Q3 2024 Chart Industries Inc Earnings Call
Okay.
[music].
Speaker Change: Good morning, and welcome to the chart Industries, Inc, 2024 third quarter results Conference call.
Speaker Change: All lines have been placed on mute to prevent background noise.
Speaker Change: The speaker's remarks, there will be a question and answer session.
The Companys release and supplemental presentation was issued earlier. This morning, if you have not received the release it.
Speaker Change: You may access it by visiting charts website at Www Dot chart Industries' dotcom.
Speaker Change: Telephone replay of today's broadcast will be available.
Speaker Change: Approximately two hours following the conclusion of the call until Sunday December 1st 'twenty 'twenty for.
Speaker Change: The replay information is contained in the company's press release before we begin the company would like to remind you that statements made during this call that are not historical in fact are forward looking statements. Please refer to the information regarding forward looking statements and risk factors included in the company's earnings release and latest five.
Speaker Change: With the S E C. The company undertakes no obligation to update publicly or revise any forward looking statements.
Speaker Change: I would now like turn the conference over to Jill Evanko chart Industries' CEO. Please go ahead.
Thank you Joelle good morning, and thank you all for joining our third quarter 2024 earnings call. Joining me today is our CFO, Joe Brakeman, who will begin on slide four of the supplemental deck that was released this morning.
The results shown are from continuing operations when referring to any comparative period, all metrics are pro forma for continuing operations of the combined business of chart and how to pro forma exclude the following businesses that were divested in 2023 routes American fan coil, Simco and Korea diffusion.
Joe Brakeman: In the third quarter of 'twenty 'twenty, four we generated $207 million of net cash from operating activities and after $26 million of Capex and had free cash flow of $174.6 million.
Joe Brakeman: This cash was used to reduce net debt and resulted in our September 30th net leverage ratio of 3.0 for meaningful progress to our net leverage ratio target of two to two and a half as well as our 2025 year end net debt goal of $3 billion in a few slides, we will discuss further balance sheet optimization plans.
Joe Brakeman: When compared to the third quarter 2023 pro forma orders increased five 4%.
Joe Brakeman: Sales of $1.06 billion increased 22, 4%.
Reported gross margin of 34, 1% increased 350 basis points.
Joe Brakeman: Reported operating income of $178 $5 million was $235 9 million when adjusted for items, primarily related to the Howden integration and head count restructuring.
Joe Brakeman: As a percent of sales adjusted operating margin was 22, 2%.
Joe Brakeman: Adjusted EBITDA of $267 million was 24, 5% of sales.
Joe Brakeman: Our adjusted EPS was $2.18, which would have been $2 48 absent the 15 cent negative EPS impact related to foreign exchange in the quarter and the Delta of our Q3 tax rate of 26, 5% to our originally assumed 20% rate, which was another negative 15 cent impact.
Joe Brakeman: The tax rate was impacted by our geographic profit mix.
Year to date through September 30th sales increased 19, 6% when compared to year to date September 30th 23 pro forma and operating margin increased year to date by 510 basis points.
Year to date through September 30th all segments sales grew compared to year to date Q3, 'twenty three all segments gross margin increased in all segments SG&A as a percent of sales declined reflecting operational improvements as well as earlier than anticipated cost synergy achievement in the third quarter, we surpassed.
Joe Brakeman: Our original year, three which was 2026 target of $250 million of annualized cost synergies.
Joe Brakeman: Slide five is a summary of the third quarter compared to Q3, 'twenty three and we will cover each of these in the coming few slides so moving to slide six.
Joe Brakeman: Our third quarter orders of $1.17 billion grew five 4% compared to Q3 23, you can see some specific order example, booked in Q3 on the page, including a variety from traditional energy to hydrogen to marine to LNG.
Joe Brakeman: Siemens energy ordered multiple air cooled heat exchangers for a variety of energy projects, including Cass County power station in Turtle Creek H.
H D. Hyundai heavy industries placed orders for exhaust gas recirculation or E G ours for marine ship engines.
Joe Brakeman: You get part of C AD group placed an order for a diaphragm compressor for their green hydrogen plants in Italy, we.
Joe Brakeman: We received an order from Thyssen Krupp for process tends to be installed in a new cement will end up the mountain cement plant in Wyoming in the USA.
Joe Brakeman: And axial and jet sand contracts were awarded to us by spark any L for the northeast link tunnels in Australia.
Joe Brakeman: We currently have over $23 billion in our commercial pipeline of opportunities.
Each quarter of this year, we had approximately 39% of our installed base of covered sites, placing aftermarket orders with us.
Joe Brakeman: Good traction yet we have room for more coverage, especially as much of the concentration is still primarily related to how did the legacy.
Joe Brakeman: We recently released enhancements to our customer aftermarket online digital portal, including customer outage timing additional capabilities for part configurations, and an updated tank sizing application.
Joe Brakeman: We also have customers that have committed work to us that are not yet in backlog totaling $1.95 billion of commitments. A few examples of these include for LNG Exxonmobil as we released a few weeks ago on behalf of Mozambique, Rovuma venture the operator of the area for concessions.
And northern Mozambique, Rovuma Basin announced its decision to select our Ips to Laura liquefaction technology and equipment for the resume of LNG project and since that announcement liability got plc and guests Tanzania L. T D and Tanzania Petroleum Development Corporation have chosen to partner with us to utilize that.
Joe Brakeman: Yes, more process and associated equipment for their small scale LNG project.
Joe Brakeman: And for hydrogen Renner G Group partners L. P has chosen to partner on their green hydrogen plant in Egypt, which is anticipated to produce 450000 tons of hydrogen per year.
Joe Brakeman: We also executed a collaboration agreement to work with Petro jet Egypt, the largest state owned construction company to advance hydrogen projects across Egypt.
Joe Brakeman: Nuclear is gaining traction we serve the nuclear space with our fan offering for traditional nuclear facilities as well as supporting some of our technologies with our guests circulated fans turbines and air coolers.
Joe Brakeman: It started October we received nuclear orders from both E D S and eczema.
Joe Brakeman: Moving to slide seven.
Joe Brakeman: Our third quarter 2024 had sales of one point over $6 billion, an increase of 22, 4% compared to Q3 'twenty three.
Joe Brakeman: And an increase sequentially of 2% when compared to the second quarter of 'twenty 'twenty four this.
Joe Brakeman: This is the first time in our history that sales sequentially increased from the second to the third quarter, reflecting continued efforts for throughput improvement.
Joe Brakeman: Project activity in specialty products projects moving to construction phases.
Joe Brakeman: Three of our four segments had record sales in the third quarter.
Joe Brakeman: We had a busy Q3 with many weather events you continue to focus on deliveries and other continuous improvement actions well. We did have early in the quarter impacts from hurricane barrel and our Texas shops, we were able to recover that within Q3.
Joe Brakeman: <unk> fared well through hurricane Helene with only a few days disruption from power outages.
Joe Brakeman: Yeah, we still have more opportunity to improve through throughput and have more continuous improvement efforts to take hold of head count.
Joe Brakeman: The only example underway.
Joe Brakeman: Kaizen events globally, using our chart business excellence, our C D tools up.
Joe Brakeman: Amazing Assembly locations in our facilities, such as moving curdle work to Allentown, Pennsylvania to increase other activities at our new Iberia, Louisiana shop.
Joe Brakeman: Well early we're putting skid working locations with larger and more capacity.
Joe Brakeman: Another example is an addition of two testing stations in our air cooler manufacturing facilities and these are just a few examples as we believe we have more throughput.
Joe Brakeman: <unk> opportunities ahead of us.
Speaker Change: The middle of Slide seven shows adjusted operating income of $236 million, an increase of 53% when compared to Q3 'twenty three.
Speaker Change: All four segments reported operating income and margin increased compared to Q3 'twenty three.
Speaker Change: This resulted in adjusted EBITDA of $267 million, which does not include adjusting for a negative foreign exchange headwinds exchange headwinds of $9.3 million in the quarter.
Speaker Change: On slide eight you can see the increases in gross profit margin reported and adjusted operating margins and EBITDA margins.
Speaker Change: All four segments had increases in gross operating and EBITDA margin when compared to the third quarter of 2023.
Speaker Change: Segment specific information as shown on slide nine.
Speaker Change: Starting with cryo tanks solutions or Cts.
Speaker Change: Third quarter 'twenty 'twenty four C. T S orders of $126 $2 million decreased 17, 5% when compared to the third quarter of 2023, primarily driven by the third quarter of twenty-three having had one order for over $19 million of railcars, which did not repeat.
Speaker Change: In the third quarter 'twenty four we did see slowing demand in China in particular in industrial gas, which is primarily reflected in Cts.
Speaker Change: Sequentially compared to Q2, 'twenty 'twenty four Cts orders were down 26% as of second quarter had a large LNG re S get order for over $20 million and also we saw the slowing demand in China in the third quarter.
Speaker Change: Third quarter, 2024, Cts sales of $162 $5 million increased 4.6% when compared to the third quarter of 2023.
Speaker Change: Sequentially compared to Q2, 'twenty four Cts Cts sales were down approximately $3 million.
Speaker Change: Reported gross profit margin of 25% and C. T. S increased 280 basis points compared to the third quarter of 2023, and 480 basis points sequentially, driven primarily by project mix and operational improvements Cts margins are typically in the low to mid twenties.
Speaker Change: Now moving to Kietrice systems, where HTS before I start on Q3 specifics I want to take a moment to discuss the LNG market and growing adoption of our modular Ips EMR technology.
Speaker Change: Already discussed Exxon, Mozambique utilization of Ips Tomorrow and wanted to share that recently two additional projects has shared with us their decision to use I P S them or for their LNG liquefaction facilities.
Speaker Change: Interest in Ips Tomorrow continues to grow as it is an accepted and validated solution for many projects.
Speaker Change: So back to the third quarter H T S orders of $424 $7 million increased 151% when compared to Q3, 'twenty three driven by multiple and various LNG in traditional energy equipment Awards. These also contributed to a sequential increase of over 50 per cent compared to the second quarter 2024.
Speaker Change: Third quarter 2020 for HTS sales of $256 $2 million.
Speaker Change: Were a record as we execute on LNG and other project backlog Q3, 24 sales increased 12, and a half per cent compared to Q3 'twenty three.
Speaker Change: Sequentially compared to the second quarter of this year H T. S sales increased eight 2% as we continued to execute on delivering our backlog and work on further throughput improvements in our shops.
H T. S Q3 gross profit margin was 29, 8% an increase of 340 basis points compared to Q3, 'twenty three driven primarily by project mix.
Speaker Change: Sequentially compared to the second quarter of this year H T. S. Gross margin improved based on higher volumes project mix and operational improvements.
Speaker Change: We anticipate H T S gross margin to be in the mid to high Twenty's consistently going forward.
Moving to specialty products.
Speaker Change: Third quarter 'twenty 'twenty, four specialty products orders were $237 $8 million and decreased approximately 49% when compared to the third quarter of 2023 as the third quarter of 2023 included a larger hydrogen related orders.
Speaker Change: Larger project timing for orders can vary between quarters in particular in specialty products and H T S.
We received customer commitments on certain projects that we did not book in Q3, given timing of paperwork and for one project timing of their S. I D.
Speaker Change: We anticipate that we will receive orders.
Speaker Change: For approximately two more larger specialty projects in the fourth quarter of 2024, one in hydrogen and one in mining, which already has been verbally awarded and terms and conditions are underway.
Speaker Change: Sequentially compared to Q2, 'twenty 'twenty four specialty orders declined 44% driven by the second quarter's record orders in carbon capture metals mining water treatment and strong globally diverse hydrogen and helium awards.
Speaker Change: Third quarter 2020 for specialty product sales of $283 million were a record for the segment increased 25, 9% when compared to the third quarter of 2023, driven primarily by increasing throughput and progress on specialty projects within the quarter.
Speaker Change: Sequentially compared to the second quarter of 'twenty four specialty sales increased 2%.
Speaker Change: Reported gross profit margin of approximately 26% increased 60 basis points compared to Q3 of last year, yet decreased sequentially when compared to the second quarter of 2024.
Speaker Change: The sequential decrease was due to the third quarter 'twenty 'twenty four expenses incurred at our newly opened 32 facility in Theodore Alabama, and that was related to our suppliers machinery startup challenges at our site and therefore associated inefficiencies unspecific space exploration related projects, which we do not anticipate repeating ahead.
Speaker Change: Ed.
Speaker Change: And finally for the repair service and leasing segment or ourself third quarter 'twenty for RSO orders of $377 $9 million increased 16, 5% when compared to the third quarter of 2023, driven in part by a larger aftermarket sale of equipment.
Speaker Change: Sequentially compared to Q2 orders grew 21% or about $65 million driven primarily by our Q3 10, and a half million dollar order for power Africa power station spares and the larger RSL equipment sale.
Speaker Change: Third quarter 2020 for ourselves sales of $365 million increased 36% versus Q3 of 'twenty three.
Speaker Change: Sequentially Q3 sales were flat to Q2, 'twenty, four which had a large field service work and also reflects typical summer timing being slower in field service outages.
Speaker Change: Reported ourselves gross profit margin of 47% was driven by the larger than typical aftermarket equipment sales sequentially to the second quarter of 2024, or so gross margin declined from 49%, which was unusually high and driven by the large field service work in Q2.
Speaker Change: Now Joe will discuss cash balance sheet, and our 24 and 25 outlooks.
Joe Brakeman: Third quarter 2024 reported net cash from operating activities of $207 million less capital expenditures of $26 1 million resulted in 174.6 million of free cash flow.
Joe Brakeman: Our September 32024, net leverage ratio was 3.04 as shown on slide 10.
Speaker Change: To reiterate our financial policy, but until we are in our target net leverage ratio range of two to two and a half times, we will not do any share repurchases or material cash acquisitions.
Speaker Change: The strength in Q3 cash reflects our ongoing cash culture efforts toward business excellence coordinates coordination of milestone billing and increasing operational throughput.
Speaker Change: As we have previously indicated we were coming off a period of heavy capex spend for capacity. Our capex spend is now normalizing and we expect normalized capex to be between two and two and a half.
Speaker Change: Sent a sales.
Speaker Change: Net working capital defined as accounts receivable inventory accounts payable unbilled contract revenue customer advances and billings in excess as a percent of trailing 12 month sales improved to 16%.
Speaker Change: As a reminder, we hit our semiannual unsecured interest payment of $79 million in the third quarter that will not repeat in the fourth quarter.
Speaker Change: Digitally the fourth quarter has multiple milestones scheduled for collection and taxes typically a tailwind to free cash flow in Q4.
Speaker Change: We continue to look to optimize our capital structure, we anticipate our 2017 seven year convertible note to settle at maturity in November 2024, with a principal of approximately $259 million paid in cash and the premium settled with equity note that the share count will change upon settlement, which is.
Speaker Change: <unk> and our outlook.
Speaker Change: Moving to slide 11, our full year 2024 sales outlook is approximately $4 two to $4 $3 billion with anticipated full year 2024, adjusted EBITDA of approximately 1.015 to 1.0 for a $5 billion. This reflects a year over year, 18% to 21% sales growth range.
Speaker Change: Which is Jill described in her comments reflects our year to date sales growth and margin progress.
Speaker Change: Sales growth at the lower end of the range is based on our confidence in what we have been able to consistently achieve year to date and backlog coverage achieving the higher end of the range will depend on larger project timing and further operational throughput actions already underway, which will continue into 2025.
Speaker Change: Our associated anticipated full year 2024, adjusted diluted EPS is anticipated to be approximately $9.
Speaker Change: I don't anticipate a tax rate of approximately 22% free cash flow is anticipated to be approximately $400 million.
Speaker Change: Our 2025 sales are anticipated to be in the range of $4 $65 billion to $4.85 billion.
Speaker Change: We anticipated adjusted EBITDA between 1.1, 75, and one point to two $5 billion. We have strong backlog coverage for 2025 and also have line of sight to additional larger orders that we anticipated closing in the coming months.
Speaker Change: We anticipate our 2025 adjusted diluted EPS to be approximately 12 to $13 and a tax rate of approximately 22%.
Speaker Change: Additionally, we anticipate ending 2025 with approximately $3 billion of net debt based on full year 2025 free cash flow generation of approximately $550 million to $600 million.
Speaker Change: We look forward to sharing additional details of our 2025 outlook at our Investor Day on November 12.
Speaker Change: Dwell please open it up for Q&A.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: You have a question. Please press star followed by the one on your Touchtone phone.
Speaker Change: Prompt on your hand house name raised Jewish did decline from the polling process. Please press star followed by the U.
Speaker Change: If you are using a speakerphone please.
Please lift the handset before pressing any cheese.
We ask that you. Please limit yourself to one question. Your first question comes from Eric Stine with Craig Hallum. Your line is now open.
Speaker Change: Hi, Joe Hi, Joe.
Joe Brakeman: Hey, Eric.
Eric: Good morning so.
Eric: I guess on 2025 guidance I know that it's kind of been an ongoing focus of yours to try to better incorporate the project more project based nature of your business. So could you go into the thought process. Joe I know you just talked a little bit about.
Eric: The backlog coverage line of sight to new orders, but you know maybe your thought process on on.
Eric: Did you haircut this guidance what gets you to the high <unk> the low end and the high end that would be very helpful.
Speaker Change: Yeah, Joe feel free to chime in on this one what I would say Eric is that we have really worked to incorporate our learnings from the movements that we have and the things we've talked about throughout 2024, and that's reflected in our 2025 outlook and that's something that.
Speaker Change: We feel very confident in this outlook given the backlog coverage that we have Joe what you referred to it.
Joe Brakeman: Stronger than typical backlog coverage, which we've got about 61% of our 930 backlog that's going to hit that is scheduled to convert in the next 12 months. So we we feel that we've kind of gotten through this evolution of getting to the point of incorporating all of the learnings that we've had.
Joe Brakeman: Over the last few quarters into our 2025 construct which was our goal to do and I feel good about being down the fairway on that in terms of the the higher end of that range, which as you know approximately a 12% growth off of the higher end of the 20 fours range is it'll round.
Joe Brakeman: More conversion of the backlog that we currently have and also we we do see movement of new orders that come in and we have good line of sight to the next few months if some of the larger orders that you know if something does move in a new order comes in that can that can be offset offsetting to get to the higher end.
Joe Brakeman: But that was our that was our thought process Eric around incorporating everything that we've learned when we have to move things between quarters, just simply because we've become a much longer cycle company yeah no nothing.
Speaker Change: Nothing really significant to add to that Eric just just like Joe said understanding that things that can make thing no revenue moved between quarters and incorporating that into our approach as we forecast moving forward.
Speaker Change: Okay, and when you talk about new potential orders that come in.
Speaker Change: I would assume if those are LNG orders then those would have to be early in the year and that would probably at best have a weighted impact in the year and is that how we should think about it that this would be more skewed to some of the other segments in terms of those order opportunities impacting 25, yeah.
Speaker Change: No that's the right way to think about it Eric.
Speaker Change: Okay alright, thank you.
Speaker Change: I think there.
Your next question comes from Marc Bianchi with Cowen. Your line is now open.
Marc Bianchi: I think I wanted to start with the order outlook Jill.
Marc Bianchi: You had talked about a $23 billion pipeline.
Nearly $2 billion of commitments that are not in backlog.
Marc Bianchi: And if we look at third quarter, you had this really good HTS performance, but.
Marc Bianchi:
Speaker Change: But there was some weakness in specialty so maybe just talk to us about put that 23 billion and 2 billion of commitments in context for us where was that recently.
Speaker Change: And how has that changed and then how are you thinking about the order progression in <unk> and into early 'twenty five.
Speaker Change: Yeah, Thanks, Mark and good morning, well, what I would say is you know.
Across the majority of our end markets with the exception of China. We continue to see good demand and are in a very strong pipeline things like either the acceptance of I P. S. EMR internationally with the rhythm of the Exxon, Arizona LNG project have added to that pipeline recently.
Speaker Change: The more that our technologies and solutions get out in the field the more of that pipeline seems to grow them. When I look at the nearly $2 billion of commitments about a billion and half of that is H T. S and the other half billion or 450 million is a specialty is entirely specialty.
Speaker Change: Since the billion and a half of HTS related that we had as we had talked about previously we've added we've added.
Speaker Change: A few small scale into that number the other opportunity that has been increasing for us is around data centers and so we did have our second quarter data center order that we talked about on air cooled heat exchangers and as he started October we got another another or.
Speaker Change: For air Coolers related to data centers. So that's another contributor to into that 23 billion of pipeline. That's not included in the 1.95 billion of commitments that that we referred to that are not yet booked them in terms of specialty weakness yeah, well when I look at it is structurally is there is there.
Speaker Change: Their weakness structurally in these end markets or in our offering for them or is it really just timing and what I would say around specialty in the third quarter or is it really truly it was just timing and you know with the mining order that one that we have.
Speaker Change: We have been awarded and we're just working on Ts and CS of the customer right now that's over $40 million as an example, a few a handful of potential in the hydrogen space center and in the $20 million to $35 million range. So these are these are.
Speaker Change: Orders in S E and financings that sometimes take a little more time than what we had originally thought and a couple of those in that $1 95 on the specialty side, where you could've been bookable in terms of our policy, but we did not feel comfortable that they were at the point of completing their financing far enough.
Along in that two to put them into our backlog. So overall, the though the only area of kind of what I would say structural concern and in the end markets right now is just China industrial gas.
Speaker Change: Okay and would you anticipate that fourth quarter book to bill could be greater than one.
Speaker Change: Yes, one or greater for us or our outlook.
Speaker Change: Okay, great. Thanks, Joe I'll turn it back.
Marc Bianchi: Thanks Mark.
Speaker Change: Your next question comes from Ben Nolan with Stifel. Your line is now open.
Ben Nolan: I appreciate it thanks.
Ben Nolan: Oh boy.
Ben Nolan: Oh sure I only want it so I'll start with this one or I guess I'll end with this one too.
Ben Nolan: If you think about as you think about the fourth quarter. Just if there is normally an uplift in the fourth quarter.
Speaker Change: <unk> guidance, you're calling for roughly a $150 million of incremental sales can you maybe talk through maybe segment by segment.
Speaker Change: How that plays out like where are you expecting the uplift in <unk> to reach your updated guidance.
Speaker Change: Yeah. So if you look at our <unk> sequentially Q3 to Q4, historically will do between 10 and 15% on average of an increase and then year over year really varies if you looked at our year over year for Q4 of.
Speaker Change: Of this year, the lower end is a little bit a little bit lower as a percent than what we have been doing the last few quarters.
Speaker Change: And the high ends pretty consistent with what we've been doing in the last few quarters.
Speaker Change: When you look at the segments themselves.
Speaker Change: We're continuing to see strength in throughput in HTS specialty and RSL and C. T. S. I would just say is consistent so that's the way to think about to think about that on a relative basis of of growth sequentially and maybe one other one other quick add here on <unk>.
Speaker Change: S. L is that yeah, we did have a larger field service work in the second quarter, and we had a larger than typical equipment sale in the third quarter and ourselves and so those were.
Those are pretty strong quarters and in that respect.
Speaker Change: Hum.
Speaker Change: And as we head into Q1 rate in 2025, Q1 is always our lowest quarter of the year and we don't anticipate anything different for 2020 five in that respect.
Speaker Change: Got it okay I appreciate it and if I could sneak in just a super fast food.
Speaker Change: I think Joe you said, 16% was the.
Unbilled revenue as a percentage of sales what should that be on a normalized basis.
Speaker Change: And that was working well, we define working capital as a percent of sales, which is the aggregate of accounts receivable inventory AP unbilled customer advances and so that 16% is as a percent of annualized of an annualized sales number yeah.
Speaker Change: Yeah, we we will share some more details on the specificity around what we expect that to be at our November 12th capital markets day, but yeah, I think you've seen us perform and that particular metric in the low 20 percents to the high teens.
Speaker Change: Kind of the range that it's been in the combined business the last 18 months.
Speaker Change: Okay I appreciate it thank you.
Speaker Change: Thanks, Matt.
Speaker Change: Your next question comes from Martin Malloy with Johnson Rice. Your line is now open.
Martin Malloy: Good morning.
Hi.
Martin Malloy: Hi art.
Martin Malloy: So putting up another good quarter here and I just from a high level.
Martin Malloy: Can you maybe talk about where you are in terms of.
Martin Malloy: Putting equipment onto maintenance service.
Martin Malloy: Contracts are or your digital offering and kind of the runway here for for growth.
Martin Malloy: In that segment, how you look at it when you look out two or three years.
Speaker Change: Yeah. Thanks, Marty for recognizing that we're we're very pleased with the aftermarket side of the business on the last few quarters, and then 34% to 35% of our total revenue and an RSL in the segment.
Speaker Change: With the strong performing gross margins, we just don't want people to get too far out over their skis on that R. S. L. Gross margin number we have meaningful ways to go in penetrating the install base and penetrating the digital uptake offering from our digital uptime offering we still are primarily.
Speaker Change: I've been traded in having legacy assets and so the tool kits being taken across the chart. The chart legacy assets that that just takes some time to integrate the various different digital offerings with that but what I would say is early innings on this so we have a we have a good ways to go but on L. P S A's and.
Speaker Change: Framework agreement, we have seen we have seen.
Speaker Change: Positive growth in terms of the number the numbers of L. P. S A's and framework agreements year to date in 2024, and we saw the same in 2023, so we're getting traction there, but what I would what I would really like to see is a higher than 39 and 40% Oh.
Speaker Change: I'll take that we currently have on customers with an installed base that are buying something after market each quarter. So that to me. That's a positive to me. It's a positive because there's more to go in this aftermarket side of the business and I'm very excited to see what we can do there.
Speaker Change: Okay.
Speaker Change: Great. Thank you I'll turn it back.
Speaker Change: Thanks Marty.
Speaker Change: Your next question comes from Pavel Marcia.
Raymond James Your line is now open.
Pavel Marcia: Yeah. Thanks for taking the question so based on the updated guidance the trajectory of revenue recognition in 2024, it's pretty balanced almost 50 50.
Pavel Marcia: Do you expect next year to be more backend weighted or less backend weighted.
Speaker Change: So we would expect that Q1 is I you know I feel like I beat this drum, but I think it's really important that we haven't we've always seen Q1 be the lowest our lowest quarter of our financial metric here, but I do think that you'll see a little a little more balance in 2025.
Speaker Change: Just given the backlog coverage that we have especially on the newbuild side of things RSL is typically pretty balanced with the exception of you know Q3 tends to extra the larger equipment sale order that we had this time tends to be a little slower because of summer outages, but we have we have a real strong line of sight on the new <unk>.
Speaker Change: Project solutions are but I do want to stress that Q1 is always seasonally our lowest quarter, but.
Speaker Change: But less of a ramp into Q4, and then what we've seen historically.
Speaker Change: And given that we're four days away from the.
Speaker Change: U S election, I have to ask.
Speaker Change: Is there a certain amount of revenue in 2025 that hypothetically could be at risk.
Speaker Change: If the either churn or carbon capture policies in Washington were to change.
Speaker Change: The short answer for those no but I appreciate the the topical question given how close you are to the election and kind of the the various different pieces and parts dependent on party them, we're very well positioned regardless of our of the outcomes just given the fact that our equipment installations go into so many different molecule.
Speaker Change: So, but what what I would say is we did think about I'm not adding what could be pent up demand into our twenty-five outlook. So there may be potential for a little upside, but we didn't we did not contemplate that and in what we've put out here, but no. We don't believe that there's a there's risk.
Speaker Change: Based on either outcome to the election, two or 'twenty five.
Appreciate it.
Speaker Change: So the.
Speaker Change: Your next question comes from Manav Gupta with UBS. Your line is now open.
Speaker Change: Good morning, It was great to see the deleveraging process restarts strongly my quick question here is you highlighted some spots in the opening comments, let's see if he has a big uptick in the nuclear cycle driven by power demand.
Speaker Change: Can you help us understand the ways in which G. P. A L S wins from that thank you.
Speaker Change: Oh. Thank you also for the comment about deleveraging, we're very very focused on that and we'll continue to the when you look at nuclear it's definitely become more active I would say in our commercial pipeline. It's not it's not something that we're serving new it's something we always have it's just a matter of of how much.
Speaker Change: Interests. There is there has been and we're definitely seeing an increase there are there's multiple different ways that we play with nuclear we do serve a the traditional.
Speaker Change: Utility companies with our C. T S applications, so with with tanks related to that we served a general nuclear space across the board with fans and now we have the ability to support S. EMR technologies with big gas Circulars and air coolers.
Speaker Change: In addition to the fans and that's I would say the fans and the tanks are primarily what we have seen to date and also recently a little bit more of an uptick in spares and aftermarket for nuclear.
Speaker Change: Now what we're seeing is the smaller S. EMR companies coming forward with various different technologies and that's what we're quoting on right now so it's a small percent of our total currently but if this does become a bigger part of the energy transition for lack of a better description a were very <unk>.
Speaker Change: Well positioned to play with equipment, we do not have a process technology for nuclear.
Thank you I'll turn it over.
Speaker Change: Oh.
Speaker Change: Your next question comes from Rob Brown with Lake Lake Street Capital. Your line is now open.
Rob Brown: Good morning, Joe.
Joe Brakeman: Hey, good morning, Rob.
Rob Brown: Just wanted to clarify kind of the specialty segment gross margin gross margins do you think you can get another sort of one time stuff in the quarter, but where do you think that can be as.
Joe Brakeman: As you ramp that business.
Joe Brakeman: Yeah I mean.
Joe Brakeman: I was I was I was disappointed in our in the third quarter, but you know at least we can pinpoint to what caused it.
Speaker Change: Where we see this is in the 30 plus low Thirty's is is we're kind of in the near near term type of timeframe. However, you define near term, but I would say in the next you know.
Speaker Change: Five quarters type of timeframe it should be running in that in that level and we will also see a little bit of benefit from the more throughput that we get on specialty just naturally by design.
Speaker Change: But more than anything it's getting out of.
Speaker Change: Startup inefficiencies and this particular one was unfortunately outside of our control, but it was fact and it was a drag on our margin in Q3 and specialty.
Speaker Change: Okay.
Speaker Change: Okay. Thank you I'll turn it over.
Speaker Change: Rob.
Speaker Change: Your next question comes from Craig Shere with Tuohy Brothers. Your line is now open.
Speaker Change: Okay.
Speaker Change: Hi, Thanks for taking the question.
Speaker Change: Wanted to dig a little bit more in the malls are nuclear question and your comments around the S. M. R. R.
Speaker Change: So a couple of things one.
Speaker Change: Uh huh.
Speaker Change: Most recently, there's been a couple you know oh.
Speaker Change: Yeah well.
Speaker Change: Well advertised or price or some of our data center opportunities that we're announcing all obviously this is going into the early twenties thirties, but want to one get a sense.
Speaker Change: The type of reactor technology has an impact on your ability to ultimately service staffs are circulated.
Speaker Change: Fans and such and then another thing that's come up is relating to data centers that they use a lot of water and youre in the water business and so just wondering if this whole you know broader you know economic driver.
The multi segment opportunity set for you.
Yeah. Thank you Craig and commercially I think this is a great example of how we haven't had to go do something different from our traditional equipment and products that we have in serving new types of growing end markets are more nascent type of end market. So let me Peel. This back just kind of from starting from nuclear.
Speaker Change: We are we we serve we can serve traditional and new S. EMR technologies and opportunities. We recently have had some activity with it with ex energy, which I think is a name that many people are.
Speaker Change: Tying to to the space and also I'm seeing.
Speaker Change: I would say an increase in the commercial pipeline in particular in Europe around nuclear opportunities with various different has tomorrow technologies. So again that really is the core offering that we serve into those and it's primarily howden offering that brought came into the portfolio.
Speaker Change: When we look at the the water in the data center opportunity. This is this is pretty broad so let me start with the datacenter piece, we've talked about air coolers for for the data center market.
Speaker Change: And it's not only around the water, but also around heat rejection, where there isn't necessarily access to water them, but on the water treatment side, absolutely I mean, I think the way to think about water treatment is there. So many secular tailwind for water treatment that that can benefit what we serve because we hit all of the.
Speaker Change: And is that this could be a great opportunity ahead, I would I would caveat that answer with we haven't seen a ton of that linkage yet, but I think it's early days on how are the the hyperscale or in other data center providers are thinking about their locations in particular and their size and their scale.
Speaker Change: And feel very well positioned without having to change our manufacturing lines or processes to achieve that.
Speaker Change: Well, we'll share more end market specifics about how we play both in the Newbuild in some of these end markets that we're discussing right now as well as an aftermarket at the November 12th a capital markets day.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Walter Liptak with Seaport Research. Your line is now open.
Walter Liptak: Hi, Thanks, good morning, everyone.
Walter Liptak: Joe I wanted to ask you guys made the comment on free cash flow about the cash culture and I know you guys have been focused on cash flow for a while but was there a change where does that mean and then.
Walter Liptak: And as a follow up there is some special cash flow.
Walter Liptak: Actions I guess you were taken in the fourth quarter I Wonder if you could quantify those and.
Walter Liptak: And then in the 2025 cash flow are there any special.
Walter Liptak: You know kind of one time actions.
Speaker Change: Yeah. Thank you Walt I'm. So we're pleased to see the activity that we've had underway through the integration and start to actually show up in the cash results here in the third quarter, the well what I would say is that the cash culture. When we described it as kind of like we described chart business excellent it's embed.
Speaker Change: And the organization, it's something that we've had a concerted effort to make be sustainable and have multiple different.
Speaker Change: Element of our organization working together, so you know with us whether it's the project management team linking to the commercial team linking to the operational team to ensure that the milestones are proper and the contract or make sure that the milestones are being hit by the operations team or the engineering team, making sure that the milestones are being billed on time.
Speaker Change: Some of those things probably sound fairly basic but they are the types of efforts that we have had underway in cash culture. We've also.
Speaker Change: Incorporated into the organization you treat the organization's money as if it were your own and focus on areas that each and every one of you can impact whether that's <unk>, whether that's traditional trade working capital or areas that are to your point you can find other ways to generate cash I do think the other piece that.
Speaker Change: B R mentioned in his remarks was around the normalized Capex is an important factor as we head into 2025, we really came off of a period of heavy spend and we feel like we have good capacity in place and so now capex is going to be more in that two to two and a half per cent of CIT.
Speaker Change: Of sales.
Speaker Change: The second piece of your question was around other things that we're doing to generate cash.
Speaker Change: And we we had talked to I think a month or so ago or maybe it was six weeks or so ago about there's other non operational actions that are that we are working on and we kind of are constantly looking at the portfolio to see what those might look like and we.
Speaker Change: We have we have a small potential product line divestiture that we're working on it it's more opportunistic and we wouldn't want to get the right price for that if we were to do it.
Speaker Change: We've got some cash repeat repatriation actions. So if you look at the balance sheet and when you do have a cash balance sitting there and so brinkmann's working on that are you.
Speaker Change: You'll have some of that back in Q4, we will be pulling back from cash from a more restricted countries in Q4.
Speaker Change: And use that for debt pay down. So those are just a few examples of what you're describing and.
Speaker Change: But again I think the real takeaway here is our goal of cash culture has been to make it sustainable and not have to rely on any nonoperational to hit our target net leverage ratio range and we're pleased to see the traction starting to take hold in for the first time.
Speaker Change: In the third quarter.
Speaker Change: Okay, great are those.
Speaker Change: Nonoperational things in 2020 for 2025 free cash flow guidance.
They're they're not.
Speaker Change: Okay, great. Okay. Thank you. Thanks.
Speaker Change: Thanks, a lot.
Speaker Change: Okay.
Speaker Change: Your next question comes from Alexa Patrick with Goldman Sachs. Your line is now open.
Hey, good morning team on the hydrogen side, you announced an Mou for a 30 ton per day look with fire can you talk a little more about the demand in the market today of minutes 30 ton horizontal becoming more common or it's 15 still.
Speaker Change: So what you're seeing any conversations around the outlook would be really helpful. Thank you.
Speaker Change: Thanks for the question, let's say you know what I would say on the liquefaction side is we're seeing more and more of that are looking to go larger and these are companies not just the ones that we're looking at at 30 tons per day. There are companies that are fully strong balance sheets that you'd be familiar with that are looking at you know hundred ton per day style none of those.
Speaker Change: Are in backlog and none of those are are anticipated in our order book here in the next.
Speaker Change: Even in 'twenty five because it takes a little bit of development time, but the concept and the market is to go larger get more scale be more interconnected to to not have these hub and spokes regionally, but actually have a true hydrogen infrastructure from production to end use.
Speaker Change: So early days on that but that's what we're seeing in terms of the direction that the market is going and the other thing I would say, we're seeing in terms of linking to that is around the storage transport and end use aspect of these more more companies getting involved in that and I'm trying to bring more.
Speaker Change: More than just California as an example in the United States into the mix, Canada has been very strong in terms of support for hydrogen whether that's through CIB or are there. Other there are other funding efforts and I think you'll see Canada actually be one of the leaders in in hydrogen infrastructure development.
Okay. That's very helpful. And then just sticking with specialty products do you guys.
Speaker Change: Can you talk a little bit more about the mining project award expecting them for kill anything around the size of the award or any color you can provide on that.
Speaker Change: Yeah, it's it's up.
Speaker Change: Approximately 40 million U S dollars its for a project that is our international project at non U S project and it would be primarily howden legacy equipment.
Speaker Change: Okay. That's helpful I'll turn it over thank you Ross.
Speaker Change: Thanks Elisa.
Speaker Change: Your next question comes from Sharif I'm Robbie with C V kick your line is now open.
Speaker Change: Hi, Thanks, Thanks for taking my question I wanted to just wanted to piggyback on that last one about hydrogen.
Speaker Change: Is there an upper limit to.
What charts hydrogen liquefaction tech can do in terms of capacity like we talked about 30 tons per day, but.
Speaker Change: You raised the point that for example, a petro jet could do could be 10 exercise in the back half of the decade.
Speaker Change: And can you speak to the medium term trajectory for specialty margins as we see more hydrogen liquefaction compression.
Storage comprise more specialties mix. Thank you.
Speaker Change: Thanks, Sri Thanks for the questions what.
Speaker Change: So technically there is no upper limit to what we can do we're actually.
Speaker Change: Working with a partner that's not somebody we've named.
Speaker Change: That is looking at a 300 ton per day as an example in the in the medium term. So in the late latter part of this decade and you know, we're certainly capable to do it it does require a different type of development and the engineering arena, but it's all based off of our current technology. So it's around <unk>.
Speaker Change: Scale, it's around can you get the efficiencies we've done a lot of work around like what is most efficient in and the current state of the 60 or 70 ton per day. So there's many factors that go into it but there's not a limit to how we can scale. It's just a matter of what the customer is looking for and right now what I'd say.
Speaker Change: The Egypt, one we talked about is by far the largest we've seen the potentially largest we've seen knit followed behind that is this other.
Speaker Change: Partner that we Havent disclose who they are but it's about a 300 ton per day I'm. Obviously, both of those are well not obviously the one is international the other is also international.
Speaker Change: When we look at.
Speaker Change: Medium term trajectory for specialty.
Speaker Change: There is elements of specialty that are a little more mature than others and if I pick the mature elements those would be like in the in the category of mining, where we're very well positioned currently are the <unk>.
Speaker Change: Many customers are pretty consistent in what they do and we see we see their behavior being consistent whereas theres other aspects of specialty that we think later in the decade, which we consider a medium term.
Speaker Change: Really take further hold in terms of growth and that would be around the hydrogen side, the water side and the carbon capture side. So the.
Speaker Change: Whether it's our forecast or someone else's from a macro perspective. The the later part of this decade is anticipated to accelerate further and so we would we would expect specialty to continue to have a strong growth trajectory in the medium term for all the reasons that we've talked about.
Speaker Change: Okay.
Speaker Change: Thanks, Joe that's great color I'll turn it over.
Speaker Change: Thanks, Gerry appreciate it.
Speaker Change: Your next question comes from Sohrab <unk> with Bank of America. Your line is now open.
Speaker Change: Hi, Good morning, Joe.
Joe Brakeman: Good morning, sorry, good morning.
Speaker Change: Oh, Hey, maybe I wanted to go back and touch a little bit on the fact that Oh.
Speaker Change: Last holiday and you continue to become more and more project oriented versus more individual productivity get bid and obviously that has impact on cash milestone payment timing.
Speaker Change: Actually in all of those things, but can you maybe talk to how you are managing that transition internally from a project management standpoint.
Speaker Change: The amortization et cetera standpoint, anything that you're doing internally do dispositions the organization to better handle project going forward.
Speaker Change: Sure and I'd also just point out that post holiday and we also have 30% to 35% of our revenue and aftermarket, whereas before we had about 13% to 14% right. So just to be clear. The Newbuild solution said is is less.
Speaker Change: As a percent of our total revenue, but with that said the many of the actions around the cash culture Ah, but structurally what we have done is we've set a one chart global commercial team at one of our global Engineering team in one chart Global project management team and those those groups.
Speaker Change: Work together with the our regional operations that are working to increase the throughput that we've talked about so okay faceted, but I think the question in particular that you were asking was around structurally what have we done to to work to improve the throughput on cash and in the project.
Speaker Change: <unk> solution that starts at the upfront with the customers the timing of the milestones are then it's through the project management and key account managers that manage the project themselves. They work closely with the operations.
Speaker Change: And then there's just an element also I would say a discipline.
Speaker Change: And ensuring that this isn't something that happens on a weekly basis that happens on an hourly basis and all of those things together will support we believe we will continue to support the sustainable cash generation that we anticipate to have.
Speaker Change: Okay.
Okay perfect I got it okay. That's all I had to send it back.
Speaker Change: Hey, thanks.
Speaker Change: There are no further questions at this time I will now turn the call over to Joe for closing remarks.
Joe Brakeman: Thanks, Joelle and thanks, everyone for joining us today, we look forward to hosting you on November 12 at our capital markets day, and thank you to all of our global One chart team members for all of your ongoing efforts.
Joe Brakeman: Have a great day.
Joe Brakeman: Okay.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and I say you. Please disconnect your lines.
Speaker Change: [noise].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Okay.