Hello and welcome to the Chart Industries and Flowserve Corporation conference call. Following prepared remarks, instructions will be provided for the question-and-answer session. As a reminder, today's conference call is being recorded. Turning to slide two, the discussion will contain forward-looking statements that are based upon information available as of today. Actual results may differ due to risks and uncertainties, and the companies undertake no obligation to revise or update such statements. Please refer to additional information included in the press release, investor presentation, and SEC filings of both Chart Industries and Flowserve Corporation, which are available on the website of each respective company. Turning to slide three, today's presenters are Chart Industries President and Chief Executive Officer Jill Evanko, and Chief Financial Officer Joe Brinkman, and Flowserve Corporation's President and Chief Executive Officer Scott Rowe, and Chief Financial Officer Amy Schwetz.
At this time, I would like to turn the call over to Ms. Evanko. Please go ahead.
Thank you, Lynette. Good morning, and thank you for joining us today. This is an exciting day as we announce the transformational merger of Chart and Flowserve, which will create a scaled, differentiated leader in industrial process technologies. With this combination, we will build on the significant progress both Chart and Flowserve have made in recent years. Together, we are establishing a high-performance platform to deliver value-added process technologies, products, systems, and services to our global customer base. With a comprehensive portfolio of flow and thermal management solutions to support more customers across end markets, we will unlock new opportunities and deliver differentiated growth. At the same time, our increased diversity and strong financial foundation will provide greater scale and resilience, as well as enable us to enhance value for all shareholders.
This is truly a landmark moment for both businesses, and one that would not be possible without the incredible work of our Chart and Flowserve team members around the world. As you'll see on slide five, bringing together our two businesses creates a more resilient and diversified business poised to perform through market cycles, drive profitable growth, and sustain cash flow. Together, we will have greater scale, diversification, and global reach, with further exposure to premium, high-growth end markets. Our substantial combined aftermarket business and expanded global install base will allow us to drive strong, recurring revenue streams and spur new growth on day one of closing. We also see meaningful opportunities to enhance our efficiency and profitability as we unlock the synergy of these two combinations.
With a strong financial profile and robust cash flow, we will be operating from a solid financial foundation to execute against our disciplined and balanced capital allocation framework that is focused on value creation. We believe our combined company will be defined by our shared values, grounded in a commitment to safety, innovation, communities, and a passion for delivering results. Before we get deeper into strategic and financial benefits, I'll review the transaction terms on slide six. This is structured as an all-stock merger of equals. At close, Chart shareholders will own approximately 53.5%, and Flowserve shareholders will own approximately 46.5% of the combined company on a fully diluted basis. Chart has a strong track record of realizing synergy opportunities through prior transactions, with the successful integration of Howden serving as the latest example.
This merger is anticipated to drive approximately $300 million in annual cost synergies, with additional upside from commercial revenue synergies. In this combination, we are also bringing together our teams. I will serve as Board Chair, and Scott will serve as CEO. The Board will be comprised of 12 directors, with six from each company. We will be headquartered in Dallas, Texas, and we expect to maintain a presence in both Atlanta and Houston, supported by both of our global footprints across more than 50 countries. We expect to close the transaction in the fourth quarter of 2025, subject to approval by Chart and Flowserve shareholders, regulatory approvals, and other customary closing conditions. Through this merger, we will create a scaled leader well-positioned to enhance value for shareholders.
As you'll see on slide seven, the combined company will have combined revenue of $8.8 billion, with a strong growth rate and an attractive margin profile. We'll also be able to translate this profitability to robust cash flows, with $1.8 billion in combined cash flow over the 12 months ended March 31, 2025, inclusive of anticipated annualized cost synergies and defined as EBITDA less capital expenditures. This, along with our strong balance sheet, will provide us with considerable flexibility. Turning to slide eight, together, we expect to accelerate our progress and capture new and exciting opportunities as we capitalize on macro and secular tailwinds. An important one is the increasing need for energy globally. This includes energy intensity, energy security, energy access, and decarbonization. For example, artificial intelligence and data center growth are driving demand across all forms of power generation, including nuclear.
Another important secular trend is the need to repair aging infrastructure. In addition to our broad service network, we can also leverage retrofits, spares, digital, and new equipment for this market. Turning to slide nine, you can see how this merger will allow Chart and Flowserve to take a significant step forward in our journeys to diversify our businesses, creating a more resilient platform that is poised for growth. This merger will allow us to utilize our complementary strengths in key end markets to accelerate our penetration of growing premium end markets. We'll also be able to further accelerate growth by bringing each business into new geographies where the other has a strong footprint. For example, Flowserve has a strong footprint in the Middle East, an area of strategic growth for both companies.
Another example is Chart's global systems capabilities, which will be able to pull greater content through in high-growth markets. Our diversification across end markets and geographies, along with our strong aftermarket business, will provide us with a much more predictable set of earnings. In fact, on a combined basis, our historical revenue volatility improves by almost four full percentage points. With that, I'll now turn it over to Flowserve CEO Scott to dive further into some of the opportunities we expect to generate and our vision for the future as the combined company.
Great. Thank you, Jill. I'm very happy to be here with you today to announce this incredible milestone that builds on the success of both companies over the last several years. I've known Jill and Chart's team for many years, and one of the key reasons we see such an amazing opportunity through this merger is that we share a vision for success. Turning to slide ten, if you look at the 3D strategy and Chart's nexus of clean strategy, you can see that we've been taking many of the same steps on our strategic journeys. We have both expanded into new high-growth end markets and developed a suite of low-carbon solutions to support our customers' decarbonization efforts. Overall, we share a very similar strategy to deliver value for our shareholders. While we have similar strategies, we have led to many opportunities across a broad range of end markets.
Each company brings a different level of maturity in select end markets. As we bring together our highly complementary products and technology, we will be able to accelerate our strategic progress to generate new opportunities across end markets. Combining our capabilities will also allow us to deliver a complete systems offering from front-end engineering design and process technologies to mission-critical equipment through aftermarket services to a broader range of customers. This will unlock considerable cross-selling and product pull-through opportunities across a wide range of end markets. Turning to slide 11, you will see that our true differentiator will be leading with process technology designed to solve our customers' biggest challenges. These innovative technologies will pull through a comprehensive and complementary set of technically differentiated equipment, creating an integrated system for our customers.
We can then provide full lifecycle support for our customers through our expansive geographic presence and broad aftermarket capabilities. Combining Red Raven IoT with Chart's Uptime and VinSim platforms, which focus on seamlessly gathering and integrating the physical sensor data from all rotating equipment, will allow us to offer an unmatched customer experience to monitor, optimize, and protect their systems and assets. Our digitally integrated systems will allow us to grow our relationships with customers and create more opportunities for our aftermarket services as we become the first line of defense to help our customers protect and enhance their operations. On slide 12, you can see how our complementary portfolios fit together. Combining Chart's leading expertise and process technologies across compression, thermal, cryogenic, and specialty solutions, and Flowserve's leading capabilities in flow management will allow us to provide customers with a broad portfolio of end-to-end solutions.
The integration of Chart and Flowserve's products enables us to meet the demand for comprehensive industrial process technologies and services across diverse end markets. Our combined differentiated portfolio will allow us to provide a superior customer experience and improve our ability to deliver high-quality, value-added solutions to the expanded global customer base. Together, we have the capabilities to bring a new kind of specialized and highly differentiated approach to the industry. We will be positioned to deliver more high-impact, value-driven engagements to customers from front-end engineering design through aftermarket services across different end markets. On slide 13, we've laid out how these systems will look in two different customer environments: liquefied natural gas and nuclear. Looking at each phase of this full lifecycle approach, we will have consultative design and process technology capabilities in which multiple products can be included and specified in system configuration.
Our joint engineering expertise will allow us to collaborate with our customers' technical teams in a deeper and more meaningful way. By working with customers on specifications and product selection, we will be able to help them drive efficiency and safety through effective process flow control and thermal management practices. This complete systems approach will generate further opportunities for our services as we will have multiple product integration touchpoints that will require a more sophisticated product approach. For example, Chart's process technology called IPSMR is driving additional opportunities in modular LNG projects. Our full system approach will offer customers unmatched value and integration across their operations, making us a true partner of choice to our global customer base across a wide range of end markets.
Turning now to slide 14, both Chart and Flowserve have focused on building and growing their aftermarket franchises in recent years, driving more predictable and resilient revenue while also delivering margin expansion. With a vastly expanded global installed base of nearly 5.5 million assets, we are creating a nearly $4 billion aftermarket franchise. The combined aftermarket business will provide profitable recurring revenue and deliver unmatched service levels to our customers. We will be able to leverage our combined service center footprint of more than 200 locations globally to deploy Chart and Flowserve services. As we further deploy our digital platform, we will be able to help our customers monitor their assets, predict unplanned downtime, as well as drive further productivity and operability within their industrial processes. What you see on this slide is just the starting point. We expect to accelerate our aftermarket growth through this combination.
I'll now turn it over to Joe to provide more insights on the combined business.
Thanks, Scott. Turning to a breakdown of our synergies on slide 15, given the complementary nature of our businesses and operations, we expect to unlock significant cost synergies as we integrate our companies. In total, we expect to generate approximately $300 million annual cost synergies within three years following the transaction close, primarily driven from materials and procurement savings, roofline consolidation, organization efficiencies, and consolidation of duplicate public company costs. We also expect to drive significant upside from commercial revenue synergies over time, representing an incremental 2% growth on the combined company's revenue. In terms of capabilities, the Chart team brings tremendous experience in the synergy space, having just delivered a significant level of synergies with the Howden acquisition. Based on our early assessments between Chart and Flowserve and by leveraging the learnings from the Howden integration, we see significant opportunities to deliver value across the combined company.
With that, I'll turn the call over to Amy.
Thanks, Joe. Let's dive into how this merger will not only bolster how we serve our customers, but also how it will provide a strong financial profile to drive enhanced shareholder value. As you see on slide 16, together, we will have a highly efficient business model at scale within the industrial space. With our expected synergies, our strong margin profile will create flexibility and enable further investment in the business, generating more opportunity for growth. We believe the combination establishes a new leading industrial company from a scale and profitability standpoint, positioned well to create value for shareholders and customers against this tier set. Turning to slide 17, the compelling synergies that Joe just touched on will build on what will already be a strong financial foundation.
We expect to have robust cash flow generation as Chart and Flowserve have delivered a combined $1.5 billion of cash flow as defined as EBITDA less capital expenditures over the last 12 months as of the first quarter of 2025. Capital expenditure needs for this business are expected to be relatively modest at approximately 2% of sales. This, coupled with an anticipated conservative leverage ratio of two times net debt to adjusted EBITDA at close, creates ample flexibility to execute on our disciplined and balanced capital allocation framework, which will include delivering and simplifying our balance sheet to match the attributes of investment grade, making growth investments, and returning capital to shareholders. Notably, we expect to pay a regular dividend consistent with Flowserve's historical per-share payout levels, as well as utilize share repurchases to offset equity dilution.
I'll also note that in addition to the synergies Joe described earlier, we believe the combined financial profile will generate more than $25 million in interest savings in the first year. I'll pass it back to Scott to conclude the prepared remarks.
Thanks, Amy. Turning to slide 18, as Jill noted at the start, what makes this combination truly special is our shared set of values and commitment to supporting associates and customers that will carry on as a combined company. Both our businesses recognize that our associates are the bedrock of our success, and we will continue to foster a culture that emphasizes safety, empowers innovation, and delivers career growth opportunities. These values have been key to both companies' success, and we intend to ingrain them into our combined company. We will also remain committed to providing the highest level of service to our customers. This transaction is truly about bringing together capabilities that will allow us to better support our existing customers and broaden our reach and offering to serve new customers. We are only successful if we deliver for our customers.
Together, we'll have an expanded set of innovative capabilities to help our customers conquer the biggest industrial challenges and achieve their goals. To conclude, this is truly a historic day for Chart, Flowserve, and our combined stakeholders. Through this transaction, Chart and Flowserve will set a new course as a scaled, differentiated industrial leader poised for significant growth and value creation. Bringing together our complementary portfolio will allow us to deliver a suite of end-to-end solutions and offer a system approach to support the full customer lifecycle. With increased exposure to diversified and attractive end markets and expanded aftermarket franchise, we will become more resilient and capitalize on the opportunities regardless of the market condition. Underpinning all of this is our strong financial foundation and cash flow generation that will position us for success and allow us to continue to invest in growth and delivering shareholder returns.
I want to thank the associates at both Flowserve and Chart for their hard work and dedication to serving our customers with excellence. I'm excited to embark on this journey with you, and I can't wait to see what we can accomplish together. Operator will now open the line for questions.
Thank you. If you are dialed in via the phone and would like to ask a question, please signal by pressing star one on your telephone keypad. If you are joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on your phone line will indicate when your line is open. We do ask that you please state your name and company before posing your question. Again, that is the star key followed by the digit one if you have a question or a comment. We'll move to the first caller in the queue. Caller, please go ahead. Your line is open.
Hi, this is Mike Halloran. Can you hear me?
Yeah, good morning, Mike.
Hi, Mike.
All right, sorry. Hey, first, congratulations, everyone. I know it's probably a lot of work on your end, so I certainly appreciate the effort it took here. First question is kind of a twofold one. First, I certainly understand everything you laid out on the slide as far as how the companies can work together. Why now from a transaction perspective? Then secondarily, probably a little more for Scott, could you put the transaction in context of the simplification and complexity reduction you're doing with Flowserve? Maybe why now is a good time relative to those moves and what you can do with the combined entity and how you can take some of those learnings to the combined entity?
Sure. Let me start, and then I want Joe to touch on kind of the market and the mega trends on why now.
Really, when we look at both companies, Flowserve that, Mike, you know very well, right? We've made tremendous progress on the 3D strategy. We've made progress with the Flowserve business system. We've got tremendous momentum. When we look at what Chart and Jill have done over the last couple of years, it's the exact same thing, right? The margin expansion, the revenue growth, all on the back of the Howden acquisition, the successful integration, and the synergy realization has been an amazing journey. I just think that the timing is absolutely perfect. We've got positive momentum with both organizations. We've really dialed up the ability to operate and execute for our customers. I just think it positions us incredibly well to do this at this time.
Bringing it together, as we talked about right now, allows us to create a very differentiated industrial leader that does both thermal and flow management. Any industrial complex out there, no matter the end market, will benefit from our ability to support both thermal and flow management. Joe, maybe talk about the mega trends and why the timing in the market is right.
Yeah, I would echo what Scott already said around our respective strategies, the journeys we've been on, and this being a point in time where we're just going to further accelerate this through the combined entity. On the mega trends, this is a great time in the market where we're seeing, with our systems and solutions capability, the opportunity to continue to build more content as we have done in the Chart standalone business over the last few years. Adding Flowserve's wonderful product offering as well as the aftermarket capabilities are really going to further our ability to get deep in these end markets that have the mega trends associated with them. We're seeing that in liquefied natural gas. We're seeing that in power generation as a whole, where both companies are very well positioned with complementary products.
We're seeing that in the water treatment end market as an example, where both of us play. Globally, there's just an enormous amount of secular tailwinds that are driving both businesses on their own and combined together are going to give us even more ability to penetrate these high-growth end markets with the full solution and system offering. I can't stress enough the entire life cycle from front-end engineering design all the way through to the life cycle, the aftermarket services, and as Amy pointed out, a combined 200-plus service center footprint. It's an exciting time to continue the journey and build on the journeys that we've both had independently.
Yeah. We think this is the exact right time to bring our two companies together. Mike, maybe on your second question, I'll just provide background for those that do not know. Flowserve has been on a journey of complexity reduction. We're doing this on the back of an 80/20 program where we're following that methodology pretty fully. I'd say, Mike, as you know well, right, we have five product business units or five major verticals around those products. The whole complexity reduction is about how do we optimize that product family. We're well down the line there. We're not going to slow that down. Let's just use the valve example.
As FCV optimizes their portfolio, what that does is now allow us to put the right products and the right technology on the back of some of the process technologies that Chart will bring. We feel like the optimization of the product families is the right way to go. We feel like that plugs in nicely with our complementary products and offering at the Chart side. We will look at taking those product families and pulling them into the back of the process technologies.
No, that's helpful. The second one here is just pretty straightforward. 2% plus or minus is what you talk to as far as growth additive. Maybe just a sense for how much overlap there is through channel for you guys right now and where that opportunity sits. Is it just further penetrating customers where you have overlap? Is it existing customers that maybe you don't have that overlap on? More of a sense for how deep that opportunity is.
Yeah. So I think really, when we think about the product pull-through, there's two things. One is geography, and then second is product pull-through on the back of technology. I'll touch geography. I'll let Joe talk about how Chart can pull through some of the products on the back of their technology, very similar to what they did with Howden. On the geographic side, while both companies are incredibly diverse and operate around the world, there are countries where Flowserve has better market penetration. In the prepared remarks, Joe talked about the Middle East, where we do incredibly well. Chart's presence there is good, but maybe not as good as we want. We see a tremendous opportunity to expand the offering in the Middle East on the back of the work and the infrastructure that we have there.
There are other geographies that we're targeting where Chart has done incredibly well, and we look to leverage some of their relationships and market there.
What we see is the ability to pull through not only on the geography side, but also on the end market side, where Flowserve has a real strong position, for example, in nuclear, and we have a great nuclear offering. This will be a great way to pull Chart products through to Flowserve's end markets. In the system solution side, with Chart pulling Flowserve equipment through, maybe I'll give a very tactical example here on the LNG side with our IPSMR process technology that Scott referred to in the prepared remarks. We have the process technology that is utilized in LNG liquefaction in large export facilities around the world. Most recently, we've talked about our IPSMR being used in Cheniere's Corpus Christi stage three facility. It's been selected by ExxonMobil for use in Mozambique's Rovuma and multiple other applications.
With that, to date, as a standalone company, we have had mission-critical equipment that goes into that offering, such as brazed aluminum heat exchangers, compression capabilities, air coolers, and so on. What we see is being able to pull through more content with this combination is from Flowserve's expansion valves, control valves, and those can be incorporated on day one. Also, utilization of Flowserve equipment in end-use and re-gas applications. That would be on the other side of export, on the import side, where we could utilize seawater pumps, high-pressure pumps, cryogenic pumps, incorporate those same applications into the fuel station and vaporizer offering that we have. That is just one example with a lot of detail, but that is, I think, a great way to characterize one end market, and we have laid out a dozen end markets that we can do that in.
Maybe just to put a pin on the growth side, we put 2% there as kind of a way to think about that's incremental growth to what we would get on top of the market. As you can expect, the teams have been working together incredibly closely now for four or five weeks. The growth workstream seems to be having the most fun right now. They're identifying a lot of opportunities. There's a detailed plan in terms of how do we unlock the geographic potential, but also how do we make sure that we're pulling the products across and leveraging the combined offering. I'm pretty excited to see that growth and pretty confident that the 2% is a really good number at this point.
Thanks, Scott. Thanks, Joe.
Thanks, Mike.
Thank you. At this time, we'll move to the next caller on the queue. Caller, please state your name and company.
Hi, good morning. Jill and Scott, it's Saurabh from Bank of America.
Hey, good morning, Saurabh.
Hey, Jill. Scott, I want to touch on the aftermarket side of the business a little bit. Jill, you know we talk a lot about that on the Chart side of things, but just looking at the numbers you laid out, 33% on the Chart side, 51% on the Flowserve side. So 42%, which is a really big number, and you talked about further accelerating that. Maybe you can spend a little time on how do you plan to do that? Is it about attachment rate? Is it about geographical complementarity? Just spend a little time maybe to talk about the aftermarket side of things.
Absolutely. We are super excited to continue to build the aftermarket in the combined business at about 42% of combined revenue. This is a great part of the resiliency story, the predictability story, as well as continuing the opportunity to further expand margin. With that, leveraging Flowserve's service centers as well as Chart's service centers globally, that is a pretty complementary footprint that we have in those respective service center locations. Scott mentioned the five and a half million install base, asset install base. That being able to cover that gives us an exceptional amount of opportunity, and attachment rate is an area that we see to be able to deliver more and more growth on the aftermarket side of things.
In addition to that, and I'm going to hand it over to Scott to talk about the digital side, because I think that that's something that in the combined business, from a Chart standalone perspective, we were starting to get some traction on the digital uptime and how to invent them offering, but this is going to really bolster that opportunity to penetrate the full solution, the full life cycle, utilizing the combined digital offerings. I am going to ask Scott to talk about the digital side.
Sure. On the digital side, we've got a product called Red Raven that essentially allows us to instrument, monitor, predict unplanned downtime, and then just really support our customers with their ability to operate and drive profitable operations in their flow loops. Now with the Chart offering, we expand that with Uptime and VinSim. Those teams are also excited to talk about how that technology comes together. As you think about the digital layer now across that $5.5 million of assets, it really starts to drive substantially more opportunities, both in recurring revenue on a subscription for monitoring, but also on the back of visibility for parts pull-through and product replacement.
That digital work is also a workstream within the integration office, and we feel that that's going to really enhance our ability to better understand our customer challenges, but then also best support their efforts as they're looking to drive operability in their sites.
Okay. Fantastic. No, that's great color. And then just a quick one. We know aftermarket margins on the Chart side of things, right? We talk about mid 40%. That's gross margin, right? But any color, Scott, to the extent you have disclosed your aftermarket margins, maybe just help us think about that.
Yeah. I'll let Amy provide a framework on aftermarket margins.
Directionally, aftermarket margins for Flowserve are greater than 40%. We certainly see aftermarket as being a way that we can blend up our overall margins over time.
Okay. I got it. Amy, thank you. I'll turn it back.
Thanks, Sarah.
At this time, we'll move to the next caller in the queue. Caller, please state your name and company before posing your question.
Andy Kaplowitz, Citigroup.
Hey, Andy. Good morning.
Good morning.
Thank you, Andy.
I think you're welcome. Scott, I think the street understands the rationale for the deal, but why does the mechanics for the deal in terms of all stock make the most sense for Flowserve? As you know, the stock, I think most people would agree, appears relatively inexpensive versus many multi-industry peers. Why wasn't an outright sale considered or a different type of transaction?
Sure. In these things, you always look at lots of different options and ways to construct a deal. What we really wanted to do is make sure that all of our shareholders would benefit equally from the combination. A merger of equals made the most sense. This is what Jill and I started to talk about from day one and really started to lock in.
As we looked at kind of all of the things that you would expect in valuation, we determined that the merger of equal would allow our joint shareholders to benefit from the synergy realization, the growth progress, and everything else that we're doing. We are excited to bring it together in this fashion, and we feel that there's a great opportunity for all sets of shareholders here.
Yeah. One thing I might add to that is that the merger of equals framework allowed us to really target to maintain investment grade from a balance sheet perspective, which we think provides a great value to our shareholders, to our customers, and frankly, it's something that we can provide to the Chart shareholders over time. The strong financial profile of this scaled industrial leader is something that, as a team or as teams, we were intently focused on.
Very helpful, guys. Maybe could you elaborate a little more on your synergy forecast? I know you mentioned 40% cost synergies will come from SG&A, 60% will come from COGS, but maybe you could talk about the bigger buckets of opportunity a little more. Is it materials and procurement savings, maybe the elimination of duplicate public company costs? If you could just elaborate on the buckets that you mentioned, that would be helpful.
I can start with that. What we've seen is from building from the bottoms up, as the two teams work together, just an immense amount of synergy opportunity. We, coming off of two years of integration on Howden, have seen kind of the areas that are low-hanging fruit, the areas that are a little bit harder to get to. What we see here is an immense amount of kind of day one opportunity to go generate these synergies. Materials and procurement, the size of the combined business, the scale of the combined business gives us a lot of opportunity on the procurement side. We also, while we have a very complementary geographic and manufacturing and service center footprint, there are some opportunities for us to consolidate excess capacity together within certain regions. That is an area that we've done an overlay of each of our respective footprints.
You start getting into each functional area, and to your point on the duplicate public company cost is just one example of areas where the two teams have similar SG&A or costs related to indirect, and that's something that we see the opportunity to streamline. Plenty of different vectors to go after on the cost synergy side. What I am the most excited about is that this was built from the bottoms up with the two teams, and the two teams on balance are going to be involved in the actual integration together post-close. That is a model that we have seen proved to be successful in achieving and potentially overachieving synergies on the cost side.
Yeah. Just one thing I would add to that. When you, on a tactical level, when you look at Legacy Howden within Chart, and Flowserve, both companies are using a lot of castings, forgings, doing machining work, doing assembly work, doing testing work. As Jill mentioned, from a procurement synergy standpoint, that lines up extremely well. On the facility side, very similarly between Legacy Howden and Flowserve with those activities. Very nice synergies there.
Yeah. The last thing that I might mention, Andy, is we've been obviously focused on EBITDA margins for a reason, but we think there's a tremendous amount of value that we can provide through interest expense savings as well through this transaction. It leads to our confidence about pretty significant accretion from the get-go for the combined company.
Just to close it out, we've got an integration management office. They're here today in the building, and we're excited that that work is we can start planning for this. Once we close the transaction, we start moving pretty fast on synergy realization.
Very helpful, guys. Congrats again.
Thank you.
Next caller, your line is open. Please go ahead.
Hi, this is Mark Bianchi from TD Cowen. Thanks for taking my question and congrats on the announcement. I guess the first thing that sticks out to me is, hey, Jill, the first thing that sticks out to me is the EBITDA margin difference across the two companies. I know you just laid out the synergies. It sounds like most of those are sort of combined synergies coming from both sides and just from the combined nature of the business. Is there a path to get sort of the Flowserve contribution of that margin level up to chart levels, or is there something structural about certain of the products that Flowserve is selling that can't get up to that chart level?
Yeah. We really like the Chart EBITDA margins, and we're envious of what Jill and the team have done. We have been on a path of substantial margin improvement across the Flowserve enterprise over the last couple of years. We've got a framework and a program on the back of our Flowserve business system for both operational excellence and what we call portfolio excellence to continue that journey. I'd say we've got strong momentum. We're going to continue to lean in. The integration work and the synergies will help us there to accelerate that journey, but we have no intent to slow down on our acceleration of margin expansion.
I would add, Mark, in the combined entity, that ability to pull the Flowserve new build products through to the full solution and system offering where that just adds more content. That in and of itself, from a mix standpoint, is a positive mix generator to both Flowserve standalone, but also on the combined business. That is an area that we see a great amount of opportunity again on day one post-close. I would be remiss not to comment on the aftermarket. The combined aftermarket and that opportunity, that recurring revenue, that stickiness of margin in both companies is another area that we think we can exploit further.
Okay. You sort of touched on it just now and talked about before with this kind of combining the product portfolios and the complementary opportunity there. Are there any specific product lines where there is overlap where it could be something that could raise some regulatory concern?
Yeah. No, we really see very little risk on the regulatory front. We do have to file in multiple countries, both for antitrust and just the FDI filings. Really, there's no overlap. Today, we supply a lot of product to Chart on the valve side and some of the pump side as well. When we look at what Chart Legacy has brought and Howden acquisition, there's really nothing that overlaps or could be deemed as anti-competitive. This is highly complementary, and we're looking forward to optimizing that full suite of product services on the back of the process technology. We're excited about the ability to do that with our customers.
Great. Thanks, Scott. I'll turn it back.
Thanks, Mark.
At this time, we'll move to the next caller in the queue. Please go ahead.
Good morning, everyone.
Hey, good morning. Morning, Nathan.
Good morning, Nathan.
I guess I'll follow up with a couple of questions on the synergy. You talked about $300 million on cost side over three years. Maybe you could just lay out how you see that progressing year one, year two, year three. And then I think typically revenue synergies take a little bit longer to start reading through. So that two points of additional growth that you're talking about, when do you expect to start seeing those benefits and maybe when it's ramped up to the full two points?
Yeah. On the cost synergy side, I'll hit that. I'll let Jill talk about kind of the ramp-up of the 2% growth. On the cost synergy side, what we put in the slide was 25% of cost synergies within year one. We're very confident on that. There are some things that are quick wins and that we'll move very, very fast on. That actually gets you a run rate higher than the 25% as we exit year one. The teams have already been doing a lot of work upon closing. We'll be able to move quickly on some of the things that would be natural kind of day one synergies in execution. I'd just say beyond that, your run rate coming out of year one is going to be probably at that 33% or even higher.
Year two is a heavy lift. As we start to think about some of the manufacturing consolidation opportunities, those will be in that kind of end of year two and into year three. Again, the teams laid this out nicely. We're confident in our ability to achieve this number. We are going to move with speed following the Howden Chart integration playbook to make sure that we can achieve these upfront and early.
From the commercial side, we believe that on day one, there are certain commercial synergies that can be achieved right out of the gate. We spoke a little bit on the aftermarket side. That is an area certainly. The modular offering that we have on the system solution side at Chart and that ability to pull the Flowserve equipment into that complete solution offering to our customers is also a day one opportunity on the commercial synergy side. That comment applies to LNG. It applies to carbon capture. It applies to helium and hydrogen. It applies even to water treatment for us. There are a lot of levers for us to pull immediately to start achieving those commercial synergies.
Thanks. I guess my follow-up question here is for Scott. I mean, Scott, Flowserve has been on a business simplification initiative here for the last couple of years, and combining together with Chart does put a lot more on your plate, a lot more things to do. Can you just talk about how confident you are that the Legacy Flowserve businesses can continue on that simplification journey without being distracted by all of the other things that are going to go on here over the next couple of years? Thanks.
Yeah. No, absolutely, Nathan. That's a really good question. In fact, I've got my leadership calls here right after this, and we will be reiterating that message fully. Just to answer your question directly, I'm highly confident that Flowserve continues the journey that we're on. As you know, we did our big org design change in 2023, so we're kind of two and a half years now into this. That's proving to be driving substantial business results and growth. I'm very comfortable with our business unit leaders, our VP GMs, and the two division presidents to continue on that operation. We will lift some folks out in the designated integration management team, but I really don't see a lot of distraction for, let's say, our seals leader or our valves leader or our engineer pump leader.
Their job will be to continue to do what they've been doing, execute on the Flowserve business system. I'm confident that we continue to deliver results there.
Thanks very much for taking my questions.
At this time, I would like to remind our audience that it is the star key followed by the digit one if you have a question or a comment. We'll move to the next caller in the queue. Please state your name and company before posing your question.
Good morning. This is Manav Gupta with UBS. One question which I wanted to ask is, what will be the role of the LNG in your portfolio? We are seeing the world change from the stick build approach to modular approach, and GTLS was very well positioned for it. Going ahead, what role will the LNG growth markets play in the overall company?
Good morning, Manav. Thank you for the question. It is a key area. Overall, the global energy demand is continuing to increase, has been a macro tailwind for the Chart business. It has also been a macro tailwind for the Flowserve business, both independent of each other. Together, we think we can really drive more. What I mean by that is around the LNG, where the move to modular has been a trend in the industry itself, and also the uptake of our IPSMR technology across multiple projects, and our ability then to also have all of the mission-critical equipment that supports IPSMR in-house. This just adds to that. This just further bolsters that ability. In addition, on the LNG side, it is 9% of it will be 9% of the combined company revenues. I would not stop on LNG here.
I want to keep going and just really get into this global energy increasing demand. You've heard us at Chart talk about the data center demand, heat rejection. When Scott touched on flow and thermal, we probably haven't spent enough time talking about what flow and thermal means, but that combination is exceptional to have that together to be able to serve all these different energy and markets. Power generation, nuclear, LNG, data centers, the list can go on and on. Together, that flow and thermal capability will drive even more content than either of us on a standalone basis can do.
Perfect. My quick follow-up here, Jill, was you were targeting to get to 2.5 times leverage by year-end. Looks like if the deal does close, your leverage will be at 2. The plan was to either do more bolt-ons and probably buyback. Now it looks like the plan will be more like payout of dividends and maybe buyback. Can you talk about some leverage targets here that the deal allows you to achieve? Once you get there, what will be the plan for shareholder returns? Thank you.
Yeah. So one, I would say just we continue to say we're targeting an investment-grade rating with the transaction. Leverage at close is anticipated to be 2 times net. I think that as you over time, you will see that 2 times transition to a gross leverage ratio for the combined company. I think where we're at as a scaled platform is one that can continue to participate in M&A over time. Of course, there's a tremendous amount of value for us delivering on the $300 million of cost synergies and the revenue synergies that we've outlined. Over time, this space is a fantastic one for future organic growth and inorganic growth. I would say that shareholder returns, whether or not that increases to the dividends or share buybacks over time, will be balanced and measured against what is the greatest return for our shareholders.
Manav, that was Amy answering that. I'll chime in. What I would just want to reiterate here is the amount of scale that the combined business brings allows us that flexibility to have multiple ways to return to shareholders and continue both of our respective capital allocation strategies together. Both companies have talked about inorganic opportunities over time that further our technology capabilities, further our aftermarket capabilities, just as a couple of examples. That combined strategy of high ROIC investment in the business, both organically and inorganically, will be even more able to deploy in addition to the expected investment-grade rating. This is kind of, I would say, a continuation of both company capital allocation strategies brought together at scale makes us able to have this financial foundation of strength and also play organically and inorganically.
Yeah. Just maybe tie to one of the previous questions. The merger of equal concepts allows us to have a very strong balance sheet straight out of the gate. As Amy and Jill just both said, this is the beginning, right? We want to be a compounder. The space is still highly fragmented when you look at kind of the peer group and some of the opportunities out there. We want to be a compounder. We'll do it the right way. We'll follow a capital allocation strategy that absolutely drives value creation for shareholders.
Thank you.
Next caller, your line is open. Please go ahead.
Thank you. Good morning. It's Deane Dray from RBC.
Morning, Dean.
Hey, good morning. Congrats to both teams. Just, Scott, you made a reference to four or five weeks the teams have been working together. Can you step back, give us a bit more deal history? Just in terms of the genesis of the deal, how discussions came about. You're using the merger of equals. I don't know, does a breakup fee apply here? Is it a working assumption that no goodwill gets created in the structure?
I'll let Amy handle the accounting questions here. I'll talk about how the deal came together. As you know, there will be a proxy filing in a few weeks that will have kind of the legal record. I don't want to go into too much detail. I'll just go back to what I said in the prepared remarks. Chart and Flowserve have worked together for many years, even before Jill and I became CEOs at our respective companies. Since then, we've grown that partnership. There's been a lot of pull-through on our valves. We're providing cryogenic valves and other valves into the Chart systems. We announced a great technology deal two years ago with hydrogen pumping, where we kind of inherited the pump technology. Chart was pulling us through on the back of a hydrogen fueling system.
There has been a lot of dialogue. As we've seen Chart's progress over the years and similar with Flowserve progress, these discussions started at the beginning. These discussions started as we continued to build on our system's capabilities. That is how it evolved. We're excited to be where we're at today.
Maybe just starting to purchase accounting, maybe a little premature to discuss what that would look like. Just at a foundational level, both of us have done purchase accounting recently with acquisitions. I will not comment on whether or not there will be new goodwill on the balance sheet, but you can assume that there will be goodwill on the balance sheet of the combined entity.
Good. That's very helpful. We'll look for those. Go ahead.
Deane, I think the last part of the question is the breakup fee, which.
Oh, yeah. You want to hit that.
Yeah. So there's a breakup fee of 3.25%.
For both entities?
Yeah. On our respective market caps.
Got it. Okay. I appreciate that. Just a follow-up question, since it is such a near-term challenge. Does the current tariff situation with the combined entity pose any new challenges in terms of exposures or mitigation plans?
Yeah. No, it does not introduce anything new. I mean, Deane, you know us well and kind of our numbers that we have talked about. We continue to watch that, and we still feel very comfortable about our ability to mitigate the full impact. I would just say Chart's exposure is substantially lower than the Flowserve exposure.
Got it. Thank you.
At this time, we'll move to the next caller in the queue. Caller, your line is open. Please go ahead.
Hi, Eric Stein with Craig Hallum. Thanks for taking the call.
Eric.
Hey. I guess question for me, and I guess for Jill, this I know with Howden, I mean, clearly a big part of that, certainly aftermarket, but also just increased content in a lot of the end markets you're in. You put up the slide. Maybe just stick with the two examples you gave, LNG and also nuclear systems. I mean, more content, but would love to hear kind of the magnitude of that more content. Maybe LNG is the most important, but nuclear will become more important.
Yeah. Thanks, Eric, for the question. That's an area we're so excited about, this more content. To your point too, it's kind of furthering and building upon that strategy that we deployed with Howden. The LNG side, some of the pieces and parts that I commented on in one of my earlier answers, that's millions of dollars of additional content in an LNG solution. You know, Eric knows well, when we talk about LNG, we talk about it in four areas. The LNG process technology for big LNG, the second area for small scale and floating, the third for LNG infrastructure, and the fourth for aftermarket service repair. The pull-through of Flowserve's equipment hits all four of those areas. That's something that we're very excited about.
Millions of dollars of additional content actually across all four of those categories, regardless of which application you're talking about. On the nuclear side, this would be more leveraging Flowserve's strength in the nuclear end market. We've talked about the Chart standalone business has fans are the primary application for nuclear in the traditional sense, which are mainly retrofit. We have helium circulator technology, compression technology for SMR as well. That's an area that we think that the combined entity can really leverage the strength of Flowserve's nuclear footprint and customer relationships to pull Chart content through. For a sense of content on that, helium circulator or an SMR can be anywhere from $4 million to a large helium circulator project, $70 million of Chart content. You can kind of grasp that these would be even more highly scaled end markets together.
Okay. That's helpful. Then last one for me, just from a regulatory perspective, looks like this is obviously very complementary. I mean, are there any areas where there's close enough overlap where there may be some concerns in terms of approval of this? Maybe where's the confidence level in that?
Yeah. I'd say highly complementary offering, no concerns. We'll obviously file in all of the necessary jurisdictions. We'll continue to provide updates as we progress through the legal process.
Eric, I would say we have a high level of confidence just given the complementary nature of the business. Clearly, we've had advisors looking at that as well. That's something that we're confident in, the combination here and the complementary nature. One of the things that we were looking at was, are there really any dyssynergies? We don't anticipate any meaningful dyssynergies given the highly complementary nature of the business. Kind of attacking that question from a couple of different angles.
Yep. Okay. Thanks.
At this time, we have time for one more question that will come from the next caller in the queue. Caller, your line is open. Please go ahead.
Hi. This is Michael Elias to see you on for Joe Giordano at TD Cowen. How are you?
Morning, Michael.
Great. Thanks for taking my question. Just following up from earlier remarks on the call, obviously, more recently, Flowserve has been going through the simplification strategy, 80/20 as a core tenet. Maybe, Scott, you can elaborate on this, but what inning do you believe Flowserve is on the 80/20 front? Now, potentially being as a combined entity, are there any product pruning opportunities at Chart you can elaborate on? Thank you.
Sure. Yeah. I'll just kind of, again, for those that don't follow the Flowserve story, we're on a path with our 80/20 program. We call it complexity reduction. We've got five business units that are fully in flight here. The fifth business unit just went live in May. That last one is now moving into the chute. We've got two or three business units that are now going into their second cycle. We really like the progress and the momentum. It's ingrained with the 80/20 methodology, and the teams are fully running this. We're well down the line. I just say every year you continue to get better and better with this. I just think of this as a flywheel.
We are kind of in year two, and now we are starting to see some accelerated results, but tremendous opportunity to work that forward. We have two big companies coming together, a very broad offering. As we bring those together, we will look at potentially applying some of those 80/20 concepts across the top level of the portfolio. There may be some opportunities to divest something or reshape the portfolio. We do know there are lots of opportunities to continue to acquire technology that might make sense on the back of what we are doing. At this time and straight out of the gates, we do not have any plans for an immediate divestiture or need to do that.
From the Chart perspective, part of our journey is business excellence and deploying similar continuous improvement approaches throughout the business. There is always more to go. I think that bringing the two together will really optimize those efforts.
Great. Thank you.
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