Q1 2021 Linde PLC Earnings Call
Good day and thank you for standing by welcome to the first quarter 2021 Lindy earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
I asked the question during the session you'll need of press Star and then one on your telephone.
Please be advised that today's conference may be recorded if you require any further assistance. Please press star and then zero.
I'd now like the hand, the conference over to your Speaker today, Mr. Juan Pelaez head of Investor Relations, Sir you may begin.
Crystal. Thank you good morning, everyone.
And thanks for attending our 2021 first quarter earnings call and webcast.
I'm, hoping the highest head of Investor Relations and I'm joined this morning by Matt White, Chief Financial Officer, and Sanjiv Lomba, Chief operating officer.
Today's presentation materials are available on our website at <unk> Dot com in the investors section. Please.
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 two of this presentation.
Sanjiv and Matt will now give an update on <unk> business outlook and first quarter performance.
And we will then be available to answer your questions Sanjay.
Sanjiv all yours.
Thanks, a lot and good morning, everyone.
Once again, the Linda team delivered another stellar quarter across all fronts.
So the 2% growth in EPS, 57% growth in operating cash flows operating margins, expanding 320 basis points and of course, our Oc.
At 14, 5% and of course, very strong progress across our ESG goals all of it.
Are you seeing carbon intensity and making strides in gender diversity.
Matt will walk through the more through the details on the financial numbers, but frankly, they speak for themselves.
A few months ago, we marked the two year anniversary of the merger so I'd like to take the opportunity to recap both of our performance and also provide you a medium term outlook unexpected financial performance going ahead.
Let me move on to slide three.
Slide three shows our 2018 to 2020 growth relative to key competitors across the full major financial metrics EPS operating profit margin.
Operating cash flows and of course, very importantly return on capital.
From my perspective these of the full most important financial metrics the determined performance in this industry.
And it is of course quite clear from that slide as you see that we have lead across all four in fact, I'd say, but some pride that Linda has the undisputed best performance in the entire industry since our merger.
Our employees have accomplished this while integrating two global companies during possibly the worst pandemic in a century.
But of course this is nothing new.
We have been the industry leader for almost three decades now.
And I want to move on to slide four and talk a little bit about that history of over 25 years.
From 1993 to 2017 as the last full year before the merger.
The compound annual growth rate of Linda sales EPS dividend and operating cash flow exceeds both competitors across the board.
We have a long history of generating compound value for our shareholders, while sustainably and profitably growing the company.
And of course, Linda outperformance extends beyond just our industry.
The right hand side of the day you can see.
The EPS guidance that we've had over the same period against the broader S&P 500.
So it's clear we've been the industry leader for many years and we fully expect to continue that trend for decades to come.
Our midterm strategy, which is on our next slide five provides the roadmap on how we plan to get this.
Most of you have seen this strategy before it's fairly straightforward and simple enough that we can summarize it on one page.
It starts of course with optimizing our base business of industrial gases in engineering.
I've said this before.
Our unique operating rhythm provides a real competitive advantage in how we extract value you're in and you're out irrespective of the macroeconomic climate.
Of course proven this in the prior recessions and some black Swan events, including the most recent COVID-19 pandemic.
So while our resilient business model provides downside protection.
Also have the ability to leverage and any economic recovery due to our exposure to the cyclical end markets.
Primarily heal through merchant and packaged gases.
Of course, the pricing structure he'll also helps the closely correlates with inflation.
You've already seen some of that demonstrated in the last few quarters and I anticipate further upside if the economy continues to recover.
Finally.
We will continue to grow by capitalizing on future opportunities.
It has demonstrated the highest compound growth rate in the industry across all key financial metrics and we expect to maintain this distinction.
Currently there are secular growth drivers around two of our key markets.
It is comprised of about 30% of our sales.
These are health care and electronics.
You're all familiar with what is happening in the electronic space today, our customers are looking to expand production of chips to meet soaring demand, while improving and strengthening local supply chain logistics.
We are an integral part of this development as industrial gases are of critical component to successfully operating of modern fab today.
I fully expect electronics to comprise the largest portion of backlog wins over the next couple of years as we continue to see high levels of interest for new customer bills.
Furthermore of the health care market continues to grow as well.
The combination of demographics and trend towards telehealth.
As you know our health care business, particularly the home care business. So does the critical second line of defense during the recent pandemic and.
And of course, we expect future trends to create new growth opportunities, allowing us the leverage our leading dense network to support momentum towards a distributed health care market.
The combination of these strategic elements should enable us to grow annual earnings per share on average more than 10%.
That is something we've demonstrated throughout our history.
And we feel confident we can continue for the long term.
Now you'll notice I said, 10% EPS outlook excludes the impact from the transition to clean energy.
Currently we view the benefits from this transition as incremental to our EPS outlook.
The clean energy of course is a hot topic as you all know in fact, I haven't quite realized how many global hydrogen experts that really were until only six months ago.
However, producing storing and supplying hydrogen to enable the cleaner fuels is something we've been doing for decades. In fact hydrogen has been one of our fastest growing molecules over the past 10 years.
So given this I'd like to use the last few slides to provide your view on the overall clean energy market explain why Linda is exceptionally well positioned to succeed and share with you our overarching strategy going forward.
But before I start I want to state that we are not providing specific guidance on either expected sales of wins from keeping the energy at this time.
This is a rapidly evolving landscape with many countries taking different box. So the pace of the transition is just too uncertain to make multiyear ill detailed projections.
All of them what I can confirm is that Linda has the experience the tick.
Knowledge and the asset network to be a significant player in the transition.
Just want to elaborate on this I'd like to provide you our view of the clean energy market on the next slide slide six.
It's safe to say that nobody really knows how the decarbonization market will ultimately play out said.
So it may be helpful to start with an overview of the potential opportunity.
We think of clean energy transition in two main pieces. The first being how we can provide solutions to managing carbon.
And the second relating to clean hydrogen development now.
Now we already have a number of significant the applications that reduce capture sequester or clean and monetize gas streams for use of.
A good example of this off current.
Carbon dioxide business at about $1 3 billion, serving several key end markets.
Looking ahead, we see more opportunities for our technologies and solutions to enable our customers to reduce their carbon footprint through capturing the removal of their emissions.
Furthermore, we believe blue and Green hydrogen will both play an important role in the transition to cleaner energy.
In theory, the total available opportunity can be represented by the current <unk>.
<unk> trillion dollars of hydrocarbon market.
However that will be solved by a blend of solutions and I'll take the yields to evolve.
So as an example, one estimate assumes green hydrogen will reach $100 billion by 2030.
Let's say roughly 1.5% of today's hydrocarbon market.
But time will tell.
Given the uncertainty as I said before I'm not going to provide you a specific estimate of timeline today, but I do want to reiterate.
That this is of significant opportunity for Linda and something we see as an upside to our base business.
So but this is the backdrop it may be helpful to understand what Linda brings to the table regarding technology asset network and experience, which you can find on the next slide slide seven.
Whether it's production distribution of our application and services.
We have over 50 years of experience as an owner and an operator of billions of dollars of hydrogen infrastructure.
We are agnostic to how that molecule is meet whether it is true reforming chemistry of by electrolysis, we have the technology and the operating expertise for all of them further.
Furthermore, we have the largest and the most dense hydrogen distribution network in the world This will be crucial.
The ensuring a safe reliable and cost effective energy transition.
Our technology.
Many proprietary applications and extended service capabilities position us exceptionally well for this opportunity.
And finally.
We also have the ability to leverage our engineering business to integrate various technologies into solutions and to offer sale of gas of selectively sale of equipment, providing us a unique competitive advantage.
Overall, we have a very long and successful history of supporting the transition to clean energy and I believe we are incredibly well positioned across the entire value chain as this initiative accelerates.
I'd like to wrap up the clean energy discussion on the next slide slide eight with the view of our overarching strategy and give you some key supporting examples as well.
The strategy on the left is something we've mentioned before it's.
It represents a proven approach to profitably growing in industrial gas business.
Building hydrogen.
It starts with leveraging our leading integrated asset network.
In addition to that we execute locally market driven strategies. We believe many of these initiatives will vary by country.
We also expect to continue to advance and grow our technology leadership in the space.
Across the value chain by leveraging the expertise of our engineering team.
As well as developing partnerships that provide us access insight and hopefully accelerate opportunities.
Now on the right on the side of the slide you'll see three projects, we recently announced.
Just want to remind you of that these are part of our base Capex and therefore not included in the $3 5 billion backlog.
Of these projects are all the $350 million for Green and Blue hydrogen infrastructure in South Korea, Germany, and the United States.
Just to pick on the example in South Korea, we are partnering with one of the largest industrial conglomerates to build out of liquid hydrogen infrastructure to fuel municipality buses day.
We continue to evaluate a significant and growing number of opportunities from large and mega projects two very small ones.
But irrespective of the size of the opportunity.
We will always maintain a disciplined approach to pursuing projects that meet our investment criteria.
This summarizes the midterm strategy and how we currently see the clean energy market.
But this is something I will provide more updates on in the future as it continues to evolve.
Now before I hand over to Matt I wanted to make one final point on our ESG initiatives.
Simply said ESG is embedded in our culture, it's part of our operating rhythm and it's part of our compensation philosophy.
It has been an integral part of our values and forms the foundation of Linda's mission statement, making our world more productive.
I'm pleased to say we are currently tracking ahead in many of the initiatives we laid out in early 2020.
Including <unk>.
Carbon emission intensity reduction and increasing gender diversity.
But this isn't enough.
No we need to do more.
We are therefore in the process of thoughtfully developing more ambitious ESG goals, which I expect to share with you in the future call.
But until then you can be certain debt, we will continue to improve our performance in this area.
So with that I'll now hand over to Matt who will take you through the financial results and our guidance Matt.
Thanks Sanjiv.
Please turn to slide nine for an overview of the first quarter results.
Before I jump into the numbers I'd like to remind you that we deconsolidation of joint venture in APAC.
Which reduces sales and operating profit by about 3%.
But it has no effect on EPS since we are maintaining a consistent ownership position.
This deconsolidation is shown as the divestiture and we provide further details in the APAC segment results, which you can find in the appendix.
Total sales grew 7% from last year and were flat sequentially.
Underlying sales increased 5% from prior year and 2% sequentially.
Volumes continue to recover growing 3% over last year and 1% over the fourth quarter.
Sequentially negative seasonal effects and temporary outages in the U S. Gulf Coast from storm, Barry were more than offset by a broad based increase in volumes.
Industrial production levels have consistently risen in most geographies.
Which supports the volume recovery in the packaged and merchant supply modes.
And note that while <unk> had a temporary negative effect on sales for the first quarter.
<unk> impact was immaterial due to our contractual structure.
Referring to our end market trends in the appendix.
Every end market grew sequentially and over prior year.
Except for food.
Mostly due to restaurant closures and seasonality in just our distribution business in the U K.
Pricing improvements of 2% is in line with globally weighted inflation.
The majority of our contracts have mechanisms in place to adjust for local cost inflation.
Operating profit increased 25% over prior year from a combination of higher pricing incremental.
Volumes and a lower cost base.
Furthermore, operating margins expanded 320 basis points.
Which marks the seventh consecutive quarter that we have expanded operating margins more than 200 basis points.
EPS of $2.49 grew.
Grew 32% from last year and 8% sequentially.
You can see the wider than normal growth rate differential between operating profit and EPS, which is mostly driven by the joint venture deconsolidation.
We had another strong quarter in capital management with operating cash flow of 57%.
And return on capital, reaching 14.5%.
R O C levels have been trending well as we continue to grow earnings by double digit percent.
While maintaining a disciplined and focused capital allocation process.
Capex is down 5% from prior year as temporary declines in project backlog spending more than offset increases in growth projects categorized as base capex.
Approximately 40% of base Capex is for growth.
<unk> the clean energy projects Sanjiv mentioned.
As well as the majority of small on site wins, we announced yesterday.
Overall these results clearly validate our positive leverage to the economic recovery.
While offering significant downside protection as evidenced in 2020.
Slide 10 provides an update on our capital management process.
It starts with cash generation, which you can see on the left side.
Linda employees have done a great job focusing on cash conversion.
And thus, making more capital available for the company to deploy.
Available operating cash flow, which we define as operating cash flow less base capex.
Has exceeded one $5 billion for the last two quarters.
And while we continue to generate healthy levels of cash.
How we spend it is equally important which is shown on the right half of the slide.
Our capital allocation process is simple and consistent.
We have a mandate to maintain an a credit rating and raised the dividend every year.
After which our priority is to invest in growth that meets our criteria.
And then any leftover cash is used for stock repurchases.
The Pie chart represents how we spent the first quarter operating cash invest.
The investing zero point $8 billion to grow and returning $1 $4 billion to shareholders.
This approach provides balance but more importantly.
Forms the foundation of the strategy and earnings outlook provided by Sundries.
I'll wrap up with guidance, which you can find on slide 11.
The second quarter guidance range is $2 52.
The $2.55.
The midpoint represents an increase of 33% over 2020.
And 38% over 2019.
I believe it's important to provide the 20th 19 comparison.
The properly distinguish between true growth, which of this demonstrates from mere recovery, which other companies may be showing.
This guidance includes an estimated year over year FX tailwind of 4% since Q2 of 2020 was the low point on foreign currency weakness.
Sequentially. This range assumes stable economic conditions with a moderate improvement related to normal seasonality.
In other words, the Q2 guidance range does not assume any improvement in the underlying economy from Q1.
Note that preliminary April results came in better than our internal estimates.
So if these conditions persist Q2, EPS would be at the upper end or above this range.
The updated full year guidance range is $9 60 to $9 and 80 or.
Or 50 cents higher than what we provided last quarter.
The midpoint of the range is 18% above 2020, and 32% above 2019.
I'd like to explain how we approached full year guidance, especially as it relates to the half year comparisons.
At this point, we have updated full year for the better performance in Q1, and the latest Q2 outlook of which this first half year combined was approximately 50 cents better.
However, we have not update of the second half guidance.
The other words, we left the second half alone until we get a better sense of the recovery pace.
Rest assured we will capture any improvement in the economy as we have recently demonstrated.
Furthermore, we will provide a more detailed update next quarter.
However, today, we are refraining from adjusting the back half until we get more visibility.
Of course, if if economic conditions hold or improve we will be above this full year range, but for now we believe this is the most prudent approach given the global uncertainty.
I'd now like to turn the call over for Q&A.
Thank you.
As a reminder to ask the question you'll need the press Star and then one of your telephone.
So all of your question. Please press the pound key.
And our first question comes from Bob Court from Goldman Sachs. Your line is open.
Thank you very much good morning.
I appreciate the comment sanjiv on the hydrogen markets and obviously a lot of uncertainties how it all develops I was curious you.
You put forth maybe of an applied green hydrogen price in the future Thats still the two to three times the.
The price of the gray.
Great hydrogen and I'm just curious.
Think the world's going to need some carbon tax or some other ways to incentivize the adoption of green hydrogen how do you sort of see that developing.
Thanks, Bob that's a that's of Great question I'm sure a lot of people are discussing the very fact, as we speak Bob So.
Youre absolutely right today, we do see that differential between green hydrogen to Grand Blue hydrogen, obviously blue hydrogen somewhere in the middle of providing a more immediate scalable option by the green hydrogen for at the kind of get to a point of inflection where adoption really happens essentially three things need to happen. The first you know.
The regulators across the world need to get to a view on what carbon tax what carbon pricing or other mechanisms that created that incentive to go and do something about it or put in place.
We can talk about what that range might look like if you like but that's the necessity of the second is you've got to see the technology evolve and get down to a point, where youre seeing significant reduction in cost the two cost of the green hydrogen as you're well aware of Bob one is obviously of renewable energy, becoming cheaper I know, there's a lot of work happening in that space and.
And equally we are doing a lot of work on the second option, which is about making sure that of plant Capex comes down so working through ATM on the Bam option as an example, but also making sure that efficiencies around that the the membranes improve sufficiently to give us a little bit of a lift there as well so all of the three things need to happen ballpark.
For really adoption to happen you know the inflection point that I that I referenced on the wrong.
Perfect. Thank you.
Thank you.
Our next question comes from P. J <unk> of a car from Citi. Your line is open.
Yes, hi, good morning.
First of all I want to thank you and to give a shout out to your employees in India.
We have tremendous been getting oxygen to hospitals during this tragic situation.
So thank you there.
And then my question is.
Commodity prices go up for all kinds of commodities.
With strong demand in metals and chemicals and general manufacturing.
If you're a customer of assessing inflation.
Is it does it help you to get price as well from those customers.
And then you of pricing in America seems to have accelerated.
In the <unk> compared to last few quarters. So can you just talk about this pricing dynamic. Thank you.
<unk>.
Thanks P. J, so I appreciate that shout out and with family in India, you know I'm kind of acutely aware of how challenging the situation is there I wanted to take maybe just a couple of minutes of P. J before I get to your question to just talk briefly about how proud of.
We are over here on our on our team in India, who are currently working round the clock to support hospitals patients saving lives.
Everything they do it is kind of focused on that.
The teams also kind of reward their whole operating philosophy to produce more than 3000 tons per day of medical oxygen. That's almost 10 fold, what we were producing and delivering just four weeks ago. So a huge amount of work has gone in there. We've deployed about 1200 drivers on the roads, serving about 1000 hospitals in the country.
Theres been phenomenal work being done on that I thought it's appropriate that I just take a moment to kind of cover that of course being a global Corporation. Linda globally has been able to help as well would be of airlifted of 40, plus ISO containers. They are now helping the supply chains in the country and another 40 to go into in the days ahead.
<unk>, obviously taken on many of our ideas you've seen the oxygen express that's going around India also that's something that that would be of help but put in place in and using the.
The armed forces in many cases to move oxygen across various locations in the country. So our country and in deep deeply challenging situation, but we're doing all we can as as is appropriate.
I also want to just maybe quickly add a quick word of appreciation for our teams in Brazil, Mexico. Other Latam countries. Obviously, the they didn't get the same kind of press, but the reality is they were faced with similar challenges and I've done enormously good work to support hospitals and patients. So I'm really proud that our teams across the world are doing their bit too.
To support our communities through this pandemic.
Now the P J I'm going to kind of more specifically talk to your question on inflation and our view on inflation as you know we price to a weighted average of inflation typically and as we think about our inflation or our kind of net.
So the conclusion there is that we will see prices going up as inflation happens and you know we are we at.
You don't have a great track record of being able to do that consistently in fact, even when inflation wasn't quite there you've seen us perform on our pricing of history on pricing is positive you know if you go back 20 years as well and that's the kind of the.
DNA that the that the team carries to move forward on the pricing piece, so fully fully expect to see that happening as inflation does come into play.
And N P. J. This is Matt I may just add one or two things to what Sanjay said I think as a reminder, as you well know of any commodity cost of inputs. We have we passed all of them through that's contractual and then the only second thing I'd add is what we've seen in these patterns before in 2011 is a good example of example, I'd say 2006 seven are good.
Ample and even 2016 when you do see some rebound in commodities, our customers' volumes tend to increase a lot of their consumption of gas is also tends to go up so we'll see to what extent are you can see that as well I mean, we're starting to see parts of it.
But that also tends to be a positive tailwind with just overall industrial activity.
Thank you.
Thank you.
The next question comes from Tony Jones from Redburn.
Your line is open.
Yes, good morning from London, everybody. Thanks to taking my question.
I wanted to ask about margins in the two parts to the question. So first you reported margins, which continue to surprise and we've got 100 basis points or so of sequential improvement I wanted to just ask is this now a sustainable level I know you call out of the deconsolidation effects.
But are there any temporary gains we need to adjust full.
With Opex down now of around 2 billion and then the second part of it and maybe it's more important is this as good as it gets or do you think that's for the potential for margins to improve as you get the product to the improvements overtime. Thank you.
And Tony This is Matt I could probably handle added to the sanjiv has any other inputs. So I think on the margin is going up you're absolutely we see the sustainable Theres nothing temporary and just to confirm the deconsolidation of had no effect on margins. Even if you look at the APAC in the appendix, where we show the kind of the effect you can see the.
Margins are pretty much the same so the deconsolidation had no effect.
And again I'm, referring to operating margins, obviously as well here operating profit. So we absolutely see the sustainable this is something that you.
This is the hard work every one of the world is doing.
This is about putting together quality business and making sure we run it efficiently and effectively and as far as it's good to the gets you know we get asked that question every quarter.
But I would say that you know and I've said it before just look at the segments right. When you look at the geographic segments of Americas, EMEA and APAC that Theres nothing that is fundamentally different between those three segments. We do the same thing. It is a very homogeneous business day supply across all three supply months, they have end market distributions.
That arent drastically different.
So that kind of defines what the opportunity set is.
And if you go back to 2018 Americas was 23% EMEA was 17% now of me is over 25% of Americas, 28%, So you're seeing the improvement across the board APAC as well almost 25% was 17%.
This is part of what we're doing to run this business and I don't see any any temporary aspect and I would say whichever segment is leading is kind of showing the way.
The only thing matter of the other thinking both EMEA and APAC are are heading for that Americas margin right. They are pretty pretty competitive guys all debt.
That's great I appreciate the detail. Thank you.
Thank you.
Next question comes from Nicola Tang from Exane BNP Paribas. Your line is open.
Hi, Brian Thanks for taking the questions.
So I wanted to ask a little bit about the second half outlook and I completely hear you on sort of the volume from Shang I'll. This is lack of funding went from from that phase, but if I look at how you slice it sort of implies an H T M. EPS Grace of only about 5% sensors and the nice that your passion and the first of which I was there.
The thinking seems a bit of aggressive just thinking about the productivity gains that you just talked about support from the buyback I guess, even the FX headwinds before we even think about volume.
I was just wondering if there was anything I was missing there in terms of the H T versus.
H, one dynamic from the year on year basis.
And then the second question is on the other H two on hydrogen and thank God forbid that detail on clean energy.
Exactly.
Yeah again, I hear you in terms of the timing being uncertain and somebody else kind of if you think long dated but when you look at the pipeline of projects that you'll sort of evaluating them in which part of the value chain and hydrogen how you're seeing the most of project proposals at the nine months is it broad base of close them you guys just sort of pause.
And the distribution and fueling and or is it in a specific kind of the activity.
<unk>.
Okay, Nick Watts matter I can take the first one and sanjiv will take the second.
So as I mentioned in the pre remarks, we really we just didn't touch it.
Obviously, theres a lot of companies not even giving guidance today and we have a very high degree of confidence in what we're laying out and that we can deliver on that.
But as far as the second half right now we felt we would just leave it alone adjust the year for what we've demonstrated in our view on Q2, but rest assured three months from now we will update that back half and as I mentioned if conditions hold well then yes, we're going to do better than this obviously stay improve we can also do better but for.
Now we just felt we.
We will take it kind of quarter by quarter of little bit of a wait and see approach and therefore, I wouldn't really look into too much other than that on the second half at this point.
Thanks, Thanks, Matt and Nicola now moving onto the exciting H two.
Part of the question that you asked.
So let me let me just take a step back and give you a sense of the projects. We're looking at and then dive a little bit deeper and tell you where we see some of that.
The buildup that you were asking about so.
They're evaluating at the moment of between 210 to 220 opportunities individually somebody as I mentioned, some very large mega projects and down to the smaller ones as well.
We see obviously many of them progressing some maybe not and there'll be others that we will probably not want it to because they don't meet our investment criteria. So it'll be kind of selective about that as well now we see that spread.
The focus in two specific areas, primarily I think mobility driving a lot is kind of well ahead. If you like in its development and then carbon capture and sequestration picking up particularly in geographies, which have oil and gas assets and therefore want to understand how best to manage the energy transition.
Through the speeds.
To your exact point on which part of the value chain, we see it I think.
In mobility tends to be a little bit of a balance between what we see around production versus distribution in dispensation. You know we have technologies across the entire value chain. So in many ways. We're really fortunate to have the ability to kind of be able to provide that holistic solution to our potential customers.
Ccs, obviously it tends to be a lot more on the production side, which is where the the blue hydrogen piece in particular as a consequence of of Ccs comes into play.
I hope that gives you enough color to what what you were asking for Nikola yes.
Okay. That's great. Thank you.
Thank you.
Next question comes from David Begleiter from Deutsche Bank. Your line is open.
Thank you and good morning, Sanjay from that.
On the same point just on you look at your project cap ex going forward, how much of its focus on clean energy Andrew of hydrogen this year.
That will trend to increase over the next perhaps a three to five years.
Hey, David This is Matt So I think right now there's very little to any of and as we mentioned on the prepared remarks, most of the clean energy are in the base Capex. So those three projects. We highlighted are all base capex and and to <unk> point Youre seeing a lot of neither areas of mobility of this as more distribution assets or assets.
Round the.
The density that we're building in certain areas.
So that is something that when they do come into the backlog. Obviously you will note that but at this point the vast majority of what we're doing right now is part of that growth in the base Capex.
Very good and just on the merchant pricing how.
How much of commercial pricing, we realized in this year and given the inflation, we're seeing overall would that should that be increasing over the next.
Few quarters going forward.
So David.
On merchant pricing, we're kind of seeing low to mid single digits in across the different markets that we talk about typically.
The Americas and EMEA tend to lead as you've seen from the pricing numbers and apex of little bit behind but they're hearing the skull and then all of that I'm looking to them to show of show some improvement sequentially in the next quarter as well. So we kind of seeing across the board pricing kind of move up now the appointment of inflation I think I mentioned this earlier as well David.
With inflation of pricing will go up that's been traditionally how we've seen a pricing move and we are well prepared and there are there is enough conversation within the organization already in terms of how big of how we will be managing that so I'd expect to see what the inflation pricing continue to move in line.
Thank you very much.
Thank you.
Our next question comes from Duffy Fischer from Barclays. Your line is open.
Yeah good morning.
Wanted to just follow up on that one of if I could the pricing in APAC in particular has kind of been flat at 1% for the last four quarters, even though at the beginning of that period volumes were kind of down 9% and now Theyre up 10, and you know I understand it's not a commodity business, but generally when you're getting that kind of volume increase asking for price.
Gets a little bit easier is there something offsetting your ability to get price share, where maybe somebody who owns their own oxygen units is dumping more on the market is there of ramping up their steel production or something like that so how should we think about APAC pricing in particular, given the strong volumes, we're seeing there.
Hey, Duffy. Thanks, Thanks for the question I'm glad you asked it because of my inbox steam will be will be listening to this as well. So there is nothing structurally different that should fundamentally changed the pricing targets that we've had it out to do all of our teams over there the market is a little bit different in terms of the distributor.
Kind of muddled.
Is it some of the larger geographies over there.
And in some cases the level of onsite, we have but putting that aside for a moment of view is pricing in the APAC should hit the 2% target that we have as of as a corporation.
And at the moment I see progress happening.
The 1% is disappointing they know that and my expectation is sequentially, we will see at least the percent of improvement in Q2, and I'm, hoping to see 2% year on year in Q2 as well. So nothing there is nothing holding them back from that.
Terrific. Thank you guys.
Thank you. Our next question comes from Jeff Zekauskas from Jpmorgan. Your line is open.
Thanks very much.
Okay.
I think to Matt's description.
Rice is going up a couple of percent, but theyre being inflationary pressure.
Does that mean that the price cost benefit in the quarter was zero that is.
Prices went up 2%.
Costs went up 2%.
And secondly, do you have an update on your project with Exxon in Singapore that is have you begun to spend for that.
Hi, Geoff I can take the first one adult sanjiv here I will take the second one sure so.
As you well know the spread of of our price less cost inflation of productivity is a very important metric that is part of our operating rhythm.
We look at every country at the lowest levels of detail because that spread is very important how we manage that spread as the compound decades ago and every country is different right every country has different inflation profiles, but the spread is something we constantly look at so given in the first quarter here.
<unk> you know obviously, we have the price at the top of the house of 2%.
On our cost front, they were lower as you probably saw especially on the fixed cost.
Due to some efficiencies we were able to achieve we're also achieving efficiencies in the variable cost. So the spread was probably a little wider in this first quarter, but nevertheless on a go forward basis, we always have to make sure we manage that spread and we feel quite confident in our ability to do it in and also the things the large commodity inputs since we pass them through.
They don't create as much AR issues on that as you might see in other types of industries. So for us, it's really managing a lot of the fixed cost and the operating costs.
And the SG&A, which as you know part of what we do with this rhythm.
And Jeff Let me move on and talk a little bit about the Singapore project that you mentioned so as far as our project is concerned you know we have obviously been impacted by COVID-19 on the schedule itself, but we have been executing the project we've been spending on the project we have commitments in place and the project is currently underway.
Our first module is in fact very large modules have now reached the site and are in the staging area. So progress happening as we speak.
Great. Thank you so much.
Yeah.
Thank you. Our next question comes from Steve Byrne from Bank of America. Your line is open.
Yes. Thank you.
<unk> you were talking about having a couple of hundred clean energy projects that youre looking at it and you lay out a pretty clear case on on the slide seven about monday's expertise and capabilities in that whole supply chain.
There is one area that I don't see you mentioned the.
It would seem to be an advantage for you, but I welcome your comment on that and that he has.
The access to renewable power or maybe restated.
The contracts that you have with with power suppliers it would suggest that the.
You would have a meaningful advantage there in terms of electricity pricing from renewable power versus the many new entrants that are getting into this business can you comment on that.
Thanks, Steve the that's the <unk>.
Great point, you make and actually we should probably have mentioned that on that slide so the well well well suggested.
There are there you know the way, we think about renewable power and you're absolutely right. We are one of the largest consumers and in most countries, where we operate and therefore, we have a if you like the collective ability to go and have those conversations with all with our power supply is and what tends to happen on renewal part of if I can just take a step back as to tell you that the grid by itself.
And many of the supply of as a consequence of conversations that we're having with them are actually moving in and the level of renewable power within the grid itself is continuing to grow. So that's good that we are seeing action.
From from these larger players in addition to that obviously, we then go out specifically and sign up Ppas with renewable power.
Europe.
Of developers who are in some cases on a one on one basis in other cases on a share basis. We would then get into long term contracts with.
Often providing them support for their broader project as well and in each one of these cases because of our incumbency, we have well established methodology as to how we get pricing on the renewable power whether it's on.
In the circumstances of the grid or whether it's on specific ppas as well. So that is a competitive advantage youre right and obviously, our incumbency provides that and it's something that we focus on quite quite a bit as we as we move ahead.
And Steve I met I can just out of few things as well. So as you may know today about a third of our power is renewable already so we've already been quite active in that space and it's not something we built overnight. This has taken many years to get to that point and as we mentioned, we will give a more wholesome.
S G.
Our fulsome I should say ESG update in the future and this is an integral part of our ESG initiatives, especially around managing scope two emissions.
Emissions is the renewable power effort. So this is something that we absolutely are actively doing we have been doing for quite a long period of time.
And we'll give further updates as it relates to that our initiatives are affords ESG and you know to your point given our position we are able to help these investments and it's something we're actively working on and looking for today.
And can either of you comment on where you think you are in the from the achievement of the cost synergies that you initially laid out of.
With the merger with with Praxair, and Linde AG do you think you reached your coming to the end of that of.
Process, where do you think that you've got a long way to go.
Steve there's never an end to be efficient and productive so.
If there's no and it's something we have to continue to do and its integrated to our culture.
But as you know we measure ourselves on our performance how did we deliver and that's always you know we gave you a number as you know but at the same token we said judge us on our performance how do we expand margins how do we grow EPS, how do we manage the return on capital how do we generate excess cash how do we grow.
Looking back in the two years since we started this presentation I think we've demonstrated on a relative basis. You know we've done a pretty good job. We've got a good start for the last couple of years and so this is going to be the foundation for what we're going to continue to do going forward.
Thank you.
Thank you.
Our next question comes from John Mcnulty from BMO capital markets. Your line is open yeah. Thanks for taking my question I wanted to dig into the the release that you would put out the other day on the on the small on site contracts for 2020 to maybe get a little bit more color around the can you can you speak to.
Whether this was a lot of <unk>.
<unk> units for COVID-19 or if it was more of a sign that this is this recession is maybe a little bit different and the snapback from some of the smaller customers out there was may be quicker and then I guess as a follow up to that would you say that business is a little bit of a leading indicator for how we should be thinking about the larger scale projects and the demand for those.
Yeah.
John Thanks for that question I must admit that we have.
Really proud of our of small onsite portfolio and something that we believe provides the really.
The fulsome growth kind of opportunity for all businesses across the world. So the there are a couple of ways to kind of look at that portfolio and see how that correlates to what we're seeing in the market. So we're seeing that growth coming from COVID-19. There is no linkage to that at all.
Most of these units RVP assay of units, which is slightly lower purity typically going into the industrial processes, we do that of our pulp and paper, we've seen a fair amount of growth in pulp and paper.
We are seeing growth in some other segments, you know ancillary segments around metals as well.
Gloss and and many of those in fact, so I mean, it is of widespread portfolio debt that support the large number of different industries.
I would say to you that it's a good point to industrial activity generally I don't I don't see of particular correlation for larger projects. If that was your question, but we do see this kind of correlate to the industrial activity and as people move there.
Their consumption increases these come into play.
Got it and maybe yeah. Sorry go ahead, Matt I was just going to add one quick point to that I think it probably a little bit to Steve's earlier question. I mean, as you know we never gave revenue synergies that was not something we committed number two but the.
This area was an area, where when we brought both companies together it really filled out the product line portfolio of the small on site plants and this is an area where I think we've had a very strong execution given the combination of the technologies and capabilities from the merger of the company and.
I think the success rate kind of speaks to that.
Got it no and it makes a makes sense and I guess, maybe I can ask a follow up to that when you I don't normally I guess, if there is such thing around recessions. It takes about 18 to 24 months for kind of the the larger scale projects. The project backlogs of start filling back up again, I guess, given the snapback that we've seen in a lot of the industrial.
Does it look like in the conversations that you're having is that is that gonna be a little more short lived in terms of how long it takes to get that that kind of flow flywheel working on the big projects again, how should we be thinking about that.
So John just just kind of commenting.
Commenting briefly on the level of activity, we're seeing because in many ways is that leading indicators. So we are seeing proposal activity increasing obviously.
Seeing that increasing of the U S. We are seeing an increasing across Asia, I think about China, South Korea, India couple of the ASEAN markets as well so we're seeing a lot more projects now.
A part of these projects of all electronics, you've heard me talk about electronics before what are the strong growth we've seen in the quarter and my expectations that we will see a lot more of electronic project growth happened as we as we see these new fab build up the happened as well they are progressing well, they're all on track and you've seen a number of announcements I'm sure.
From TSMC, Samsung Intel and so on and so forth. So those are all looking looking to be on track and part of that activity. I also have to say that the other piece I'm I'm a little more.
A little more positive on US is the more traditional markets you know steel chemicals refining also project activity actually picking up over there.
As we see so.
I'm not going to comment, particularly if we are seeing get all of potentially this is a snapback I see this as fundamental underlying activity picking up and translating that into projects that people are pursuing and we are getting we are getting a chance to participate them.
Great. Thanks, very much for the color.
Thank you and our next question comes from Peter Clark from Society Generale. Your line is open.
Yes, good afternoon, everyone I've got two questions first one for Sanjiv I think.
About of the productivity being embedded obviously in the in the plc is the story now on productivity more about north of adding cost back if the volumes continue to grow.
All of them the salvage cost cutting as such because I did notice obviously Q4 will get the Q1 numbers later in terms of the head count and the severance costs.
They did slow obviously in the fourth quarter from the pace earlier in the year and then the math on the cash flow I mean, the Q1 performance now is what we would normally see in the legacy companies. He's in the in Q4, which is normally the strongest quarter I'm. Just wondering how that progress is true the given that you always make more money in the second half. Thank you.
B the thanks, I'm going to I'm going to give you a quick view on productivity. So you've heard me say the as before and I think Matt kind of made of very good good observation of Iran, which is that we are always going to be very very focused on managing our cost base. Our total cash fixed cost is something we can.
Of discuss every month of the.
Business reviews that we carry out so adding costs back is something we kind of manage actively.
I think it doesn't necessarily translate into productivity because for productivity, we want to see that that incremental action as well, which makes it tough but it isn't the DNA of the organization Peter and you've heard me talk kind of passionately about the fact that every individual in our organization has got a mandate to go out and look for productivity every.
It's thousands of projects, which add small benefits, but actually flow into the the entire productivity bump that we put together there's the one other thing, which I think is now enabling that are helping us accelerate that and that's around digitalization and again hopefully you've heard me speak about this as well before we using digitalization not as of.
As a significant tool that's going to create earth shattering new discoveries for us, but it's something that we apply in our business the deal with pain points every day, our organizational model is embedded within the organization. So digital you know kind of expertise is being built up within every business across the world and we are encouraged.
King them and in fact, I track it every quarter to all of them what percentage of productivity is coming from digital world part of initiatives that we've put in place. So that is an enabler of that I see and actually ensuring all of productivity stays on track.
Yeah, So Peter on the cash yeah pretty solid Q1 cash I think the starting with when I think about.
Operating cash flow kind of as a percentage of our EBITDA, we were almost high eighty's. This quarter normally to your point Q1 is seasonally lower so I think it's a combination of a few things I mean first of all obviously with EPS growing at 32% you know half of the benefit just came from earnings. So as we continue to have strong earnings growth that <unk>.
Would flow right through the cash flow the other half of the year over year improvement was mostly working capital as we had net everywhere else and we're just seeing strong performance around the world in terms of collections management of payables and inventory just managing the the asset and liability base quite well engineering had a very strong working capital performance as well as they continue.
To manage their projects incredibly well under different difficult circumstances.
You look forward into the second half of I think it should just be a continuation of an earnings driven with tight working capital management effort. So.
If we can continue to see kind of the strong results that should flow through to cash I mean cash is an integral part of our compensation is something that we track very diligently each month and we're seeing the benefits I think of that effort and we should continue to see the benefits of that effort looking forward.
Thank you.
Thank you.
Our next question comes from Geoff Haire from UBS. Your line is open.
Hi, Good morning, just two quick questions.
First of all I was just wondering if you could help us sort of think about what your pricing assumptions are within the guidance for the second half of the year.
And then also obviously you had very strong pricing in Europe, and North America relative to at least one of your peers. I was just wondering what was driving that and the high sustainable letters.
Yeah, Jeff so.
Probably of stated before I guess two points of your number one we fully continue to expect to price two weighted inflation and since the second half guidance, we really didn't touch it would be based on kind of of three months ago view, but as you know last quarter, we had about a 2% pricing this quarter of 2% pricing now.
Now you don't see the first decimal, but we are seeing a bit of improvement as inflation kind of picks up but that's what the expectation would be just continued to price to the weighted inflation.
Is what are our views are when we look forward.
Alright.
Thank you.
Our next question comes from Vincent Andrews from Morgan Stanley Your line of open.
Thanks, very much just wanted to follow up on the green hydrogen discussion I'd heard sort of very clear and very confident our point.
Point of view on the opportunity set and in particular that it it would be in excess of the 10% compounding that you anticipate sort of from the core business and I guess I just want to better understand you know as we think about sort of our capex that we're putting in our models in the <unk>.
For the medium to long term.
How much do you think that what the scale up and overall, what implications that would have the broader capital allocation. Thanks.
Hey, Vince it's Matt so.
No.
I think a couple of things first as we mentioned right now the vast majority of these projects are falling under base Capex and we would anticipate to continue to see growth in base capex, primarily around either distribution infrastructure type assets to support and some production assets, whether it be electrolyze yours or are.
Other kinds of hydrogen smaller hydrogen producing assets. So from that perspective, I would model you know that.
At 40% or more growth a portion of the base capex might accelerate related to these initiatives. If there are any backlog projects they would likely be announced.
In terms of being additions to the backlog.
But I would say from a capex spend and benefit we're not changing our investment criteria. Its the same how we approach. These is the same.
And so I would just model it just like Sanjiv said, it's it's incremental to the greater than 10% EPS growth rate that we're looking to do and what we find and can add into this should be accretive to that you know over the over the coming years here.
So we don't need to take our capex forecast into the high three billions or anything like that.
That would only happen as a function of any large projects and I think from that perspective, we'll see if they meet our investment criteria of yes.
But that's something that we had mentioned that we've got over 200 of projects. We're evaluating and you know we meet our investment criteria, we will spend and we should want to spend that capex here.
But we've shown I think with our metrics that we keep our discipline and keep our approach.
We should get the right growth in the right the results.
Thanks very much appreciate it.
Thank you.
We'll take our last question from Kevin Mccarthy from vertical Research partners. Your line is open.
Good morning, Thanks for squeezing me in Matt in your prepared remarks, you made a comment that April results exceeded your internal expectations and I was wondering if you could comment on what accounted for that variance if anything stood out in terms of region or end use market and then secondly, if I may.
And Yuri was a drag on sales.
Was that Dragon and how.
How did you insulate the profit.
From from being impactful I appreciate you of contracts, but would of thought maybe there would be a slight impact in your merchant <unk> packaged gas business. So I'm wondering.
If you just simply recovered by the end of March or if youre able to offset through electricity sales or otherwise.
Hi, Kevin It's Matt I can do the first one and Sanjiv will take the second one so my comment related to April it was fairly broad based I would say for the most part.
What we've been seen as is recovery in developed markets on an industrial front.
Some developing markets are still in some areas going through some challenges, but the expectation is probably by the back end of the quarter, we hope to see some industrial activity rebounding, but I would say it's for the most part.
Incremental industrial activity, especially in certain developed markets like we're seeing in North America, especially places like Asia.
It's really what's driving it pretty much of continuation of what we've been seeing.
And Kevin moving onto Uri, then and just kind of briefly giving you a sense. So again I think it was a good opportunity for me to just mentioned that our team in Texas did an outstanding job they've managed to ensure that the shutdown and started up safely quickly we were able to support our customers.
And even in some cases.
Some of the some of the players who are not our customers to just make sure that they remain safe and helping them with area of startups as well. So our customers really have have actually started up and are are operational now whether it's refineries chemicals.
All of them back back online and we're seeing volumes.
To pre COVID-19 levels in some cases as well.
Particularly on the chemical side of bulk customers again, I think we saw quick turnaround over there post the.
Both the winter freeze them and again with some support from US in all of our customers are back up and running we see levels of back to January already in that space as well refinery is probably the most specific one way you know that they have a longer lead time to start ups. Even there we were quite a we were quite.
Pleased to see that they were they were up and running in three of four weeks and to the hydrogen volumes are about 12% I think thereabout higher than.
Where we were earlier in the year. So again, it's been pretty pretty good in terms of how that overall piece has been managed I guess, the the point that the that the guys in Texas set to me.
Which I think holds here as well as we're used to seeing storms Hurricanes freezes. This is not new this is something that we work on every year and we've got a team that fully understands that I'm getting lots of back online is significantly important making sure customers you know how of the product available to keep them safe and ready to go.
Now contractually of obviously, we are well protected as you've just remark. So that's one of the reasons, we don't see of significant exposure, while we see some top line movement, but again from March to April we've seen that uplift come back fairly quickly as well.
Thank you.
And that does conclude our question and answer session for today's conference I'd now like to turn the call back over to the one <unk> for any closing remarks.
Crystal Thank you and everyone on line. Thank you very much for participating today. If you of any further questions. Please feel free to reach out a great rest of your day take care.
Yeah.
This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a great day.
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