Q3 2020 Linde PLC Earnings Call
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Please Sir you may begin.
Thanks, Chris Good morning, everyone and thank you for attending our 2023rd quarter earnings call and webcast.
For sure growth for the full year.
On top of 23% growth last year.
X FX.
As expected the more resilient markets we serve.
Healthcare electronics and food freezing.
Continued to perform to perform well.
And our fixed fee contracts have protected us from volume reductions in the more cyclical and markets.
Geographically all segment showed volume improvement versus Q too.
But still remain below pre covid levels.
Going into Q4 expect volumes in Asia.
Led by China, Taiwan, and South Korea.
To be positive both sequentially and year over year.
However, we see grow flattening out in both the Americas and Europe sequentially.
As Covid cases continued to rise or remain at elevated levels.
The impact is most pronounced in our metals in manufacturing market segments.
This is consistent with published macroeconomic data and and with what you are hearing from other companies.
I know, there's a lot of interest regarding 2021.
I think we will all acknowledge covid is a bit of a wildcard at this point.
What I am confident in is the resiliency of our integrated supply business model.
Which we've been clearly demonstrating.
Our ability to achieve positive pricing in any environment.
The strength of our backlog.
And our ability to achieve cost efficiencies on an ongoing basis.
Those points over the last two years driven by cost efficiencies, good price management and the rollout of digitalization initiatives.
The integration between legacy Praxair, and Lindy a G. In Asia was completed a head of scheduled.
And generated substantial benefits for the company.
Another indication of the success of the merger.
<unk> leadership is our employee survey results.
Which were quite positive across the entire Asia population.
On the projects side, 70% of our solid gas backlog today is in Asia.
And many of those projects were one as a result of standing Jeeves leadership.
In terms of clean energy Sanjeev has been a strong advocate.
We have more project activity in Asia today than any other part of the world.
And I expect Asia to be the region, where we forsee meaningful results.
<unk> has been a staunch supporter.
Of all our corporate values.
Safety.
Integrity diver.
Diversity.
Community.
And sustainability.
Ill now turn it over to Matt to discuss our Q3 performance and outlook.
Thanks, Dave and.
And good morning, everyone.
Third quarter results can be found on slide three.
Sales of $6.9 billion were 2% below prior year.
But 7% higher sequentially.
Versus prior year volumes are down 3% as lower base volumes, primarily in the manufacturing end market.
More than offset positive contribution from project startups in APAC and Americas.
While it's difficult to know the exact impact from coated.
We estimate the Q3 effect to be a mid single digit percent decrease.
Despite the lower year over year volumes, we had a solid sequential improvement with gas volumes, increasing 6% from recovery in food and beverage refer.
Refining and chemicals.
And the more cyclical markets of metals and manufacturing.
At the consolidated level engineering sales were flat with prior year.
But down 3% from the second quarter.
This was primarily due to project timing.
As the sale of equipment backlog has held relatively steady at $4.9 billion.
Pricing trends continued to be positive with increases of 2% over prior year and 1% over the second quarter.
All geographic segments achieved higher pricing.
As local management took actions to recover cost inflation.
You will notice that the year over year impact from FX was zero percent.
Due primarily to a stronger euro and Chinese RMB, mostly offset by weaker Latin American currencies.
Sequentially FX was a 3% tailwind.
As the dollar depreciated across most foreign currencies.
Operating profit of $1.5 billion or 22.1% of sales rose, 9% from 2019 and 15% sequentially.
Versus prior year operating profit grew from a combination of higher pricing.
Cost management and defensive revenues in the form of resilient end markets and fixed contract payments in fact operating margins expanded 230 basis points from 2019.
Our fifth quarter in a row of expanding margins more than 200 basis points.
Sequentially.
Operating profit grew 15% and margins increased 140 basis points from strong profit leverage on the higher volumes.
As demonstrated this quarter our business has a unique combination of downside protection with fixed payments and resilient end markets.
Yet upside potential on economic recovery.
Diluted EPS of $2.15.
Was 11% higher than prior year.
And 13% higher sequentially.
Frankly, I don't expect you'll find many industrial or material companies that can claim year over year double digit percent EPS growth in this environment.
Which speaks to the high performance culture and quality of the Lindy business model.
Further validation of our performance can be found in the cash flow trends.
Q3, operating cash flow of $1.9 billion increased from both prior year and second quarter.
Confirming a continued high conversion of earnings to cash flow and.
Resulting in an operating cash flow to EBITDA ratio of 84%.
Equally important is the disciplined capital deployment Evan.
Evidenced by prudent Capex investments and have consistently rising return on capital.
Which reached a record 12.8% this quarter.
Base, Capex, which represents all non backlog spending has.
Has increased from smaller onsite growth projects, primarily serving the manufacturing end market, including paper and glass.
However project Capex, which represents contractual growth with spend over $5 million has declined.
Primarily due to startups.
While our ability to start up on time, it speaks to the quality of our customers and contracts I.
I do anticipate the overall backlog to decline into 2021.
Similar to the trends we saw in 2009 and 2015 following capital cycle corrections.
But recall following those corrections customer project spending rebounded and subsequently led to significant project backlog growth.
Including a record year in 2011.
So using history as a guide.
I expect the capital cycle will eventually recover and provide future growth opportunities.
Return on capital is the ultimate metric for this industry.
And we have consistently demonstrated a prudent balance of growth.
And quality.
Poor contract management, and misallocation of Capex can lead to significant cash losses, potentially even greater than the initial investment.
This explains why Lindy is laser focused on a consistent proven investment process to stay within our core expertise and dense integrated supply network.
While properly balancing diversification.
Risk and return.
Now, while we had a solid third quarter performance.
I believe it's just as important to discuss our longer range trends.
Which you can find on slide four.
From a financial perspective.
Our owners want to accompany that will deliver high quality growth.
While prudently managing capital and.
Generating excess cash to fund growth and shareholder distributions.
And when looking at our results since the merger in Q4 of 2018.
That's exactly what you'll find.
The top half of this slide demonstrates high quality growth.
And just under two years, we expanded EBIT margins 600 basis points and grew quarterly EPS by 42%.
Most companies would be pleased with this performance by itself.
Yet we accomplished it with a commitment to capital discipline.
2020 year to date operating cash flow is up 27% and free cash flow has more than doubled.
This enabled funding of growth and shareholder distributions.
Including a 10% dividend increase and over $2 billion of share repurchases.
Furthermore, return on capital has increased 250 basis points from the merger date.
It's also important to note that financial performance Wasnt, our only focus.
We're living our core values through improved safety performance.
Employee diversity.
And carbon reduction, which are all detailed in our 2020 sustainability report that was issued in July.
Many people tend to forget that we achieved these results while integrating too complex multinational companies during a global pandemic.
In fact.
While some stated we would not be successful.
I continue to look forward to what we will accomplish next.
I will now wrap things up with our updated 2020 guidance, which you can find on slide five.
For the fourth quarter were estimating EPS in the range of $2.11 to $2.16.
Excluding the 1% FX headwind assumption.
This range represents 13% to 15% growth over 2019.
We're anticipating flat volumes sequentially.
As incremental project contribution.
He is expected to be mostly offset by seasonally lower sales and engineering project timing.
We believe this range is appropriate in light of the continued uncertainty around the pandemic and subsequent economic impact.
Full year guidance is now $8.05 to $8.10, which includes an estimated 2% FX headwind.
This updated range falls within our February 2020, pre co that estimate of $8 to $8.25.
So in summary.
Eric Specter of the global challenges.
We are expecting to grow full year EPS, 12% ex currency.
And the us deliver on our original 2020 financial commitment.
I'd now like to turn the call over to QNX.
Thank you Sir.
As a reminder to ask a question you need to press star one on your telephone to withdraw your question. Please press the pound key standby assay compiled the Q and a roster.
Our first question comes from Duffy Fischer of Barclays.
Your line is open.
Yes, good morning Fellas.
Okay.
First question, if we could just go to the slide that Matt was just on slide four the chart in the upper left hand corner, just showing the profit margin expansion.
Could you talk about the size of the buckets that contributed to that you know how much was price how much was integration how much was just cost cutting its respective companies and then is there anything in that improvement that would be transitory that might become a headwind in there we think of something like may be in lincare.
You might be over earning because coal that is or respiratory disease may be that's got better business. This year than it might a year or so from now so anything in there that we would need to overcome day to keep that as either a base or a base to grow from.
Well the way the way I would answer that Duffy as you know in any given year and you're going to have some headwinds you got to have maybe just maybe some tailwind to than the rest of you just got to go execute.
And.
I think the point is you know year end year out quarter in quarter out every month the team executed at a high level pricing is always an element of this if you go back over this timeframe I am sure it probably was about 2%.
We always get pricing in this business, we will get it going forward as well. So I think that is a factor.
Certainly good cost management.
Through this last quarters, several quarters, which is very important as a result of co bid and then as you guys. You spoke about earlier, we did have some merger synergies, which quite frankly, I don't look at anymore, because thats kind of in the rear view mirror to us because right now we're just working on cost efficiencies in every business and.
And so that will sustain us going forward and what I'm confident in our ability to continue to drive operating margins North Awards is kind of what I said continued price improvement continued good cost management productivity programs, which we've been ramping up here.
And whatever volume comes our way I think you've seen from Q2 to Q3, we were able to take that volume and translated into ever higher levels of margin all the way down the income statement.
And of course, we had some large project contribution look forward to and that will be we have a fairly healthy backlog today, so that will sustain us for a while.
So we'll continue to.
Continue that trend that you're referring to on the upper left hand side.
Perfect and then.
If you could.
Maybe just look at merchant and package and kind of walk through the three big geographies and what you are seeing volume wise, there and how that looks today.
Well I think package is more impacted by manufacturing.
So manufacturing globally.
Has been suffering more so than other market segment. So.
If I look at it.
Inside of that number and if you look back in the United States. For example, you would see the hardgoods is weaker than gas. So you probably have still have.
Negative double digit year over year hard goods volumes.
But on the gas side it'd be much better say low low negative single digit so you've got to have those trends.
On the merchant side it can be affected by resilient markets and often is so if you were to look at.
The us and Europe healthcare food freezing our large markets for us and those markets have held up very well as mats spoke about and as you can see in that end market chart in the back and.
And then if you were to look into look at Asia, you would see that electronics markets and we do provide merchant liquid electronics markets too it's not all over the fence.
Holds up quite well so merchant generally speaking would be better because of the resilient end market exposure.
Exposure packaged gas a little weaker because of manufacturing in both cases, the fixed fee structures have held up exceptionally well.
Great. Thank you.
Thank you.
Yes.
Our next question comes from.
Okay Vince Sachs. Your line is open.
Thank you very much.
Steve for Matt I wanted to ask you guys about hydrogen a little bit here, obviously, it's been a lot of fanfare about this market.
But wondering how it fits in that with your description of investing with high returns on capital and explore.
Exploiting your core dense network.
Well some can lend itself with or are you going to do more rifle shot ups can you speak to how you think about that market opportunity.
I would say rifle shots very focused shots based on end market presence and market infrastructure customers. We know customers often in most cases are already supplying and so to me. These look very much like the normal fair industrial gas over.
Over the fence projects and the only differences clean hydrogen as the product.
Exactly thats the only difference.
And just add to that Bob as you can imagine it's an asset intensive growth area and that's how we view is our strength is to manage these assets and get a.
Good returns relative to the risk on that so we don't see that very different at all in on how the rest of the industrial gas business runs and is operated.
That's helpful. Thanks, and Steve I know last time, you guys named COO. He only was there for about a year and then.
It was a succession should we read into this that you're planning on heading out at some point in the not so distant future where line you sticking at the at the helm for a while longer.
One day I will head out, but there's there's nothing.
Decided or plan, but you can rest assure one day I will not be here.
[laughter] okay. Thanks.
Thank you.
Up next we have Peter Clock Society Generale. Your line is open.
Yes. Thank you good morning, everyone and welcomes Angie.
I've got a quick query on terms of the guidance, obviously Europe than top end the way Youre guiding back in February.
Since then we had the pandemic demand across the world.
Obviously took a bigger volume hits clearly productivity has been a key thing better for you Steve would you say the way that lead. The plc has adjusted to this would have been the same as the praxair I.E. The organization is pretty much adjusted to the way you would like to see it and then the follow up to that is I asked me. If this is Adam.
Because I think way back in Q2 19, we will till date, who was the model very quickly in terms of adjusting and productivity benefits.
Just wondering how you see the difference than the plc. The main differences anyway as against Linda AG and perhaps even be as see thank you.
So I'll take the first part question that I'll turn that one over to Sanjeev.
Quite frankly across the board and Lindy plc people did what they needed to do to address the challenges of cold weather that was jumping through hoops to take care of patients. There was a recent article about what our drivers and our team did in India to provide oxygen into all those hospitals and need so.
So that's what people did really across the board. There's hundreds of stories, just like that but from a cost management standpoint.
I would say everybody stepped up to the challenge and there really is no differentiation in terms of legacy organizations.
Thanks Peter.
Now my observation of the productivity piece would really goes something like this.
And Linda BLC. The main difference I see is we find productivity as a fundamental part of our business processes entirely embedded it's not a program as we might have run in Linda acai or Lindy GE or an initiative that's separate from the business that doesn't sit on top it sits within the business itself.
I think we do everyday there are collections of projects that we have that build and deliver on these productivity at foot and the overall benefits that we see in there and I think thats kind of the fundamental difference between what I've seen in the past and look what we are now going through in the building.
Okay.
Thank you.
Omar.
Lamar.
Ask that all those <unk>.
Wanted to ask a question if you could please hit star one again all those ask a question. Please it's all one again.
Next we have nicolo Tang of Exane BNP. Your line is open.
Hi, everyone and thanks to the presentation.
Thanks for taking my questions and congrats SNG gone from the prevention.
Firstly I wanted to ask about the.
Backlog.
Okay.
Hillary Clinton on it declined in the backlog into Twentytwenty, one and I was wondering if you could talk about the existing backlog as well and do you see any delays in your existing.
That local and.
Lehmann and Pat.
Advise capex guidance unless you've taken it down very slightly is that and make that will to project delays or cancellations or is that a low end non project spend.
And.
Then I had a second question on the buyback shares.
Good luck with that.
Well, you can keep going and I'll take the first one and I'll, let Matt handle the second most likely I haven't heard your question, yet, but most likely.
I guess the second question was.
The original commitment around the buyback I think with 6 billion by February 2021, and I know that it was in Q2 that you. We started it in Q3, it seems to be a bit of there the pace than in previous months.
And if my calculation is correct I think you have about $1.7 billion of that buyback remaining so I was wondering if you're still committed to completing this within the original timeframe is heavily 2021 or what they are trying to be a bit more tactical about the pace, perhaps where they could take the equity market or pass rated to market conditions.
On the capital projects.
Okay. So this is Steve I'll take the first part on the backlog so.
The backlog number we publish is a function of.
Projects that we have signed a that come into the backlog and projects that started up which comes out of the backlog and so you got to kind of divorce that from an annualized capex spend rate.
But what Matt was saying is we can look at projects were starting up next year. That's a good thing right. That's why we we close those projects. So we get it started up so when you start seeing the revenue and the returns.
But based on the amount that we're going to be starting up and based on our best estimate as terms of in terms of when we will replenish or we will add projects to the backlog. It is likely that number could come down now it could also bounce around so.
Because again this is lumpy.
So that's really what what what he is referring to and enter and if we think just really in terms of where we think projects are going to come from or where they are coming from electronics is quite strong.
And for reasons that you're all very much aware of so if anything the electronics opportunity pipeline is becoming stronger.
Overtime, clearly clean energy, we're looking at quite a few projects. It's a question of timing.
And then I would say the rest of the project opportunity slate is really more of a function of demand.
There are projects that we know customers would like to do but right now their balance sheet their.
Businesses are fairly weak and they're going to wait until demand comes back but this kind of goes back to mass earlier point that when demand comes back all kinds of projects tend to flow.
Back into the pipeline system with respect to delays I don't expect to see much in the way of a further delays other than what we've seen which was very mild compare to what you've heard others talk about Oh, we are pretty confident about this the status of all certainly all the big projects that we have in the pipeline today I don't.
Anticipate any further delays and we feel very good about when we will start seeing.
The commercial benefits of those from those investments.
And with respect to a little lower Capex spend I mean, I would say certainly all the good project opportunities we are pursuing.
This would be non growth spend that we have just been continuing to manage.
Closely more closely everyday.
So we are finding savings here and there and which is what we always expected would happen as we really focus more so on the non growth capex spend.
But in inside of that number that base Capex number you know the growth with respect to pulp and paper projects with respect to glass with respect to lithium ion.
Battery projects small on site project really is quite strong.
And so that has been a very favorable trend throughout Goldman.
Thanks, Steven and I, Nicola and I'll, just add one point to Steve before I go to the buyback question I think just to clarify to you know our definition of backlog. It's not the definitions are not consistent in this industry. So I just want to make sure you understand that my opinion, we have the most stringent definition on how we define backlog.
It must be grow it must be contractually secured over $5 million. It means we don't put ammo use we don't put Ela wise, we don't put merchant only type projects, so to Steve's point, even within our base capex spending a little less than half of that is for growth and for very good growth.
For Onsites below $5 million. Some of these small onsites were putting in places like glass.
And some other.
Strong growing markets like paper. We also are seeing a lot of good growth opportunities in there that may not meet our backlog definition, but we see good returns relative to the risk and things were pursuing so I just want to make sure. When you think about the capital we're spending on growth. There are two elements theres, what fits our fairly stringent backlog definition, but then.
There is a substantial portion of growth that we also have that were pursuing in the base capex.
Regarding the share buybacks, yes, just a couple of points to make first the expiration I wouldn't look too deep into that into February that's more of a technicality that's required under the European I may our requirements.
In reality, I think a better way to think about how we look at buybacks is that they are an integral part of our capital allocation policy as you probably well know we always look to maintain our a rating and grow the dividend every year and then after that our priority is to grow and it's to invest in growth could be acquisitions could be.
Recaps could be projects, but we always tend to have a lot of excess capital left over and then with that excess capital that goes to buybacks. So our expectation is to continue to have open buyback programs as far as why we're probably a little bit less on tract and the 6 billion. Obviously as you know with Covance, we turned it off for about a core.
Peter just in light of the <unk> the items we discussed.
At that time in Q2.
But this is something that we've been in the market now everyday since August since we started back up and our approach is to be in the market every day and then when we see opportunities we'll go heavier at times, but.
But this is something that will be an integral part of our capital allocation policy.
Okay. Thank you.
Chris do we have any more questions.
Yes, our next question from David Begleiter.
Thank you Steve there was some concern that some refining my unpack your Americas results and margins.
Didn't appear to be the case. So if you talk about what happened with your refining business in Q3, and what drove the strong margin expansion in Americas in <unk> in Q3 as well. Thank you.
Okay. So the first part. Your question is is there was a concern that refining may have hurt our margins that would you said that was kind of yeah. Okay and then in the Americas. Okay. So Americas is.
A lot of it's a big region. So there's a lot of elements to it.
But let me just say I think you know, obviously, 20% operating margins not bad.
So how did we get there and good pricing good cost management team reacted very quickly.
We finished out some of the.
Integration opportunities we had earlier so we certainly saw some of the benefits of that the Americas has always been very strong productivity programs and the fixed fee structures take or pays all that held up very well throughout this period.
So thats really what and the resilient end markets, obviously, we benefit from that health care food freezing a predominantly in the Americas as I talked about earlier and we did very we're doing very well in those markets.
With respect to refining I as I look at the volume certainly are down.
Q3 year over year, they were up sequentially from Q2 as out Theres some noise in that because of a series of Hurricanes that certainly affected Lake Charles.
The first hurricane affected motiva.
So there needed to be we had to recover from that and they've been recovering from that so October obviously, it looks a little better say than September.
For that reason, but we were you know even though it's down year over year again, we have very good commercial terms and conditions on all of those contracts down there that that protect us.
And so again as I said earlier, you know, there's always has tailwinds and headwinds and things. We just have to go execute so I've never seen a quarter, yet wherever there's nothing but tailwinds. So that was just one headwind during the quarter, we had to do with the team did a very good job, but we're pretty much out of that now I don't anticipate another.
Hurricane between.
Between now and the rest of the year. So I think they'll be buying the biggest issue in refining as you know.
Is that the diesel fuel side has been strong.
The gas side has been very weak, though has been coming back and jet fuel where refineries typically make good margins has been terrible.
But refining refinery utilization is coming up from where it was but low eightys is not a good place for them they need to be much higher than that to start making money.
But were in pretty good shape.
And Steve last is just on the European shutdowns have you seen any impact yet any way to quantify the impact in Q4 for you guys.
Well.
I think the answer to that is.
We have to watch it I think pretty closely because a lot of these shutdowns are really started going into effect.
Clearly I can look at volumes and see that medical oxygen is quite strong.
But it's it was strong it's been strong and so we continue to be strong in October and that typically as you know it's a function of cobot case rates a Cobra case rates go up I expect to see our oxygen sales go up so thats been strong I believe there probably was some build ahead knowing that the shutdowns were coming so we probably got a little better volumes than.
We would ordinarily get as people were preparing in advance for the shutdowns, but but this is why we are saying flat sales in Q4 because.
I think we're going to see the effects of this for the rest of the quarter.
We're confident that it will be around flat, but certainly the shutdowns in Europe.
We are going to be a drag to volumes and we anticipated they would be though medical the medical side I'm sure. We will continue to be strong throughout.
Thank you.
[noise]. Thank you.
Our next question comes from John Mcnulty of BMO capital markets. Your line is open yes. Thanks for taking my question. So so maybe a question around how to think about the backlog and potential for activity I think.
Every recession is a little bit different in this one obviously was deeper than than the old nine recession, but but seems to have snapped back maybe a little bit more quickly I guess, how are you thinking about the progression of how your backlog or when your backlog may actually start to improve just given kind of the differences in recession is there a way to think about that at this point.
I would say it's hard for me to forecast that I think electronics projects are going to be there. So I'm pretty confident about that I think the only the only question about clean energy is the timing of some of these projects.
If I look at all the projects we track the number is well into the billions of dollars, but how many of these go forward at what pace I think really remains to be seen.
I do think over the next three years, we'll probably spend $1 billion or capex against clean energy, but again, that's based on my assumptions of when some of these projects are likely to break loose obviously, what we're working on far exceeded that but I think thats kind of a reasonable X.
Expectation that we have here internally with.
With respect to the rest of the backlog is really a function of demand John So I think if demand comes back you'll see some of these oil and gas companies for example start to spend money on de carbonization projects.
Really with or without regulations, because I know they want to but really they are not in a financial condition to do that today. So it really hinges more on demand I would say.
Got it fair enough and I guess, maybe maybe to that so twoq you. Obviously is a pretty big drop in three bounced back pretty pretty solidly when you think about the take or pay thresholds that you have and that it does sound like it certainly helped a lot into Q1, and maybe a bit in threeq as well I guess is there a way to think about.
What percentage of the business is kind of at that watermark or above now where were incremental volumes actually do fall directly to the bottom line versus first maybe not like how should we be thinking about that in a minute.
Yeah. John This is Matt I think you may recall, when we had spoken last quarter about the 65% of the defensive sales and about half of that is protected contractually a large portion. In addition to the take or pay also is rent.
So the rent continues throughout on the package.
On them the onsite to your point on take or pay.
We have a few that may be at that level or in South America. You tend to have a few you see a little more in certain markets like metals today that are running at lower levels, but these are pretty traditional and consistent of what we've seen in past cycles.
So I'd say for the most part, though South America, a few in Europe and as you look at our working capital performance and our cash flows. Obviously, we continue to get paid and a lot of the reason is because we're connected to top tier players in those regions and in those markets. So that does insulate us and and we expect that these.
We'll come back up.
As we've seen in prior cycles.
Thanks, very much for the color.
Thank you.
Up next we have Vincent Andrews of Morgan Stanley Your line.
Line is open.
I think it is Sandra could stay on for Vincent just a quick question on pricing. It sounds like you expect it to continue to be positive on a very strong third quarter here. So just as we think about the fourth quarter Juan what is kind of embedded in the guidance and two how should we think about it going into 2021 and obviously so.
But over the last few years, but is that kind of 1% to 2% still the range are you thinking about him.
And maybe kind of the lower side of that.
Well I think.
Going Q3 to Q4.
I wouldn't expect to see much in the way sequential pricing because a lot of our price increases are really geared more towards the beginning of the year.
So I think it's in it's kind of in the round area. It may end up being plus one, but but I'm not anticipating that now.
And then going forward into next year every year, we expect to get 1% to 2%. Some years. We've we've got more to go back and look historically, but it's never zero.
So that would be my expectation next year.
Great. Thank you and then in terms of margin.
You talked about a strong margin in the Americas and sort of what drove that as we look at it.
In the coming year.
Do you expect most of the margin expansion to come into other regions and is it fair to think about the current level of Americas is rather stable going forward and if you could kind of give some more color on the other regions and what kind of level of margin expansion, we could expect.
Well I don't expect to go backwards anywhere.
And.
You know a lot of the good work that we have put in is going to continue.
Continue to pay dividends going forward. So we will be stable if at least at these margin levels, but what will lift the margin levels will be volumes coming back. We're still below last year, everyone is a and as volumes recover to something more normal. We certainly expect the levers that just like we did from from Q2 to Q.
Three.
And as far as.
Yes.
Yeah.
[music].
Hello.
<unk> coffee <unk> tea.
Pricing is.
The commercial terms and conditions all of those rental fees storage fees take or pays all of that held up exceptionally well resilient markets are good for us healthcare food freezing, particularly in Americas and also in Europe. So that's what drove that level of profitability and you know.
Really our philosophy here and it's not rocket science, but as we look at all businesses large and small and we get very granular in terms of how we can improve the profitability of all of them.
Very helpful. Thank you.
Thank you.
NFC I guess the constant JP Morgan your line is open.
Thanks very much.
Two questions.
Hence the focus of cost cutting band in the United States and in the subsequent quarters, we'll see it more in Europe and other areas and second in your sequential price improvement is it broad based that is our oxygen and nitrogen prices up sequentially yours.
More eccentric and maybe it has to do with hydrogen or something like that.
Well there has been some contribution a year over year.
From helium, probably somewhere in the order of 25% to 30% contribution in pricing.
But sequentially, probably not because ah that price increases were obtained.
In prior quarters, and and you wouldn't see much in the way of a sequential help from helium. So the answer that it's really more broad I've looked at all of our packaged gas businesses. They have good price increases a good price realization I should say merchant liquid I see pretty good price realization across the board so.
It's not one or two products that are driving all of the price increases and.
And if it was it wouldn't be a.
It wouldn't have the would be as long lasting as as if we had had broad based so there's always we always work on it broad based on cost.
Cost cutting I mean, certainly in places like Americas, and I would say, even Asia, we could respond more quickly in terms of cost, but we have been doing the same in Europe, and it's taken a little longer as we said in the beginning we have to work through the process there.
Which we've always known we needed to do like I think the process is a good process in many ways.
Because it forces you to get very detailed and granular in terms of what cost actions, we're taking and why but we've been making good progress with that and we will continue to do that.
In EMEA, so one could look at that and say, perhaps there's more opportunity over the long term in terms of operating margin improvement and that's probably the case.
Okay. Thank you very much.
Okay.
Thank you.
And next we have hi, Tyson of Wells Fargo. Your line is open.
Hi, guys nice quarter.
Steve when you think about.
Your earnings growth, 12% in there in a tough year is pretty impressive.
Let's turn to the cadence of growth and maybe some of the variables. If we ever get back to you know, 234% type of global global industrial production growth.
You mean, how should I think about that in terms of margin lift.
Well I would imagine that growth to be better than 12, right. So just I'd, just be curious where where that could well high.
I I think well look the way I have to think about it is and again, we will be back in January we'll give you a lot more color around us.
And what I said in my comments were if volumes are stable.
And maybe get a little help it doesn't have to be much continue to get some pricing execute the backlog continue our productivity that would give me confidence that we will have a double digit earnings growth next year.
And obviously, there's a lot of there's a lot of leverage around volume just as there is around pricing in terms of how that falls to the PS line, but we'll be back to talk more about that later.
Understood and then you know natural gas prices have gone up.
Maybe it's a little bit more seasonality or or whatever but yeah. Historically when gas prices go up tends to be good for.
Industrial gases Asia do you think there's any fundamental potential positives with gas prices up here.
I think if you're thinking back to some of the some of the old days, where natural gas prices got into the six $7 range and therefore slot of our applications like oxy fuel combustion that would reduce the use of natural gas were more valuable.
I just don't see I don't see natural gas prices moving to that point that would make.
That it would accelerate that kind of activity.
Two $3 natural gas I mean, it's all pass through on the hybrid size. It does make hydrogen a little bit more expensive and I think if you're trying to think about it in terms of.
Green hydrogen for example versus gray hydrogen gray hydrogen prices are really a function of natural gas.
Whereas the green hydrogen is really a function of renewable power prices and also our ability to lower capital and lower operating costs to make electrolytic hydrogen more competitive.
But that's really yet.
Got it thank you.
Thank you.
And next we have Steve Byrne of Bank of America. Your line is open.
Yes. Thank you Steve you mentioned, the medical oxygen being strong due to co. Good another one of your medical gases nitric oxide oxide you have one competitor Mount Grant that was filed for bankruptcy a few weeks ago do you see potential for.
Meaningful share gains with that product and I know you can't advocate off label use but docs have liberty to do that are you seeing any growth in that product just driven to treat covert patients.
Well, Steve you know a lot about this topic.
So clearly mallinckrodt had a.
Practically all the market share all at one time, which is why we chose to enter this space. The business is growing nicely, we are seeing nice receptivity to being in the marketplace.
Clearly.
That competitor Mallinckrodt, certainly wants to hang onto what they have which is what we anticipated they would do.
The growth has been somewhat muted recently because of Cove. It right. So you need to get in there today too.
Make your presentations you need to.
Set up the equipment you need to provide the cylinders and so the ability to really have those engagements.
Has been slowed somewhat because of cold it.
So, but as far as the demand the potential the excitement.
Quite frankly that we are in the business that's still there.
With respect to off label use you are correct. We can certainly get advocate for off label use as our lawyers that make it very clear to us.
I don't ask the question in terms of how much nitric oxide is being used to fight coded for example, though there are studies out there that say that it is effective against coded.
So I really can't answer that question, but I am aware that some of that's taken place.
And one on your backlog of sale of gas.
What fraction of it would you say, whether it's Asia or you're referring to Rick customer base is tied into either your existing pipelines were an expansion of your pipeline network that represents really an investment longer term for you to two.
In April.
Subsequent projects.
More modest capital cost.
I would say.
The major per cent of the huge percent of that is tied to existing.
Complexes enclaves that we were in that we were able to either.
Stan to pipeline or add to a plant a and be able to serve not only a baseload customer, but other customers that part so I didn't add up the percent back and look at the large projects and it's a major percent of that 3.7 billion yeah.
Yeah, Steve This is Matt even that to Steve's point that aspect also helped us win that right with our existing asset base and reliability of having that existing network density was also a part of our ability to secure those contracts.
Thank you.
Hi, Thank you.
And next we have Kevin Mccarthy of vertical research your line is open.
Hi, Good morning, this is corey on for Kevin.
To an earlier question about hydrogen.
That you described as rifle shots, given increasing support for green hydrogen for.
For instance, Chile Chiles government this week.
Put out a plan.
[noise] geographically, where do you see green hydrogen opportunities that might fit the rifle shot description or something like what you did with your plant in California, where you upgraded.
[noise].
[laughter].
[laughter].
Pardon me this is the operator I'm sorry about that.
Well that's obviously.
Im going to call back in on there was a lot of static on the line.
Let's see let me just.
Everybody was kicked off.
Hi.
Speak is able to hear me.
Chris are you there.
Yes are you able to hear me on.
Now again okay.
I ask Mr. Mccarthy the call back end there was a lot of static on the line.
Hey, Brian Yes. Unfortunately.
Okay. Okay.
Let's move to the next off yet.
Yep. Thank.
Thank you one moment.
Next we have P.J. juvekar of Citigroup, Sir your line is open.
Yes, Hi, good morning can you hear me.
Yes.
Great first of all in Sun Jim Congratulations.
Thank you Steve.
Steve I have a question for you you know you talked about your hydrogen strategy as being local and in market.
And then I look at some of the projects, including some recent ones buy fertilizer companies.
They want to bake you.
You don't want to shift green hydrogen.
I should say green ammonia globally, and your strategy seems to be deliberate in market.
Can you just sort of.
Talk about your strategy and what are the risks of shipping it globally as how you see it today.
Well I think.
It's not that I am opposed to any kind of global strategy in terms of of delivering product.
What what I see is that every country wants to develop their natural resources with respect to what they believe gives them a competitive advantage.
And I think if you look at it.
All the countries were really into day every one of those countries wants to develop their own renewable power they want to develop their clean hydrogen infrastructure and why is that well its stimulus for their economy. Its employment for their people its energy security.
So that's why we like to look at this more granularly in terms of what's really going on the ground and find projects. We can get our arms around we can understand we can understand the returns we're going to have confidence in the investment and I think thats going to be the best way to go but you will hear about prop projects in places like Australia.
You might hear amid Saudi or North Africa, or other parts of the world, Chile, where they think they have an advantage for example, and renewable power and they want to exploit that but you've also got to think in terms of all these countries that have an abundance of natural gas the U.S., Russia, Northern Africa, Canada.
Australia all of these countries, who will also look to monetize those natural gas resources and make woodlot people call blue hydrogen, which can be very cost competitive versus green hydrogen depending on the cost of natural gas for example, and a comparable cost against renewable power.
So you're going to see all of these play out and the way I think about it is it's potentially huge market. It is all additive to us in terms of opportunity and we want to just find the right places to play around the world.
In places that we already have a clear investment.
Okay. Thank you that's.
Thats clear and a quick question on Latin Americas, specifically, Brazil.
Given sort of the covert impact in the country and the volatility of the Brazilian real.
Can you just talk about sort of price and volume trends of what you're seeing there. Thank you.
Well, what you're seeing in a place like Brazil that it's also across the rest of Latin America is a high demand for health care, a very high demand for medical oxygen. We are the industry leader there we've been industry leaders are clearly where the excellent position to serve.
And with respect to pricing.
We're in pretty good shape, they've historically done a good job and they continue to do a good job, which is why I look at the performance. If you were to look at it you would say you know what cobot.
But obviously you know the the dynamics underneath where healthcare is much stronger the metals or manufacturer weaker is what's really going on.
Beneath the covers with respect to when the governments will ever.
Address their issues and be in a position maybe to go back to where they've been.
That kind of remains to be seen.
I'm sorry could you address the FX question, because you know the reallocated to could die, but it does not.
It's not a credit in your numbers, sorry, I missed that.
Hey, the fee Jay This is Matt Yes, no problem, you will see it and as I mentioned.
Obviously, the reality of the Mexican peso the Argentinian peso all took a dive but as I mentioned.
The euro and the Chinese the C and why the RMB.
Helped offset that on a global level.
But as Steve mentioned, you know in addition to those devaluations you get more inflation than what you would see viz, a viz. Some other more developed nations and that higher inflation. The team's done a great job to recover through the pricing actions to make sure we can stay in.
In line with whats happening inflation on the ground and they do a good job to maintain their costs. So by getting that positive spread it helps insulate the business from some of these more.
Significant devaluations in the effects that have.
Thank you so much.
Thank you.
And next we have mark.
Yeah.
Your line is open Sir.
Yes. Thank you good morning actions Manolo cannot mindset.
Too many questions.
Add on question too.
Before again on the helium market.
Could you give us an update there how do you see potential additional capacities and holiday.
Affect the market.
From your side.
Good My first question and the second question again on the project Capex stake.
Statements Youve set.
Heavily down in the third quarter and pursue a assumptions for little backlog for Twentytwenty one.
What should be expect foot project Capex fluent 2020, one is that another decline than basically flat and this that and the few or should be the nose of group who on gross Capex next year.
Well, we havent I Havent really looked at the numbers for next year, yet as it's over and we have some time to do that but in terms of capex spend rate.
You shouldn't expect much of a change year to year. Because these are monies that are being spent against projects that we still have to complete so we'll refine that number more going in next year, but it's not like a backlog number that can move around quite a bit based on projects being added or projects being started up its much more level.
Loaded in that respect and you were asking something about potential capacity for Europe, and I apologize I really didnt pick up the question.
Oh Healy both Uh huh.
Hello Hello.
Okay helium for the best well.
So first of all helium.
Demand is weak.
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As a result of really just the general use of helium, but also fiber optics is down a bit MRI as probably holding up okay, but not as strong as it could be.
With coal bid and then electronics would be more of a positive one the more positive market segments. The helium serves but then again balloons, which are though not a huge percent very profitable and thats been way down as.
As a result of Covance. So generally speaking demand has been weak.
I think you know when that turns itself around again will be a function I think of Covidien. When cobot is past us with respect to supply coming on.
I don't expect to see much in the way of supply until probably the end of next year, maybe even the beginning of the following year. If we're talking about supply out of Siberia, but I think supply.
Again don't expect to see much aware supplied towards into next year.
Until perfect. Thank you. Thank you.
Thank you and because that was the last question I will now hand, it over to Juan funded for closing comments.
Chris Thank you and thanks, everyone for participating todays call. If you have any further questions. Please feel free to reach out to me.
Directly they say spot.
Ladies and gentlemen. This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
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