Chart Industries Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2024

Key Takeaways

  • Free cash flow was $174.6 million in Q3 after $26 million of CapEx, reducing net leverage to 3.04× and advancing toward the 2–2.5× target.
  • Q3 sales of $1.06 billion rose 22.4% year-over-year with adjusted operating margin of 22.2%, EBITDA margin of 24.5%, and adjusted EPS of $2.18.
  • Orders climbed 5.4% to $1.17 billion with a $23 billion commercial pipeline and $1.95 billion of customer commitments including LNG projects in Mozambique and green hydrogen in Egypt.
  • Specialty Products orders fell 49% year-over-year due to project timing, and startup inefficiencies at the new Alabama facility weighed on Q3 margins.
  • Chart reiterated 2024 sales guidance of $4.2–4.3 billion and forecast 2025 sales of $4.65–4.85 billion with adjusted EPS of $12–$13 and ending net debt of approximately $3 billion.
AI Generated. May Contain Errors.
Earnings Conference Call
Chart Industries Q3 2024
00:00 / 00:00

There are 14 speakers on the call.

Operator

Good morning, and welcome to the Chart Industries Inc. 2024 Third Quarter Results Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question and answer session. The company's release and supplemental presentation were issued earlier this morning.

Operator

If you have not received the release, you may access it by visiting Chart's website at www.chartindustries.com. A telephone replay of today's broadcast will be available approximately 2 hours following the conclusion of the call until Sunday, December 1, 2024. 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.

Operator

The company undertakes no obligation to update publicly or revise any forward looking statements. I would now like to turn the conference over to Julie Vanko, Chart Industries' CEO. Please go ahead.

Speaker 1

Thank you, Joelle. Good morning and thank you all for joining our Q3 2024 earnings call. Joining me today is our CFO, Joe Brinkman. We will begin on slide 4 of the supplemental deck that was released this morning. Results shown are from continuing operations.

Speaker 1

When referring to any comparative period, all metrics are pro form a for continuing operations of the combined business of Chart and Howden. Pro form a excludes the following businesses that were divested in 2023: Roots, American Fan, COFINCO and Creo Diffusion. In the Q3 of 2024, we generated $200,700,000 of net cash from operating activities and after $26,000,000 of CapEx spend had free cash flow of $174,600,000 This cash was used to reduce net debt and resulted in our September 30 net leverage ratio of 3.04, meaningful progress to our net leverage ratio target of 2 to 2.5 as well as our 2025 year end net debt goal of $3,000,000,000 In a few slides, we will discuss further balance sheet optimization plans. When compared to the Q3 2023 pro form a, orders increased 5.4%, sales of $1,060,000,000 increased 22.4%. Reported gross margin of 34.1 percent increased 3 50 basis points.

Speaker 1

Reported operating income of $178,500,000 was $235,900,000 when adjusted for items primarily related to the Howden integration and headcount restructuring. As a percent of sales, adjusted operating margin was 22.2%. Adjusted EBITDA of $260,700,000 was 24.5 percent of sales. Our adjusted EPS was $2.18 which would have been $2.48 absent the $0.15 negative EPS impact related to foreign exchange in the quarter and the delta of our Q3 tax rate of 26.5 percent to our originally assumed 20% rate, which was another negative $0.15 impact. The tax rate was impacted by our geographic profit mix.

Speaker 1

Year to date through September 30, sales increased 19.6% when compared to year to date September 30, 2023 pro form a, and operating margin increased year to date by 510 basis points. Year to date through September 30, all segments sales grew compared to year to date Q3 2023, all segments gross margin increased and all segments SG and A as a percent of sales declined, reflecting operational improvements as well as earlier than anticipated cost synergy achievement. In the Q3, we surpassed our original year 3, which was 2026 target of $250,000,000 of annualized cost synergies. Slide 5 is a summary of the Q3 compared to Q3 2023 and we will cover each of these in the coming few slides. So moving to slide 6.

Speaker 1

Our 3rd quarter orders of $1,170,000,000 grew 5.4% compared to Q3 2023. You can see some specific order examples booked in Q3 on the page, including a variety from traditional energy to hydrogen to marine to LNG. Siemens Energy ordered multiple air cooled heat exchangers for a variety of energy projects including Cass County Power Station in Turtle Creek. HD Hyundai Heavy Industries placed orders for exhaust gas recirculation or EGRs for marine chip engines. EGAD, part of SEAD Group, placed an order for a diaphragm compressor for their green hydrogen plant in Italy.

Speaker 1

We received an order from Thyssenkrupp for processed sands to be installed in a new cement line at the mountain cement plant in Wyoming in the USA. And

Operator

axial and jet sand contracts were awarded to us by Spark NEL for the Northeast Link tunnels in Australia.

Speaker 1

We currently have over $23,000,000,000 in our commercial pipeline of opportunities. Each quarter this year, we had approximately 39% of our installed base of covered sites placing aftermarket orders with us. That is good traction, yet we have room for more coverage, especially as much of the concentration is still primarily related to Howden legacy. 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. We also have customers that have committed work to us that are not yet in backlog, totaling $1,950,000,000 of commitments.

Speaker 1

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 4 concessions in Northern Mozambique's Rovuma Basin announced its decision to select our IPSMR liquefaction technology and equipment for the Rovuma LNG project. And since that announcement, viability Gap PLC, NGAS Tanzania Ltd and Tanzania Petroleum Development Corporation have chosen to partner with us to utilize our IPSMR process and associated equipment for their small scale LNG project. And for hydrogen, Renergy Group Partners LLC has chosen to partner on their green hydrogen plant in Egypt, which is anticipated to produce 450,000 tons of hydrogen per year. We also executed a collaboration agreement to work with Petrojet, Egypt's largest state owned construction company to advance hydrogen projects across Egypt.

Speaker 1

Nuclear is gaining traction. We serve the nuclear space with our fan offering for traditional nuclear facilities as well as supporting SMR technologies with our gas circulators, fans, turbines and air coolers. To start October, we received nuclear orders from both EDF and Axima. Moving to Slide 7. Our Q3 2024 has sales of $1,060,000,000 an increase of 22.4% compared to Q3, 2023 and an increase sequentially of 2% when compared to the Q2 of 2024.

Speaker 1

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, LNG project activity and specialty products projects moving to construction phases. 3 of our 4 segments had record sales in the Q3. We had a busy Q3 with many weather events, yet continue to focus on deliveries and other continuous improvement actions. While we did have early in the quarter impacts from Hurricane Beryl in our Texas shops, we were able to recover that within Q3. Our shops fared well through Hurricane Helene with only a few days disruption from power outages.

Speaker 1

Yet we still have more opportunity to improve throughput and have more continuous improvement efforts to take hold ahead. Some examples underway include Kaizen events globally using our Chart Business Excellence or CBE tools, optimizing assembly locations in our facilities such as moving kettle work to Allentown, Pennsylvania to increase other activities at our new Iberia, Louisiana shop. Similarly, we are putting skid work in locations with larger and more capacity. Another example is an addition of 2 testing stations in our air cooler manufacturing facility. And these are just a few examples as we believe we have more throughput improvement opportunities ahead of us.

Speaker 1

The middle of slide 7 shows adjusted operating income of $236,000,000 an increase of 53% when compared to Q3 2023. All four segments reported operating income and margin increased compared to Q3 2023. This resulted in adjusted EBITDA of $260,700,000 which does not include adjusting for negative foreign exchange headwinds of $9,300,000 in the quarter. On slide 8, you can see the increases in gross profit margin, reported and adjusted operating margins and EBITDA margins. All four segments had increases in gross operating and EBITDA margin when compared to the Q3 of 2023.

Speaker 1

Segment specific information is shown on slide 9. Starting with Cryo Tank Solutions or CTS. Q3 2024 CTS orders of $126,200,000 decreased 17.5% when compared to the Q3 of 2023, primarily driven by the Q3 of 2023 having had one order for over $19,000,000 for railcars, which did not repeat. In the Q3 of 20 24, we did see slowing demand in China, in particular in industrial gas, which is primarily reflected in CTS. Sequentially compared to Q2, 2024, CTS orders were down 20.6% as the 2nd quarter had a large LNG regas skid order for over $20,000,000 and also we saw the slowing demand in China in

Operator

the

Speaker 1

Q3. Q3 of 2024 CTS sales of $162,500,000 increased 4.6% when compared to the Q3 of 2023. Sequentially compared to Q2 2024, CTS sales were down approximately $3,000,000 Reported gross profit margin of 25 percent in CTS increased 2 80 basis points compared to the Q3 of 2023 and 4.80 basis points sequentially, driven primarily by project mix and operational improvements. CTS margins are typically in the low to mid-20s. Now moving to Heat Transfer Systems or HTS.

Speaker 1

Before I start on Q3 specifics, I want to take a moment to discuss the LNG market and growing adoption of our modular iPSMR technology. We already discussed Exxon's Mozambique's utilization of iPSMR and wanted to share that recently 2 additional projects have shared with us their decision to use IPSMR for their LNG liquefaction facilities. Interest in IPSMR continues to grow as it is an accepted and validated solution for many projects. So back to the Q3, HTS orders of $424,700,000 increased 151% when compared to Q3 2023 driven by multiple and various LNG and traditional energy equipment awards. These also contributed to a sequential increase of over 50% compared to the Q2 of 2024.

Speaker 1

Q3 2024 HTS sales of $256,200,000 were a record as we execute on LNG and other project backlog. Q3 2024 sales increased 12.5% compared to Q3 2023. Sequentially, compared to the Q2 of this year, HTS sales increased 8.2% as we continue to execute on delivering our backlog and work on further throughput improvements in our shops. HTS Q3 gross profit margin was 29.8%, an increase of 3.40 basis points compared to Q3 2023 driven primarily by project mix. Sequentially compared to the Q2 of this year, HTS gross margin improved based on higher volumes, project mix and operational improvements.

Speaker 1

We anticipate HTS gross margin to be in the mid to high 20s consistently going forward. Moving to specialty products. 3rd quarter 2024 specialty products orders were $237,800,000 and decreased approximately 49% when compared to the Q3 of 2023, as the Q3 of 2023 included larger hydrogen related orders. Larger project timing for orders can vary between quarters, in particular in specialty products and HTS. 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 FID.

Speaker 1

We anticipate that we will receive orders for approximately 2 more larger specialty projects in the Q4 of 2024, 1 in hydrogen and 1 in mining, which already has been verbally awarded and terms and conditions are underway. Sequentially compared to Q2, twenty twenty four, specialty orders declined 44%, driven by the 2nd quarter's record orders in carbon capture, metals, mining, water treatment and strong globally diverse hydrogen and helium awards. 3rd quarter 2024 specialty products sales of $283,000,000 were a record for the segment and increased 25.9% when compared to the Q3 of 2023, driven primarily by increasing throughput and progress on specialty projects within the quarter. Sequentially, compared to the Q2 of 2024, specialty sales increased 2%. Reported gross profit margin of approximately 26% increased 60 basis points compared to Q3 of last year, yet decreased sequentially when compared to the Q2 of 2024.

Speaker 1

The sequential decrease was due to Q3 2024 expenses incurred at our newly opened Teddi II facility in Theodore, Alabama and that was related to a supplier's machinery startup challenges at our site and therefore associated inefficiencies on specific space exploration related projects, which we do not anticipate repeating ahead. And finally, for the repair service and leasing segment or RSL, 3rd quarter 2024 RSL orders of $377,900,000 increased 16.5% when compared to the Q3 of 2023, driven in part by a larger aftermarket sale of equipment. Sequentially compared to Q2, orders grew 21% or about $65,000,000 driven primarily by our Q3 $10,500,000 order for Power Africa power station spares and the larger RSL equipment sale. 3rd quarter 2024 RSL sales of $360,500,000 increased 36% versus Q3 of 2023. Sequentially, Q3 sales were flat to Q2 2024, which had large field service work and also reflects typical summer timing being slower in field service outages.

Speaker 1

Reported RSL gross profit margin of 47% was driven by the larger than typical aftermarket equipment sales. Sequentially to the Q2 of 2024, RSL gross margin declined from 49%, which was unusually high and driven by the large field service work in Q2. Now Joe will discuss cash balance sheet and our 2024

Speaker 2

and 2025 outlooks. Q3 2024 reported net cash from operating activities of $200,700,000 plus capital expenditures of $26,100,000 resulted in $174,600,000 of free cash flow. Our September 30, 2024 net leverage ratio was 3.04 as shown on Slide 10. We reiterate our financial policy that until we are in our target net leverage ratio range of 2 to 2.5 times, we will not do any share repurchases or material cash acquisitions. The strength in Q3 cash reflects our ongoing cash culture efforts, Chart Business Excellence, coordination of milestone billing and increasing operational throughput.

Speaker 2

As we have previously indicated, we are coming off a period of heavy CapEx spend for capacity. Our CapEx spend is now normalizing and we expect normalized CapEx to be between 2% and 2.5% of sales. 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%. As a reminder, we had our semiannual unsecured interest payment of $79,000,000 in the 3rd quarter that will not repeat in the 4th quarter. Additionally, the 4th quarter has multiple milestones scheduled for collection and tax is typically a tailwind to free cash flow in Q4.

Speaker 2

We continue to look to optimize our capital structure. We anticipate our 2017 7 year convertible note to settle at maturity in November 2024 with the principal of approximately $259,000,000 paid in cash and the premium settled with equity. Note that the share count will change upon settlement, which is contemplated in our outlook. Moving to Slide 11, our full year 2024 sales outlook is approximately $4,200,000,000 to $4,300,000,000 with anticipated full year 2024 adjusted EBITDA of approximately $1,015,000,000 to $1,045,000,000 This reflects a year over year 18% to 21% sales growth range, which as Jill described in her comments, reflects our year to date sales growth and margin progress. The 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.

Speaker 2

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. Our associated anticipated full year 2024 adjusted diluted EPS is anticipated to be approximately $9 based on an anticipated tax rate of approximately 22%. Free cash flow is anticipated to be approximately $400,000,000 Our 2025 sales are anticipated to be in the range of $4,650,000,000 to $4,850,000,000 and anticipated adjusted EBITDA between $1,175,000,000 $1,225,000,000 $1,225,000,000 We have strong backlog coverage for 2025 and also have line of sight to additional larger orders that we anticipate closing in the coming months. We anticipate our 2025 adjusted diluted EPS to be approximately $12 to $13 on a tax rate of approximately 22%. Additionally, we anticipate ending 2025 with approximately $3,000,000,000 of net debt based on full year 2025 free cash flow generation of approximately $550,000,000 to $600,000,000 We look forward to sharing additional details of our 2025 outlook at our Investor Day on November 12.

Speaker 2

Joel, please open it up for Q and A.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from Eric Stine with Craig Hallum. Your line is now open.

Speaker 3

Hi, Jill. Hi, Jill.

Speaker 1

Hey, Eric. Hey,

Speaker 3

Eric. Good morning. So, 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 the backlog coverage, line of sight to new orders.

Speaker 3

But maybe thought process on did you haircut this guidance? What gets you to the high the low end and the high end? That would be very helpful.

Speaker 1

Yes. 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 things we've talked about throughout 2024. And that's reflected in our 2025 outlook. And that's something that we feel very confident in this outlook given the backlog coverage that we have.

Speaker 1

Joe, you referred to it, the stronger than typical backlog coverage, which we've got about 61% of our ninethirty backlog that's going get that is scheduled to convert in the next 12 months. So 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 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 higher end of that range, which is approximately 12% growth off of the higher end of 24s range, is around more conversion of the backlog that we currently have. And also, we do see movement of new orders that come in and we have good line of sight to the next few months of some of the larger orders that if something does move and a new order comes in that can be offsetting to get to the higher end.

Speaker 1

But 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.

Speaker 2

Yes. Nothing really significant to add to that, Eric. Just like Jill said, understanding the things that can make revenue move between quarters and incorporating that into our approach as we forecast moving forward.

Speaker 3

Okay. And when you talk about new potential orders that come in, I mean, 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 late impact in the year. I mean, 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?

Speaker 2

Yes. No, and that's the right way

Speaker 4

to think about it, Eric.

Speaker 3

Okay. All right. Thank you.

Speaker 1

Thanks, Eric.

Operator

Your next question comes from Marc Bianchi with TD Cowen. Your line is now open.

Speaker 5

Hi, thanks. I wanted to start with the order outlook. Jill, you talked about a $23,000,000,000 pipeline, nearly $2,000,000,000 of commitments that are not in backlog. And if we look at Q3, you had this really good HTS performance, but there was some weakness in specialty. So maybe just talk to us about put that $23,000,000,000 $2,000,000,000 of commitments in context for us.

Speaker 5

Where was that recently? And how has that changed? And then how are you thinking about the order progression in 4Q and into early 2025?

Speaker 1

Yes. Thanks, Mark, and good morning. What I would say is, across the majority of our end markets, with the exception of China, we continue to see good demand and a very strong pipeline. Things like the acceptance of IPSMR internationally with the Revuma, the Exxon Revuma LNG project have added to that pipeline recently. So the more that our technologies and solutions get out in the field, the more that pipeline seems to grow.

Speaker 1

When I look at the nearly $2,000,000,000 of commitments, about $1,500,000,000 of that is HTS and the other $500,000,000 or $450,000,000 is specialty, is entirely specialty. Since the $1,500,000,000 of HTS related that we had talked about previously, we've added a few small tail into that number. The other opportunity that has been increasing for us is around data centers. And so we did have our 2nd quarter data center order that we talked about on air cooled heat exchangers. And as we started October, we got another order for air coolers related to data centers.

Speaker 1

So that's another contributor to into that $23,000,000,000 of pipeline. That's not included in the $1,950,000,000 of commitments that we referred to that are not yet booked. In terms of specialty weakness, what I look at is structurally, is there 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 Q3 is it really, truly was just timing.

Speaker 1

And with the mining order, that one that we have verbally been awarded and we're just working on Ts and Cs with the customer right now, that's over $40,000,000 as an example. We have a few handful of potential in the hydrogen space that are in the $20,000,000 to $35,000,000 range. So these are orders and FIDs and financings that sometimes take a little more time than what we had originally thought. And a couple of those in that $1,950,000 on the specialty side were could have 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 to put them into our backlog. So overall, the only area of kind of what I would say structural concern in end markets right now is just China industrial gas.

Speaker 5

Okay. And would you anticipate that 4th quarter book to bill could be greater than 1?

Speaker 1

Yes. 1 or greater is our outlook.

Speaker 5

Okay, great. Thanks, Joe. I'll turn it back.

Speaker 1

Thanks, Mark.

Operator

Your next question comes from Ben Nolan with Stifel. Your line is now open.

Speaker 6

I appreciate it. Thanks. I wish there weren't only one. So I'll start with this one or I guess I'll end with this one too. As you think about the Q4, just there is normally an uplift in the Q4.

Speaker 6

I think in guidance you're calling for roughly, I think, $150,000,000 of incremental sales. Can you maybe talk through maybe segment by segment how that plays out? Like where are you expecting the uplift in 4Q to reach your updated guidance?

Speaker 1

Yes. So if you look at 4Q, sequentially Q3 to Q4 historically will do between 10% 15% on average of an increase And then year over year really varies. If you looked at our year over year for Q4 of this year, the lower end is a little bit lower as a percent than what we have been doing the last few quarters. And the high end is pretty consistent with what we've been doing in the last few quarters. When you look at the segments themselves, we're continuing to see strength in throughput in HTS, specialty and RSL and CTS, I would just say is consistent.

Speaker 1

So that's the way to think about that on a relative basis of growth sequentially. And maybe one other quick add here on RFL is that we did have larger field service work in the Q2 and we had a larger than typical equipment sale in the Q3 in RFL. So those were pretty strong quarters in that respect. And as we head into Q1, right, in 2025, Q1 is always our lowest quarter of the year and we don't anticipate anything different for 2025 in that respect.

Speaker 6

Got it. Okay. I appreciate it. And if I could sneak in just a super fast one. I think Joe you'd said 16% was the unbilled revenue, as a percentage of sales.

Speaker 6

What should that be on a normalized basis?

Speaker 1

That was working how 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. We will share some more details on the specificity around what we expect that to be at our November 12 Capital Markets Day. But yes, I think you've seen us perform in that particular metric in the low 20 percent to the high teens is kind of the range that it's been, in the combined business last 18 months.

Speaker 6

Okay. Appreciate it. Thank you.

Speaker 1

Thanks, Ben.

Operator

Your next question comes from Mark Molloy with Johnson Rice. Your line is now open.

Speaker 7

Good morning. Good morning.

Speaker 8

Hi, Mark.

Speaker 9

Hi. RSL is putting up another good quarter here. And just from a high level, can you maybe talk about where you are in terms of putting equipment on to maintenance service contracts or your digital offering and kind of the runway here for growth in that segment? How you look at it when you look out 2 or 3 years?

Speaker 1

Yes. Thanks, Marty, for recognizing that. We're very pleased with the aftermarket side of the business. The last few quarters have been 34% to 35% of our total revenue in RSL in the segment, with strong performing gross margins. We just don't want people to get too far out over their skis on that RSL gross margin number.

Speaker 1

We have meaningful ways to go in penetrating the installed base, in penetrating the digital, uptake offering from our digital uptime offering. We still are primarily concentrated in housing legacy assets. And so the tool kits being taken across the chart legacy assets, 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 good ways to go. But on LTSAs and framework agreements, we have seen positive growth in terms of the numbers of LTSAs and framework agreements year to date in 2024 and we saw the same in 2023.

Speaker 1

So we're getting traction there. But what I would really like to see is a higher than 39%, 40% uptake that we currently have on customers with an installed base that are buying something aftermarket 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 9

Great. Thank you. I'll turn it back.

Speaker 1

Thanks, Marty.

Operator

Your next question comes from Pavel Molchanov with Raymond James. Your line is now open.

Speaker 10

Yes, thanks for taking the question. So based on the updated guidance, the trajectory of revenue recognition in 2024 is pretty balanced, almost fifty-fifty. Do you expect next year to be more back end weighted or less back end weighted?

Speaker 1

So we would expect that Q1 is 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 quarter of our financial metric year. But I do think that you'll see a little more balance in 2025 just given the backlog coverage that we have, especially on the newbuild side of things. RSL is typically pretty balanced with the exception of Q3 tends to ex the larger equipment sale order that we had this time, tends to be a little slower because of summer outages. But we have a real strong line of sight on the new build project solutions. But I do want to stress that Q1 is always seasonally our lowest quarter, but less of a ramp into Q4 than what we've seen historically.

Speaker 10

And given that we're 4 days away from the U. S. Election, I have to ask, is there a certain amount of revenue in 2025 that hypothetically could be at risk if the hydrogen or carbon capture policies in Washington were to change?

Speaker 1

The short answer, Pavel, is no. But I appreciate the top of the question given how close we are to the election and kind of the various different pieces and parts dependent on party. We're very well positioned regardless of the outcomes just given the fact that our equipment and solutions go into so many different molecules. So, but what I would say is we did think about, not adding what could be pent up demand into our 2025 outlook. So there may be potential for a little upside, but we did not contemplate that in what we've put out here.

Speaker 1

But no, we don't believe that there's risk based on either outcome to the election to our 2025.

Speaker 10

Appreciate it.

Speaker 1

Thanks, Pavel.

Operator

Your next question comes from Manav Gupta with UBS. Your line is now open.

Speaker 11

Good morning. It was great to see the deleveraging process restart strongly. My quick question here is, you highlighted some parts in the opening comments. Let's say we have a big uptick in the nuclear cycle driven by power demand. Can you help us understand the ways in which GTLS wins from that?

Speaker 11

Thank you.

Speaker 1

Thank you, Manav. Thank you also for the comment about deleveraging. We're very, very focused on that and we'll continue to be. When you look at nuclear, it's definitely become more active, I would say, in our commercial pipeline. It's not something that we're serving new.

Speaker 1

It's something we always have. It's just a matter of how much interest there is. There has been and we're definitely seeing an increase there. There's multiple different ways that we play with nuclear. We do serve the traditional utility companies with our CTS applications, so with tanks related to that.

Speaker 1

We serve general nuclear space across the board with fans. And now we have the ability to support SMR technologies with the gas circulators and air coolers 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. Now what we're seeing is the smaller SMR companies coming forward with various different technologies and that's what we're quoting on right now.

Speaker 1

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, we're very well positioned to play with equipment. We do not have process technology for nuclear.

Speaker 11

Thank you. I'll turn it over.

Operator

Your next question comes from Rob Brown with Lake Street Capital. Your line is now open.

Speaker 4

Good morning, Jill.

Speaker 1

Hey, good morning, Rob.

Speaker 3

Just wanted to clarify kind of the specialty segment gross margins you think you can get. I know there were sort of one time stuff in the quarter, but where do you think that can be as you ramp that business?

Speaker 1

Yes. I mean, I was disappointed in the Q3, but at least we can pinpoint to what caused it. Where we see this is in 30 plus, low 30s is where kind of in the near term type of timeframe, however you define near term, but I would say in the next 5 quarters type of timeframe, it should be running in that level. We'll also see a little bit of benefit from the more throughput that we get on specialty just naturally by design. But more than anything, it's getting out of start up inefficiencies.

Speaker 1

And this particular one was unfortunately outside of our control, but it was fact and was a drag on our margin in Q3 in Specialty.

Speaker 4

Okay. Thank you. I'll turn it over.

Operator

Thanks, Rob. Your next question comes from Craig Shere with Tuohy Brothers. Your line is now open.

Speaker 12

Hi. Thanks for taking the question. I want to dig a little bit more into Manav's nuclear question and your comments around SMR. So a couple of things. One, most recently, there's been a couple well advertised TRISO SMR data center opportunities that were announced.

Speaker 12

Now obviously, this is going into the early 2030s. But want to get a sense if the type of reactor technology has an impact on your ability to ultimately service gas circulators, fans and such. And then another thing that's come up is relating to data centers is that they use a lot of water and you're in the water business. And so just wondering if this whole broader economic driver has a multi segment opportunity set for you?

Speaker 1

Yes. 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 or more nascent type of end markets. So let me peel this back just kind of from starting from nuclear. We serve we can serve traditional and new SMR technologies and opportunities.

Speaker 1

We recently have had some activity with X Energy, which I think is a name that many people are tying to the space. And also, seeing, I would say, an increase in the commercial pipeline, in particular in Europe around nuclear opportunities with various different SMR technologies. So again that really is the core offering that we serve into those and it's primarily, the Howden offering that brought came into the portfolio. When we look at the water and the data center opportunity, this is pretty broad. So maybe start with the data center piece.

Speaker 1

We've talked about air coolers for the data center market. And it's not only around water, but also around heat rejection where there isn't necessarily access to water. But on the water treatment side, absolutely. I mean, I think there's the way to think about water treatment is there's so many secular tailwinds for water treatment that can benefit what we serve because we hit all of the contaminants that this could be a great opportunity ahead. I would caveat that answer with we haven't seen a ton of that linkage yet.

Speaker 1

But I think it's early days on how the hyperscalers and other data center providers are thinking about their locations in particular in their size and their scale. Again, feel very well positioned without having to change our manufacturing lines or processes to achieve that. And we'll share more end market specifics about how we play both in the new build and some of these end markets that we're discussing right now as well as an aftermarket at the November 12 Capital Markets Day.

Speaker 12

Thank you.

Operator

Your next question comes from Walt Liptak with Seaport Research. Your line is now open.

Speaker 4

Hi, thanks. Good morning, everyone. Jill, I wanted to ask, you guys made a 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? What does that mean?

Speaker 4

And then as a follow-up, there's some special cash flow actions, I guess, that you're taking in the Q4. I wonder if you can quantify those. And then in the 2025 cash flow, are there any special kind of one time actions?

Speaker 1

Yes. Thank you, Walt. So we're pleased to see the activities that we've had underway through the integration start to actually show up in the cash results here in the Q3. What I would say is the cash culture when we describe it is kind of like we described Chart Business Excellence. It's embedded in the organization.

Speaker 1

It's something that we've had a concerted effort to make be sustainable and have multiple different elements of our organization working together. So whether it's the project management team, linking to the commercial team, linking to the operational team to ensure that the milestones are proper in 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. 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 incorporated into the organization and 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 traditional trade working capital or areas that, to your point, you can find other ways to generate cash. I do think the other piece that BR mentioned in his remarks was around the normalizing CapEx is an important factor as we head into 2025.

Speaker 1

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 2% to 2.5% of sales. The second piece of your question was around other things that we're doing to generate cash. And we had talked, I think, a month or so ago or maybe 6 weeks or so ago about there's other non operational actions that we are working on and we kind of are constantly looking at the portfolio to see what those might look like. And we have a small potential product line divestiture that we're working on.

Speaker 1

It's more opportunistic and we would want to get the right price for that if we were to do it. We've got some cash repatriation actions. So if you look at the balance sheet, we do have a cash balance sitting there. And so, Brinkman is working on that. You'll have some of that back in Q4?

Speaker 2

Yes. We will be pulling back some cash from more restricted countries in Q4 and use that for debt pay down.

Speaker 1

So those are just a few examples of what you're describing. And 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 non operational to hit the target net leverage ratio range. And we're pleased to see the traction starting to take hold in for the first time here in the Q3.

Speaker 4

Okay, great. Are those non operational things in the 2024, 2025 free cash flow guidance?

Speaker 1

They are not.

Speaker 4

Okay, great. Okay, thank you.

Speaker 1

Thanks, Walt.

Operator

Your next question comes from Alexa Patrick with Goldman Sachs. Your line is now open.

Speaker 8

Hey, good morning team. On the hydrogen side, you announced an MOU for a 30 ton per day liquefier. Can you talk a little more about the demand in the market today? And then is 30 ton per day becoming more common or is 15 percent still what you're seeing? Any conversations around that outlook would be really helpful.

Speaker 8

Thank you.

Speaker 1

Thanks for the question, Alexa. What I would say on the liquefaction side is we're seeing more and more that are looking to go larger. And these are companies not just the ones that we're looking at 30 tons per day. There are companies that are fully strong balance sheets that you'd be familiar with that are looking at 100 ton per day style. None of those are in backlog and none of those are anticipated in our order book here in the next, even in 2025 because it takes a little bit of development time.

Speaker 1

But the concept in the market is to build larger, get more scale, be more interconnected to not have these hub and spokes regionally, but actually have a true hydrogen infrastructure from production to end use. Still early days on that, but that's what we're seeing in terms of 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 companies getting involved in that and trying to bring 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 their other funding efforts. And I think you'll see Canada actually be one of the leaders in hydrogen infrastructure development.

Speaker 8

Okay. That's very helpful. And then just sticking with specialty products, you guys, can you talk a little bit more about the mining project award expected in 4Q? Anything around size of the award or any color you can provide on that?

Speaker 1

Yes. It's approximately US40 $1,000,000 It's for a project that is international project, a non U. S. Project and it would be primarily Houghton legacy equipment.

Speaker 8

Okay. That's helpful. I'll turn it over. Thank you all.

Speaker 1

Thanks, Alessa.

Operator

Your next question comes from Charisse Ammaravi with

Speaker 11

B. C. A.

Operator

Bank. Your line is now open.

Speaker 13

Hi, thanks for taking my question. I really want to piggyback on that last one about hydrogen. 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 you raised the point that for example what Petrojet could do could be 10x that size in the back half of the decade. And can you speak to the medium term trajectory for specialty margins as we see more hydrogen liquefaction compression storage comprise more of specialties mix?

Speaker 13

Thank you.

Speaker 1

Thanks, Charisse. Thanks for the questions. So technically there is no upper limit to what we can do. We're actually working with a partner that's not somebody we've named that is looking at a 300 ton per day as an example in the medium term. So in the late latter part of this decade.

Speaker 1

And, we're certainly capable to do it. It does require a different, type of development in the engineering arena, but it's all based off of our current technologies. So it's around scale, it's around can you get the efficiencies. We've done a lot of work around like what is most efficient in the current state. Is it a 60 or 70 ton per day?

Speaker 1

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, the Egypt one we talked about is by far the largest we've seen, the potentially largest we've seen. Followed behind that is this other partner that we haven't disclosed who they are, but is about a 300 ton per day. Obviously, both of those are well, not obviously, the one is international, the other is also international.

Speaker 1

When we look at medium term trajectory for specialty, there's elements of specialty that are a little more mature than others. And if I pick the mature elements, those would be like in the category of mining, where we're very well positioned currently. The mining customers are pretty consistent in what they do. And, we see their behavior being consistent. Whereas there's other aspects of specialty that we think later in the decade, which we consider medium term, really take further hold in terms of growth.

Speaker 1

And, that would be around the hydrogen side, the water side and the carbon capture side. So, the whether it's our forecast or someone else's from a macro perspective, the later part of this decade is anticipated to accelerate further. And so 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 13

Thanks, Jill. That's great color. I'll turn it over.

Speaker 1

Thanks, Sherif. Appreciate it.

Operator

Your next question comes from Saurabh Pant with Bank of America. Your line is now open. Hi, good morning, Jill and Joe.

Speaker 1

Good morning, Saurabh. Good morning.

Speaker 7

Hey, Jill. Maybe I wanted to go back and touch a little bit on the fact that post Howren, you continue to become more and more project oriented versus more individual product oriented. And obviously, that has impact on cash milestone payment, value of free cash flow and all of those things. Can you maybe talk to how you are managing that transition internally from a project management standpoint, your organizational setup standpoint, anything that you're doing internally to just position the organization to better handle projects going forward?

Speaker 1

Sure. And I'd also just point out that post housing, we also have 30% to 35% of our revenue in aftermarket, whereas before we had about 13% to 14%, right? So just to be clear, the new build solution set is less as a percent of our total revenue. But with that said, the many of the actions around the cash culture, but structurally what we have done is we've set a OneChart global commercial team, a OneChart global engineering team and a OneChart global project management team. And those groups work together with the regional operations that are working to increase the throughput that we've talked about.

Speaker 1

So this is multifaceted, but I think the question in particular that you were asking is around structurally what have we done to work to improve the throughput on cash and in the project and solution that starts at the upfront with the customers, the timing and the milestones, then it's through the project management and key account managers that manage the project themselves and work closely with the operations. And then there's just an element also, I would say, of discipline and ensuring that this isn't something that happens on a weekly basis, it happens on an hourly basis. And all of those things together will support we believe will continue to support the sustainable cash generation that we anticipate to have.

Speaker 7

Okay, perfect. I got it. Okay, Jill. That's all I had. I'll turn it back.

Speaker 1

Thanks, Rob.

Operator

There are no further questions at this time. I will now turn the call over to Jill for closing remarks.

Speaker 1

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 OneChart team members for all of your ongoing efforts. Have a great day.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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