Chart Industries Inc (GTLS) 2020 Q4 法說會逐字稿

Good morning and welcome to the Chart Industries, Inc. 2020 Fourth Quarter and Full Year Results Conference Call. (Operator Instructions) The company's supplemental presentation was issued earlier this morning. If you have not received the release, you may access it by visiting Chart's website at www.chartindustries.com.

A telephone replay of today's broadcast will be available following the conclusion of the call until Thursday, February 25, 2021. 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 filings with the SEC. The company undertakes no obligation to update publicly or revise any forward-looking statement.

I would now like to hand the conference over to your speaker, Ms. Jill Evanko. You may begin.

Thanks, Towanda, and good morning, everyone. I will slide right into the supplemental presentation that was released this morning, starting on Slide 3. We officially have begun reporting in our new segmentation, as shown here, which we believe is clear for shareholders to understand the key drivers of our growth in margin. Additionally, all discussion is around continuing operations as we closed on the divestiture of CryoBio on October 1.

So now let's get into the meat of our results and get going on explaining why we believe 2021 is set up to be a breakthrough year for our company. We set multiple records in 2020, which we'll share today, and expect some of those to be beat in 2021.

Moving to Slide 4. Our focus over the past 2.5 years has been on executing our strategy to be the world leader in providing cryogenic process technology and equipment for the industrial gas and clean energy end markets. Our strategic focus areas have been on expanding our high-growth, higher-margin areas of the business, creating and penetrating repair service and aftermarket capabilities, incorporating geographic diversity into our manufacturing as well as our leadership, creating a broader customer base and stickier relationships with those customers through repair capabilities as well as flexibility and targeted long-term agreements and finally, delayering the cost structure of the organization. The focus on these actions will continue, and I'll share some progress from 2020 and the fourth quarter specifically today as we walk through these results.

We executed 33 long-term agreements and master supply agreements in 2020. This is extremely meaningful as historically, we only had agreements with a handful of North American customers. Also meaningful is that of these 33 agreements, for the first time ever, we have 14 repair and service long-term agreements and 10 agreements with customers outside of the United States. We have broad-based and more consistent order activity. For example, we booked 80 orders greater than $1 million each in the fourth quarter and had orders with 472 new customers in 2020, of which 109 were in specialty.

In the first half of 2020, we took out over $60 million of annualized cost by eliminating [luxury] layers in the org structure and also finding areas in the business where we could promote high potential talent. We're very pleased with our strategic investments completed in 2020 and those that we have executed to date so far this year, which you can see on the bottom of Slide 5.

We approach these investments with 2 fundamentals. First, the investment brings access to customers and commercial projects that could not be accessed without significant organic investment. And second, the investment brings access to regions or geographies for their respective products and applications that otherwise could not readily be accessed.

As we have stated, we have a very unique offering that addresses the clean power, water, food and industrial nexus, and one of our most recent wins, BlueInGreen, which was completed in early November, has already generated synergies. Our water treatment orders for 2020 were a record. And in the 6 weeks of ownership of BIG in Q4, we sold 10 water treatment orders totaling $4.1 million, $3.2 million of those having both Chart cryogenic equipment and BlueInGreen dissolution solutions.

January 2021 started with 3 additional water treatment orders. As we shared when we announced the acquisition of BlueInGreen, we felt the non-U.S. markets would have great potential for the combination of BIG's technology and our equipment. Case in point is the December win that we had, a contract in Brazil with the government water utility serving the state of São Paulo's 46 million people.

By way of background, Brazil ranks 112 out of 200 countries in sanitation. This project is in the center of the city, the first of its kind in a statewide environmental remediation plan to treat Brazil's polluted water bodies directly using a distributed network of oxygenation installations.

The Worthington cryogenic and hydrogen trailer acquisition also closed in the fourth quarter and came out of gate strong, contributing to our hydrogen trailer record orders for the year. Fourth quarter was our highest order quarter in history for hydrogen trailers. And currently, there are 16 liquid hydrogen trailers in backlog in the U.S. and nearly a dozen gaseous hydrogen trailers and backlog in Europe.

The completion of the SES acquisition for cryogenic carbon capture technology, followed by our early February investment [in Svante], another carbon capture business, has resulted in multiple new commercial opportunities. As I have previously said, we think carbon capture is on the brink of having a hydrogen-style breakout in terms of project activity.

We're collaborating closely with our partners McPhy and HTEC on hydrogen opportunities ranging from liquefaction to fueling stations to trailers. And currently, we have over 20 projects that we are bidding on together with one or both of them.

It isn't just our inorganic investments that contribute to our unique position in the clean power, water, food, industrial nexus as shown on Slide 6, as commercializing each day more and more is also our organic R&D efforts that further differentiates us. 82% of our products have intellectual property associated with them. We continue to increase that percent through our organic new product development efforts, which I'll share with you today the status on 2 key hydrogen product developments.

But before we get to hydrogen, hydrogen, hydrogen, let's start with what is very exciting about our 2020 year and what sets us up for a breakthrough 2021. On Slide 7, you can see our full year 2020 records for Chart as well as for each of the segments. While there are many accomplishments, including record gross margin and operating income, lowest SG&A as a percent of sales, highest adjusted earnings per share, the one that is most important to us as a company of safety, and we achieved our lowest total recordable incident rate and number of accidents in our history in 2020.

Second half 2020 orders increased sequentially over the first half by 28%, as you can see on the right-hand Slide 7. And flipping to Slide 8, you can see that each of our segments had second half order growth above 24% when compared to the first half. The broad-based order activity contributed to our year-end record backlog of $810 million.

On the right-hand side of Slide 8, you can see fourth quarter 2020 records, and I would point out that food and beverage was a sleeper surprise given the dramatic slowdown that occurred in the second quarter due to the global restaurant shutdowns from the pandemic. We saw specific fast-food chains and beverage companies move ahead with orders in December for their new builds and franchises.

As we have mentioned previously, we continue to adapt to meet the medical oxygen equipment needs of our customers as they serve hospitals and nursing homes dealing with COVID-19. The fourth quarter was the highest quarter of 2020 for medical oxygen related equipment primarily driven by demand in Europe. And while not a record, the demand for trailers in the Eastern Hemisphere doubled in the second half of 2020 when compared to the first half of the year, which sets the second half of 2021 revenue on trailers up very well.

Slide 9 shows you our near-term and total addressable market size for specialty products is now $5.75 billion, an increase in the last weeks of $1.25 billion. The increase was driven by 3 things: first, the inclusion of liquid hydrogen onboard vehicle tanks resulting from the status of our testing and prototype tank, commercial interest and our joint agreement with Ballard Power. Currently, we are discussing the use of [HLH] tanks with 14 different potential customers.

Second, the addition of Cryo Technologies' expanded hydrogen liquefaction capabilities and commercial pipeline opens up the very broad liquefaction process market for which our combined content on these types of projects ranges from $15 million to $100 million each. Our combined content would be inclusive of the liquefier, storage and trailer loading, and these estimates are for 5 to 60 ton per day plant. And third, Cryo Technologies' access to and experience in the helium market not only provides us content on large helium liquefaction projects but also storage, ISO containers and transport core Chart equipment.

So we thought we'd share some data by each of the new segments with you, starting on Slide 10 with specialty products. 2019 included a large fourth quarter order for LNG by rail of $22 million. Making order comparables more challenging, but what I would point out to you is that we saw a 55% increase in fourth quarter 2020 sales when compared to the fourth quarter 2019 sales. So we're starting to see that strong order activity hitting the shipments.

And while less impactful in 2020, cannabis and space exploration are smaller specialty areas, both with a unique position utilizing our existing equipment. We work with major space launch companies, including receiving a $1.4 million order from one on the last day of the year, and we're pleased with our ongoing hydrogen tank deliveries for the Indian space research organization.

In terms of cannabis, we saw an increase in both alcohol and cannabis equipment demand [due to] lockdowns. And with federal cannabis legalization gaining steam, this is another area where our specialty market could go from very nichey and embryonic to larger production scale.

Okay. You've waited 11 slides for it, hydrogen, the topic that continues to be the hottest one in the clean energy portion of our specialty markets. Recently, there was an article titled "The Hydrogen Economy Is No Longer A Pipe Dream", which I thought was apropos. The Atlantic Council hosted the fifth World Energy Forum in late January and in conjunction with that, shared a survey of global energy leaders.

When asked which carbon-free energy technologies will see the greatest increase in investment in 2021, 31% said hydrogen, followed by battery storage at 23%. These stats prompted the think tank conducting the study that suggests that 2021 might be the year of hydrogen, couple that with 30 countries launching national hydrogen strategies and over $70 billion from 51 countries tagged for hydrogen work. For us, 2020 was the start of the decade of hydrogen, as evidenced by our backlog of $39 million, which is all expected to ship this year.

Looking ahead to 2021, we're excited about many things hydrogen, including our start to the year in hydrogen orders, which is in line with our expectations. That includes a variety of equipment sold, such as tanks, upgrades to gaseous hydrogen trailers already on order as well as Lifecycle installation services.

The Secretary General of the China Standard Committee has released the [drafting group public] for comment, a major milestone toward our expected April final approved liquid hydrogen bulk tank group code. This is a significant differentiator for our equipment to be built for and used in the hydrogen economy in China.

We, along with 10 other companies, launched Hydrogen Forward a few weeks ago. As you know, Chart and our hydrogen forward partner companies, including Air Liquide, Anglo American, Bloom Energy, CF Industries, Cummins, Hyundai, Linde, McDermott, Shell and Toyota, are united under a shared belief in the environmental and economic benefits of hydrogen technologies.

With all this excitement, we sometimes forget one of our greatest progresses over the last quarter, our organic product development activities for hydrogen equipment. Our liquid hydrogen onboard vehicle tank prototype, as shown on the right-hand side of Slide 11, has been built and tested, and we're excited about having it as an option for our heavy-duty transportation customers, both existing ones and new potentials.

On the left-hand side of the slide, you can see a rendering of our hydrogen test facility in Minnesota. We chose to include only a rendering because actual photos have too much confidential information surrounding the components that we design and build. We're collaborating with industry partners as we advance safety and innovation at this facility. Figuring prominently in that effort is demonstrating our one-of-a-kind liquid hydrogen pumping system. Ducote gave it to me for Christmas. It definitely still have a few holidays to get through before being fully production ready, but it will be this year.

And while I could go on and on [setting] things happening in hydrogen, there are too many other areas of the business for which we are developing solutions for our customers and helping new customers achieve their ESG targets. On the left-hand side of Slide 12, you can see 2 examples of our recent folks and we had a whopping 31 folks in the quarter. We're very excited to partner with Pepsi to upgrade their CO2 capacity at one of their U.S. facilities that's through our Lifecycle team.

Additionally, you may remember that our dosing technology is used regularly in nitro beverages, such as Starbucks nitro coffee in a can, and we're now seeing applications for dosing for oxygen water. We're collaborating with a company called O2 on their unique oxygen water, a functional hydration and recovery drink that makes clean [life-giving] products. Thanks to their CEO, Dave Colina, for sending our team some of these tasty low-calorie, high-energy drinks. You can see me trying it in the picture on the bottom left. We had to take it away from Merk. If you think (inaudible) gets him energetic, you should have seen him with this thing.

A variety of applications with our -- a subset of our 65 new customers in the fourth quarter are shown on the right-hand side of the slide. Pretty fun to see our equipment being used in Nitro Beer, canned wine, bottled egg alternatives, whatever that is, squeezable dips and for eyeball research.

So moving on to Slide 13. For the full year, repair, service and leasing was 13.5% of our total revenue. We expect this percent to significantly grow in 2021 driven by our expanded leasing capabilities, our 14 recently executed repair and service agreements and business rebounding, which has a nice aftermarket component to it. Our South Carolina greenfield location is set to begin repairs in the second quarter of 2021. Next Thursday, we'll hold the building dedication ceremony as the final beam is placed on the building, and we look forward to welcoming our customers at the site in May.

I would point out the fourth quarter record RSL gross margin. This was driven by more installation and repair work from the Lifecycle team, which is typically high-margin work, as well as a fantastic December in Orca upgrades from our repair and service team in Minnesota.

Our investment in expanding our leasing fleet for standard product, in particular, ISO containers and mobile equipment, has gained traction since we started investing in the leasing fleet expansion in May of last year. Leasing's Lisa Dole, who runs our global leasing team, and her leadership team also known internally as the ladies of leasing had the new equipment being built leased before each piece was even completed.

A few points of reference for you. From the first to the third quarter of 2020, we had 25 new leases signed. In the fourth quarter, there were 28 new leases signed compared to 6 in the fourth quarter of 2019, which brings a total of 53 leases signed for the year. This compares to 18 new leases signed in 2019. And in January of 2021, we quoted 78 new leases with 28 different customers. So the group is off to a great start. 37 new leases have already been signed only 6 weeks into 2021.

Moving to Slide 14 in our cryo tank [solutions] segment. We saw growth in orders and expanded gross margin as our Chinese business executed the best it has in our history, posting record operating income. Additionally, while we saw recovery in the traditional industrial gas aspects of the business in the fourth quarter, purchasing from the majors was not yet back to pre-COVID levels.

Specifically, gas major purchasing in the Eastern Hemisphere contributed to the highest order quarter in history for our D&S products in the East. However, Q4 did not fully compensate for the low order intake in previous 3 quarters, so the full year of 2020 was still below 2019 in that region by 6.2%.

Additionally, trailer orders were part of our COVID slowdown in the second quarter of 2020. And we saw a significant increase in the fourth quarter in all trailer activity, and 2021 is off to a strong start in this area with 114 trailers ordered year-to-date as of yesterday compared to an average of 84 trailers per quarter last year. Said differently, our highest order quarter for trailers in 2020 was Q3 with 115 trailers ordered, and we're already at 114 year-to-date.

Slide 15 is our last segment to cover and certainly contain the most ups and downs in 2020, ranging from $98 million of revenue from VG's Calcasieu Pass project to a sudden and deep drop-off of air-cooled heat exchanger orders after the start of COVID and the OpEx situation to ending the year with a significant air cooler order of $70 million for (inaudible) application as well as a $30 million VRV shell and tube heat exchanger order for processing facilities in the Eastern Hemisphere.

We are pleased to see the increasing activity in the carbon capture market. And with the addition of SES' carbon capture technology and our investment in Svante, our commercial pipeline continues to grow. As one of our team members said, our commercial pipeline is actually off the charts right now for carbon capture opportunities.

We now have well over 50 potential customers that we're working with on various project quoting stages. A significant percentage of the total carbon capture plant cost, regardless of whether the process is post-combustion carbon capture or direct air carbon capture is equipment that we offer, with air-cooled heat exchangers representing approximately 50% of total equipment cost or 20% to 25% of total project cost in amine processes and approximately 50% of total project cost in direct air carbon capture.

With the recent rise in LNG prices as seen on the left-hand side of Slide 16, in particular in JKM, and the winter weather in Asia and just this week in Texas, there is a growing need for LNG supply after a hiatus of new export terminal construction. We expect this pricing trend to continue and in turn, more big and small-scale LNG projects to move to FID in 2021. You can see on the upper right-hand chart 3 big LNG projects that have the potential to be ready to roll this year.

Venture Global's Calcasieu Pass project is tracking on schedule, and our equipment revenue on this project is expected to conclude in the first [half] of 2021. VG's CEO recently indicated that the first phase of Plaquemines or 10 million tons per annum is expected to have necessary sales completed by midyear and also expected to FID this year. As a reminder, our equipment for the first phase totaled approximately $125 million, and this project is not included in our 2021 guidance.

Our small and utility scale LNG pipeline is very robust with 24 potential projects in our bidding pipeline that could go in 2021, totaling approximately $150 million, with a few shown on the bottom right-hand side of Slide 16. And don't forget all of the infrastructure being built globally, ranging from fueling stations to over-the-road trucking to storage to ISOs. Just one example of LNG's continued cost competitive and scalability was December's announcement that the Central Indian government plans to create a gas infrastructure in India with an investment of $60 billion over the next 4 years, inclusive of LNG terminals.

And finally, worth noting is that LNG is also getting greener. In addition to our hydrogen development initiatives, Chart continues to develop energy transition solutions that lower emissions from LNG facilities. Many of our LNG and traditional IOC customers are thinking of how to make their facilities other molecule ready. This ranges from gas stations being able to handle other molecules completely or hybrids of mixed molecules to setting up terminals that are 100% LNG now that can be switched all at once or gradually to include (inaudible). Our equipment and processes are well suited to be able to adapt to these changing requirements.

This past year, Chart completed a design study with Total in conjunction with Siemens to evaluate technologies to reduce CO2 per ton of LNG. The study compared Chart's IPSMR and IPSMR+ designs with direct gas turbine drives and electric drives with combined cycle power plant. The IPSMR+ configuration with electric drives and combined cycle power plant significantly improved overall plant efficiency and reduced CO2 emissions, another efficient and cleaner option now for our customers to choose from.

I'll now hand it over to Merk to talk or maybe he can sing about our financials. Merk?

Thanks, Jill. I'm going to pass on the singing. The increasing mix of higher-margin aspects of the business and maintained discipline in our streamlined cost structure, which is reflected in the $60 million of annualized cost that was reduced from the business in the first half of 2020 contributed to full year reported EPS of $2.22, as shown on Slide 17.

When adjusted for onetime costs, full year 2020 adjusted EPS of $2.73 was a record. Full year EPS benefited significantly from the fourth quarter adjusted diluted EPS of $1.27, resulting from broad-based execution across the business, including record operating income. Note that we closed on our McPhy investment of EUR 30 million for 4.59% ownership and an accompanying commercial MOU on October 15, 2020. And in the fourth quarter, that investment contributed $0.36 of after-tax earnings per share. When excluding this investment gain, our adjusted fourth quarter EPS was $0.91.

The current restructuring in our 2021 outlook is for the consolidation of our Tulsa, Oklahoma air-cooled heat exchangers into our 260-acre Beasley, Texas location, which is partially complete and expected to conclude by midyear. Additionally, we are keeping our 500,000 square foot Tulsa manufacturing facility to create additional capacity for certain product lines in high demand.

Moving to Slide 18. We thought you would like a straightforward summary of our quarter and full year financials compared to that same period in 2019. I won't belabor the slide, but we are very proud of the year-over-year increases particularly in margin and cash, especially in light of the 4% decline in sales compared to the prior year. We also are encouraged by a record low SG&A as a percent of sales of 15.1% for 2020.

Slide 19 shows our continued disciplined approach to our balance sheet. We continue to prioritize the use of our strong free cash flow generation for debt paydown, organic investment and strategic inorganic investments. Our view of maintaining our net leverage ratio at 2 or below is unchanged.

The sale of the cryo business closed in the fourth quarter of 2020 for $320 million of cash. After posting our second highest net cash provided by operating activities from continuing operations and free cash flow in our history during the fourth quarter of 2020, our net leverage ratio as of December 31 was 1.59 or 1.71 when excluding the mark-to-market benefit of the fee.

Pro forma December 31 net leverage ratio for our Svante carbon capture investment and our acquisition of Cryo Technologies was 1.88 or 2.02 when excluding the mark-to-market benefit of McPhy. The growth in free cash flow as a percent of sales is indicative of the cost structure changes in the business, working capital management and our improving margin profile.

Back to you, Jill.

A version of Slide 20 was apparently a prior fan favorite, so we brought it back, even though this is a "damned if you do, damned if you don't" slide. This particular walk provides 2020 by major category to the low end of our 2020 sales range. Yes, we could do one to the high end to the midpoint too, just shows us as the low end is extremely realistic based on our backlog and typical order levels. I debated giving you an approximate number versus a range but felt that the range captured more of the opportunity available to us to get to the high end.

The top end of our new range is $1.38 billion. So what would shape your thinking on where in the range you want to be? First, acceleration throughout the second half of the year in 2020 in order activity. We built some conservatism into our low-end with the thought process that those levels might temper. We have not seen that tempering yet.

Second, specialty products, in particular hydrogen, are still on the newer end of customer behavior so we did not build a significant amount of first half orders into the outlook. Obviously, this could be significantly higher than the organic growth shown on this slide with just a few drop in orders in Q1 or Q2.

Third, if HLNG order levels continue as they did in the second half of 2020, that figure is considerably conservative. And one last data point, although I can provide a bunch more around other specialty markets, et cetera, is that if liquefaction projects, again, regardless of molecule, come into the order book early enough in the year, we would recognize meaningful revenue later in the year.

Do remember that full year 2021 sales includes $21 million from Calcasieu Pass revenue in the first quarter of 2021 as well as $30 million of 2021 revenue from the acquisition of Cryo Technologies. There is no additional big LNG revenue included in our outlook, although we do believe new orders will be received during the year, which would be additive to our guide.

It is important to note that our pre-COVID-19 typical year would have low first and fourth quarters with the second and third typically the highest quarters in the year. This year, we expect the first half to be lower than the second half based on the lead time of our backlog. We also expect the first quarter of 2021 to be sequentially down when compared to the [fourth quarter of 2020] but up when compared to first quarter of 2020.

So that brings us to the rest of our guide on Slide 21. We anticipate full year non diluted adjusted earnings per share to be approximately $3.50 to $4 on 35.5 million weighted average shares outstanding, up from our previous estimate of $3.10 to $3.45. Our assumed effective tax rate is 18% for the full year 2021.

We expect capital expenditure spend to be in the $40 million to $50 million range, driven by organic investments in our high-growth areas, inclusive of expanding product capabilities in our Teddy Trailer and Tank facility, completion of our repair and service facility in South Carolina, R&D, new product development for hydrogen and continued targeted lease fleet expansion. Even with these additional CapEx investments, we have increased our free cash flow guidance to $190 million to $220 million, reflecting a 14% to 16% of sales range.

Finally, on Slide 22, the appropriate place to conclude today's prepared remarks is our unique position to not only focus on our own ESG scorecard but also help our customers achieve theirs. You can see the continued growth in our customers' movements toward accomplishing their ESG targets through the utilization of Chart equipment, including an over 100% increase in water treated in the U.S. when compared to the prior year and a greater than 100% increase in reduction of diesel used in heavy-duty over-the-road trucks as a result of our equipment and processes. And as we released in December this year 2021, our incentive targets for everyone on the executive team include a portion related to our Chart carbon emissions reduction target for the year, [making it personal and measure it, 2 keys] to success in achieving it.

Finally, before we open it up for Q&A, we have an open issue that's not included in our results, which was brought up last night by our external audit firm regarding the Air-X-Changers trade name as of October 1, 2020, which is our test date for impairment. Ironically, chosen by the auditors to avoid last minute's subjective issues, the AXC trade name has full book value of $55 million, although the discussion is around $12 million of that.

To give you a little more color on this, everyone involved, including Deloitte, agrees that the carbon capture market is taking off and going to be very active over the next decade. We hired another big 4 firm to prepare the impairment analysis of the trade name, which includes challenging of the inputs and review of results, and they included the carbon capture potential, and their conclusion was no impairment.

So the outstanding debate at this point is what exactly could have been known by project for the next 10 years exactly on the October 1 date and where it is in the spreadsheet, whether it was known or not at that date. So you get the idea that this is a technical accounting item, and the outcome will be included in our 10-K filing, which we expect to file within the next few days.

If the resolution of this is different than our team's position, earnings per share would be correspondingly reduced. However, adjusted earnings per diluted share would be unchanged from what has been reported as it would be a onetime noncash, nonoperational item. Regardless of the outcome, you've heard what we think of the potential growth of the carbon capture market where our air coolers are very well positioned.

With that, I'll now turn it over to Towanda to open it up for questions.

(Operator Instructions) Our first question comes from the line of James West with Evercore ISI.

So you've had a flurry of investments, of transactions, M&A in the last couple of months. It seems to me that most of these are companies you know well. They weren't sourced by bankers. I mean you did them yourself and so integration shouldn't be a concern. But I'd love to hear just your thoughts on the integration of these businesses. And if we -- if I'm correct in that this is going to be fairly seamless, even though it is kind of M&A.

Yes. And thanks, James, for pointing out the fact that we've done these without using bankers because I think that's an underappreciated element of these transactions and the relationships that we have in the market. So we are very familiar with all of the companies that we've either invested in or acquired.

And the integration assumption that you're making is (inaudible) just given 20-plus years of working together, whether it's with BlueInGreen or whether with Cryo Technologies, it's -- we've acted as if we're one when we go to customers and when we have a supplier customer relationship. So there's not very much heavy lifting around the integrations, and we will continue to ensure that the engineering teams work together, which they already have even pre-deal.

Okay, okay. Great. And then maybe unrelated follow-up for me. If we look at kind of specialty markets of carbon capture, hydrogen and water treatment, the key 3 that are on the green or sustainability spectrum here, what do you see as the cadence of which ones are going to hit your P&L first, which ones are coming later? Is it all coming at the same time? Kind of how do you think about managing that growth?

Well, certainly, hydrogen is -- continues to be active. So as I commented, we kind of had built a little bit of conservatism into our thinking purely because it only became so active really starting in May of last year, and we wanted to make sure we didn't kind of get out over our skis.

Somebody, I think, asked the question of, I thought you guys were going to be at $55 million of revenue in your range into low. We're at $43 million pre Cryo Technologies at the low end of the range. So obviously, $55 million is very realistic. So I think we'll continue to see hydrogen step-up. I think it will become much more active on the liquefaction side, so the liquid hydrogen side, especially on these heavy-duty transport activities that are really ramping up between now and 2024.

The carbon capture is -- I almost view carbon capture as 12 months where it is and its evolution -- it feels like it's about 12 months behind where hydrogen is. And so we're starting to see quite a bit of that activity like that 50 potential customers on carbon capture. But just like early last year where hydrogen customers were sorting through, do I want to do a green hydrogen project? Or do I want to be maybe a little more realistic and get it done faster and do SMR blue hydrogen.

It's that type of discussion on the carbon capture side. So I anticipate that's going to get rolling very quickly. And incentives around that also have been evolving. And a lot of our customers' conversations is, "All right, heck, let's do a hydrogen-ready LNG terminal. And while we're at it, let's have carbon capture associated with it." So there's this interlinkage concept is starting to happen.

And water is just more consistent. I think my opening remark about that Brazilian water treatment project is meaningful because these governments that are in places where water hasn't been treated previously are starting to think of this as an important step in campaigning and platforms, et cetera. So we're really pleased to be first in the door on that Brazil project because it has the potential to have a series behind it.

Our next question comes from the line of J.B. Lowe with Citi.

Well, thank you for that Slide 20. I was a big fan of previous versions of that.

Thank you for liking it.

I wanted to touch on just the air-cooled exchanger and fans business. I know that 2020 was kind of a tough year for that business, but only a 3% rebound in 2021. Kind of wondering if you could walk us through the moving parts of that.

Sure. And so the way that we thought of it is we're going to wait and see. We're starting to see considerable recovery. And again, this is to the low end as a reminder here. And then on the very bottom section, a portion of that business is in the aftermarket. So it's in the RSL bucket, which you can see growing at 10%. And then [tack on] that specific project column 2 with the $20 million, and that's the portion of that $70 million order that we expect to be in the fourth quarter from a revenue perspective.

So overall, we are starting to see that business rebound in like -- I answered James' question around -- the carbon capture opportunities are starting to become more real. We don't have any carbon capture built into this particular outlook at the low end. But that certainly has the potential to have one of these projects. Our content -- if it's equipment alone, it is somewhere between kind of $6 million and $10 million. If it's equipment and process, between $15 million and $20 million on the demonstration projects.

So I do believe that we'll surpass the figures on this page on air coolers. But again, we're trying to give you a sense of how we're waiting to see some of that mid, higher end of our range roll out. And to be frank, if order levels continue the way the second half was in 2020, that's not a hard target to hit at the higher end.

Got you. Okay. Makes sense. My other one was just on the LNG market. We talked about 1 or 2 projects going ahead on the small scale and the large scale, Plaquemines being one. Have conversations shifted on projects kind of beyond those first couple that you guys have better line of sight to, just given everything that's happening in the market? And what kind of timing are you guys thinking about for incremental projects that could potentially come after those?

Yes. So I'm going to split my answer between big LNG and small-scale LNG. Small-scale LNG actually has accelerated in terms of the conversations and speed with which the operators want to go from where -- from start to finish. So what used to be okay to say, I'm going to work with small-scale terminal between 18 and 24 months from order to first gas is now, can you get it done in sub-18 months.

So that's -- we view that as a positive for our business because it's a quicker book and ship once the decision is made and once it's there. It's [also] a shifting dynamic on the small-scale side where there is the thought process around how do I get my terminal to be ready for other molecules. How do I get the opportunity for this to be standard, so it's able to be replicated. And those are the conversations that have evolved early since COVID happened.

On the big LNG side, we haven't really seen a shift outside of -- or basically hit the skids in the middle of last year, and we didn't see a ton of conversation around these projects until really December type of time frame. And then the beginning of this year, the conversations have heated up very dramatically, in particular, on the engineering and making sure that we're ready to go when the signal is given.

And then from there, the next set of projects, it's kind of the same set of operators at this point. So you're dealing now with what used to be dozens and dozens of companies or operators that had the idea that I'm going to do a big LNG project.

And now it's [home on] the set of tried and true operators out in the world. And those are the guys that are looking at doing these as a series and learning from what they had before. I think that they're also probably getting more activity around efficiencies, and that's where the process is coming to play, et cetera.

Our next question comes from the line of Craig Shere with Tuohy Brothers.

Congrats on the great quarter. Can you provide a little more color around the sequentially declining specialties margins as a percent of sales but sequentially rising margins at repair, service and leasing?

And are you referring to Q3 to Q4?

Correct.

Okay. Yes. So in terms of the repair, service and leasing side, we had quite a bit of installation work and repair work on heat exchangers. And those are projects that are quicker-turn projects and they require quite a bit of skill set.

Additionally, on there, we had a really strong December on Orca repairs. And so those are, again, quick-turn type of repair activities. And we'll continue to see kind of that higher-margin mix based on what we have in the backlog right now on the RSL business.

On the specialty side of things, that really is just -- it depends on the types of products in specialty. So it really is a mix item of what's being shipped at that point in time. So it's product specific, is it a beverage take? I'm not going to go into detail on which are higher and lower margins within our product categories, but there is movement around that quarter-to-quarter.

So it sounds like the RS&L higher margins are at least for now sustainable, but the sequentially lower specialty margin maybe bouncing around and could go higher?

That's a fair statement.

How meaningful could a full industrial customer order recovery post-COVID be? And how much is really baked into 2021 guidance?

So we gave an anecdote in -- I think it was in my CTS comments around the fact that we saw rebounding activity from the industrial gas side in the fourth quarter and it had been very, very soft from kind of Q1 to Q3. But even that strength, it didn't make up for the softness in the rest of the year. So -- and that was on the Eastern Hemisphere side of things.

I think we've built in a fair recovery here but not an overly aggressive recovery on the industrial gas side of things. So definitely could be stronger bounce back. And I think the way I would characterize the first 6 weeks of the year has been very active on the industrial gas side of the business.

But 6 weeks does not yet make a trend. And so we're just going to wait and see a little bit about that. And some of it also depends on, as these companies open up their field service guys, coming back to being able to travel and so on turn this a little bit higher, too.

And lastly, on the repair, service and leasing, the traction is really impressive. I think if I understood you correctly, there were 78 new leases recently signed. Can you share what the average duration is of those leases and what you think this segment's revenues could perhaps rise to over the next couple of years?

We quoted on 78 new ones in January. Year-to-date, I think we have 37 signed. And that's definitely gained a lot of traction certainly in aspects of the business that's given our commercial team a lot of flexibility in our PRS and the leasing team has just done a great job.

In terms of what could it be, we've built in the 15% growth in -- excluding the air coolers and the fans aftermarket kind of netting it at 13%. Internally, we've kind of talked around 17% on that business in this year. And as the leases gain more traction, that's going to go up from there, certainly in 2022 and 2023. So from a percent growth perspective, also the jumping-off year.

And then the lease durations range anywhere from 5 to 10 years. So these are long-term leases with full commitments. They have down payments and then they have interest associated with them that is a good level of interest rate compared to if someone were just going out to the banks and borrowing money.

Our next question comes from the line of John Walsh with Crédit Suisse.

Appreciate all that CapEx detail on Slide 21. And obviously, you have a lot of growth CapEx there and some of these end markets are still accelerating. So just wanted to know if it was a fair assumption to think that the CapEx line could run a little hotter here, but you're still able to do that mid-teens kind of free cash flow margin on a go-forward basis? Or however you guys are thinking about it?

That's exactly right, John. So we still think that even with this higher CapEx compared to our normal kind of maintenance at $30 million or sub-$30 million, that we'll still be able to achieve [that] free cash flow as a percent of sales. And that's really driven by the earnings profile, our working capital management, some of our supply chain opportunities that we continue to go after around terms and inventory, et cetera. So we're confident in that free cash flow figure.

Great. And then obviously, you highlighted it earlier. I think a couple of people have already touched on it, but the execution here around the long-term agreements, pretty big step-up. Obviously, I know you've been incentivizing the organization. But maybe if you could just remind us how you've been incentivizing the organization and if you think we should still think that there's kind of a step function change in front of us or the pace of long-term agreement should start to normalize at some point.

So we still think that there's incrementally more long-term agreements and agreements with our customers to go after. So our goal with the organization is to continue to increase that breadth and depth of those agreements, breadth being the number of them across multiple customers as well as multiple end markets and the depth being the types of products and the repair and service side being included in those.

The organization, we have multiple different types of incentive programs. But our commercial team, the biggest change that we made there was creating a global team with our Chief Commercial Officer leading that charge. And so they're structured and incented to continue to go after making our customers sticky with us and offering the flexibility that customers look for in terms of being able to say yes to them.

And so I'll spare you the details of the types of incentives associated with that but certainly think that the trend can continue. It should normalize at some point, right? But I don't -- it's not going to normalize in 2021. So there'll be a tipping point where we've hit kind of that customer set.

And the reason I say it's not 2021 is because we're still gaining new markets in new geographies. And in those new markets and geographies that previously we just didn't have touch points in, whether it was for lack of manufacturing in that region or lack of commercial coverage, those are where we're seeing a lot of activities and kind of first chances to say, let me show you what we can do, and you can get sticky with us.

Our next question comes from the line of Marc Bianchi with Cowen.

I was curious if you could share with us what gross margin G&A and D&A is embedded in the guidance here?

Certainly. So from a -- we'll start with a side of things. I think we've got about $70 million embedded, which is split somewhere between $36 million to $38 million on depreciation and the rest of it being amortization. And then in terms of the gross margin, while we don't guide to gross margin, it's around the 30% mark as a whole for the company.

Okay. And general and administrative?

The G&A, so you'd have to just back into that based on the numbers I gave you. I don't have it handy here.

Okay. And I guess just thinking about the progression, so you said -- I think I heard that first quarter would be down sequentially, but up year-over-year. And then as we play out the rest of the year, as you get into second quarter, you've got Calcasieu rolling off, but perhaps some other tailwinds. I'm just kind of curious, is it potentially second quarter lower than first quarter? That's kind of the first part of the question. Then I have a follow-up.

Sure. So we see actually incremental step-up from Q1 to Q2, Q2 to Q3, Q3 to Q4.

Okay. Okay. Great. And then as you think about the composition of the backlog that's driving the back half of the year here, I mean, is there -- as we get into '22, would the back half of this year's run rate be a reasonable starting point going forward? Or what are kind of the puts and takes as you kind of think about that run rate?

That's a very reasonable starting point as you head into 2022. And I use the term reasonable because, again, while we'll get challenged on maybe being too conservative at the low end of the guide, as we see what happens in the first half with some of these newer specialty markets and the growth associated with them, the jumping-off point being the second half of this year will be very valuable to think about 2022.

Our next question comes from the line of Pavel Molchanov with Raymond James.

Let's take a tour back in time to the middle of 2019, ancient history, when you were talking about an upside case for earnings with large LNG projects. And I think at the peak, you said $3 annually is what it could add best gate scenario if everything materializes. Is that number still valid given everything that's changed in the last 2 years?

That number is still valid, yes. And we think about it as, all right, in broad brushes, $150 million of revenue on a big LNG project [should be] somewhere between kind of $0.80 to $1-ish on the earnings side. Obviously, that depends on what project, depends on the content and all that, but that's a fairly decent proxy to use.

That's helpful. Kind of a conceptual question about the service segment. If you had an opportunity as a company to own and operate a carbon capture project and for example, collect the Section 45Q tax credit in-house, would that be something that you have openness to doing?

We haven't had that opportunity to date primarily because we've consistently positioned ourselves as the process and the equipment supplier. But through our investment in Svante, that certainly is an avenue to be able to participate in that. And it's not something that we would be adverse to given that the market is definitely embryonic, and there's lots of creative ideas happening out there.

So I'd say the best way to characterize my response is while we don't have that happening right now, there's a lot of creativity happening in carbon capture, and we certainly don't say no to thinking about those types of options.

Our next question comes from the line of Connor Lynagh with Morgan Stanley.

Yes. We've done a fair bit on specialty markets, so I just wanted to sort of step back to some of your core industrial customers. And I guess, I would say, overall, 2020 held up a lot better than we would have expected coming into -- in the lockdown.

I guess, what I'm wondering is, if you can characterize, are there pockets of your business that have outperformed and some pockets of your business that have underperformed? Basically, what I'm wondering is if you can sort of help set the stage for -- if we start reopening the economy later this year, what does that look like in some of your sort of base industrial business?

Yes. Great point and question. Certainly, overall, the business held out better than anyone would have thought of back in March or April of last year. I would say that just the general industrial gas side of the business has the potential as the world reopens to do more than what we have included here. And that's just around the travel restrictions, the ability for some of the larger companies to get their people out into the field, that type of restriction implication.

We also are seeing and I think we'll continue to see more on the food and beverage and the dosing side of the business as the world reopens. So that naturally can under (inaudible) that linkages to restaurants reopening, people having confidence to go to stadiums. There's multiple D&S tank style projects that go into stadiums, movie theaters, that could come back and certainly even built into our thinking on the low end of our range. So those are a couple of different examples.

I'm pleasantly surprised at the start of the year on the trailer side of the business that I commented on my remarks were that certainly got hit. And that's really around the trailers that people are using require people to be out and about. And so the start to this year indicates people are thinking that the world is going to reopen in some way, shape or form just based on the lead times of those trailers.

Okay. Got it. I mean, if I were to look at your favorite Slide 20 there, I guess, basically, what type of world are you envisioning for some of the lower growth segments? I'm thinking of like storage equipment or basically just cryo tank solutions in general.

What are you sort of contemplating in terms of first half looking like versus second half looking like? And what sort of order activity do we need to see in the first half to sort of validate or cause you to revise that view?

Sure. And so you're right. I mean that's certainly the most conservative outside of our air cooler. So I would say, which one are you being most conservative on, Jill? It's air coolers. Second, (inaudible) it would be the CTS side just because of what we just talked about on the industrial gas ramifications. And we have it fairly evenly spread across the year in terms of the growth profile here just based on the way that these orders book and ship.

So by that statement, it implies I don't have much upside built in here. And we're in a wait-and-see mode to see what happens really in the first quarter in that particular business. If the first quarter does better than our thinking, that would be the point where we would revise this because we'd have a much better sense given the shorter lead times in the CTS business.

Our next question comes from the line of Rob Brown with Lake Street Capital Markets.

You talked a little bit about the leasing business, but what's really driving the growth there? Is that just your focus on it? You're taking some share or as the market shifted to more of a leasing model?

It's more of our focus on it, in fact, that we've incorporated it into our model and the optionality that we have. So it's around -- the opportunities were out there previously, and we just didn't have the offering to go after those opportunities and now we do.

Okay, great. And then just taking a step back. With a lot of changes in the business, what's sort of your current view on where you think operating margins can get to over time here with the new mix? And kind of the new models that you've put in place in terms of the -- some of the areas?

Sure. So our 2020 adjusted operating income as a percent of sales was about 11%. And we expect that, that goes up incrementally being 150 to 200 bps per year across the next 3 years. So high teens is what we've got built into our internal 3-year outlook.

Our next question comes from the line of Ben Nolan with Stifel.

I want to start a little bit on the fueling stations, if I could. As we've talked about, it sounds like more and more interest is evolving around sort of multi fuel stations where they can do LNG or hydrogen or C&G or whatever.

And I'm curious what that means from a Chart content perspective. Does that maybe mean fewer stations but more Chart content? Or just in general, you're seeing your content go up? Or how should we maybe think about that?

I think you'll see more stations, whether those are new stations or retrofitting of existing stations and Chart content goes up. So it's a positive kind of for us in both directions. And the retrofit's an interesting one that I think it will take a little bit of time to evolve the retrofit concept. But you're just not going to go adding right next door to a diesel station, a hydrogen station. So how the folks that own these networks or their thinking about that is really, I should utilize my existing site and let's figure out how to design on that particular plot of space that I already own.

Okay. So -- and that, obviously, it lowers the barrier to entry and the absolute capital cost, I would think, on their side, so it should expedite the decision-making beyond just sort of the -- what otherwise be purely economics?

Yes, correct.

And then as my follow-up, sort of completely unrelated, maybe sort of related. But as it relates to the Ballard agreement that you guys announced the memorandum of understanding, I'm trying to wrap my head around that a little bit. Is it really just kind of memorializing something that was already happening anyway?

Or incrementally, what is different? What has changed? Does it at all preclude you guys from similar arrangements with other fuel cell providers? Or maybe any color that you can provide there would be helpful.

Sure. And so it does not preclude us from working with others and it doesn't preclude us from selling our equipment directly to any end user either with them in their equipment or just on our own. So yes, the market is evolving in terms of how they're thinking about what do I want to do for heavy-duty transport with respect to hydrogen? And what I mean by that is some -- there are some players out there that simply want a liquid hydrogen onboard tank, and they're going to figure out how to incorporate it with the rest of their heavy-duty truck solution.

There's others that want a fuller or more fulsome solution. And that's where the combination of Ballard with us offers that option. And so back to the idea of à la carte menu choices for customers who either are going to do a component solution and do it themselves or they're looking for a fuller solution. That's really what it's intended to do.

And there's -- yes, there's been some evolution, and we've held back on the expansion of the addressable market size until we saw this kind of hitting a more commercial near-term opportunity. And that's why the combination of where our tank is in terms of being ready to go, the additional solution for the utilization of the tank with Ballard solutions, and then just what we're (inaudible) customers is why we felt like now is the time where we can say there is a market out there, and it is going to happen here in the nearer term.

So that's really the upshot of that conversation, but you'll see lots of different partnerships in the hydrogen economy. And that's the goal being that we all together find ways to create more cost competitive solutions for that molecule.

Our next question comes from the line of Walter Liptak with Seaport.

Good quarter. Wanted to ask about the McPhy gain in the quarter? And just to understand a little bit of the accounting, how that happened? And is that like a recurring thing?

So the McPhy gain is the mark-to-market on our investment, so the movement in their share price from the start of our investment until the end of the quarter. That mark-to-market will happen every quarter.

So whatever direction it goes, we chose to share that just as an individual call outline because some folks have an estimate embedded in their outlook for the impact of McPhy through that and some folks don't. And so we just wanted to be clear on however each individual handles it themselves.

But certainly, we expect continued benefit from the relationship with McPhy, not (inaudible) mark-to-market perspective, but also from the commercial opportunities that the 2 of us are working on together, which you would see directly in our P&L from the latter.

Okay. Got it. So the 2021 EPS guidance excludes any future gains from McPhy?

That is correct.

Okay. Great. And then I just wanted to ask about the hydrogen business. And I thought I heard you say in a comment that you were at a run rate now of $55 million, but I wanted to understand the guidance with the acquisition in there. What is the revenue run rate that you're at right now? And then as that market continues to evolve in 2021, I think I was hearing that, that could be a conservative number. I wonder if you could just provide some more details.

Yes. We're definitely hearing that what we have built in on Slide 20 could be conservative. The way that we have the Slide 20 built is existing backlog as of the end of the year, which is $38 million, $39 million plus a drop in first half orders of about $5 million plus $30 million for Cryo Technologies to our P&L in the year. So that's how you get to the $73 million built into our outlook.

In terms of the run rate, we are yet to be able to give a run rate because there's been only a couple of quarters of this type of hydrogen order activity. And so it's too difficult for us to say, yes, this is going to continue on every quarter this way or this is how it's going to step up, but the activity in that market is significant.

I mean just the amount of customer discussion that we have every single day about hydrogen equipment is astounding. And so that's really where we said, "All right, exclude Cryo Technologies' $30 million and you're at $43 million of sales in our 2020 outlook at the low end." Could that be $55 million? Yes, right? So that was where the $55 million comment came into play.

Our next question comes from the line of Ian MacPherson with Simmons.

So you're below your leverage threshold and you should generate a couple of hundred million of free cash this year. What does your pipeline look like for additional bolt-ons? I would presume that we would see a deceleration from the past 6 months, but I don't -- I wouldn't want to put those words in your mouth. Is there -- are there still interesting targets out there? And if not, just maybe a couple of words on deployment of surplus capital looking forward.

Ian, so yes, there certainly are more interesting targets out there. There's not as many and as short a period of time is what's happened over the last 3 to 4 months, which, of course, as you're well aware, you can't always time investments or acquisitions perfectly. But they're still appealing additional equipment that we would like to tack on to the portfolio if and when it becomes available.

But from here, we feel like we're really well set up for carbon capture for hydrogen for all the liquefaction across the molecule set. So there's nothing that we need. This will be more around opportunistically finding the ability to fill in gaps and we also think about it on the organic side. So the deployment of capital that you saw has raised the CapEx outlook purposefully. And that's because we think, in some cases, it's easier and quicker and more beneficial to our financials to develop this stuff ourselves.

And that's why think of it as, all right, we're making an additional $10 million acquisition of our own stuff and developing it that way. So those are the 2 ways we're thinking of capital deployment, and I don't want to be remiss and exclude continued debt paydown because we do expect to generate mid-teens as a percent of sales free cash this year. And our expectation is we continue to drive down our debt profile.

Our next question comes from the line of Chase Mulvehill with Bank of America.

I think by now, my power and my water might be on, so as long as there's (inaudible). So but I guess, first, I want to talk about gross profit margins. I think in the quarter, a little bit light versus kind of expectations. I mean, obviously, repair, service and leasing were strong, but the other segments came in a little bit light.

So maybe could you first kind of talk about maybe if there are some issues or some puts and takes to kind of what happened on the margin side in the fourth quarter. And then, how should we -- you said 30% margins for -- are kind of assumed in your 2021 guidance. How should we think about those stepping up? Do they step up back to closer to 30% in the first quarter? Or does it gradually kind of step up throughout the year?

Sure. So I'm glad to hear you were able to dial in. I know it's a complete mess down there. So I hope you're -- hope everything is okay, and I appreciate the question.

So as I commented on one of the earlier questions around product mix in some of these segments and specialty being one of those where that was the biggest driver on that side of things, the other was really around how some of the timing (inaudible) heat transfer system works. So those were the 2 drivers of the sequential decline in gross margins from Q3 to Q4.

But overall, for the full year being at over 29%, we think that the 30% mark for 2021, given having a full year of all of that cost out that we talked about, the $60 million plus of annualized cost out that we did in the first half of '20, will -- the full year of it this year, should give that 30% a very, very, very realistic shot. And everybody always accuses me of conservatism, and we'll see that step back up. We expect that Q1, that 28.7% steps back up above 29% and probably closer to percent to 30% mark in the first quarter.

Got it. All right. That's very helpful. And the other follow-up I had was on carbon capture and just carbon capture opportunities on LNG projects. And obviously, you've detailed 3 LNG projects that could potentially happen this year in your slide deck. Could you talk about the opportunities around carbon capture on those projects? Or are those customers looking at carbon capture alternatives for these projects or the other projects outside of the ones that you've listed here?

So I would say all of the LNG players are contemplating how to [ensure] that I'm doing greener LNG or cleaner LNG. That doesn't necessarily mean they're all thinking about it the same way. So on the ones on the slide, there's multiple different types of conversations happening there. But I think what you're going to see, Chase, is that the small scale and the utility scale LNG takes more of the carbon capture faster. And so those are the conversations that are nearer term, whereas the mid scale and the baseload guys, they've got to get through construction and so on.

And it's not -- I don't want to say it's not difficult, but while it's always easier to design something in upfront, I think the urgency on the mid scale and baseload from an export standpoint is getting from where we are today to -- through construction into being able to produce an export gas. Whereas on the smaller scale side, given that these are more standardized projects, they're faster, they're 12- to 24-month projects, they're thinking of, let me figure out how to optimize my smaller footprint that I have.

In some cases, I'm close to an industrial end user. In other cases, I'm working with -- in some cases, it could be a country that is utilizing the small-scale terminal, the gas coming from it, and that country is thinking about carbon capture at the other end. So I think you'll see the first of these kinds happen on the smaller utility-scale projects.

Our next question comes from the line of Greg Lewis from BTIG. I have no response from him.

I'm showing no further questions in the queue. I will now turn the call back over to Jill for closing remarks.

Okay. Fantastic. Thank you, Towanda. And Greg, if you need to follow-up with us, just give us a shot off-line. And thanks, everybody, for listening today. We're excited about our increased outlook for 2021 and look forward to talking to you all very soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.