Q2 2020 Linde PLC Earnings Call
The second quarter 2020, Lindy earnings conference call.
At this time all participants are in listen only mode. After the speakers presentation to be a question answer session to ask a question and discussion we need to press star one of your telephone.
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Now, let Dan the converts or what your speaker today want wise.
Thank you. Please go ahead Sir.
Great. Thank you.
Good morning, everyone and thank you for attending our 2022nd quarter earnings call and webcast.
I'm Lumpier <unk> head of Investor Relations and I'm joined this morning by Steve Angel, Chief Executive Officer, and Matt White, Chief Financial Officer.
Today's presentation materials are available on our website that Lindy dot com and the Investor section.
Please read the forward looking statement disclosure on page two of the slides and note that it applies to all statements made during this teleconference.
The reconciliations of the adjusted numbers are in the appendix this presentation.
Steven Matt will now give us an update on Mondays business outlook and second quarter performance and that will be available to answer questions. Let me turn the call over to Steve.
Thanks, Juan good morning, everyone.
Matt will cover the numbers, which were obviously quite good.
But just a few comments we grew earnings per share versus Q1.
And year over year, despite currency headwinds and weaker volumes.
Cash flow was very strong.
Return on capital continues to improve.
Operating margins improved in every segment.
In other words Q2 was like any other quarter, except we had to deliver this one through a pandemic.
[noise] safety performance continued to improve.
While we battled cold it around the world.
Plant reliability is at an all time high.
We brought several large projects online.
Our hospital in home care businesses continue to play an important role around the world into fight against this respiratory illness.
We provided a lot of support in our communities through donations and in kind gifts.
This type of performance doesn't happen because corporate corporate ordains it.
It happens because 80000 committed and highly capable lindy employees do their jobs exceptionally well around the world.
Please turn to page three.
We have talked about what makes lindy resilient in the past.
You can see that in a few bullets on the left hand side of the page.
The best performing markets in Q2, not surprisingly were more defensive.
Like health care food and electronics.
And when combined with our commercial terms and conditions they guarantees us a steady stream of cash flow irrespective of irrespective of volumes.
You have what we demonstrated during Q2 very resilient business.
We're not directly part of any global supply chain.
We sourced produce and sell locally.
Our businesses, our local and they optimize their cost structure based on local market conditions.
Regarding our backlog it remains firm.
We have seen some delays, which we're being compensated for.
But the backlog has held together well.
And it is all for high quality customers you know well.
We took additional cost actions in early March to ensure we could deliver the type of performance, we could all be proud of.
We eliminated discretionary costs.
We made sure all productivity initiatives, we're delivering.
We took advantage of every efficiency opportunity we could find.
A good indication of how well the team executed in Q2 can be found in our SGN a results.
[noise], which were down 14% year over year.
And reached our lowest level at 11.9% of sales since our merger.
[noise] you don't deliver the kind of cash flow, we did this quarter without doing a good job on working capital management.
And when you factor in Capex efficiencies, we generated approximately $1 billion and free cash flow.
Pricing continues to hold up well with positive price attainment in every business.
So where do we stand today since our merger close on March Onest of last year.
Operating margins have improved over 300 basis points.
And return on capital 200 basis points.
Earnings per share grew 23% last year.
Ex currency translation and has grown 11% ex FX through the first half of this year.
And based on our strong and stable cash flow, we raised the dividend another 10% this year, which marks the 27th straight year, we've increased the dividend.
And we have no intention of breaking that strict now.
If you can turn to page four.
So what are we trying to accomplish over the coming months in the years, what is our core strategy.
I broke it down to three simple sections.
First of all we want to continue to optimize the base business.
We want to drive network density in our core geographies.
We want to leverage digitalization initiatives.
To drive continuous improvement in every aspect of our business.
We want to ensure we have best in class price management and every corner of the company.
We want to streamline our business portfolio down a businesses. We're confident we can operate the way we want to operate them.
We are leveraged to any economic recovery.
As I said prices have remained stable.
So all we need is more volume.
The increase volume allows us to operate our plants and distribution networks more efficiently.
And that SGN, a reduction I spoke about earlier.
Those costs will not come back anytime soon.
Needless to say, we will get leverage down the income statement with any improvement in economic activity.
We are capitalizing on growth opportunities now in coming out of cobot.
I expect to see several opportunities in electronics come to fruition and the coming months.
And health care, which is 21% of total sales today.
Well continue to grow at a nice say, 3% to 5% clip organically.
And though the backlog is coming down somewhat as we start up new projects.
The project work between selling gas and third party remains healthy at 8.6 billion.
The last element of growth I wanted to talk about is one that seems to be dominating the airwaves. These days.
And that is clean energy.
There's a lot of hype.
Marketing.
And companies that want to burnished, there SG credentials.
Clean hydrogen is real.
Key countries and regions around the world are leading the leading the charge with regulations targets subsidies in funding.
You can see a list of those regulations on page 10.
Why are they doing this.
It is about decarbonizing their economies to address the challenges of climate change.
Of course.
But it is but it is also about resuscitating their economies post cobot.
They want GDP growth.
And they want jobs for their people.
And they don't want to outsource their green economy to anyone else.
They want to build it all locally if at all possible.
The you does acknowledge.
They will need to supplement their renewable power requirements.
From areas outside the EU.
Like North Africa.
Where they also have the ability to re purpose natural gas pipelines for renewable hydrogen.
On page 10, you can see a map of the optimal renewable sources from around the world.
Clearly countries like the us in China have the ability to develop their own sources of renewable hydrogen for their own needs.
In addition to renewable there quite a few countries advantaged in low carbon sources, such as natural gas.
That will continue to play an important role in the transition from greater Green hydrogen.
As well as into production of Blue hydrogen.
Where the CEO to is captured in the hydrogen production process.
Back to page five.
There are challenges.
First of all you have to to determine how these funding mechanisms will actually work.
But more importantly over the next decade, the cost of clean hydrogen at the point of use needs to drop at least 50% to 60%.
From where it is today.
To roughly $4 per kilogram.
To reach that target renewable power cost need to come down.
Along with the cost to be electrolysis itself.
This can be achieved by scaling up capacity.
Improving efficiencies.
And developing greater standardization around the supporting infrastructure.
This will not happen overnight, but it's certainly feasible within the next 10 years.
And something we can directly impact.
Some form of carbon pricing will also need to be in place for clean hydrogen to compete against.
She fossil fuels in some sectors.
And the market needs to develop.
Especially fuel cell electric vehicles for heavy haul trucking, which could become the largest target market for mobility by an order of magnitude.
Our clean hydrogen strategy is not unlike our strategy for industrial gases.
These markets, our local and will evolve uniquely for example, South Korea and Japan are focused on building very hot there hydrogen economy first.
Irrespective of the carbon content or color of the hydrogen molecule.
Green hydrogen will come later, when it reaches scale and cost.
China is focused on both gray and green hydrogen molecules.
The EU wants Green now.
But privately admits gray or a transition through blue hydrogen.
We'll be necessary for a period of time.
The U.S. hasn't declared yet except for California.
But the rest of the country will likely pursue all colors of the Rainbow.
Although several are already following California's lead.
We want to leverage and build on our existing integrated supply capabilities in each of these regions.
In the appendix on page 11.
Illustrates our capabilities across the entire hydrogen value chain.
I think you can see we are well positioned to participate as these markets develop.
Emerging technologies like PEM electrolysis technology needs to mature.
To bring clean hydrogen down the cost curve.
We are partnered with leading technology companies like ITM power to do just that and are already starting see the benefits.
Such relationships.
So I will end with the caption at the top of slide five.
I say this can be a huge market by 2030 what needs to happen.
It is a bit of chicken or the AG in the mobility market.
You need fuel cell electric vehicle adoption to drive hydrogen growth.
But you also need low cost hydrogen and scaled infrastructure to enable.
Fuel cell electric vehicle adoption.
If 1% of all energy consumed by heavy haul trucking today was converted to fuel cell electric vehicles that would be approximately a $20 billion per annum.
Hydrogen market.
The other demands for hydrogen are as an energy carrier.
Which many considered to be a key enabler for wide scale use of renewable power.
And hydrogen as a feedstock for industrial use.
As well as building in industrial heat.
All in all there have been 35 applications model for clean hydrogen.
About half of which should be competitive by 2030.
As I mentioned earlier, there seems to be new entrants and clean energy by the day.
Many of whom our non traditional players in the hydrogen space.
But with our expertise capabilities local presence.
And global reach.
I'm confident we will capture our fair share of this market as it develops.
That is why I say this will be a multibillion dollar business for lending.
And now I will turn it over to Matt to discuss our Q2 performance and outlook.
Thanks, Steve.
Good morning, everyone.
The consolidated second quarter results can be found on slide six.
Sales of $6.4 billion decreased 5% sequentially and 11% from 2019.
Versus prior year underlying sales declined 5%.
As 2% higher pricing was more than offset by a 7% reduction in volumes.
The price improvement was across all segments and in line with globally weighted inflation.
Volume trends include 2% growth in engineering.
Which were more than offset by a 9% decrease in the gases business.
Lindy engineering continues to execute on the high quality contractually secured $5 billion sale of equipment backlog.
The gas is volume decline is due to the negative economic climate more than offsetting positive contribution from the project backlog.
Overall, we estimate the second quarter sales headwind from coded to be 8% to 10%, although it's almost impossible to know for certain.
Sequentially underlying sales declined 2%.
As a positive 3% contribution from engineering was more than offset by a 5% volume decline in gases.
The estimated sequential impact from coded is approximately 6% to 8%.
You can see that foreign currency continues to be a headwind to sales and earnings although the US dollar has started to sell off at the end of the second quarter.
If this trend where to persist it could provide some upside to our foreign currency outlook.
Operating profit of $1.3 billion was flat with prior year and down 3% versus the first quarter.
Excluding foreign currency translation operating profit increased 4% versus 2019.
And declined only 1% sequentially.
The entire lending team is fully engaged to prudently manage the things within our control.
And deliver high quality results in any environment.
We continue to find more opportunities for productivity and efficiency every day.
So we expect to further improve upon these levels.
In fact operating margins expanded 230 basis points over 2019, and 60 basis points over the first quarter.
These are real and lasting improvements well in excess of the temporary benefit from lower cost pass through.
Furthermore, these actions enabled us to offset the lower volumes related to covance.
Which are estimated to impact profit by a few hundred basis points more than the sales effect.
Second quarter EPS was $1.90 cents.
Excluding foreign currency impact this level is 8% higher than 2019, and 3% higher sequentially.
In other words, we increased earnings per share despite an almost double digit sales decline due to the pandemic.
More importantly, second quarter operating cash flow of $1.8 billion was 76% higher than last year, and 31% higher than the first quarter.
I'll speak more to this on the next slide.
With this result is a clear validation of our business resilience.
And merger success.
Capex is trending downward from a combination of foreign currency merger synergies and timing on the sale of gas project backlog, which currently stands at $3.6 billion.
It's important to note that backlog definitions are not consistent within the industry as the Lindy backlog represents contractually committed high quality customers with incremental growth.
Therefore, we have full confidence the current backlog will continue to contribute to future sales and profit.
After tax return on capital of 12.3% represents the highest level we've achieved since the merger date.
This is a direct result of our strong commitment to capital discipline and quality growth.
In fact, our integrated and dense model across all three supply modes of onsite merchant and packaged gases.
Enables us to enhance returns on each investment.
Allowing further improvements in our C without hindering growth prospects.
Slide seven provides more details on our performance related to cash generation and capital management.
The graphic on the left shows our quarterly operational cash flow trend since the merger date in Q1 2019.
Recall that these figures represent GAAP operating cash flow.
2021st half owes CF of $3.1 billion is $1 billion are almost 50% higher than the prior year level.
Approximately one third of this improvement is due to lower merger related cash costs.
The remaining two thirds are from higher cash earnings and improved working capital.
In the second quarter alone year over year, working capital improved $430 million.
With approximately $110 million from the engineering business and the rest from improved management in gases.
These trends coupled with base Capex reductions are evidence of merger synergies and efficiencies.
You can also see that available operating cash flow is more than sufficient to cover the $500 million quarterly dividend and 300 $400 million of quarterly project Capex spend.
The Pie chart to the right shows how we deploy capital year to date through June.
We paid $1 billion in dividends and are committed to growing it every year.
Another $1.6 billion was invested back into the business.
Quality growth is a key priority use of capital.
But each opportunity must meet our investment criteria.
Finally, we repurchased $1.8 billion of Lindy stock in the first quarter at an average price of $186 per share.
You may recall that we paused the share repurchase program at the end of the first quarter to evaluate potential de caps and other higher priority uses of capital.
While certain opportunities did not fit our investment criteria, we are still pursuing others, but expect them to take longer to develop than originally anticipated.
Furthermore, we continue to have access to very cost effective capital.
As we recently issued seven and 12 year, eurobonds with coupons of 0.25% and 0.55% respectively.
Both of these bonds represent the lowest coupons ever for any industrial gas company at these tenders.
Given these developments and our continued significant excess cash generation, we are resuming the share repurchase program.
I'd like to wrap up with 2020 guidance on slide eight.
To better frame the outlook it may be helpful to describe the second quarter monthly trends.
April represented the lowest month, although it was noticeably better than what we originally expected.
Subsequently may was better than April and June was better than May.
For the entire second quarter year over year volumes were estimated down 8% to 10% from Covance.
Although the month of June recovered to about half of that range.
Looking forward to the third quarter, we still expect and FX headwind of 3%, although current spot rates have improved from this initial estimate.
The EPS range of $1.90 to $1.95 assumes no economic improvement from Q2 at the bottom end.
And a gradual increase at the top end.
We are taking a more cautious approach since the pandemic is still evolving.
However, if june conditions were to continue I would expect to be at the upper end or above this guidance range.
Rest assured that if the economy performs better we will capture that upside.
The full year guidance range of $7.60 to $7. An 80 cents follows the same logic as the third quarter estimate.
It assumes no improvement from Q2 at the bottom end and a gradual improvement at the top end.
Irrespective of economic conditions, we have a high degree of confidence in the business resilience and growth prospects across our integrated system.
Beyond the merger benefits, we continue to find productivity and efficiency opportunities to enhance business quality.
In addition, we are pursuing attractive growth prospects through our resilient end markets unrivaled hydrogen asset network and World class engineering and technical capabilities.
And when the markets do recover we fully expect to participate and win our fair share.
The global Indeed team has successfully navigated prior economic crises and each time has emerged even stronger.
I fully expect the same for 2020.
Now I'd like to turn the call over for QNX.
Thank you.
And as a reminder to ask a question you need to press star one of your telephone to withdraw your question. Please press the pound key.
Please standby we've compiled acuity roster.
And our first question comes from amount of Nicola chain with Exane. Your line is now.
Hi, everyone. Thanks for taking my question.
The first one was on the cap you had talked about.
Yes, healthy pipeline of potential opportunities and I knew that any key to now perhaps has from thanks everyone.
I was just wondering if you could update.
A little bit more details about wheel pipeline might look like and also help us to size the potential opportunity in terms of cuts could be deployed again understanding that it could be an incentive longer term b.
And then my second question the on.
You mentioned not that.
Does potential for additional efficiency measures that you guys delivering very well on that.
Can you put that in the context of your original cost synergy target the 900 million.
And I was wondering whether shorter time with cleavage.
You've seen any temporary savings.
Hello.
But you would expect to era.
Okay, well I'll take the decapitate since you gave the second question about I'll, let him handle that would or could we get a given at the water anybody, but I'll, let OLED magic, though.
So yes on the Decaf there is we have a list.
Of projects that the pipeline itself you could describe is fairly healthy but that again the pace is very slow.
And.
That's not unusual.
You have customers are always evaluating there.
Cash flow positions or their needs as as you are going through these discussions with them.
I expect we'll get some to ground, but it's not going to be a large number I don't think and I don't think it's going to be a large number anytime soon we'll do the project projects that make sense for us you've heard me say this before that over the last thing I want to do is be a lender of last resort.
So we will maintain our capital discipline and our return criteria as we work through this.
But it's just going to is going to take some time and thats just the way it is.
Nicola and as far as your second question, Yes, I'll start with to your point the $900 million as you recall on the cost side was the target we laid out there to be achieved over approximately a three year period post the merger date as we've stated in the past the more we integrate the less frankly.
We are able to differentiate between what was considered a true merger synergy and what is just simply being more efficient and productive on how we're running this combined business. So frankly on an internal basis Weve really stop spending significant effort trying to differentiate between the two and we're much more focused.
And just try and find ways to be more efficient and productive operating as one combined company. So to that degree where we really look is more how our operating margins progressing how is our growth and profit progressing and how is our growth in cash progressing.
There are obviously a lot of other metrics around that like Steven mentioned SGN Asia percentage of sales what the head count trends are how our efficiency per head count trends. So we look at those as well, but in the end of the day I want to see margin expansions I want to see growth in cash and I want to see growth and profit irrespective of what we're seeing on that.
Volume side I think this quarter, we've demonstrated that fairly well I think last quarter, we've demonstrated that fairly well and we continue to find even more opportunities every day as I mentioned, so we're looking in the end of the day to continue to find ways to improve the quality. This business, while levering every bit of sales dollar we can to add value. So.
That's how we'll think about going forward and that's how we're going to continue to measure.
Thanks, and is the Kiki, but maybe I could seeking it just a quick follow up one on the countryside and as you mentioned greater operating.
Cash conversion and you can you talk to that redeeming the buyback.
Last year at this point, the able to commit to economic steer on how much you expect to buyback tree the remainder of DNA.
Assuming that you on the T. capital Q2 sides to these on now you're much more longer term.
Yeah, and sorry, if I just to answer your last question, which I forgot the filter mentioned on the temporary savings with Covance.
As you would expect with everyone. We clearly saw a large reduction and travel I think thats consistent universally, but what I would say is that the vast majority of savings as Steve mentioned that we saw this quarter, we expect to retain and maintain a lot of them. So I'm not anticipating any significant shift than that so thats something we expect going forward error.
Respective of the smaller temporary ones on the cash flow related to the buybacks will be back in the market as we have been will be.
A participant.
As you saw this quarter, we did reduce our net debt again, so we'll continue to use it as per our capital allocation policy that any excess cash that we have.
After our priorities of growing the dividend and growing the business we will use.
In a in the opportunities to repurchase our stock and obviously at their market corrections in a we'll we'll take opportunity in there as well like we did in Q1.
So thats kind of how we're going to continue to manage it and measure it and as you know this is all underpinned by our target credit rating of a single a so we'll work within those confines and be back in the market.
Thank you.
Thank you and our next question comes from the line of Duffy Fisher with Barclays. Your line is now open.
Yes, great. Good morning, Thanks, a lot for the views on the new hydrogen so maybe just kind of a threeq heart follow up to that first over like the next five years. What you see is the premium for green hydrogen versus blue hydrogen versus gray hydrogen.
Second as you guys running the most electrolysis units globally. What is your costs done in that space, let's say over the last three years as a baseline and in what do you have line of sight for your costs doing over the next three and in the third one is because it's such a big market could you see yourself doing something aspirationally.
Maybe a couple billion dollars of build it no com investment that doesn't have the same surety that the historic model has had.
Yeah.
Okay, Duffy, that's three well prepared questions.
So I think the way you need to think about green hydrogen and keep keep in mind you have the you've got the renewable power costs you have the production cost coming out electrolysis you have the distribution costs you have the cost at the pump if you're thinking about mobility. So there's a whole chain of cost here that need due to come down and I said, 50% to 60%.
Correct.
If you were don't call grain hydrogen today coming off the electrolysis $6 and so there has to be an assumption about renewable power cost to get to the six but if you say six.
You are making with.
Two to $3 natural gas you are making gray hydrogen for one dollar. So there's a tremendous GAAP today that it would take hundreds of dollars of carbon tax or a carbon price. If you wanted to wipe out that entire difference.
So it's a big Premier today, that's why I said the cost need to come down the production cost across the entire chain.
At the same time, there needs to be a carbon price too and sent.
The scaling up of Green hydrogen it's the same thing that happened to solar power and wind power to go back and looked at the early days, everybody said the cost or through the rupee can afford it.
There were subsidies there were.
Incentives that were put in place that allowed it to scale up and come down the cost curve. So thats. The same thing we need to have happened.
Here and.
It's going to take some years to do that.
We and others are obviously working on that as we speak.
I can see plans.
I'm loot I've reviewed plans that show how that can be done.
So I think we just need to kind of wait and see how long is ultimately going to take but but I think it a few years the cost will come down quite a bit, but we need to get it down like I said, 50% to 60% across the entire value chain.
As far as what we may or May not do I mean, we're looking at projects today around the world I could give you a number it's it's like a 100 types of projects are slot them are very small some of them or sell of equipment.
Small cell of equipment some of them ROI projects that we announced in China and also some recently some are a little bigger.
But we're very comfortable with the types of activities that we have the locations that we have them in.
It's like 16 countries that are that are involved at 100 plus types of projects. So.
That really is our strategy that has been our strategy, we're very comfortable with that approach I'm, not saying I would never do a much larger project, but I'd have to be very confident in terms of that's just a good investment that will pass all the muster that we always put large project investments through.
Okay. Thank you and then.
Just off one of Matts comments, where if June numbers kind of stayed through Q3 you'd be at the upper end to beating the guide for Q3 does that imply that you guys see somewhat of a double dip happening in Q3 and things could weekend or can you talk about July and what you're seeing.
Yes, so that is what Matt said.
If I look at July's numbers today, I would say is probably slightly better than June but then again you got to keep in mind, we don't really know what's going to happen.
No I read yesterday that colds back on the main on the continent in Europe, We all know what's happening in Latin America, you can read about what's happening in the south and west back in Australia. So I don't really know what the consequence of that's going to be I don't know how governments are going to respond to that this time.
Are we going to go back into something like with what we saw in March and April and May We don't know the answer to that so it's a possibility it hasn't happened as of today, but it's certainly a possibility and.
We have to make sure that we say, we're cautious in our guidance and Thats whats behind the caution.
Terrific. Thanks, guys.
Thank you.
And our next question comes from the line to David Begleiter with Deutsche Bank. Your line is open.
Hi, Thank you good morning.
Stephen Matt just on FX pseudo mark to market today spot rates.
Imply for your Q3 and for your guidance in terms of upside.
Hey, David Yeah. This is Matt. So as you saw we have a 3% assumption now Q3 would get better by a couple of percent potentially based on spots as you know that's assumption based on spot, but it could get better by almost 2% and the full year number would be not probably in half.
As well on that so time will tell we'll see that was based on really yesterday spots, but every day the different day as you know.
Very good and see this again on hydrogen are you in different tigray blue or green hydrogen and look over the next perhaps 10 years, how much your project Capex could you foresee putting towards hydrant opportunities.
Well, you're asking me, so I I want to be a provider of what the market wants.
As I said there are certain countries around the world today that are building their hydrogen economies first there are hydrogen mobility economy. For example, using gray they will transition to Green later on I think look I mean at at the right cost.
Green is going to be profitable for everybody, but you've got to get their first and Thats. Why we think natural gas is going to still play a role I mean, we have a $2 billion business today, that's essentially all based on natural gas.
So natural gas will continue to play a role blue will make sense in locations where.
You have say low cost natural gas than you have the ability to capture the CEO too and do something with it say make.
Downstream chemical products with the CEO to or you have.
The right geological formation to sequester and the ground.
If those types of situations are present than you could see would they call blue, which is basically capturing seo two off of the grey hydrogen production process, but I think everyone would like to get to Green I, just think it's going to take some years to get to that point.
Regarding capex I mean about if I look at the list of hotter projects. We have today Theres, probably maybe a couple of hundred couple billion dollars I'm, sorry couple billion dollars of Capex, that's kind of.
Been assigned to these projects.
Some of them, we have to wait to see whether they're going to move forward or not but clearly if I said 100, some projects up and if I gave you a number like a couple of billion dollars of Capex earmarked around those numbers.
That wouldnt that wouldn't be surprising, but we have to see how fast they move and at what rate, we end up spending against those projects.
Thank you very much.
Thank you.
Next question comes from the line of Peter Clark with Soc Gen.
It is now open.
Yes, good morning, everyone I've got two as well.
This one obviously if I go back last recession is slightly different this time, but.
You had your endings plant when you're praxair.
In the had an ending because of engineering, but gas is actually was flat on EBITDA and so I look at the difference they sign obviously, you're delivering on the gas is we expected that engineering is the stand out. So I'm. Just wondering if you can give me your thoughts on the quality of its engineering business you have now.
I'll begin.
Coming in.
Because it has been outstanding I think in the past two years and then effectively if I look at some of them. All grew its I would call them critical markets very important markets view, certainly places like Brazil, Mexico, and even Australia.
How these businesses are performing you have dominant share is.
Great businesses to begin with I think you found a lot more to do in Australia. For example, but obviously, Brazil will still has the challenges with because it will be the challenges because just about these will peripheral markets, where we get less news level. Thank you.
Okay. So the first question Olin engineering at any an anomaly speaking, it's a much smaller percent of Lindy today than it was of the old Lindy AG, It's probably if I go back look about 5% of the EBITDA of our company is Linde engineering. So it can swing us too much one way or the other.
But it is doing quite well the team is executing very well they have a lot of this is picking the right projects over the years.
In addition, executing well.
Lot of this is they have more gas projects to work on so we're able to leverage their cost infrastructure much better by adding the praxair seller gas.
To the equation.
If I look at their backlog today, they probably have close to two years of backlog in front of them to continue to execute and Thats a pretty good place to be.
Don't have the order pipeline I'm not looking at that right now, but but the orders clearly are less than the sales for Q2, so but there are orders coming in there are projects, they're working on I Wouldnt say their mammoth projects today, because a lot of those customers are cautious.
As you would imagine, but certainly electronics type projects, they're working on those are working a lot of smaller projects around.
Say paper projects as you know South America, you mentioned that is very advantaged in paper.
Working on other types of projects so.
There is work coming in and there is a healthy backlog I think they'll continue to do pretty well, but if we're sitting here two years from now and the backlog is a lot lower then we'll have.
Something to address.
But we're very conscious two of our cost and making sure that we're managing costs very carefully as we're looking at.
The order pipeline and we work out these big projects.
You mentioned, Brazil, Mexico and Australia.
If you look at South America, but clearly they are they're dealing with cold beer, but it seemed like there are always dealing with something in South America, but when I look at their operating margins coming out of Q2, there at 20%.
Probably not many companies operating in South America that are running at a 20% kind of operating margin rate Mexico is always been a good.
Country for US we have a very strong presence as we do in Brazil, and we're able to use that to our advantage and Australia I talked about in earlier calls Australia.
It's been on a nice.
Glide path in terms of proof of improving the quality of their business.
I'm very pleased with the results that we've been seeing there and I think they continue to do a good job in Australia.
Thank you.
Thank you and our next question comes from Milan.
Bob chord with Goldman Sachs. Your line is now.
Okay.
Thank you Steve I wanted to ask a hydrogen question.
And I guess.
Maybe broad, but how do you insert yourself into that ecosystem and how do you get paid.
Hum.
Is it a is it a equipment model is the sale of gas model and big driver for green to ever.
Come about is it a dramatic drop in energy prices. So.
Have you get aligned with the energy providers electricity providers are you not worry about that it just seems like a.
Maybe a much different business model than what you traditionally done in large scale gas. So you get paid what's your secret.
Well I'd say, we're going to be participating both ways in a for example, we sell hydrogen refueling stations today, we've been doing that but we're also providing as part of the.
A package offering if you look at the two announcements that we made.
In China for example, one is partnering with the largest green power supplier in China.
And we're going to be providing hydrogen refueling stations were going to be providing a PEM electrolyzer.
Hey, we're going to be providing hydrogen of by the molecule. So thats what the nature of that venture is but here you know, we're kind of partnering or somebody different than we might have in the past its a renewable power supplier and this is to provide green hydrogen to buses that are going to be operating around Beijing go into the great wall in all of that.
And then you've got a project in the South where we have had a JV actually was seen up on the industrial gas aside for some time they want to branch out.
And do hydrogen for mobility. So we're taking the hydrogen off the refinery will clean it up we'll pipe it to some hydrogen refueling stations were providing.
And we'll kind of build out that market, but that will be a typical sell a gas business model as well so.
Predominately selling assets currently going to be will certainly is what we're interested in but there will be some.
So we type of cells and I think you correctly pointed out Bob that you know renewable power is a big part of providing green hydrogen so the scaling up of wind and solar is going to be key to getting green hydrogen costs down to a point, where you close the gap.
Versus conventional a weekend only.
We can only assistant that so much but certainly that's a key part of that and as I said earlier hydrogen.
Is seen as they an enabler to renewable power because one of the issues renewable power as everyone knows it's not as reliable you know the windows and always blow the sun doesn't always shine, but hydrogen can be a storage.
Mechanism for energy.
And so that's why green hives that can actually play a role in helping enable the growth or renewable power. So.
It's some of that remains to be saying, how thats going to play out, but that's that's where a lot of the focuses today.
And Bob This is Matt just to maybe add to Steve's point as far as your question also on aligning with power.
Providers as you know, we're one of the largest power purchasers in the world today, we purchase Terawatts of power and we've actively been working for many years already to improve our renewable energy portfolio. In fact, we recently got it from 35% up to 38%.
In this year to date. So this has been something that is not new for us. It's something we've been doing for a long long time and given that experience given our local relationships with all of these power producers around the world. It does give us an opportunity to leverage that in helping make this a more successful for green Heidi.
Surgeon and were able to connect our technologies in engineering and local presence with these purchase opportunities that we already have today have been relationships.
That's helpful and going to say, it's a nice relief to talk about something is not endemic related lately, but on that regard for my second question is.
Just curious.
Maybe in the aerospace business or in the hospitality CEO to business.
Is there any risk that you might need to take an impairment on those businesses given this fundamental changes in how those businesses are doing.
For the customers are those businesses I bought matter as Matt No no concerns there whatsoever I mean, the aerospace business book value is actually quite quite low.
We still generate good profits and as you can imagine that DSD business is really three businesses in one it's an aviation. It has an industrial and then it has an energy that works on things like our industrial gas turbines and other forms of more energy efficiency. So all three businesses continue to operate this is actually an opportunity for us to consolidate some site.
And they're taking appropriate actions in light of the new environment and that has always been a very very well run business. So so there are no concerns there and similarly on the hospitality Seo to business remember that as a high rent business. So we still continue to get rent on the restaurants that continue to either operate or will.
Come back and operate again, so while the volumes on page 17 for food and beverage were down 9% and thats the CEO to volumes to your point primarily into the hospitality sector. The rent continues. So this business actually is performing quite well in light of what's going on and then a rebound obviously would be upside so not not.
No concerns on either whatsoever.
Terrific. Thanks, so much.
Thank you.
And our next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is now open.
Thank you and hi, everyone.
You mentioned that there were some some project delays in the backlog, which is suppose to be expected in the current environment and that you would see some compensation for that can you just give us a sense of how substantial those projects were and the delays and how does that how's that compensation accounted for in your financial results.
Well the confidence M&A could happen various ways, we could be compensation upfront.
In terms of project delays with cash compensation or can be built into the final price usually you would find a built into the final price. So we end up with at least the same IR, our if not higher.
After we go through the negotiations around the delay our contractual language protects us very clearly in terms of we commit to a date.
If that date gets delayed than there has to be compensation to compensate us.
For that so.
Thats, how its addressed and.
Usually you would see it and higher revenues.
Margins and cash flow because of the delay to compensate for any changes that we would see.
Okay, and just maybe just a follow up on the on the repurchases in the guidance I assume there's very little if any repurchases in the third quarter guidance and.
Perhaps some in the in the full year, but probably very little that correct.
Yes, Vincent this is Matt we tend not to put too much of this in the forecast just because as you know it's also a time weighted aspects of depending upon when they're done at what point throughout so well as I mentioned earlier to neglect, we'll we'll get back in the market.
Post this call will continue to protect the a participant and then where we see opportunities and we'll we'll take advantage of that but right now.
Dissipate anything material affecting the share count at this stage.
Thanks very much.
Thank you and our next question comes from the line of Mike Tyson with Wells Fargo. Your line is open.
Hey, guys nice quarter.
In terms of the volume improvement in June and July with was it pretty even through each of the.
Segments.
Our geographic regions.
Well I would say.
As you know.
This this got all started in China first.
And then swept through the rest of Asia. That's why you had some effect from coal bid certainly in Q2 as well as in Q1 Q1, China Q2, more the southern part.
Of Asia, but it went to Europe first and then.
Came to the Americas and of course, we're still start we're still seeing some of that in the Americas, but if you were to look at something like China, We saw improvement.
Through the quarter in terms of.
Merchant volume improvement.
Our on site business, there has been very stable.
Quite strong actually all the way back to the beginning.
Certainly you can look at Europe, you can see the improvement from April to May to June if I look at the U.S. similar you can see to improve the improvement from April to May to June So really I guess that Copac an answer your question pretty much across the board you saw improved from April to May to June.
Got it and then it sounds like when care continues to do Myles.
Can you maybe talk about the returns it has that improved markedly and do you think that.
Do you think that it could be sustainable.
Longer term.
Yes, it sustainable.
In terms of the level of improvement, it's probably on the order of 1000 basis points over a couple of years.
So.
The businesses as been doing very well.
We had the.
But a lot of focused on improving the performance of that business both in terms of improving the margins.
Lowering cost, but also in terms of Capex management, we changed some of the compensation metrics around that.
And clearly Lincare is doing well in an environment like we have today, where they're an important second line of defense for the hospitals.
They months ago, they would not have treated one coded patient today, they're probably over 12000 cobot patients that they are handling.
The government Medicare as as.
As it has come to the realization that working with US is very important to making sure that.
Patients are transitioned correctly that the treatment can be provided whether it's cold bid or other respiratory illnesses and if they may if they have 1.6 million patients in total in a well over 1 billion of those would be.
We'll be respiratory type patient so.
Paper work has been eliminated we've been able to eliminate face to face requirements that with some of the.
Because it's a very document intensive paperwork intensive kind of business whenever you're working with the government, but a lot of those.
More bureaucratic processes have been removed streamlined so we're able to operate effectively and into the business continues to perform quite well and I expect that to continue.
Thank you.
Thank you and our next question comes on line of Jeff Zekauskas with JP Morgan. Your line is now open.
Thanks, very much I think I can put my two questions in one.
Is the is the Singapore coal gasification Singapore.
Gasification project for 2023 still on schedule or has it been delayed.
And secondly, you you said that it's difficult to distinguish your cost reduction efforts from.
Merger.
What's on do you have any margin targets of any kind of.
Maybe your SJ ratio or your EBIT margin or your EBIT da March.
Well you know regarding Jeff regarding an eye. This as it comes a surprise you know as we look at cost me a dollar cost as a dollar cost I do look at total cash fixed costs as a percent to sales at something I always look at I look at every our Bu around the world Regional business unit Theres 20 some.
And I always look at in terms of window I think the appropriate cost structure should be given the type of business that they are in and then of course, we always demand efficiency year over year, that's what a lot of our productivity projects are about but but I'll, let Matt can come back and answer this question as far as other metrics, but that's what I look.
Look at very closely and Thats, how we drive operating margins along with the.
Normal productivity pipeline and pricing with respect to any specific project I would rather not comment on that because you have to keep in mind their customers on the end of all of these things and I would rather they lead with any commentary regarding delays.
Okay, and I can pick up to Steve's point, a little more Jeff on the margin. So I would answer it thinking about it this way. So first it let's think about on an external benchmarking basis clearly in historically there has been demonstration and I'll talk to operating margins, which I think it's an important metric to how we think about it.
EBITDA margins on less interested in the primary reason is because as you know EBITDA includes the equity income of affiliates and that is 100% margin every time, because it's not consolidated there are no revenues. So that is just a function of how structures and ownership structures, but it really does.
I can't speak to quality at all so operating margin is where I focus that's my effort and Thats. What I think is the most important of the profitability ratios. So within that externally clearly demonstrated mid twentys for an industrial gas company.
Even when you look at our segments externally the Americas, obviously operating mid Twentys. So at a minimum on a global basis Theres nothing preventing us from trying to achieve that on our gases businesses across all three segments. Obviously, you'll have timing of depreciation you may have some portfolio differences of packaged gases versus onsite.
But irrespective when you add it all together those are numbers that we want to achieve and that we believe are absolutely feasible and have been demonstrated internally. We obviously have a lot more benchmarks than what you have visibility too and we look at every country and their operating margins, how they're structured what they're able to deliver.
Over so we have I would say, even more stringent internal expectations on what needs to happen around margin delivery into Steve's point.
When you look at price when you look at inflation and when you look at productivity the inter relationship between all those three has to be accretive if thats accretive it creates a compound value creation and Thats why we always are very intent on cash fixed cost pricing and the relationship for those and then obviously inflation.
In the environment you operate. So this is something we expect every year to try and improve on our operating margins in into your point other aspects like SDN as a percentage of sales sales or profit per head count return on capital. These are things that should improve through this internal operating rhythm and effort. So mid twentys is demonstrated in that.
It's clearly a goal and then we want to continue to work better than that on an operating margin basis.
Great. Thank you so much.
Thank you.
Next question comes from the line of Steve Byrne with Bank of America. Your line is now open.
Yes. Thank you.
Laid out on this slide.
A lot of lost the green hydrogen goals for many countries.
And do you mentioned during dialogue with 16 of them.
I wanted to ask you what do you think these countries.
Have a plan for how to implement these lofty goals do you see it more as a carbon tax that might have more impact you know on the industries that could incorporate green hydrogen and or the power companies that could incorporated as a feedstock versus.
Funding infrastructure that could be more use.
And and implementing Fuelcell based transportation, which.
Could be much smaller projects versus the former be very large projects and maybe more capital efficient do you have a view as to.
How those two buckets might play out longer term.
Well I think it's going to play out.
By country.
It's going to play out.
By region.
If I look at what's taking place in Asia, I would say that the Asian countries tend to move faster.
Whether you're talking about China or South Korea.
Australia I would put in that in that category they tend to move quickly.
I think we're going to need to see allowed the details of some of these goals that have been.
That have been.
Gone public and see how they're going to work.
I think that there will need to be a carbon tax I think there needs to be a significant carbon price and I earlier I gave a comparison between say a gray hydrogen molecule.
And green hydrogen.
As nominally where it is today so theres a significant difference I don't think you can charge hundreds of dollars of carbon tax.
And have a workable solution I think the number needs to come down.
Over time and that would be coincident with again, the cost of hydrogen coming down from green hydrogen coming down as well.
So those two things are going to need to play out together.
And we'll see how all of this evolves, but we're going to have lots of opportunity to talk about this you know as we understand more and more about would each country is intending all I'm trying to lay out here today is that we're well positioned and a lot of countries around the world that are going to be active in this space.
And I was curious about the level of involvement that.
Your engineering arm is in this initiative.
For example, you how did you mention ITM powers your partner for.
The electrolyzer, which they have a two megawatt units, which is certainly suitable for.
The.
Germany.
Fuel cell Trina project that you announced the other day, but.
That's the big shell refinery and in Rheinland were to convert all of this hydrogen over to green hydrogen.
The project would need to be a gigawatt of of electrolysis and.
Is your partner has a two megawatt.
Is your engineering business involved in in designing much larger.
Electrolyzers, we're involved in trying to.
Adopt this technology could get larger scale.
Well you know two megawatt module today, we haven't said with the size of megawatt module is going to be.
Going forward. So part of this is larger modules part of this is scaling up the plants using our lend the engineering capability. So that they can bring all of their expertise to bear around the whole balance of plant because it's not just an electra law electrolysis module.
There's a lot of other supporting.
Balance of plant, that's part of that as well and though thats all part of how you bring these costs down.
So.
There are some larger projects being discussed.
The projects of the projects that were working on today, certainly 20 megawatt I think they're good sized projects I like those projects.
Some larger projects being discussed.
And I think what what you will find is that with some of the capability. That's out there today say around alkaline technology that is like 100 year old technology. They havent really used it for water in several decades, but that certainly as the intent.
My expectation is that the Chinese are going to be very strong players.
In alkali building alkaline electoral elect electrolysis equipment, and I think they're certainly going to be players.
Particularly as we're looking at some of these much larger scale projects, but right now most of that's just being discussed the normal fair projects is in sort of the two 510 20 megawatt.
Size range, and we're perfectly happy to focus on those.
Thank you.
Thank you.
And our next question comes from the line of Jeff hair.
Well, yes. Your line is now.
Good afternoon, and actually good morning, Thanks for the option to ask question just kind of size the scale as the hydrogen opportunity.
Currently staffing hydrogens, roughly 10% of the sales of the gases as the group.
Do you think it'll take before green hydrogen same site.
Before Green eyes is what.
Same size assurance hydrogen yes.
Given the current landscape that you can see.
Well I think where that's something that there's a lot of activity today.
If I.
If I use some of the forecast that are out there not necessarily our internal forecast Sunda forecast that are out there it says that.
By 2030, this could be upwards of two 100 billion dollar size market.
I am kind of cautious and that I want to see more first I want to see the market develop I want to see more the projects.
Move forward, but certainly if it becomes the that size.
We would have no trouble equaling the size of our current hygiene business today by that timeframe.
Okay. Thank you.
Thank you and our next question comes from the line of John Mcnulty with BMO Capital. Your line is now open.
Yes, thanks for taking my question.
Even in some of your opening comments around the core strategy you highlighted.
Folio optimization, you have a handful of businesses that aren't necessarily kind of industrial gas aligned to necessarily.
Any chance that we see an ability for you guys to pair those off in the next say 12 months or so.
Well, we're going to we'll certainly we're certainly working through the portfolio Theres always a long list of activities. We divested a couple things. This past quarter. One was a LNG trading business. Another them was a small infusion business. So we're always doing things are always making packaged gas acquisitions.
In certain kinds of health care acquisitions, we're always looking we'll continue to look at.
With respect and some of the larger pieces you might be referring to.
You know with co bid some of the discussions we were having just got put on the backburner because.
You know potential buyers just aren't in a position to move forward at this time, but those are things that will continue to look at.
We have joint ventures ran around the world that Weve never been a big fan of joint ventures that we would look to find a better solution than what we have today. So we can operate these things the way we want to we're also in some small countries around the world that.
From my Vantage point would have more risk than in it than benefit in being and so we'll we're looking to.
Prune those as well, but there's always activity and lot of times, it's just a function of who's on the other end, whether they're ready to move forward our or not.
Got it now that's a that's helpful and then I guess one.
One more question just.
Yes, there's a lot of talk on the hydrogen side at the same time look there's a lot of a lot of stimulus packages. We've been hearing about there are very heavily green related hydrogen also see is obviously in that vein.
Would you say you're more excited at this point about the potential for carbon sequestration tied to whether it's the green initiatives or the push on the hydrogen mobility market or are you more excited right now about the hydrogen mobility opportunity how should we be thinking about that say over the next five years.
I would say right now the the hydrogen mobility is something that.
Is more active and clearly if you look at if you go back to the number I mentioned that if.
If we can convert 1% of all fuel today used in heavy haul trucking to fuel cell electric vehicles, that's a $20 billion market itself. So the size that market is enormous there is a lot of interest and that there. That's what most of the regulations you see today are targeting.
China 1 million fuel cell vehicles, 1000, hydrogen refueling stations, South Korea, 3 million fuel fuel cell vehicles, California 1 million. So the target really is around the target of these countries. The focus is really around fuel cell vehicles.
And hydrogen refueling stations, so I would say that presents a bigger opportunity.
The carbon capture and sequestration tends to be a little bit more one offs again, it's going to be in countries, where you have low cost natural gas to begin with like the United States and as I said earlier, they're not really as a country. We're not really moving forward quickly at this point. So that can change we can see more of that in the future, but right now that's the way.
This opportunity slate is shaping up great. Thanks, very much for the color.
Thank you.
Last question comes from the line of Laurence Alexander with Jefferies. Your line is now.
Good morning, I guess, just one last one on given the scope of the car of the projects available for the on site business.
How do you think about return on capital hurdles or how do you think about the packaged gas and merchant businesses compete for capital going forward.
And do you have any temptation to shift the merchant gas towards a more explicit pricing over volume strategy.
Well, we're always looking to to balance.
Price and volume.
When you're looking at the merchant liquid market I mean, clearly generally speaking, it's pretty profitable across the board.
But that has to be done granular Lee and what I mean by that you have to look at a customer by customer look if you have a low margin account pushing pricing hard there's lot of upside if you have a high margin account.
You want to be thoughtful in terms of.
How you manage the whole pricing expectation around that so.
That's how I think about the merchant pricing in general that's really how to think about package pricing, but any projects. They want to bring forward clearly it's got to stand on its own it's got to make good strategic sense from a product and the location standpoint, it's got to meet our return criteria.
And the same thing is true back to the on site. It has to meet our we have not changed our return criteria was right to area. We're still looking for good spreads above our cost of capital and we look at each project opportunity through that lens.
And just to add to that Laurence This is Matt.
As you know, we make 15 20 or investments and if you do it right. It could be 50 or 60. Your investments. So we have to think about our return criteria over the long haul and as you know often these onsite investments are not to tailed risks they tend to be one tailed risks to the downside because you have liquidated damages you a performance requirements.
So you have to be very thoughtful throughout all the cycles and when you make these investments so thats something that we're not going to change and every cycle is different the Steve mentioned today electronics mining things like that are doing well and with stimulus coming into the year to that could change the balance on some other industry. So we have to think long range and we always want to maintain that long.
Range view, when we make these investments.
Thank you.
Thank you and this does conclude today's question and answer session I would now let's turn the call back to want to lies for closing remarks.
Chris Thanks, again, and thank you everyone for participating on today's call. If you have any questions feel free to reach out to me directly stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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