3Q'26 Earnings Call - CHART INDUSTRIES INC

Financial Performance:

• Total company revenue for Q3 was $8.0 billion, up 14% year-over-year (YoY), with acquisitions/divestitures contributing a net 9%.
• Adjusted EBITDA reached $1.42 billion, up 14% YoY, with a margin of 17.6%, consistent with the prior year as IET margin expansion offset OFSE declines.
• Adjusted diluted EPS was $0.70, up 2% YoY; GAAP diluted EPS was $0.41.
• Free cash flow (FCF) generated was $769 million, up 10% YoY, net of ~$200 million in one-time integration and closing costs related to the Chart acquisition.
• Leverage ratio stood at 2.5 times at quarter-end; the company targets a net leverage below 1.5 times by the second half of 2028.
• Full-year 2026 EBITDA guidance midpoint increased to $5.265 billion; full-year FCF conversion expected at 45-50%.

Guidance and Future Outlook:

• Full-year IET orders raised to $21.5–$23.5 billion (midpoint up ~12%), implying a record book-to-bill of >1.6x.
• IET Revenue Per Order (RPO) reached a record $39.4 billion, up 23% YoY, with Horizon 2 orders (2026-2027) now expected to exceed $50 billion.
• Q4 guidance: Company revenue of $8.25 billion and adjusted EBITDA of $1.46 billion; assumes no material geopolitical changes in the Middle East.
• 2027 Outlook: Anticipates organic IET revenue growth in the low-to-mid single digits with margin expansion; OFSE expected to see low-to-mid single-digit growth; Chart expected to grow at a low-to-mid single-digit rate.
• Chart EBITDA margin target updated to 22-23% by the second half of 2028, with further expansion possible thereafter.
• OFSE targeting high-single-digit CAGR for Mature Asset Solutions (MAS), aiming for at least $3 billion in revenue by 2030.

Business Segments and Product Lines:

• IET: Orders of $5.9 billion (1.7x book-to-bill); revenue $3.48 billion (up 3% YoY) with EBITDA margin expansion to 19.7%. Key growth drivers: Data centers ($4.9B YTD awards), LNG ($4B YTD), and power systems ($1B orders led by data center demand).
• OFSE: Revenue increased 6% sequentially to $3.66 billion; EBITDA margin improved to 18.1%. Strong performance in Latin America, Europe, and Middle East (up 17% sequentially); SSPS revenue up 5% sequentially.
• Chart (New Segment): Orders of $831 million (0.9x book-to-bill); revenue $888 million; EBITDA margin of 17.6%. Q4 guidance includes ~$1.1 billion revenue and ~$195 million EBITDA.
• Mature Asset Solutions (MAS): Expanded into Pakistan (120+ wells with OGDC) and Libya (50 wells) with integrated, outcome-based service contracts.
• New Product/Customer Wins: Secured 1.1 GW power generation order for a US tech company; major LNG awards with Venture Global; nuclear control valve order in Europe for six reactor units; subsea systems awards in Indonesia and Cyprus.

Market and Competitive Landscape:

• Data Centers: AI-driven power demand is a structural growth driver; ~100 GW of incremental data center capacity expected by 2035 in the US alone.
• LNG: Global capacity expected to reach 800 MTPA by 2030 and 950 MTPA by 2035; accelerated Final Investment Decisions (FIDs) observed.
• Power Generation: Grid constraints are driving demand for on-site and behind-the-meter power; Baker Hughes positioned to capture this via gas infrastructure and generation.
• Market Expansion: Combined Baker Hughes/Chart total addressable market (TAM) now exceeds $400 billion, with exposure to geothermal, space, and industrial gases.
• Commercial Synergies: Early wins include leveraging Chart's cold boxes in LNG projects and selling IET equipment to legacy Chart customers.

Risks and Challenges:

• Geopolitical: Potential impacts from Middle East tensions on regional activity levels (expected moderation in Q4 and 2027) and logistics/supply chain disruptions.
• Inflation: Ongoing inflationary pressures on logistics and commodity costs affecting margins, though pricing actions are expected to offset some impact.
• Integration: Execution of $325 million cost synergy target and the integration of the Baker Hughes business system into Chart operations.
• Project Constraints: Permitting, grid interconnection, and fuel supply issues may delay specific customer projects, though company maintains high confidence in project quality and contract structures.
• Leverage: Short-term leverage at 2.5x requires deleveraging via FCF and asset divestiture (Waygate) to reach target of <1.5x by 2028.

Management Commentary and Tone:

• Management conveyed high confidence in the "higher value solutions-led" strategy, emphasizing disciplined execution and strong order momentum.
• Tone was positive regarding the Chart acquisition, citing strong integration progress in the first 100 days and immediate commercial synergy realization.
• Emphasis placed on the strategic shift from equipment sales to lifecycle services and outcome-based contracts to create durable revenue streams.
• CFO Ahmed Mogul and CEO Lorenzo Simonelli expressed strong conviction in the long-term visibility provided by the record RPO backlog, despite near-term seasonal and regional headwinds.

Analyst Questions and Answers:

• Horizon 2 Orders: Lorenzo clarified the >$50B target is driven by accelerating power demand (specifically data centers) and LNG infrastructure, with broad-based strength across traditional IET markets and digital offerings.
• 2027 Outlook: Ahmed outlined a linear progression for Chart margins, with a more meaningful step-up in 2028 driven by synergies, mix improvement (LNG volumes), and operational efficiency via the business system.
• Data Center Quality: Management confirmed backlog quality is high due to rigorous customer vetting, strong contract protections (non-refundable deposits), and focus on well-capitalized customers with secured permits.
• Chart Margins: Path to 22-23% margin is not perfectly linear; driven by cost synergies ($325M target), mix shifts to higher-margin LNG, and commercial synergies.
• Middle East: Near-term moderation expected in Q4 and normalization in 2027, but long-term outlook remains constructive regarding infrastructure rebuild and diversification.
• Business System Integration: Progress on Chart is on track, with established KPIs, improved productivity, and capacity unlocking (e.g., doubling dry cooler revenue by 2029).

Other Key Points:

• Waygate Divestiture: Proceeds from this transaction will be used to support debt paydown in Q4 2026.
• Installed Base: Every new equipment order reinforces a long-duration opportunity for high-margin aftermarket services, spares, and digital solutions.
• Strategic Partnerships: Strengthened relationships with major clients including Venture Global, SBM Offshore, and national oil companies in the Middle East (KOC, ADNOC, etc.).
• Sustainability: Focus on enabling customer sustainability through carbon capture, flared gas monetization, and repurposing infrastructure for gas storage.