GTLS - NYSE

Good morning, and welcome to the Chart Industries, Inc. 2022 Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. The company's release and supplemental presentation was issued earlier this morning and can be accessed by visiting Chart’s website at www.chartindustries.com. A replay of today's broadcast will be available following the conclusion of the call and can also be accessed through the Investor Relations section of the company's website. Before we begin, the company would like to remind you that statements made during this call that are not historical in fact are forward-looking statements. Please refer to the information regarding forward-looking statements and risk factors included in the company's earnings release and latest filings with the SEC. The company undertakes no obligation to update publicly or revise any forward-looking statements. I would now like to turn the conference call over to Jill Evanko, Chart Industries CEO. You may begin.

Thank you, Kevin, and thank you all for joining us today for our third quarter 2022 earnings call. We're very excited to share with you today what we believe to be a momentous third quarter, not only due to the number of records that we set, but also an important point for our high confidence in our strong outlook for 2023, which includes anticipated growth of over 25% in sales and over 50% in earnings per share. The numerous records in the third quarter include all-time record backlog, sales, reported gross margin, reported operating income, reported non-diluted EPS and adjusted non-diluted EPS. And while orders of $729 million is not a record, it is our second highest in history and second consecutive quarter of commitments above $700 million. With me on the call today is our CFO, Joe Brinkman. As usual, we will reference that supplemental deck that was included with the press release and can be found on our website under the Investor Relations section. Let's kick-off on slide four of the presentation, with the slide many of you have become familiar with, our Nexus of Clean full solution offering. Process technology and equipment for clean power, clean water, clean food and clean industrial applications. This offering is becoming more-and-more pertinent to the global environment, in particular, as you look at current challenges and opportunities in macro and geopolitical conditions as shown on slide five. The three main categories shown on the left-hand side of the slide, which are no particular order are expected to remain a tailwind to our business for the coming decade. LNG as a pragmatic and available energy source as countries around the world seek energy independence and security, Co2 shortages and the continued focus on sustainability, both in the public and private sector, furthered by the adoption of the US Inflation Reduction Act or the IRA in mid-August. We'll spend some time throughout today's discussion on these topics and how they are manifesting themselves in our order book, as well as why we expect them to drive continued double-digit growth in our sales this decade. And these tailwinds are also starting to coalesce together, for example, we have been talking all year about Co2 shortage is driving demand in our Earthly Labs offering, which sells for immediate access to beverage grade 99.9% purity Co2 captured in the process of beverage making and now we're seeing the IRA bring together more demand on the small scale, as well as the larger scale CCUS needs, which covers both macro tailwind two, and three on this page. More examples of that shortly. Hydrogen is one of the markets and applications that is and will continue to benefit from the macro trends just described. I'm not going to walk you through all the data points on slide six. In summary, in one year the difference in direct hydrogen investment announced is up 50% and projects that are or will be under-construction in the next eight years is up over 134%. Many countries have adopted national hydrogen strategy, including the UAE recently announcing that they've engaged to work on one. We continue to see growth and more consistency and hydrogen demand for our products and solutions over the past two years than what we had originally anticipated. With third quarter 2022 hydrogen related orders of $102.4 million, bringing our third quarter year-to-date 2022 above our full year 2021 hydrogen orders of $282 million. In the third quarter we received a purchase order for hydrogen liquefaction facility with associated water treatment for our project in West Texas with Clean Energy Holdings. They’ve also signed a letter of intent with us, which is not booked as an order or in our backlog yet for processing equipment for the additional three phases of their project with the same content as the first phase reach. This is another indicator that this trend in hydrogen is not slowing down. Also in the quarter we received a $6.2 million order for hydrogen systems and equipment from European shipyard who with Chart is working closely with a large European cruise lines on hydrogen powered vessel. A $5.8 million order for two the first transportable fuel stations for hydrogen fuel-cell trucks. And liquid hydrogen tank orders for a major industrial gas customers liquefaction plants in Europe. Importantly, this is another example of the global adoption of liquid hydrogen. And thinking back, historically Europe was predominantly focused on gaseous hydrogen and now we are seeing this movement more towards liquid for certain applications. While not yet booked, we also received a Letter of Intent from one of our industrial gas customers for hydrogen liquefaction plant which we expect can to move to order in 2023. Our hydrogen sales of $118.7 million this year-to-date through September has been supported by our Theodore, Alabama trailer and tank shop, which we affectionately call Teddy trailers and tanks. You may recall we purchased Teddy in October of 2020 for $10 million purchase price. At the time, the most trailers produced in that facility was nine in a year and now we can produce more than one a week. By way of comparison, year-to-date 2021 through September Teddy Trailer sales were $5.2 million and this year for that same-period they are $41.75 million. Some of this might be attributable to the Inflation Reduction Act which that hydrogen CCUS and water and further motion. The IRA includes $300 billion in spending for energy and climate change with multiple areas of the IRA directly supporting investments being made by our customers in those same areas. We believe that the IRA will drive more projects to happen sooner, which in turn increases our opportunities in the near-term and this decade across our Nexus of Clean. You can see some statistics supporting this on slide seven. We've touched on hydrogen order activity already, but worth noting that as of the end of the third quarter we had a pipeline of 658 hydrogen customers and potential customers, sequentially up 20% compared to the end of the second quarter and up 83% compared to the end of 2021. Our water treatment business was already growing, setting new records throughout 2022 and while we can attribute some new inbound inquiries to the IRA, we think that the international trends in the adoption of water treatment are a key driver to our year-to-date commercial pipeline additions of $131 million. The area that we believe will be most swiftly and positively impacted by the IRA is carbon capture. We've seen a meaningful increase and inbound interest in our CCUS offerings since the IRA was approved then before it, including a pipeline of 363 customers and potential customers, up over 142% compared to the end of 2021. New inbound opportunities in our small-scale Earthly Labs business totaled $9.2 million in the 75 days following the IRA announcement, compared to new opportunities in the 60 days prior to the IRA for $5.56 million. In the third quarter we also booked orders for our SES cryogenic carbon capture solutions with a customer in Saudi Arabia, as well as with the European Energy Infrastructure Company. And perhaps most interesting in terms of changes for CCUS since IRA was passed isn't the anecdote that I have shared with some of you throughout the quarter, so we had more inbound inquiries in the first 24 hours after the IRA was announced than we have ever had in any 24 hour period. But rather that pre IRA leads for CCUS or about 17.5 per month on average and post IRA leads are now 32.4 per month. As a result of continued and consistent order activity as well as the IRA that I just described, adding more certainty to this decade opportunities, we're increasing our specialty products, total addressable market as shown on slide eight in the near-term by approximately $2 billion and to $49.3 billion through 2030. Also note that in addition to the areas discussed under the IRA impact we are increasing our 2030 TAM for gas by rail and space exploration applications. We're uniquely positioned in gas by rail for a variety of molecules. Additionally we're in multiple discussions with existing and new potential customers about using not just our tender cars rail, but also we have work underway with customers on the onboard liquid hydrogen tank for utilization in not just heavy duty commercial vehicles, but also in locomotives. The private space exploration trend continues and becoming a global market. As you're aware we're expanding our Teddy Alabama site for supersize tanks and are the only company in the world that can build 1,500 cubic meter cryogenic storage tanks. You can see the build in each one of [indiscernible] on slide 41 in the appendix if you're interested. So moving to slide nine, this shows each of our three quarter this year and the orders that comprise of over $2 billion of commitments in the first nine months of the year. We received full notice to proceed on the remaining 12 cold box systems for Venture Global Plaquemines Phase 2 project in the third quarter for $91.8 million, which brings year-to-date Big LNG-related orders to over $620 million. This marks three consecutive quarters that we have booked Big LNG work, the first time this has happened in our history, as well as an indicator that LNG is going to be less cyclical across the coming years than in prior cycles. Our commercial pipeline of potential orders overall currently in discussion for order placement in the next two years or 24 months is greater than $9.5 billion. And so far in the month of October, demand continued across the business with 17 orders through two days ago this past Wednesday, each greater than $1 million with a very wide range, ranging from space exploration to re-gas, to refurbishment of the cold box, multiple air coolers, LNG fueling station, a large bulk tank order, just to name a few. Also noteworthy is that our Doser business had its biggest month of the year in October in terms of orders and we still have a few more days to go this month. With over $2 million in orders the first-nine months in 2022 and five of our last seven quarters setting order records, average quarterly orders excluding Big LNG in 2021 and 2022 are over $470 million as you can see on the right hand side of slide 10. This compares to the average of $250 million per quarter from 2016 to 2020. And as I said at the end of the second quarter a reminder that we're not going to hit %470 million or more every single quarter ahead, but we do anticipating -- anticipate continuing to book each quarter at much higher level than our pre 2021 historical average. So we're definitely pleased to be multiple historical records this quarter and this trend continued as you can see on slide 12. As I mentioned at the outset of the call, Q3 was an all-time record backlog, sales, reported gross margin, reported operating income, reported non-diluted EPS and adjusted non-diluted EPS quarter. There were numerous other records across the business segments and individual sites, too many to name, but I'm going to touch on a few including the fact that our Sri City, India team posted record sales. Our VRV team, which you may recall, we purchased via an acquisition at the end of 2018 hit their best ever gross profit, gross margin, operating profit and operating margin and the parts repair and service piece of RSL did the same. Also worth pointing out is our reported operating margin as a percent of sales of 10.1% has already been achieved three other times this past decade. We'll discuss that more in a moment. An important and critical part of our business is our number one priority of safety. We achieved our lowest safety total recordable incident rate in Q3 and I am proud to share that 79% of our sites have had no safety incidents in the trailing 12 month period. On slide 13, you can see our third quarter 2020 results with the green box denoting historical highs. Our third quarter 2022 orders were the second highest in our history, with all of our top three historical record quarters occurring in 2022. This contributed to our eight consecutive quarter of record backlog of $2.254 billion. Backlog is now 100% higher than one year-ago. Both Heat Transfer Systems and Specialty had record backlogs as of the end-of-the third quarter. Not only this the first time we have surpassed $2 billion in backlog, the composition of our backlog is very rich, which gives us further confidence in the growth outlook we're presenting for 2023 and beyond. As shown on slide 14, reported gross profit was an all-time record and that translated into 25.4% reported gross margin as a percent of sales. When adjusted for unusual items it was 27.3% and in-line with our anticipated sequential margin improvement to exit the fourth quarter 2022 at 30% gross margin as a percent of sales or more. We also continue to face headwinds in the macro-environment, but we do not add-back to adjusted gross margin, adjusted operating margin or adjusted EPS. Those you can see listed on the side of slide 14. I'll get into segment gross margin specifics in a moment, but as a tee up three of our four segments reported gross margin as a percent of sales increased by more than 170 basis points sequentially compared to the second-quarter 2022 with HTS increasing over 700 bps. The third quarter 2022 was only the fourth time in the past decade that we had reported operating income as a percent of sales of 10.1% or more and adjusted operating income as a percent of sales of 12.6% as shown on slide 15. Reported operating income of the 10.1% was the highest since the third quarter of 2020 as well. All of these activities roll into our record reported EPS and record adjusted EPS of $1.15 and $1.49, respectively, shown on slide 16. We reduced the add-back shown by our mark-to-market benefit, as well as our restructuring release in RSL net of cost, as we concluded restructuring activities in that segment. The third quarter of 2022 was our last quarter for integration-related costs from our acquisition of AdEdge Water Technology's, as well as LA Turbine as each hit their one year anniversary in the Chart family. We did not add-back the negative impact to sales or EPS from currency headwinds or FX rate changes and we do anticipate that these will continue to be variable in the coming quarters. We estimate the third quarter 2022 impact from foreign-exchange rate changes was approximately net negative $0.06 to EPS when you're netting translation and transaction. I won't spend time on slide 17, it’s included as a video of the progress we have made operationally across the past year. The left-hand side is our reported EPS walk from Q3 2021 to Q3 2022 and the right-hand side is our adjusted, both reflecting continued progress in operational margin improvement execution. The next section of our presentation provides an update on operating activities that support our sequential margin increases, as well as continuing to meet the ongoing demand across the business with targeted capacity expansion. Starting on slide 19, the top row and bottom left graph relate to our main input material costs. You've seen these graphs previously and the good news is that, input costs were similar to the second quarter of 2022, yet the backdrop is still continued geopolitical and inflationary uncertainty. Gas and energy prices are a key driver in component availability and cost, in particular in the EU and while recent prices have been declining they are still over five times the 2019 standard price. We have then continued to proactively fortify our supply-chain channels both globally and locally to reduce the associated risks. You can see examples of these commitments in our press release. Bottom right hand graph on slide 19 shows the global freight index. You can see that while it's trending in the right direction it’s still like material input costs above historical run-rate. We've now had two quarters in a row where net neutral on freight costs as a result of pass-through customers. However, a quick comparison, in 2021 we averaged about $1.4 million of additional cost on freight per quarter through the P&L. Despite the ongoing well discussed supply-chain challenges, I would like to congratulate our global team members who continue to drive improvements in our shops in this quarter, we had 12 of our manufacturing facilities with 100% on-time delivery. And none of what I just mentioned is new in terms of operating in an uncertain environment, so we continue to look for ways to differentiate our business in the forming category shown on slide 20. First, pricing, we've completed multiple price increases over the past 15 months, including additional actions taken in the third quarter of 2022 and planned across the next six months. Second, cost-control, the fundamental operating principles in the business and we continue to look for productivity and automation projects, which Joe will talk about in a moment. Third further collaborations and partnerships, in particular, in specialty products and finally building on Chart specific differentiators, such as our ability to help our customers very early in their design phase for the first of a kind projects and being a first-mover on receiving certifications for equipment in places like Korea and China, which we believe will be an important differentiator as specialty markets move from regional to global across this decade. In the third quarter 2022 we executed eight MOUs, of which two included master supply agreement which you can see on the left-hand side of slide 21. Four related to carbon capture and CO2 equipment, two for hydrogen and one each for liquefaction and LNG, further demonstrating the breadth of our solution offering and penetration across the Nexus of Clean. One of the master supply agreements was for LNG equipment with Yanchange and Shell Petroleum, while another was with a major beverage company for carbon capture and storage technology and equipment. Our 79 new customers this quarter were across a broad reach of geographies. 43% North American, 37% Asia Pacific and approximately 20% in Europe and the Middle East. One of our favorite topics, first of a kind orders were 17 in the third quarter, also comprised of geographic and application breadth, which you can see on the right-hand side of slide 21. We kicked-off our first feasibility study for carbon capture with biobased food ingredients with Bioveritas, we booked an order with Firefly for a space exploration application and we welcomed a new customer in Asia-Pacific for food and beverage equipment. Certifications globally and regionally in cryogenic equipment as I commented are a key differentiator. We received numerous new certification shown in the middle of the page, and this included approvals for specific product lines in Australia, Canada and Korea. Now I'll turn it over to Joe Brinkman on some operational productivity and capacity expansions in place.

Thanks, Jill. Our ongoing organic productivity and automation projects are constantly in-flight with a few new examples to share this quarter shown on slide 22. These six projects are just a sample of the multiples we have underway and should give you a good sense of how they help with margin improvement as well as capacity in some cases. Take the middle top row, which in our Chart China facility the [SAW] (ph) welder was integrated into the other end-of-the original mig welder arm to achieve two welding processes for the same equipment, which significantly improves the plant capacity and efficiency. By way of comment, these types of projects have enabled Chart China to consistently break records with the third quarter of 2022 their highest gross margin and operating income quarter since 2014. Another example shown on slide 22 is in the bottom row middle, where we are implementing a bellows machine for automatic rotation of a vacuum insulated pipe during the welding process. This includes -- this improves weld time by 68% and generates with one machine over $53,000 a year in savings. We are very excited to receive our brazing furnace after a year in the making into our Tulsa, Oklahoma flexible manufacturing facility in the quarter, which you can see an actual photo on slide 23. We will begin post braze activity in the fourth quarter, which is right on schedule and supports more capacity for a variety of different end applications that use brazed aluminum heat exchangers, whether it'd be LNG, hydrogen, helium or CCUS. As a reminder for our expansion in Theodore, Alabama long Mobile Bay as shown on slide 24, we have already -- we already have the space exploration order book to go through this expanded location, for which the build-out is progressing on our original timeline. And on slide 25 we have a similar situation in our Goch, Germany trailer facility, where we are expanding on our existing property and have a base-load order of $22 million that will be delivered out of the expanded location in 2024. We anticipate production will begin either in late third quarter of 2023 or early fourth quarter of 2023 in the expansion, which is also set to have a new area for service and repair. I'll now turn it back to Jill to quickly run through segment performance starting on slide 27.

Thanks, Joe. HTS delivered a superb third quarter and we expect these types of strong results to continue into the fourth quarter of 2022 and the full-year of 2023, given the record backlog levels, continued recovery in our air cooler business, operational excellence, capacity expansion and the macro tailwind of LNG, LNG, LNG. A few items to point out about the third quarter in HTS. Excluding Big LNG, orders increased 59% sequentially, include 27 individual commitment, each over $1 million, demonstrating that there is not a customer concentration in HTS like there used to be. The chart on the left shows the continued execution and completion of capacity and restructuring to have each of our products made in more than one location. You can see the sequential material gross margin and operating margin improvement in this segment driven by the start seeing our newer project mix backlog trend of revenue, these projects as we have discussed previously, range from a bigger LNG work to the small-scale and floating LNG, as well as various more traditional medium-size orders. All of this sets up the combination of longer timeframe revenue recognition on Big LNG with the nice coupling of sub-18 month RevRec on the $10 million to $40 million sized projects. This mixed combination is expected to continue across the coming years. I'd be remiss to not comment on the fact that the strong growth in HTS segment and improving margins are supported also by our recent acquisition of Cryo Technologies and Fronti Fabrications, which give us more capacity to meet customers' delivery timing. As we look ahead, the fourth quarter of 2022 and full-year 2023 are set up well in HTS. Specifically, the increasing air cooler margin continues, while first production is expected to begin in Q4 under our expanded New Iberia, Louisiana rooftop. HTS is also a key contributor to our strong end of the year cash flow outlook with over $100 million of large cash milestone payment receipts scheduled in the fourth quarter. The third quarter of 2022 marked our third quarter in a row where we booked Big LNG purchase orders totaling over $620 million this year-to-date. We anticipate at least one more Big LNG project release in the coming nine months and you can see on slide 28 that the momentum continues, not just in Big LNG, but also small-scale and floating LNG. I think slide 28 is pretty powerful. It shows that this decade is going to have plenty of LNG activity even considering what has already moved to FID. It also demonstrates the traction that IPSMR and midscale technology is gaining in the market as a whole. So, I'm just going to point out a couple of things on 28 row one, which is our Big LNG project pipeline of what can move to FID in the coming years. This shows the same number as last quarter 24. And remember that we booked one order in the third quarter, so obviously a new one came into the pipelines, which is also reflected in row three for the size of our potential book of business. Row two shows our international opportunities for IPSMR and I commented previously that multiple international oil companies have qualified our technology for potential use in their projects. And then lastly on the slide, categories that are sub-5 million ton per annum on the bottom table. Our pipeline for this bucket of LNG is as robust as it has ever been. So we've included slide 29 in the deck since IPSMR is gaining more traction through the movement towards smaller trains and also the receipt of the validation that I already commented on. One of the questions we commonly receive is what differentiates IPSMR from other options. So we've included this as a [indiscernible] to look at the power cost savings, potential to increase production, multiple different ways that IPSMR can benefit a project. And then I'd also point at the bottom of slide 29 where we discuss our heavy hydrocarbon removal system and nitrogen rejection technologies. These systems are becoming more important with varying gas compositions. And in the third quarter of 2022 we received two orders for studies on these systems to be potentially installed in Big LNG projects. Moving to slide 30, specialty products which typically have volume and mix movements between quarters had lower than anticipated sales, driven by the timing shift of two particular projects revenue recognition. Not only the project mix-shift negatively impacts reported gross margin as a percent of sales for specialty, which was 31.6% for the third quarter we also had continued low volume in the higher margin HLNG vehicle tanks. And one large customer freight revenue, which had de-minimis associated margin and we finalized our year-one integrations for outage in LA turbine. Looking ahead, we expect specialty products to grow sequentially in all metrics, ranging from sales, to gross margin, to operating margin with multiple levers across the segment contributing including water treatment operations now in-house and specific space and hydrogen project revenue to be recognized in Q4 of 2022 that were pushed from the third quarter. While the CTS segment is certainly not a bright shiny thing, we're definitely pleased with the third quarter performance shown on slide 31, which market key milestone and a uptick for margin in this segment. While sales declined sequentially from Q2, driven by the combination of the pulling of shipping lower-margin backlog as we explained in the second-quarter earnings call and foreign-exchange impacts, CTS orders increased 13% sequentially, which is a question we get regularly asked about demand. This increase in orders for $120 plus million shows that demand continues with orders like record 226 ISO containers ordered in the quarter, as well as industrial gas customers continuing to predict mid-single-digit growth for 2023. For CTS Q3 marks our first sequential gross margin as a percent of sales improvement in a year and as we look-ahead we anticipate that trend to continue sequentially into Q4 and into 2023. Slide 32 shows our RSL segment for both the quarter as well as a very strong outlook ahead. RSL posted third quarter record sales, gross profit and operating income. The chart on the left-hand side of slide 32 demonstrate the conclusion of our restructuring activities in RSL and the jumping-off point for further incremental expansion in this segment. The sequential sales decline from Q2 to Q3 was driven by timing of international field service work that moved to Q4 due to visa requirements of the work came in basically at the end of the quarter and a large fan aftermarket sale in the second quarter. Future is really bright for RSL with our expanded European footprint through CSC and our United States strategic location being leveraged by our LTA customers. We anticipate a strong fourth quarter 2022 with winter temperature changes yielding more field service work, more interest from our EU customers and leases for trailers, in particular, and a strong orders start to Q4 with faster turn work anticipated later into the quarter and into the first quarter of 2023. So turning to slide 34, our outlook for 2022 for sales in the range of $1.65 billion to $1.70 billion with associated adjusted non-diluted EPS in the range of $5 to $5.25 and approximately 35.87 million weighted shares outstanding with an assumed tax-rate of approximately 17%. The change to our prior sales guidance of $1.725 billion to $1.8 billion, is driven by currency headwinds and timing of specific project revenue recognition, which is typical in our business. We're pleased to share that our adjusted non-diluted EPS outlook remains at or above $5, which demonstrates our third quarter and expected fourth quarter execution of margin improvement actions. Anticipated full-year free-cash flow of approximately $175 million is driven by the large milestone payments I commented on in HTS and then more inventory reduction anticipated as our fourth quarter is expected to be our highest sales quarter of the year. Our net leverage for the third quarter of 2022 is 2.92 times, the first time we are below 3 times since the second quarter of ‘21. And then slide 35, which is really -- the point here -- in our high-level of confidence as we look-ahead to the full-year of 2023. Sales in the range of $2.1 billion to $2.2 billion, which includes only Big LNG projects that are in backlog as of the end of September 2022. Associated adjusted non-diluted EPS is anticipated to be in the range of $7.50 to $8.50 on 35.87 million weighted shares outstanding, assuming a tax-rate of 19% for the year. We anticipate associated free-cash flow in the $250 million to $300 million range for the full year 2023. I want to spend a moment on the buildup from backlog to our old greenfield on the table at the bottom of slide 35. I'd point you to four, which is our outlook of $2.1 billion to $2.2 billion in sales. Note that this does not include any new or additional mid-size or large projects that could come into the order book between now and the end of the first half of 2023, which would have the potential to have revenue associated with them in the year. On line five of the table you can see that as one or more mid to large-size project comes into the order book between now and the end of Q1 ’23, we’d anticipate recognizing between $50 million and $75 million more of revenue into the full-year 2023. So before we open up for Q&A, I want to take a moment on slide 37 through 39 to thank our global One Chart team members for their embracing of our key themes, safety is our top priority, customer orientation, strong work ethic and giving back. Congratulations for our entire team for hitting our lowest ever TRIR within the third quarter, for being acknowledged as a Women’s Business Collaborative Company of Purpose and a finalist in three categories of the 2022 S&P Global Energy Awards. Finally on slide 39, I'd like to personally thank each of our Welding Council team who continue to give extra effort to be part of the Council, which allows us to lean in cryogenic certifications and performance. And now, Kevin, please open it up for Q&A.

[Operator Instructions] Our first question comes from Eric Stine with Craig Hallum. Your line is open.

Hey, Jill and Joe.

Hi, good morning.

Good morning. So, maybe first question. I know in the release you talked about Big LNG pipeline of $5.7 billion, I'm just curious your thoughts on that. I mean, you've got a number of things in play and obviously not all of those projects move forward, but you've got an outlook for a longer-cycle than you've seen in the past, but you've also got increased urgency given the macro backdrop. So, as you think about that you think it's -- these things flow gradually over that longer-cycle. Do you think they are front-end loaded? How are you thinking about that going-forward?

Definitely it looks different than it ever did in the history of LNG and that's evidenced by the fact that we booked Big LNG orders in each of the first third quarters of this year, which shows that earnings marching towards certainty on FID across a variety of projects. I would anticipate that it does continue across a longer period of time and kind of stair-step its way versus being completely front-end loaded. To give you a little color on kind of our expectations on these projects and timing on FID. While we haven't included it in our 2023 outlook, we do anticipate that we should get released in late Q1, early Q2 on an equipment-related order for a separate project that's not currently in backlog. We're also working, as I commented, on two particular potential NRUs which are add-ons to existing facilities or to projects that are moving to FID. So an NRU content for us is somewhere between kind of $75 million and $90 million per NRU add-on. I'd anticipate that just given the changes in gas composition and the needs for NRU or HHCs that we'd see an order sometime in 2023 related to that. We also anticipate to see an IPSMR international order and that could be either small-scale or it could be a larger project in the year -- in the upcoming year. And Lastly, I'd say that there's multiple projects that have come into the pipeline that even ones that weren't kind of considered on hiatus or deceased before this year, there's new projects starting to come into the pipeline for customers that currently have existing projects that has move to FID or about to move to FID. So we like that continuation of the utilization of the same equipment, the same design and that really adds to this look across the coming decade of more consistency for these larger projects.

That's great color. Thank you. And then maybe just on floating LNG. I mean, can you talk a little bit about that, obviously, when it's big LNG, I know you recognize that, you get them on a six-month lag and when you recognize it over two to three years when it's floating, just given the potential size of those projects, little bit lower in terms of dollar amount or actually it could be quite a bit lower. I mean, how do you think that those or how should we think about those flowing from project award to then starting to recognize? And how long you would recognize that?

Yeah. The floating were interesting and as an overarching rule you can take any of these floaters and they are typically going to be RevRec sub-years or sub-24 months and there is kind of a subtext to that which is depending on the size or the construct of these projects. So if you take for example the fast -- NFEs Fast projects, those are 12 month type of book to delivery. Then there is other projects that have a more design work that's not already completed and that would put you kind of at that 18 month mark, but certainly faster from award to recognizing the revenue in that sub-18 or some 24 month period than a larger scale project, we like that mix of floating and small scale in conjunction with the Big LNG, because you do get these multiple levers to pull and it also -- it's like frosting -- it's like frosting a cake, because I'm not a baker but I've seen people do it. So through layer one on and then layer two on and this builds upon itself which you're starting to see our backlog continues to grow, we're starting to see multiple projects in these $10 million to $50 million size ranges in addition to a few of these $200 million to $500 million projects. So we like that combination, it leads to a nice margin mix and it also leads to more consistency through our shops which we anticipate will further improve margin as we have benefits and absorption versus those [indiscernible] cycles.

Got it. Okay. Thanks, Jill. I will take the rest offline.

Thank you, Eric.

One moment for our next question. And next question comes from Ben Nolan with Stifel. Your line is open.

Hi, Jill. I really want to ask about LNG, but not going to, So maybe if I can start with carbon capture stuff. I -- clearly we're seeing an acceleration of activity in the last few months. I sort of had expected that if you're going to raise the total addressable market that one would have had more. I'm curious of few things, first of all, you're already sort of been anticipating some sort of acceleration like we're seeing. And then as you look into the ‘23 guidance, I'm curious how much carbon capture is in there and also how do we think about the margins for that business is -- obviously it depends on I suppose exactly what you're doing, but just in general.

Sure. So first of all on the TAM side, I completely agree with you that I anticipate it's going to get larger as we start to see commercialization. So we took an approach of building it from an anticipated number of plants of various different sizes and you can see those assumptions in the appendix. With that said, I would anticipate that it continues to grow across the coming years. It was a little hesitant to go larger until we start to see the commercialization of the plant build themselves, we're certainly seeing the most activity on feasibility and design studies than we have ever seen. So positive trend in that direction, but I'm looking for the certainty around some of these larger-scale actual plants being added to facilities. So that will be something key to watch to see that TAM grow from us. So it's on the horizon here and I was very bullish on this two years ago and I continue to be bullish, but I think we finally hit the point where the macro factors supports some of the larger industrial applications for the full solution. In terms of what we're seeing on the CCUS side and this is – we will roll Earthly Labs, the small-scale in with the larger industrial to kind of give you a number that's in the $40 million range in the year. With that said the margins on CCUS do depend on the application so Earthly Labs, obviously, is a very unique application, it's a very quick turn from booked to delivery and install and has a nice payback for the customers. And so those types of applications are above that 35% gross margin as a percent of sales mark. On the larger-scale industrial, the studies which are engineering work, we get nice margin on those but we roll it in our mindset towards the full project. So the larger size industrials will be at kind of that 30% mark and we don't anticipate that there's a lot of downside to that, but it's probably not a ton of upside to the margin on these larger projects just because of all the different input costs that go into them.

We got you. Great. And then for my second one, switching gears a little bit. I was a little surprised to see the Cryo Tank orders up, just given sort of the macro-environment and that tends to be a little bit more industrial gas oriented, good to see. And appreciating that hydrogen specialty, but as you do look into Europe and there's all this uncertainty, it sort of feels like to me and I'm just asking you maybe for color around this that, while there might be industrial gas question marks, it sort of feels like you're seeing an acceleration [Technical Difficulty] hydrogen in Europe as a geography or other hydrogen plus CCUS or whatever. That is over and above sort of what you would ordinarily do in just your regular normal industrial book of business, is that fair? And I guess associated with that, again, are you seeing anything different at all in just order activity in Europe?

Yeah. I think your point -- well, Ben you were at gas tech earlier in the quarter in September and what we heard and continue to hear from both the public and the private sector in EU is that, while there is this need for solving the nat gas issue in the near-term there is also an overarching feeling that sustainability has to remain top-of-mind for the region. I will also comment that during a recent visit to the EU in the last couple of weeks there is a lot of discussion from the governments that the US IRA has put additional pressure for the EU to do something on incentivizing the demand side for hydrogen in particular. So I think there's going to be continued acceleration in hydrogen in the EU as a whole and it's going to be a variety of different applications -- I sort of alluded to this in my prepared remarks, but I'll revisit it in that, we are seeing potential customers and existing customers that previously would have only talked about gaseous hydrogen, now coming to us and saying that the only way we can solve for, the distance we want to go on a train as an example or the linkage between a fuel-cell and the necessary equipment to power a more heavy-duty application requires liquid hydrogen. So there has been an evolution in the EU. I think that while nat gas is what gets the headlines in the news, hydrogen is definitely accelerating and we're seeing that as well in the order books with things like the work that we're doing equipment for, the hydrogen powered cruise ship as an example. Variety of different applications and uses and if the EU Commission decides that they're going to put something in play that is similar to the IRA, I think you're going to see that even further accelerate in 2023. With that said on the industrial gas side of things, it is something that we're watching in particular in the EU. Well, as a whole our industrial gas customers are telling us that they for their global outlook are kind of in that 4% to 6% range for 2023 in terms of growth over 2022, there is regional elements that go into that. And I would anticipate that we'll see flat on the EU side on tanks, there could be a little bit of timing around that where in the winter there's fewer purchased and in the spring there more, some of that timing just depends on their existing underutilized inventory that they have already in their asset fleet. As a whole, that's kind of how we've modeled it heading into 2023. So in particular in the region of Europe, I think that'll be out of all the regions in industrial gas the softness as we head into the New Year.

All right. I really appreciate it. Very thorough again. Thank you.

Thanks, Ben.

One moment for our next question. Your next question comes from John Walsh with Credit Suisse. Your line is open.

Hi, good morning, everyone.

Good morning, John.

I guess maybe just first thinking about the operating margin, I think you already went into detail on the quarter, but maybe you can just give us some of the expectations you have for Q4. And maybe even beyond since you have ‘23 out there, obviously, good momentum. But just maybe level-set us on the trajectory you see here from Q3?

Definitely. And as you said good momentum, that's our view as well. We were very pleased with the third quarter as a whole, in particular, three of the four segments sequential margin improvement. Certainly as you've heard me say previously, ours is not a quarterly business and so movements like we had in specialty aren't talking to us, but certainly it provide for more visibility into the fourth-quarter and the sequential margin improvement that we expect. So we're expecting as a whole our gross margin coming out of the year to be above 30% and that for the fourth quarter, so coming out of the year we will be meeting in the fourth-quarter with the operating margin in the mid-teens point. As you look across the segments, I would expect that sequentially Cryo Tank Solutions gross margin as a percent of sales increases into the fourth quarter. The heat transfer -- heat transfer [indiscernible] hard to keep that exactly like the third quarter, but it will be pretty darn close, we've got a good line of sight on the project mix in heat transfer. So we like that continued level of margin. Specialty, we see sequential step-up over a few 100 bps sequentially on the margin side. And then RSL we expect to be kind of in that 38-ish percent range in the fourth-quarter. Then as you head into 2023, I'm going to take this opportunity to remind everybody that in every year in the history of our world we expect this to be the same that the first-quarter of our year is always the lowest quarter of the year for all metrics and we would expect that to be the same scenario with the exception in HTS, because we have the backlog that supports kind of continued and more even sales across 2023. And then still we see -- we’d expect to see Q4 and Q1 margins look pretty similar and then step-up from there as the volumes grow in Q2, Q3 and Q4 of ‘23.

That's great. Thank you for that. And then maybe just switching to cash, if I did the math correct, next year you're kind of implying 13% or so free-cash flow margin. But obviously, you are going to be delivering a lot of sales and so probably building some working capital. Just curious what the levers are there to pull for that free-cash flow outlook? And maybe just as we think about these milestone payments that you have coming in Q4, I'm sure there some of those next year as well. Just maybe anything around that cash, because it looks like you have really strong cash next year.

Yes, we do anticipate really strong cash and it's never fun, people don't like to have a heavy fourth-quarter on any metric, but that's just the way that our projects schedules are. And so, the milestone payments in the fourth quarter are mid project milestone or early project milestone payments, so we definitely anticipate and have very specific scheduled around the 2023 full-year milestone payments. So those are our contributors, those are one of the levers. The other is that, we'll have some build of working capital on the AR side, but ultimately we have built so much safety stock on the inventory side that we at a point where we feel like we cannot hold as much on the inventory and bleed some of that out so that's another lever to pull from a working capital perspective. So all-in all the 13% we think is kind of right damn fairway number and with the milestone payment schedule, it gives us the confidence to put that number out there right now.

Great. Thanks for the details. I'll pass it along.

Thank you, John.

One moment for our next question. Our next question comes from Rob Brown with Lake Street Capital Markets. Your line is open.

Good morning, Jill.

Hey, Rob. Good morning.

Maybe sticking on the margin question sort of -- does this kind of plays out and not necessarily next year, but what sort of the operating margin you think you can get the business to and how do you we see that?

So I will -- I think we can get the business to 20% plus operating margin in the coming couple of years, and that's with multiple different reasons for that, including the automation of productivity that we have underway, but also the combination that it sounds like I’m beating a dead horse here on the combination of these $10 million to $40 million projects in conjunction with some of the larger projects that really allows us to manage our shops better, have more than one location where we make these and not have to have the whipsaw effect that you had seen over historical cycles where we had to quickly add a lot of labor and then quickly take that labor out. So all in all, that is certainly within our targets. It's within our targets that we have out through 2024 and 2025. To be specific, we've got operating margins in our targets in 2024 for the year at 20%, and then we have it actually increasing by about 100 bps into 2025.

Okay. Great. Thanks for the clarity there. And then on your '23 kind of outlook, what's sort of your assumptions around European kind of energy and supply chain issues? Are they -- are you assuming they get better? Are you assuming they stay about the same -- assuming they get worse, but what's sort of your assumptions there?

Yes. In our current outlook, we assume that they get worse before getting better across the coming kind of six months or maybe its four months. But through the winter we expect that it's going to get worse and then return to kind of where we are now. But our assumption is that, there is no silver bullet that makes that situation better. Now the opposite side of the coin is that's a positive for our business in the sense of demand and being able to help on the energy access side of things, and we're certainly seeing regas terminal activity, some of the Dagger, the mobile regas units that we have being adopted by new customers very quickly. And that's a solution that we can solve for and deliver in a matter of months versus larger terminals that get built in years. So it's a double-edged coin because in manufacturing world, the input costs and the uncertainty exists, yet the opposite side of that is, we're able to anticipate more demand associated with the European regions trying to resolve this energy issue.

Okay. Thank you. I’ll turn it over.

Thank you, Rob.

One moment for our next question. Our next question comes from Sam Burwell with Jefferies. Your line is open.

Hi. Good morning, everybody. I wanted to circle back towards carbon capture. And I mean, as I understand that your Cryo Solution is differentiated from most others in the carbon capture space. So I was curious if you could sort of breakdown how you think about how your TAM compares to others and that you're better suited to retrofit existing facilities versus others you kind of require new builds. And then in terms of what we can expect to see in terms of the MOUs like bearing fruit with orders coming in and ultimately, the revenue is being recognized. What's the time frame you guys see in terms of being able to have us like see orders and revenues come in from carbon capture at least for the large-scale industrial stuff.

Absolutely. So great questions. And on the SDS cryogenic carbon capture technology or CCC, as we call it, it definitely is differentiated very, very strong applications for the retrofits in particular, in large industrial applications, where we've seen the majority of the work come into our order book to date have been in industrial manufacturers, so ranging from studies for a large metals manufacturer, to cement plants, to International Flavors & Fragrances, there is a variety of different retrofit studies that have been completed or are in place. So in terms of the TAM, I think you're going to see larger TAMs out there for carbon capture as a whole than what we show. Ours is being built up and saying, okay, realistically how many of these plants are going to be built in this period of time. The larger the CCUS plant gets the longer period of time it takes to build. So my view is, if you ask for a TAM that was out into 2035 or 2040, you're going to see a sharp ramp from 2030 to those periods of time, because this will become more standard. It will become more standard sizes and the applications will have kind of picked the technology that they want to use. So on a longer view, I think that we're really, really well positioned, well positioned this decade but really well positioned in the coming couple of decades. With that said, on how these MOUs play out into the order book. I'll give you one example. We weren't allowed to provide specifics, but I commented that the one MOU that came with a master service agreement in the quarter, which is for a large beverage manufacturer. With that MOU when we signed it, we received about $2.5 million order for Co2 related equipment for their facilities and that is in conjunction with carbon capture. In addition to that, the majority of the MOUs that we signed in the quarter came with some order associated with it, not certainly at the $2.5 million level, but we're starting to see these relationships really benefit the order book. And the other part that I like about the partnerships and collaborations is that, it pulls you through to end markets that were not necessarily kind of already well positioned in. So for example, South Africa with CAT Group is a market that they're strong in, and they can pull our technology through the opposite weigh, not just geographies, but end markets and applications like the AG gas agreement where we're having access to agriculture, further penetrating that and it opens up the option for and what I believe will be the larger TAM as we hit more of these end markets. So still really embryonic, but I think the future is very bright for carbon capture. And I think we made the investments in the technology at the right time so that we had this kind of runway to get to the point that we are commercialized and this can be built tomorrow when someone places an order.

Got it. That's very, very helpful. And then maybe another one going back to LNG. You guys have obviously done a really good job winning orders for modular train projects between Venture and Cheniere and the New Fortress as well. Just curious what the TAM that you guys associate with LNG, how much sort of like increase in modularity, does that assume? And does that really hit on kind of the smaller ticket items? Or do you think that there will be like a wave of sort of larger but modular train projects that you guys can capture business on?

Yes. So the numbers that we put out there, which I think we're on slide 28 of the supplemental deck, this is built up from actual project discussions with customers that were mid-flight on design phase or other even further along in some cases. So some of that is less of -- well, all of that is less of a top-down view than a bottoms-up view, which in my world gives me more confidence than if we just said the world as a whole and we take a percent of the TAM. So I feel really good about the fact that we're well positioned on the projects that you see on slide 28 in that $5.6 plus billion of larger addressable market. The caveat to that is how -- when these projects go or if they go. If you asked us this question two years ago, that number would have been a lot smaller because of exactly your point, Sam, on the fact that the movement has been to -- in modularity could be semantics, right? There's a lot of questions. People say, what does modularity be? But what it means in our world is this mid-scale and the utilization of IPSMR as a process technology and not doing a full 20 MTPA baseload facility all at once but rather doing one or two or three MTPA trains and having the optionality as an operator to link them together and to do them at whatever point in the time line works for the balance sheet. So absolutely I think that the addressable market has grown as a result of this movement at the macro level, but also our positioning in with some multiple international oil companies for the validation of the process itself. I'll come back around on your actual question, which is, do I think that there's more out there than what we're showing and there could be more if this trend continues, very direct answer is, yes. There is more out there. We're consistently getting inbound on small-scale and floaters that were not in the pipeline a day ago. I can give you an example just from this week, on Tuesday afternoon, I got to reach out from an associate that had moved between firms. And they're at a new potential customer that had been talking to us about an LNG project. And now they're saying, "Hey, we're going to move this direction to the smaller size and we want to work with you on IPSMR." So there is definitely more potential opportunities that are out there on the small scale and the floating. Thank you for that question.

Yeah. Got it. Thanks, Jill.

Thank you, Sam.

One moment for our next question. Our next question comes from Martin Malloy with Johnson Rice. Your line is open.

Good morning. Congratulations on the strong order quarter. My first question was on -- it’s actually on slide eight, water treatment. It looks like the second largest TAM in the near term there and a big increase from what was previously there. Could you maybe talk -- give us a little more color on what's going on in water treatment? And then also food and beverage, without -- I would have expected an increase there, given what's going on with Co2, pricing for pure Co2. So maybe if you can comment on those areas.

Absolutely. Thanks, Marty. So on the water side of things, we have -- we always thought water was kind of an underappreciated piece of our portfolio. And now that we have the technologies via BlueInGreen and AdEdge, we have been able to penetrate more markets than we could have with just equipment. And now we're a year in on having technology that hits all 300-plus contaminants. With that, what we have seen are larger wins in the international markets, and the international markets member states, so we'll take India as an example, where once you are doing a project already, there's numerous follow-on projects that their respective state will make the decision on what technology and who is the provider of that. So one of the increases in the TAM on water is driven by India. You may recall that we have had two larger water treatment wins in India, about $5 million a pop this year to date. And those same states were in discussions on multiple other projects that those same states are looking to do in the near term. The other large geography that we've been able to penetrate over the last year or so is Brazil with the Sao Paulo Brazil water treatment project. So now that we're established again as an entity to be able to operate in these regions with proven treatment technologies, we're in discussions for more and more projects. So we wanted to wait until we got to a point where we had enough of that experience that already in the backlog before we said we think that there's a lot more here in a very short period of time. Then the other piece, I would say, is we're seeing larger order sizes as a whole, and that's content. It's driven by content, it's driven by the type of contaminants. Just this month in October, we received another $3 million water treatment order in the United States. So it gives you a sense that what we're previously when we were doing a tank for a water project, it could be $100,000 to $250,000. And now we're seeing multimillion dollar projects in the pipeline. So those are some of the bigger contributors to the penetration on the water side and the larger increase in the near-term TAM. I'd also say that what's contemplated in part in the water TAM is the inter linkages of the Nexus of Clean. So if you said, pick three areas of the business that are benefiting from being together, I'd say, food and beverage, water and carbon capture. Because we're seeing food and -- traditional food and bev customers talk to us about water treatment. We're seeing Earthly Labs customers talk to us about tanks for their applications and water. So we really like that. It's starting to coalesce, but it's not there. So we only baked a little bit of that in the past. And then the last part of your question on the food and bev is not increasing. We have a fairly consistent set of customers on the food and beverage kind of traditional side. And we think we've captured the TAM for the Co2 shortages in some of these other specialty areas. So we didn't increase -- we did not increase the food and bev TAM there. But we are continuing to get new customers in that market. And so I would say, while we haven't increased the TAM itself, I believe that our market share is increasing in food and bev, in particular on some really nice national accounts that have multi-store builds.

Great. And my second question, I wanted to ask about the leasing business. And it looks like you've got strong orders on the ISO container side. Could you maybe talk about what you're seeing on the outlook for the leasing business?

Absolutely. So on the leasing business we continue to invest our organic CapEx into the fleet itself. We did a pretty big ramp between the middle of 2020 and the middle of 2021. And then over the last year, we've probably put in another kind of $7 million, $8 million of CapEx. With that said, we continue to stay very disciplined on what is in that leasing fleet. So that standard product that if it is returned we're able to redeploy it. It's rarely returned. I can tell you almost the majority of the time, certainly, the leaseholder end up buying the equipment. So good outlook on the leasing side. It is a function of how fast it grows is a direct function of our ability to add to the fleet itself. The ISO container side, we've actually seen more outright buys than leases on the ISO side. And I think that is a direct result of the movement towards this energy access and security and resiliency trend. We're looking ahead to seeing the leasing business continue to grow. It's a nice tool to have in the portfolio when you're talking with customers that have a bookend to their capital budget. And I think that where you'll also see an uptick on the leasing side in the portfolio is if we are to offer leasing options on trailers or tanks for hydrogen applications.

Great. Thank you very much.

Thanks, Marty.

One moment for our next question. Our next question comes from Marc Bianchi with Cowen. Your line is open.

Hi. Thank you. Just first off, I'd like to confirm the year-to-date EPS that would be consistent with the guidance. I see $3.04 for year-to-date. Is that correct?

That is correct.

Okay. Great. So implying $1.96 to $2.21 for the fourth quarter. What tax rate is assumed for fourth quarter? I got you on the 17% for the year, but it looks like there was a pretty big tax benefit in the third quarter and that might bring down the full [Technical Difficulty] year, but maybe the fourth quarter is still 20% or something. Can you just clarify that?

Yes. So in the third quarter, we did have tax benefit in China, which was the release of the valuation allowance associated with kind of continued improvements in our results in China and some of our foreign jurisdictions. I anticipate that the fourth quarter, though, doesn't have that onetime benefit that we saw. And so, in the kind of low 20% for the fourth quarter.

Got you. Got you. Okay. And then last one for me. Just on the free cash flow. Can you talk about the nonrecurring costs that are added back. It was, I guess, $43 million year-to-date. What sort of the expectation for fourth quarter when we try to -- as we're thinking about the guidance for the year here?

Yes. So we would -- what we've modeled for the add-backs in the fourth quarter is about $5 million on nonrecurring. It could be a little bit higher than that. And then we would have nothing on the inventory for strategic build as we're looking to drive that inventory down and given the profile of our shipments in the fourth quarter we anticipate inventory to decrease, and then there would not be anything related to divestiture-related tax payments or we don't have any escrows coming through release.

Okay. Can you talk about sort of what the year-to-date includes that $43 million that I referenced? It sounds like maybe it's some of the stuff you just said, but just curious if you could spend a little more time on it?

Yes. So there's -- the add-back specifics by category, there's some details in the appendix of the deck, I think on slide 43 maybe. In there, we have restructured. [Technical Difficulty] And I can run through some of those if you want.

I was just curious, yes, I mean, the biggest bucket is that sort of nonrecurring items outside of the working capital movements and that totaled $43 million year-to-date, I guess it was $13 million in the most recent quarter. Maybe just discuss what that is? And I guess the implication of calling that out is that it's not going to be something that we would see in 2023? I guess I just want to kind of confirm that.

Yes. So let me run through each category there. Sorry, Marc, I didn't understand it first what you're asking, but I do now. The implication is that, we would have some add backs in 2023, but not all of these categories that you see today. The restructuring category relates to severance and other kind of organizational restructuring, which we've had, I commented on the RSL, which actually we reduced add-backs this quarter can we had an excess accrual associated with that. And that was around restructuring the management in the RSL segment itself. On the deal and integration related costs, we only add back year one integration related. So you would see that completely unless we did another deal between now and any time in 2023. The last acquisition we did was Fronti in May of this year. So you'd see integration-related begun by next May and fairly minimal just given the fact that Fronti and CSC were very small on acquisitions themselves. And then while you also would see anything that is related to the one free closing liability that we have remaining related to the Cryo bio divestiture and any deal or acquisition-related actual deal costs themselves. Then on organic startup, similar where these -- as these startups come into play, then we would not have add-backs related to that. So for example, as we completed the air cooler consolidation in the second quarter, you didn't have any add-backs related to that in the third quarter. The brazed aluminum pulse line, we'd anticipate that one comes off here in the first quarter when it's up and running. German trailers will run through the middle of '23. The vapor riser line will be fully up and running by the end of this year and then the training cost is actually just excess bullet because it's really captured in the first -- in the start-up costs themselves. And then on an ongoing basis, you would have each quarter mark-to-market whatever direction it goes up or down has either added back or reduced?

Got you. Okay. So is there any steer on what the number ought to be for '23 if we think about like the reported free cash flow and the adjusted free cash flow, what the difference there would be in 2023?

Yes. I would say sub half of what you see for 2022.

Okay. Great. Thanks so much Jill. I’ll turn it back.

Thank you, Marc.

[Operator Instructions] One moment for our next question. Next question comes from Walter Liptak with Seaport Research. Your line is open.

Hi. Thanks. Good morning, guys. I wanted to ask kind of a follow-on. You talked earlier about gross margins, operating margins for 2023. I wonder if you can just help us with the cadence of revenue and the way you think the EPS are going to flow in 2023? Are we looking at something similar to this year, maybe with better supply chain or some of the project work for LNG, there's a different cadence?

Yes. So I'll start comment of the first quarter every year is lowest quarter, and that is certainly going to be the case in 2023. That's a function of when the customers want the standard product, kind of the difference between book and shift based on the holiday booking period to the shipments themselves, whereas on the project side, that's a little more consistent. So Q1, certainly the lowest from a sales perspective. And then what I would anticipate, which would be similar to this year is Q2 every quarter being sequential. So if you look back before this past year, we would have had Q1 as the lowest quarter and Q4 as the second lowest quarter. This year, we'll have each quarter sequentially increasing from the top line. Next year would be the same scenario, so Q1 to Q2 and so on.

Thank you. One moment for our next question. Our next question comes from Craig Shere with Tuohy Brothers. Your line is open.

Good morning. Jill, just a couple of follow-ups on prior questions. First, in your discussion on water in the Nexus of Clean, I was a little surprised that you didn't mention the need for clean water in hydrogen water electrolysis. Is that because that is not more of an immediate but maybe multiple out quarters or two to three years before that becomes more meaningful versus some of the other water drivers? And maybe you can elaborate on that.

That's exactly right, Craig. So it's definitely one that where we have a lot of inbound interest on. We're just getting to the point where it is commercially ready. It's just getting these guys to place orders around it. When -- as we were building the TAM and talking about it internally, the guys brought that up and had a pretty big number associated with it for the 2030 mark, the $750 million was the number that they gave me. We just said, let's see some commercial activity before we put that out there.

Okay. Great. And lastly, on the subject of acquisition costs and integration costs and onetime items, I think one of the things that might have been lost in that discussion is you're historically lower than most company acquisition expenses because they're direct usually, if not every time up until now without any banking fees whatsoever. And maybe some thoughts about ongoing or perpetuity returns from these comparably low-cost investments.

Yes, we definitely we definitely spend less on most deals than what you would anticipate for a company like us and that has been the result of the relationships and kind of the bolt-on nature of the acquisitions that we do. We expect that these deals in the majority of deals that we've done, we have on day one said they will be accretive to us coming out of the gate, and the majority of these have returned as we expected them to. So across the coming years, we'll continue to anticipate that they grow at or above the numbers that you see for the total company, and that is the case as we've modeled into 2023. And I think where you're going to see even further returns is as this concept of the nexus of clean or the inter linkages where the fact that we wouldn't be getting certain orders in water if we didn't have Earthly Labs as an example, or we wouldn't be getting orders in SCS carbon capture if we didn't have AdEdge in the portfolio, because their customers are coming to our portfolio for multiple solutions. And that's where I really see besides the standard answer of how we model and why we buy these things, that's where I really see the differentiated value opportunity ahead by having this combination of the portfolio that we've made over the last three years.

Thank you.