shops, which we anticipate will further improve margin as we have benefits in absorption versus those peak trough cycles.
Got it okay. Thanks, Bill I'll take the rest offline.
Yeah. Thank you one moment for our next question.
Our next question comes from Ben Nolan with Stifel. Your line is open.
Hey, Joe.
Hey, Joe.
I really wanted to ask about LNG, but I'm not going to so.
Maybe if I can start with carbon capture stuff.
Aye.
Clearly.
We're seeing an acceleration of activity.
In the last few months our survey had expected.
We're going to raise the total addressable market that one would have had more.
I'm curious a few things first of all have you already sort of been anticipating.
Some sort of acceleration like we're seeing and.
And then as you look into the 'twenty three guidance.
I'm curious how much.
Carbon capture is is in there and and also how do we think about the margins.
For that business.
Obviously, it depends on I suppose exactly what youre doing but just in general.
Sure. So first of all on the Tam side I completely agree with you that I am.
Anticipate it's going to get larger as we start to see commercialization. So we took an approach of building. It from an anticipated number of plans of various different sizes and you can see those assumptions in the appendix with that said I would anticipate that it continues to grow across the coming years with a little hesitant to go long.
Larger until we start to see the commercialization of the plant build themselves. We're certainly seeing the most activity on feasibility and design studies than we have ever seen so positive trend in that direction, but I'm looking for for the certainty around some of these larger scale actual plants being added.
Two two facilities, so that that will be something key to watch to see that Tam grow from us. So it's it's on the horizon here and I was I was very bullish on this two years ago and I continue to be bullish, but I think we finally hit the point where.
The macro factors support.
Some of the larger industrial applications for the full solution.
In terms of what we're seeing on the <unk> side and this is.
I will roll earthly labs, the small scale in with the larger industrial and kind of give you a number that's in the $40 million range in the year with that said the margins on <unk> do depend on.
The application so earthy labs, obviously is a very unique application. It's a very quick turn from book to delivery and install and has a nice payback for the customers and so those types of applications or above the above that 35% gross margin as a percent of sales mark on the larger scale industrial.
There's the studies, which are engineering work, we are we get nice margin on those but we roll it in our in our mindset towards the full project. So the larger size industrials will be at kind of that 30% Mark and we don't anticipate that there's a lot of.
Downside to that but there's probably not a ton of upside to the margin on these larger projects just because of all the different input costs that go into them.
Yes.
Great.
And then for my second one switching gears a little bit.
Was a little surprised to see the cryo tank orders up just given sort of the macro environment.
Tends to be a little bit more industrial gas oriented.
Good to see.
And I appreciating that hydrogen is specialty but as you do look into Europe and there is all of this uncertainty.
It sort of feels like to me and I'm just asking you.
Maybe for color around this that while there might be industrial gas question marks.
Feels like Youre seeing an acceleration.
In Europe , as a geography or.
Other hydrogen plus ccs or whatever.
That is over.
Over and above sort of what you would ordinarily do in and just your regular normal industrial book of business is that fair and I guess associated with that again are you seeing anything different at all and just order activity in Europe .
Yes.
Take your point and well.
Well Europe than you were at gas Tech earlier in the quarter in September and what we what we have heard and continue to hear from both the public and the private sector in the EU is that while there's this need for solving the Nat gas issue in the near term. There's also an overarching feeling that sustainability has to remain.
And top of mind for the region.
I would also comment that during a recent visit to the EU in the last couple of weeks. There's there's a lot of discussion from the government that the U S. IRA has put additional pressure for the EU to do something on incentivizing the demand side for hydrogen in particular.
So I think there is going to be continued acceleration in hydrogen in the EU as a whole and it's going to be a variety of different applications.
I sort of alluded to this in my prepared remarks, but I'll revisit it in that we are seeing potential customers and existing customers that previously would have only talked about gaseous hydrogen now coming to us and saying that the only way we can solve for the distance we want to go on a train as an example.
The linkage between a fuel cell in the necessary equipment to power a more heavy duty application requires liquid hydrogen. So there isn't there has been an evolution in the EU I think that.
While Nat gas is what gets the headlines in the news hydrogen is definitely accelerating and we're seeing that as well in the in the order books with things like me. The work that we're doing equipment for the hydrogen powered cruise ship as an example variety of different applications and uses and.
The EU Commission.
Sides that theyre going to put something in play that is similar to the IRA I think youre going to see that even further accelerate in 2023.
With that said on the industrial gas side of things, yes. It is something that we're watching in particular in the EU, while as a whole our industrial gas customers are telling us that they need for their global outlook are kind of in that 4% to 6% range for 2023 in terms of growth over 2022.
There is regional elements that go into that and I would anticipate that.
We'll see.
Flat on the EU side on tanks there.
There could be a little bit of timing around that whereas in the winter theres fewer purchased in the spring. There is more some of that timing just depends on their existing underutilized inventory that they have already in their asset fleet.
As a whole that's kind of how we've modeled it heading into 2023. So in particular in the region of Europe , I think that'll be out of all of the regions in industrial gas the softest.
As we head into the new year.
Alright.
I really appreciate it very very thorough again, thank you.
Thanks, Ben talked to you.
Remember for our next question.
Our next question comes from John Walsh of Credit Suisse. Your line is open.
Hi, good morning, everyone.
Good morning, John .
I guess, maybe just first.
Thinking about the operating margin I think you already went into detail on the quarter, but maybe you can just give us some of the expectations you have for Q4.
And maybe even beyond since you have a 23 out there obviously good momentum.
But just maybe level set us on the trajectory you see here from Q3.
Definitely and as you said good momentum that that's our view as well where we were we were very pleased with the third quarter as a whole in particular three of the four segments sequential margin improvement.
He certainly as you've heard me say previously ours is not a quarterly business and so movements like we had in specialty arent shocking to us but certainly.
Provide for more visibility into the fourth quarter and the sequential margin improvement that we expect.
So were expecting as a whole on our gross margin coming out of the year to be above 30% and that for the fourth quarter. So coming out of the European meeting the fourth quarter with the operating margin in the mid teens point.
As you look across the segments I would expect that sequentially cryo tanks solutions gross margin as a percent of sales increases into the fourth quarter that heat transfer heat transfer it can be hard to harder to keep that exactly like the third quarter, but it'll be pretty darn close and we've got a good line of sight on the project mix in heat transfer.
So we like that continued level of margin specialty we see sequential step up over.
Over a few hundred bps sequentially on the margin side, and then RSO, we expect to be kind of in that 38 ish percent range in the fourth quarter, then as you head into 2023.
Take this opportunity to remind everybody that in every year in the history of our world and we expect this to be the same that the first quarter of our year is always the lowest quarter of the year for all metrics and we would expect that to be the same scenario with the exception it in H T M.
Because we have the backlog that supports kind of continued and more even sales across 2023 and then so we would see we would expect to see Q4 and Q1 margins look pretty similar and then step ups from there as the volumes grow in Q2, three and four of 23.
Yes.
Yeah.
That's great. Thank you for that and then maybe just switching to cash.
If I did the math correct next year, you're kind of implying.
13% or so free cash flow margin.
But obviously you are going to be delivering a lot of sales and so probably building. Some working capital just curious what the levers are there to pull for that free cash flow outlook and maybe.
Just as we think about these milestone payments that you have coming in Q4 I'm sure. There's some of those next year as well just maybe anything around that cash because it looks like you got really strong cash next year.
Yes, we do anticipate really strong cash in.
It's never fun people don't like to have a heavy fourth quarter on any metric, but that's just the way that our projects schedules are and.
And so the milestone payments in the fourth quarter, our mid project milestone or early project milestone payments. So we definitely anticipate.
We have very specific schedules around the 2023 full year milestone payments. So those are contributors are one of the levers. The other is that we will have.
Some buildup of working capital on the HR side.
But ultimately we have built so much safety stock on the inventory side that we are at a point, where we feel like we can.
Not had hold as much on the inventory and bringing some of that out. So that's another lever to pull from a working capital perspective. So all in all the 13% we think is.
Kind of a down the fairway number and with the milestone payment schedule. It gives us the confidence to put that number out there right now.
Great. Thanks for the details I'll pass it along.
Thank you John for.
Our next question.
Our next question comes from Rob Brown with Lake Street Capital markets. Your line is open.
Good morning, Joe.
Hey, Rob good morning.
Maybe just sticking on the margin question sort of is this.
Kind of plays out not necessarily next year, but what's sort of the operating margin. You think you can get the business to and how do you sort of see that.
So I will I think we can get the business to 20% plus the operating margin in the.
In the coming couple of years, and that's with multiple different reasons for that including the automation and the productivity that we have underway, but also the combination that it sounds like I'm, beating a dead horse here on the combination of these $10 million to $40 million project in conjunction with some of the larger projects.
That really allows us to manage manage our shops better have more than one location, where we make these and not have to have the whipsaw effect that you had seen over historical cycles, where we had to quickly add a lot of labor and then quickly take that labor out. So all in all that that is certainly with.
In our.
Our our targets, it's within our targets that we have out through 2024 and 2025.
To be specific we got operating margin.
In our targets in 2024 for the year at 20% and then we have it actually increasing by about 100 bps into 2025.
Okay, great. Thanks for the clarity there and then veteran here.
'twenty three kind of outlook, what's sort of your assumptions around European kind of energy and supply chain issues are they are you assuming they get better or are you assuming they stay about the same presumably that's assuming they get worse, but what's sort of your assumptions there.
Yes.
Current outlook, we assume that they get worse before getting better.
Across the coming kind of six months or maybe it's four months, but through the winter. We expect that it's going to get worse, and then returned to kind of where we are now but our assumption is that.
There is no silver bullet that makes that situation better now the opposite side of the coin is that as a positive for our for our business in the sense of demand and being able to help on the energy access side of things and we're certainly seeing re gas terminal activity.
<unk> some of the the dagger.
The mobile and re gas units that we have being adopted by new customers, a very quickly and that's something that the solution that we can solve for and in.
And deliver in a matter of months versus larger terminals that get built in years. So it's a double edged coin because in manufacturing world the input costs and the uncertainty exist yet the opposite side of that is we're able to anticipate more demand associated with the new European regions trying to resolve.
This energy issue.
Sure.
Okay. Thank you I'll turn it over.
Thank you Rob Hawley member for next question.
Our next.
Comes from Sam Burwell with Jefferies. Your line is open.
Hey, good morning, everybody I wanted to circle back towards carbon capture and.
That's what I understand that your cryo.
<unk> is differentiated from most others in the carbon capture space. So I was curious if you could sort of break down how you think about how your Tam compares to two others and that you are better suited to retrofit existing facilities versus others. So you're kind of require new builds.
And then in terms of what we can expect to see in terms of the Mou is bearing fruit.
With with orders coming in and ultimate revenues being recognized whats the timeframe you guys.
See in terms of being able to.
Us.
I see.
Orders and revenues coming from carbon capture at least for the large scale industrial stuff.
Yeah, absolutely so great questions and on the SCS cryogenic carbon capture technology or CCC as we call. It it definitely is differentiated.
Very very strong applications for the retrofits in particular in large industrial applications, where we've seen the majority of the work come into our order book to date have been in industrial manufacturers, so ranging from studies for a large metals manufacturer too.
Two cement plants too.
International flavors and fragrances are there's a variety of different retrofit studies that have been completed or are in flight. So in terms of the Tam I think youre going to see larger Tam out there for carbon capture.
As a whole then what we show ours is being built up and saying okay realistically. How many of these plants are going to be built in this period of time, the larger that the Ccs plant gets the longer period of time it takes to build.
So my view is if you ask for a Tam that was out into 2035 or 2040, youre going to see a sharp ramp from 2032 those periods of time.
This will become more standard it'll become more standard sizes and the applications will have kind of picked the technologies that they want to use so on a longer on a longer view I think that we're really really well positioned.
Well positioned this decade, but really well positioned in the coming couple of decades.
With that said you know on how these ml use play out into the order book I'll give you. One example, we weren't allowed to provide specifics, but I commented that the one Mou that came with a master service agreement in the quarter.
As for our large beverage manufacturer.
With that Mou, when we signed it.
We received about $2 $5 million order for C. O two related equipment for their facilities and that is in conjunction with carbon capture.
In addition to that the.
The majority of the Mou that we signed in the quarter came with some order associated with it not not certainly at the $2 5 million dollar level, but we're starting to see these relationships really benefit.
The order book and the other part that I like about the partnerships and collaborations that it pulls through to end markets that we're not necessarily kind of already well positioned and so for example.
South Africa with Cat group is a market that they're they're strong in and they can pull our technology through the.
The opposite way not just geographies, but.
End markets and applications like like the AG gas agreement, where we're having access to agriculture further penetrating that and it opens up the option for and what I believe will be the larger Tam as we hit more of these end markets. So still really embryonic, but I think the <unk>.
<unk> is very bright for carbon capture and I think we made the investments in the technology at the right time. So that we had this kind of a runway to get to the point.
That we are commercialized and this can be this can be built tomorrow when someone places an order.
Got it that's very very helpful.
And then maybe another one going back to LNG you guys have obviously done a really good job of winning orders for our modular train projects between venture an engineer and then new fortress as well.
Just curious what the Tam that you guys associated with LNG, how much sort of like increase in modularity does that assume and does that really hit on kind of the smaller ticket items or do you think that there will be like a wave of sort of larger but modular train projects that you guys can can you have your business.
Okay.
Yes, so the the numbers that we put out there, which I think we are on slide 28 of the supplemental deck. This is built up from actual project discussions with customers that were mid flight on design phase or other even further along in some cases.
So some of that some of that is less of all of that is less of a top down view than a bottoms up view.
In my in my World gives me more confidence and if we just said the world as a whole and we take a percent of the Tam. So I feel really good about the fact that we're well positioned on the projects that you see on slide 28, and that $5 six plus billion dollars of larger addressable market.
The caveat to that is how when these projects go or if they go.
If you asked US. This question two years ago that number would have been a lot smaller because of exactly your point Jim on the fact that the movement has been too and modularity could be semantics right. There's a lot of question people say, what does modularity, but what it means in our world is this mid scale and utilization of Ips Tomorrow is a process.
Technology and not doing a full 20 M. Tpa baseload facility all at once but rather doing one or two or three in tpa trains and having the optionality as an operator to link them together into to do them at whatever point in the timeline works for the balance sheet. So absolutely.
I think that the addressable market has grown as a result of this movement at the macro level, but also our positioning in with multiple international oil companies for the validation of the process itself.
I'll come back around on your actual question, which is do I think that.
There's more out there than what we're showing and there could be more if this trend continues.
Very direct answer is yes, there is more out there.
We're consistently getting inbound on small scale and floaters that were not in the pipeline a day ago.
I can give you. An example, just from this week on Tuesday afternoon, I've got a reach out from.
In associate that had moved between firms and they're at a new potential customer that had been talking to us about an LNG project and now they're saying Hey, we're going to move this direction to the smaller size and we want to work with you on Ips EMR, So there's definitely more potential.
Opportunities that are out there on the small scale in the floating so thank you for that question.
Yeah got it and thanks Joe.
Wonderful Thank you, Tim and number four our next question.
Our next question comes from Martin Malloy with Johnson Rice. Your line is open.
Good morning, congratulations on the strong order quarter.
Thanks. My first question. My first question was on it's actually on slide eight.
The water treatment.
It looks like the second largest Tam.
<unk> in the near term there.
And a big increase from what was previously there could you maybe talk give us a little more color on what's going on in water treatment and then.
Food and beverage.
Without.
I would've expected an increase there.
Given what's going on with the Cotwo.
Pricing for pure Cotwo, So maybe if you could comment on those areas.
Absolutely. Thanks, Marty so on the water side of things are we have we always thought water was kind of an underappreciated piece of our portfolio and now that we have the technologies via blue and Green and add edge, we have been able to penetrate.
More markets than we could've with just the equipment and now we're you know we're a year in on having technology that hits, all 300, plus contaminants with that what we have seen our larger wins in the international markets.
And the international markets.
Member States. So we'll take India as an example, where once you are doing a project already theres numerous follow on projects that their respective state, we'll make the decision on what technology into as the provider of that so one of the increases in the Tam on water is driven by India.
You may recall that we have had two larger water treatment wins in India about $5 million a pop this year to date and those same states we're in.
Discussions on multiple other projects that those same states are looking to do in the near term. The other large geography that we've been able to penetrate over the last year or so is Brazil with our Sao Paulo, Brazil water treatment project. So now that were established again as an entity to.
Be able to operate in these regions with proven treatment technologies, where we are in discussions for more and more projects. So we wanted to wait until we got to a point, where we had enough of that experience that already in the backlog before we said, we think that Theres a lot more here in a very short.
Period of time.
Then the other piece I would say is we're seeing larger order sizes as a whole and that's content that's driven by content, it's driven by the type of contaminants.
Just this month in October we received another $3 million water treatment order in the United States. So it gives you a sense that what were previously when we were doing a tank for water project. It could be 100 to $250000 and now we're seeing multimillion dollar projects.
In the pipeline. So those are some of the bigger contributors.
Two to the penetration on the water side and the larger increase in the near term Tam.
I'd also say that what's contemplated in part in the water Tam is the inter linkages of the Nexus of clean. So if you said <unk> three areas of the business that are benefiting from being together I'd take food and beverage water and carbon capture because we're seeing food in traditional food and bev customers talk to us.
Water treatment, we're seeing earthly labs customers talk to us about tanks.
Tanks for further application and water. So we really like that it's starting to call us, but it is not there so they only baked a little bit of that in the gym and then the last part of your question on the food and Bev not increasing.
Fairly consistent set of customers on the food and beverage kind of traditional side and we think we've captured the Tam for the Sidoti shortages in some of these other specialty areas. So we didn't increase not increase the food and Bev Tam there, but we are continuing to get new customers in that market and so I would.
While we have an increase the Tam itself I believe that our market share is increasing in food and Bev in.
In particular on some really nice national accounts that have multi store builds.
Great.
My second question I wanted to ask about the leasing business and it looks like you've got strong orders on the ISO container side could you maybe talk about what youre seeing on the outlook for the leasing business.
Absolutely so on the leasing business, we continue to invest our organic capex into the fleet itself, we did a pretty big ramp between the middle of 2020, and the middle of 2021, and then over the last year, who has probably put in another $7 million to $8 million of Capex.
With that with that said, we continue to stay very disciplined on what is in that leasing fleet. So that standard product that if it is returned we're able to redeploy it. It's rarely returned I can tell you almost the majority of the time certainly the the leaseholder.
Ended up buying the equipment so good outlook on the leasing side.
It is it is a function of how fast it grows is a direct function of.
Our ability to add to the fleet itself.
The ISO container side, we've actually seen more outreach.
Outright buys than leases on the ISO side and I think that is a direct result of the movement toward this energy.
Access and security and resiliency trend.
We were looking ahead to seeing the leasing business continue to grow it's a nice tool to have in the portfolio when you're talking with customers that have you know.
Book Ins to their capital budget and I think that we're you'll also see an uptick on the leasing side in the portfolio. If we are to offer leasing options on.
Trailers or tanks for hydrogen for hydrogen applications.
Yes.
Great. Thank you very much.
Thanks, Mark and number four our next question.
Our next question comes from Marc Bianchi with Cowen Your line is open.
Okay. Thank you.
Just first off I'd like to confirm the.
Year to date EPS that would be consistent with the guidance I see $3.04 for year to date is that correct.
That is correct, okay, great. So implying 196 to $2 21 for the fourth quarter.
You got it.
What tax rate is assumed for fourth quarter I got you on the 17% for the year, but it looks like there was a pretty big tax benefit in the third quarter and that might might bring down the full year, but maybe the fourth quarter is still 20% or something can you just clarify that.
Yes, so in the third quarter, we did have.
Tax benefit in China, which was the release of evaluation allowance associated with kind of continued improvements in our results in China and some of our foreign jurisdictions.
I anticipate that the fourth quarter, though it doesn't have that that one time benefit that we saw and so in the kind of low 20 percents for the fourth quarter.
Got you got you Okay, and then last one for me just on on the free cash flow can you talk about the nonrecurring costs that are added back. It was I guess $43 million year to date, what's sort of the expectation for fourth quarter when we try to.
As we're thinking about the guidance for the year here.
Yes.
Yes, so we would what we've modeled for the add backs in the fourth quarter is about $5 million on nonrecurring it could be a little bit higher than that.
And then we would have nothing on the inventory for strategic build as we're looking to drive that inventory down and given the profile of our of our shipment in the fourth quarter, we anticipate inventory to decrease and then there would not be anything related to divestiture related tax payments or.
We don't have any escrow is coming to release.
Okay can you talk about sort of what the year to date includes that $43 million that I referenced it sounds like maybe it's some of the stuff you just said, but just curious if you could spend a little more time on it.
Yes, so there is.
The add backs specifics by category there are some detailed in the appendix of.
Of the deck I think on slide 43, maybe.
Again, there we have restructured yeah and I can run through some of those if you want I was just curious I mean, the biggest the biggest bucket is that sort of nonrecurring items outside of the working capital movements.
And that that totaled $43 million year to date I guess it was $13 million in the most recent quarter maybe just.
Discuss what that is in.
The implication of calling that out is that it's not going to be something that we would see in 2023.
So just wanted to kind of confirm that.
Yeah, So let me run through each category there.
Sorry, Mark I didn't understand that first of all you're asking but I do know.
The implication is that we would have some add backs in 2023, but not all of these categories that you see today.
The restructuring category relates to severance and other kind of organizational restructurings, which we've had I commented on the RSL, which actually we reduced the add backs this quarter, because we had an excess accrual associated with that and that was around restructuring the management and in the RSL segue.
Mint itself.
On on the deal and integration related costs, we only add back year, one integration related so you would see that completely unless we did another deal between now and 'twenty in anytime in 2023. The last acquisition. We did was a frontier in may of this year, so you'd see it.
Integration related be gone by next May and fairly fairly minimal just given the fact that frontier in CSC were very small on acquisitions themselves.
Then way.
You also would see anything that is related to.
The pre one pre closing liability that we had that we have remaining related to the cryo bio divestiture and any deal or acquisition related actual deal cost themselves then an organic startup similar where these as these startups come into play then we would not have add backs related.
Weighted to that so for example, as we completed the air cooler consolidation in the second quarter, you Didnt have any add backs related to that in the third quarter.
The brazing and Tulsa line, we'd anticipate that that one comes off here in the first quarter, when it's up and running German trailers will run through the middle of 'twenty three.
In April I Riser line will be fully up and running by the end of this year.
And then the training cost is actually just the excess boy because it's really captured in the first.
In these startup costs themselves.
And then on an ongoing basis, you would have each.
Each quarter Mark to market whatever direction, it goes up or down as either added back or reduced.
Gotcha.
Okay.
So is there any any steer on what the number ought to be for 'twenty. Three if we think about like the reported free cash flow in the adjusted free cash flow, what's the difference there would be in 2023.
Yes, I would say.
They saw the half of what you see for 2022.
Okay.
Great. Thanks, so much I will turn it back.
Thank you Mark again, ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your Touchtone telephone one moment for our next question.
Yeah.
The next question comes from Walter Liptak with Seaport Research Your line is open.
Alright, Thanks, good morning, guys.
Hey wanted to ask.
Hi.
Kind of a final one you talked earlier about gross margins operating margins for 2023 I Wonder if you can just help us with.
The cadence of revenue.
And the way you think the Etfs are going to flow in 2023 are we looking at something similar to this year.
Maybe with better supply chain or some of the.
Project work for LNG, there's a different cadence.
Yeah. So I'll start back on my comment of the first quarter every year is the lowest quarter and that is that.
That is certainly going to be the case in 2023.
A function of when the customers want the standard product kind of the.
Difference between book and ship based on the holiday booking period to the shipments themselves.
On the project side, that's a little more consistent.
So Q1, certainly the lowest from a sales perspective, and then what I would anticipate which would be.
Similar to this year is Q2 every every quarter being sequential so if you look back before this past year. We would've had Q1 is the lowest quarter and Q4 is the second lowest quarter. This year, we will have each quarter sequentially increasing from the top line next year would be the same scenario. So Q1.
Q2, and so on.
Thank you one of them are for next question.
Our next question comes from Crusher with Tuohy Brothers. Your line is open.
Good morning.
Jill just just a couple of follow ups on prior questions.
First in your discussion on water in the Mexico clean.
I was a little surprised that you didn't mention the need for clean water.
Hydrogen water electrolysis.
Is that because of that.
That is not more of an immediate but maybe multiple quarters or.
Two to three years before that becomes more meaningful versus some of the other water drivers.
And maybe you can elaborate on that.
That's exactly right Craig So it's definitely one that we have a lot of inbound interest on.
We're just getting to the point, where it's now it is commercially ready. It's just getting these guys to place orders around it.
As we were building the tan and talking about it internally.
The Guy who brought that up and had a pretty big number associated with it for the 2030 Mark.
$750 million was the number at that time.
They gave me we just said, let's see some commercial activity before.
Before we put that out there.
Okay great.
And.
Lastly on.
On the subject of acquisition costs and integration costs and one time items.
I think one of the things that might have been lost in that discussion.
Is your historically lower than.
Most company acquisition expenses, because they are direct usually if not every time up till now without any banking fees whatsoever.
And maybe some thoughts about.
Ongoing or a perpetuity returns from these comparatively low cost investments.
Yeah, we definitely.
We definitely spend less on most deals than what you would anticipate for a company like us and that has been the result of the relationships and kind of the bolt on nature of the acquisitions that we do we.
We expect that these deals in the majority of the deals that we've that we've done we have on day, one so to be accretive to our two us coming out of the gate and the majority of these have returned as we expected them to so across the coming years, we will continue to anticipate that they grow.
At or above the numbers that you see for the total company and that is the case as we've modeled into 2023.
And I think what are you going to see even further returns is as these this concept to the next as a clean or the inter linkages where the.
The fact that we wouldn't be getting certain orders in water. If we didn't have earthly labs as an example, or we wouldn't be getting orders in SCS carbon capture if we didn't have an edge in the portfolio because their customers are coming to our portfolio for multiple solutions.
And that's where I really see the besides the standard answer of how we model and why we buy these things, that's where I really see the differentiated value opportunity ahead by having this combination of the portfolio that we've that we've made over the last three years.
Thank you.
And I'm not showing any further questions. At this time. This does conclude today's presentation. You may all disconnect and have a wonderful day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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