Q2 2021 Linde PLC Earnings Call
[music].
Yeah.
Good day and thank you for standing by welcome to the second 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 to ask the question during the session you will need.
And then 1 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 would now like the hand, the conference over to your Speaker today, Mr wanted to low head of Investor Relations. Please go ahead.
Crystal. Thank you good morning, everyone and.
The press for attending our 2021 second quarter earnings call and webcast.
I am <unk> <unk> head of Investor Relations and I'm joined this morning by Matt White, Chief Financial Officer, and Sanji Lomba, Chief operating officer.
Today's presentation materials are available on our website at <unk> dot com in the investors section.
Thanks, Please read the forward looking statement disclosure on page 2 of the slides and note that it applies to all statements made during the tough comps.
The reconciliations of the adjusted numbers are in the appendix of this presentation.
So on the Matt will now give an update on Wendy's business outlook and second quarter performance and then we'll be available to answer questions. Let me turn.
Turn the call over to Sanjiv.
Thanks, a lot and good morning, everyone.
Linda employees once again produced stellar results in the second quarter, achieving multiple new records, including a 24, 2% operating margin.
The $2.7 earnings per share and 15.
<unk>, 7% return on capital.
Volume grew 15% pricing increased 3% along with global weighted inflation and we continue to optimize the business through many productivity initiatives.
I'm really proud of how the Linda the team delivered industry leading performance despite.
The challenges we constantly face.
And I expect to continue this performance for many years to come.
Last quarter I presented to you the Linda strategy, which outlined the levers that we use to grow EPS more than 10% per year.
Given the results so far I think it's safe to say, we're well on our track.
Track that.
That said I believe it's also important to have a clear path to future revenue expansion, which I'd like to discuss on the next slide.
So on slide 3 you will see.
That when previously I had highlighted to you that Linda has a unique advantage of being.
Being able to offer its customers a sale of gas or sale of plant option.
Our engineering capabilities are a clear competitive advantage, allowing us to participate in almost every type of growth opportunity, while maintaining our investment criteria.
Going forward, we are therefore.
<unk> going to present, the sale of gas and sale of plant backlog combined.
This quarter of Tau.
The project backlog stands at approximately $7.5 billion, representing contractual growth with high quality customers and secured cash flows.
Now in addition to this.
<unk> backlog in parallel we also invest around $1 billion per year on base business growth opportunities.
These are great opportunities to deliver high quality long term growth, but they are either under $5 million in spend or don't contain contractual fixed the elements for secured.
The incremental growth.
Base growth projects typically also have shorter execution times are margin accretive and support of network density strategy.
Some examples include the clean energy projects, we announced earlier this year.
The hydrogen liquefy or in the U S Gulf coast that we.
It started up and of course more than 25 small onsite projects that we have already won this year.
We saw glass Balkan pay book mining and other growing end markets with the small on sites.
In addition, the business continues.
To leverage of dense network with winning new merchant and packaged accounts, which further enhances the quality of our business.
As stated we currently have approximately $7.5 billion of contractually secured growth projects, which will execute over the next 3 to 4 years.
The recent less 1 billion per year of incremental base growth Capex.
The revenue expansion from these investments.
<unk> organic growth already being captured from our existing dense supply network across a diverse spectrum of end markets of <unk>.
Once we vote.
<unk> demonstrated how we leverage this through the current economic recovery that Youre seeing.
As I sit here today.
We are currently reviewing a pipeline of hundreds of prospective projects not included in this backlog.
Which easily represent more.
Then $10 billion of potential investment opportunities.
Including a significant number of electronics and clean energy projects and of course sale of planned projects.
Both sale of gas and sale of plants are great ways for us to growth, while maintaining our investment discipline.
Given our strong execution capability I remain bullish on lenders' outlook and growth prospects.
God bless of what happens with inflation of macroeconomic trends or the pace of secular growth drivers. We have a proven business model that can generate compound value growth for our shareholder.
Today decades into the future.
Now before I hand over to Matt I want to make a comment on our ESG goals.
I mentioned to you in the last quarter's call that we are developing new ambitious ESG goals, which we expected to share in the near future.
We.
Shareholders generally working with our business leaders around the world to determine these targets and more importantly to incorporate them in our operating rhythm.
Just on that progress I expect to disclose these new ESG goals before the end of the year.
I'll hand over now to Matt who will take you through the financial results.
Delights mats.
Sanjay.
Please turn to slide 4 for an overview of the second quarter results.
Sales of $7.6 billion are up 19% from 2020 and 5% sequentially.
Versus prior year.
And the volumes increased 15% across all supply modes and end markets.
Manufacturing chemicals and metals drove this increase since Q2.2020 was the low point for cyclical markets.
Sequentially volumes increased.
Increased 4%, which marks the fourth consecutive quarter of volume expansion.
Demonstrating our leverage to the economic recovery.
Price increased 3% versus prior year, and 1% sequentially as all geographic segments continue to manage.
Manage inflation.
This is also evident in the 2% energy cost pass through related to on site contracts.
Operating profit of $1.8 billion increased 39% over prior year and 9% sequentially.
Operating margin of 24, 2% was 350 basis points over last year. Despite of 50 basis point headwind from cost pass through.
This represents the eighth quarter in a row, we have increased operating margin more than 2.
200 basis points from a combination of volume expansion.
The actions and productivity measures.
EPS of $2.70.
Increased 42% from 2020 and 8% from the first quarter.
We've also provided the Q2.2019 growth rate of 48%.
As mentioned last quarter I believe it's important to distinguish true growth, which this clearly demonstrates from mere recovery.
R.
<unk>, which is 1 of the most important metrics in this industry.
Rose to a record 15, 7%.
It has increased every quarter since 2018 from steady profit growth over a prudently managed capital base in fact.
Linda has consistently proven the ability to deliver industry, leading high quality growth by.
By following a disciplined capital allocation model.
Slide 5 provides more color on that capital allocation model, including overall cash.
Management.
You can see the progression of operating cash flow on the table to the left.
With the first half up 27% over last year.
Note that we had $300 million of higher cash taxes, this quarter when compared to Q2.
2 last year.
Since this is only timing related I expect operating cash flow to improve year over year and sequentially in the third quarter.
To the right you can see how we allocated capital for the first half of this year.
Stated simply.
We want to grow the business in the.
<unk> back into the business.
And reward our shareholders with increasing dividends and share repurchases.
I think the Pie chart below confirms this approach.
We invested $1.5 billion into the.
And returned $3.2 billion back to shareholders.
I'll wrap up with guidance, which you can find on slide 6.
This slide is similar to last quarter, including how we set the guidance ranges.
Business third quarter guidance is $2.62.
The $2.70.
This represents 21% to 26% growth over prior year.
And 34% to 39% growth over 2019.
Compared to Q2.
This assumes no sequential improvement in the underlying economy, and a 1% foreign currency headwind.
For full year 2021.
We are raising our prior guidance by 50.
2 of new range of $10.10 to 10.
And 30.
This 50 <unk> increase is from the Q2 outperformance and the higher Q3 guidance range.
In other words.
And consistent with last quarter, we have not updated the fourth quarter at this.
$10 of rest assured next call, we'll provide an updated and more meaningful fourth quarter guidance.
And if volume trends are stable or improve we'll be at the upper end or above this range.
Until that time, we remain highly confident in our.
As of <unk> to grow 2021, EPS at least 23% from last year and 38% from 2019, while positioning Lindy for industry, leading long term value creation.
I would now like to hand, the call over to Q&A.
Thank you and as a reminder to ask the question you'll need a price donlin 1 of your telephone.
What's wrong a question you May press the pound key.
1 on the far first question.
And our first question comes from David Begleiter from Deutsche Bank.
The Bill is now open.
Thank you and good morning.
Thank you of them at the 15% of volume growth from the quarter.
What do you think that was versus the industry did you gain share do you think this quarter versus competitors.
David Thanks for the question so as you saw.
Solid growth and we mentioned across all end markets as well the.
Remedy is we solve that economic recovery come through we've said as part of our strategy with leverage that economic recovery. That's what we're seeing happen around I would say that in some markets. We have seen some share gain.
But that's kind of an ongoing business transaction.
The element that we see all along.
Very good and Matt thinking about share buybacks, how should we think about buybacks in the back half of the year.
Yes, so David as you know from our capital allocation policy, we will continue to sweep excess cash towards buybacks so year to date.
We have been over.
<unk> dollars were on a good pace and as I mentioned I expect Q3 cash to be higher so I see no reason why we need to deviate from kind of our current pattern.
But obviously our priority continues to be to invest in growth, which we're going to do and as Sanjiv mentioned, we have a lot of opportunities there but.
We'll also be repurchase.
Repurchasing shares pretty much every day in the market.
Thank you.
Oh, thank you.
Our next question comes from the Tony Jones from Redburn. Your line is open.
Oh. Thank you thanks for letting me ask questions.
<unk>.
Good morning.
Yeah, I've got 2 actually 1 was the volumes. So if I look at say Q2, 2019, and then sort of adjusted for the price and cost pass through this quarter I was just reported.
Sort of implies volumes are off about 3.4% versus the Q2 in 2019, but slightly down.
And in Asia.
Firstly I guess, he's the right does.
Does it may be imply some for the Optionality in Asia Pacific and can we use that sort of underlying 3% to 4% volume growth versus 2019. The next couple of quarters.
And then the second question, sorry, if I'm right from from asking quite of few.
Few things here Capex in the cash flow and also as a percentage of sales it looks like it's been trending down for a while but the project backlog looks really solid how should we think about that or is it just the post pandemic timing effect of the investments. Thank you.
Tony Thanks, why don't I jump into the Capex.
Based on the lost not to just talk through the volumes and reconcile them.
Just on Capex I think 1 of the reasons, we're providing the pipeline viewed today was to give you a sense of how we see the opportunity I've said in the past I've seen some improvement in proposal activity across the bulk sale of gas and sale of plants and.
Sales of gas side that proposal activity, particularly coming from electronics as an example.
And of course, the suite of clean energy projects, and the more traditional markets as well, including chemicals and us and others. So I do expect to see that capex, reflecting the pipeline of opportunity that we just defined so I don't see.
All of this I mean, the changes of marginal anyway, but notwithstanding that I see absolutely no concerns around how I expect that pipeline to flow into backlog.
They're not.
And Tony just to answer the volume question your calculations closer to but it's about 5% of globally is what we would have seen.
In Q2 volumes versus 2019 from this quarter in Asia Pac actually is leading its more around 8%. So I'm not sure if maybe on the deconsolidation of how you calculated that but the volumes in APAC were about 8% above Q2, 2021 versus Q2, 19, and we're pretty much at mid single digits across the board.
For all of the regions. So I would say, we're seeing the right the right patterns in the right traction and obviously price of 3% to 4% as well when you look at that metric versus 2019.
Thank you that's great detail.
Thank you. Our next question comes from Bob <unk>.
From Goldman Sachs. Your line is open.
Thank you very much good morning.
Morning, guys I wanted to ask about the strong island project that was going to start up in 'twenty, 3 and hows that progressing I think it's your biggest ever investment and.
What have you learned of anything about building those gasifier.
Alright, Thanks, Bob so.
1 of the larger investments as you as you rightly point out.
That's progressing well, obviously there has been some COVID-19 impact.
On our schedule as well as of our customer.
Still on track to getting largely mechanically complete by.
That'd be the originally set out plus or minus a few a few weeks.
Yeah.
To be honest <unk> been running gasify is.
That Singapore site for decades, so really none of this is new for us from an engineering point of view, we've been building classifiers.
For decades as well.
So you know there's a lot of the organization.
Additional learning that we've been able to put into that project. So it's coming along quite nicely.
And as a follow up if I might you guys have an interesting seat in the whole gastric or hydrogen economy. That's developing I wonder if you can give us your latest thoughts on which way that's going as it.
The day to be globally distributed hydrogen from single complex is in the best electricity areas is it going to be locally produced hydrogen is it going to be ammonia any updated thoughts on how you see that ecosystem evolving.
Sure sure happy to provide that Bob and that's the that's a great question. So.
It is.
Is it can rightly point out of very fast developing dynamic space.
And we start to talk more and more about clean energy more broadly, but just talking about the specifics of what <unk>. So our view is when we think about our strategy we believe.
Local execution and locally driven strategies.
As you are where we see the most value creation in terms of our business model and in terms of how we are kind of attempt to take that strategy to execution.
Demonstrating that the South Korea in the local market, where we are where we are putting a liquefy and building a whole ecosystem around liquid fueling for.
<unk> or heavy.
Have you been of duty vehicles.
So that's kind of broadly our strategy now I must add to that with all of that obviously, we also recognize there is a portfolio approach that we would be taken to this and we do expect to see that there will be some larger.
Sure.
The feed markets, which may not be entirely local which might have some export content to it but we do see the distributed model as being certainly book more effective and creating greater value.
The supplemented in cases by some larger production facilities, where you have some obvious.
Instill advantages I mean.
We've talked previously about the it'll how you could get involved in Africa. As an example of very low cost electricity that allows you to put a large complex green hydrogen production facility.
And the best way to get that the hydrogen to market as an example would be the then.
Then take it from the large complex and price it across the Europe, if you could.
And again you'd have to repurpose some of the existing pipelines and make sure that cost effectively gets to Europe for it to have some traction there. So that's 1 example, where we think you would see.
The changes that happened in Chile with the.
The desert has a similar advantage of.
High quality.
So our ability to take that put into renewable bar generate green hydrogen and then move into the markets close to it.
Does that does that give the color you were looking for book.
Yes, perfect. Thanks, so much.
Thank you.
Our next question comes from Nicola Tang from <unk>.
BNP Paribas your line is open.
Okay.
Hi, everyone and thanks very much the the interesting color around the project backlog and I wanted to ask a little per round lot.
The back book itself, it's pretty solid at the 7.5.
Dollars the size of the back book itself hasn't really been growing if anything I think it was more like 9 or 10 billion of couple of years ago, you talked about the you know hundreds of projects less potentially 10 billion can you talk about the potential timing of adding those into the backlog.
No out of existing projects come on line and then.
You know that will drop out of the back book do you expect to see growth in the back book or actually it would be more stable at current levels on a sort of net net basis.
And then the second question somebody around on the.
Backlog with other than just curious any of you mentioned that you'll seeing project activity of potential project activity.
So the traditional.
The industrial areas.
I'm curious to understand you know what areas.
But youre seeing that pick up in activity, Yeah, and then I forgot the next step at all full time.
Thanks, Nicola so low.
Let me start over the backlog and then we come back to the project.
Logic activity pick up that I referenced so.
As you said the backlog of 7.5 billion that gets impacted by startup that we have so we are going to have some start up later this year.
And we will see that impact flow through you've actually got some press releases that we had recently around some of those as well now in terms of the timing of of.
Yeah.
Projects coming into the backlog.
We don't control the timing, although often day.
Non controls the timing because you know you're kind of doesn't let us announce many of these wins, but.
All of the starting that you'll see in the second half an improvement in the backlog come through because we are very close on the on a couple of projects.
The we think it will be.
We will be formally closed out which is contracts signed before we can bring them on again nickel of Europe.
The others, but I'll just recap it.
Our.
Conditions of putting something of the backlog of very stringent the has to be secured by a contract.
It must be more than 5 million obviously.
With the larger projects that doesn't matter and it needs to have a guaranteed cash flow profile, which ensures that the backlog then has incremental guaranteeing the incremental growth of those conditions have to be met.
And we see a number of projects that will flow into the backlog later this year and then some obviously in the early part of next year as.
Well, so I feel reasonably confident on.
On the developments that are going to see that backlog of bolt on the sale of gas and the sale of plant site.
Yeah.
Now I'll move on to 2 of the proposal activity. So.
I'm going to talk about 1 area of the in particular, where we see a significant amount of activity.
And you've heard me referenced this before the close it won't come as a surprise which is electronics.
And really you've been hearing of the press, obviously, a lot of about chip shortages, but the reality is.
You know that that industry has been looking at ramping up its production capabilities for about 12 months now.
And there are a host of projects that are all in various stages of development by TSMC by Samsung by Intel by Globalfoundries is a long list of people, who are going to be investing in that space and therefore, a large part of our time at the moment.
In that proposal activity is being spent around the electronics.
Area in particular in the cloud now in addition to that we're also seeing some chemicals projects. We're also seeing even.
And it might surprise, some but even in the seal area, we're seeing some projects.
The 1 other area of nickel of which kind of is really linked to clean energy but.
Where we.
Now in the refining chemical even steel companies engaged actively with us is around the reduction in.
In the in their emissions or in the case of refining.
What can we do around carbon capture and making you know of reducing their emissions how can we help them create technical.
Solutions I've said this before in the last call that we have a full suite of technologies around this we have the ability working with partners to provide a holistic solution to many of our customers in that space and again, we're seeing a lot of activity pick up on that and move forward.
So that's kind.
Kind of nicely to.
We have seen no question.
So of the Decarbonization point I was the.
Wondering if you had any initial thoughts from the states of.
The 55 proposals.
What it means the Mr. In the white of Castleton distressed players and whether the does any sort of progress.
On the C O T free Mike on the U S side, you know somebody you won't get that in the Pea.
So think of that you've heard me say this before that.
The decarbonization more broadly in the hydrogen economy, particularly the pick up you know we need a couple of couple of 3 things to happen, obviously regulation with deep we've seen that happened very much in Europe. I think your point is absolutely valid that we see Europe provide the kind of.
Penalties of incentives of the Garden Stakes.
Which are allowing momentum to build in that space quite actively and aggressively so as good to see.
Participating in that.
Whether it's gypsy funding, whether it's other incentives whether it's the broadest coalition.
That is looking at contract for differences to make sure that we're leveraging facilities elsewhere to support the European economies. I've also said in the force just to make the point in the U S. We are encouraged to see progress happened in that area as well now you know that.
The U S. Currently offers of 45 Q.
Use of that is inadequate for any substantial momentum to build up in the space, but I'm encouraged by bi.
Conversations going on in the house and hopefully the standard that that'll move some of the.
The incentives and proposals forward in that space. So I'm looking forward to seeing developments there.
All of it quite closely.
So I guess the other couple of things that need to happen, which I think create the momentum that we need and I am the risk of repeating myself from our from the last call, we do need to see that the.
The technology Roadmaps and sure that the technology Fry, the green and Blue which is.
Currently available of scalable.
Creates the cost curve that is necessary for large scale adoption to happen that remains.
I won't say that the challenge that is actively being worked on but there is the timing challenge to that and it will take years before we get to a point of a green in particular.
And the has the ability to.
Have a cost effective solution available at scale.
Good good solutions that are available today, we provide many of those ourselves, but I recognize that there is still of a scale up that is currently lacking in the green hydrogen space and finally, I think we need to be working very closely.
Making sure that the end point of consumption. So in this case, if we are talking about heavy duty vehicles buses.
Trucks are indeed trains and ferries that technology development in that space is happening actively hence the number of partnerships that we do to make sure that we're right in the mid.
The middle of those developments and we are encouraging and promoting them as much as possible.
Provided about broader answer than you were looking for but I think this was worth recapping because these are the things that are ensuring that the momentum that we see today sustains and you actually see investment of development in that space.
That's great. Thank you so much.
Thank you.
Our next question comes from Jeff Zekauskas from Jpmorgan. Your line is open.
Alright, thanks very much.
Your returns on capital of moved up which is natural given your cost reduction programs.
Growing the economy.
Have your returns on capital, though in your onsite projects really changed over the past couple of years that is are the returns on capital and an onsite going up or staying the same.
Jeff This is Matt how are you.
On our investments.
In the period at the same.
So we've maintained that throughout and therefore, how we look at the projects and the expectations. We have remained the same but to your exact point given the density model that we have we're getting significant growth on this business on the non capital intensive basis, and then we continue to deliver on our projects.
Greg just start up of our projects and execute those projects, which deliver on the expected returns that we entered into them on and the combination of the 2 is giving us a significant acceleration in return on capital and at this point, we continue to see this happen and as long as these trends continue it should bode well.
Well for that metric going forward.
Okay. Thank you for that and in your in the hydrogen area. When you contemplate various projects are any of the projects that you.
That you contemplate.
Involved with.
Ammonia being made in some choice.
Projection, whether it's the mid east or Australia, or somewhere else that is are you working with any.
Possible builders of those projects or youre not doing that.
Right Geoff so.
So all of the headline that by saying, yes, we are of I want to kind of give you a slightly broader.
The picture as well, Jeff just to give you a sense of where we stand on the hydrogen.
So.
As you know I've mentioned this before.
On the previous call that we run out of Linda hydrogen Council. We meet every month, we review all the projects. The last the last of year. We had a couple of couple of weeks ago was.
Of course to solve to 140 projects across that whole range of opportunities in that space.
Adding up to what we call a probability weighted GAAP capex low value of about $4.1 billion. So again.
All of these are larger projects, obviously large we see a large number of mobility projects, which tend to be somewhat.
Malo, but to your point.
1 of the areas, where we're seeing both the.
Increase in the number of projects as well as large size projects is the space of carbon capture and.
Beyond that we then look at hydrogen of pneumonia.
As being too.
Somewhat.
Which kind of get added on downstream to that so the answer is yes, we are working with a number of different different customers and players were looking at the ammonia loop.
You may also be aware of that Linda has its own ammonia loop technology out of the Linde engineering. So we've done a number of these ammonia loops.
Elsewhere, including in the Middle East and Eastern Europe and in the U S. So we have the unique advantage of being able to tie both or all of those technologies in and provide the solutions when it makes it very attractive to many of our customers.
Thanks very much.
Thank you. Our next question comes from that piece of the drove a car from Citi. Your line is open.
Yes, good morning, Sanjiv and Matt.
Sanjiv does your deal with the ITM give you are near the vantage in the routing green hydrogen projects since you have the pump technology.
Through the joint venture and can you sort of give me like the examples of that.
Yes.
So yes of course, so the deal with ITM is is unique in many ways P. J. The falls that we are an equity investor in ICM that means we have skin in the game with them, but more.
Currently we have of joint venture with IP with ITM that there was the Linda engineering.
Joint venture called <unk>, which is where all of the scale up on larger projects above of particular size happens and that is what gives us the unique competitive advantage of having access to greet them.
Technology.
And being able to support of ITM and scaling that up for large large projects that we are that we're looking at and pursuing and again.
We are seeing good good developments in that space a lot of proposal activity P. J as I as I referenced earlier on we are very close.
Embargo of cases in those discussions with some select customers. So really pleased to see that ITM linkage and find ourselves leveraging that quite actively as we develop these projects.
Great Great and sticking to Green hydrogen you also had to deal with plug power to use.
And the enough sales.
To convert some of your class 6 and class 8 trucks over the hydrogen can you give us an update on that thank you. So P. J good working with plug power and we book of plug power in many different ways, we supply most of the hydrogen requirements today as an example, while they don't have their own facilities up we are also looking at.
Our collaborative development in a number of other spaces, which hasn't been announced yet, but we are kind of progressing on different fronts over there.
1 of the things that we have agreed with plug power and I must admit here with a few other players as well is that we will be trialing on our on our trucks.
<unk>.
Use of fuel cells, and then will be moving our trucks to hydrogen. So we already have a plan in place for the U S for Europe, and South Korea to be progressing with those trials and seeing how the how they move forward. So again net of activity happening in that space.
We are really waiting with bated breath the P.
To get these trucks on the road.
Great great. Thank you.
Thank you. Our next question comes from Peter Clark from <unk>. Your line is open.
Yes, good morning, everyone and thank you the first.
Is around essentially following on from.
The first question you had about the market share, particularly looking at the U S packaged gas business because I know there's differences in the mix I know the biggest competitor out there has a lot of hard goods a lot of construction the you've been seeing double digit growth now in that business in the first quarter, you probably acceleration of what you're sort of in the first quarter in the second.
The quarter, and there's still actually down, particularly dragged back by the highest growth. So I'm. Just wondering are you taking some share of who is all about mix maybe regional and then the second question is around the investments obviously very excited with all of the organic investment you have.
On the potential for that I'm, just wondering on the.
Potential acquisition line of you just not see many potential targets that fit the criteria on return given what you can do internally with your money. Thank you.
Thanks, Peter Great question so.
I have to I have to admit Peter I am thrilled with the Pac U S packaged gas business in the.
You know that that team is really moving forward at the moment, but that'd be see double digit growth both on gas and hard goods, we see strong sequential growth on both of those elements as well. So I know I've read some of our competitors talking about that space, but the reality is we are certainly.
Growing very strongly in that space and I.
Where the us kind.
Moving forward anecdotally, obviously people will tell you that we're taking share, but I don't particularly want to comment on that.
Anecdotal, but you can look at the numbers and I think the comparison of what will kind of tell its own cash due to the.
To the right conclusion.
So again very very strong performance over the on bolt.
Hard goods and gases.
If I move on to investments and talk a little bit about the acquisitions piece. So you know 1 of the challenges Pedro as you'll appreciate given where we stand in our size and having some lift through 3 years of of regulatory approvals on the module we are very sensitized.
You know how large acquisitions can happen. So we are left with the much smaller pool of opportunities. There we will do tuck in acquisitions in most of our markets any day of good high quality Tuck in acquisition, we will go after and we will do that.
As soon.
Soon as we find them and of course, they have to live up to our investment criteria of requirements as you know well.
The larger ones become a little more challenging, particularly as we've got to kind of understand the requirements from from local regulatory environments are antitrust et cetera, and that's the way typically something larger trips.
Stu.
So do I expect to see us doing acquisitions moving forward, Yes will you see a large number of tuck ins happen, most likely where we find those opportunities come through.
We will certainly pursue them all.
All day long if we could.
Got it thank you.
Up.
Thank you. Our next question comes from Geoff Haire from UBS. Your line is open.
Good morning.
Just had 2 quick questions first of all of the margin of improvement that you report kind of just check does not include any benefit from rising energy costs and if it does could you possibly breakout.
Alright.
And then just looking at the operating cash flow, which is obviously.
Flat in Q2 year on year, and Don sequentially, you've mentioned higher cash taxes are there any other movements within the cash flow in the quarter that are half of negative impact.
Okay.
Hi, Jeff It's Matt I can answer that so I think the your first question.
Just to make sure I got it right you were asking about margin related to energy can you repeat that 1 again of kind of low.
So obviously, you've obviously, you've got big margin improvement that you've been reporting from.
All of US every quarter since you've come.
You've merged what I'm just trying to understand is within the margin improvement, you've obviously had rising energy costs.
Does that give you a benefit to the margin as well.
And so I'm trying to look at what the margin improvement would be natural of rising energy costs, yes. So on that 1 the actual the rising energy costs will dilute your margins and Thats, what we call cost pass throughs. So we isolate cost pass through.
And obviously what.
<unk> is the simple grossing up so you'll see the sales and cost of goods rise equal dollar amounts.
So therefore, it has no effect on our variable contribution of growth contribution dollars, but it will have a negative effect on your margin because you're simply do any growth of effect. So we isolate that out as cost pass through that is primarily natural gas and.
That is electricity energy.
So those components tend to drive that obviously as inflation youre seeing in those type of commodities rises we will pass them through but they will dilute our margins. So for example year over year I mentioned, while we are up to 350 bps on our margin that includes a 50 basis point head.
Headwind related to this cost faster so excluding that we would have been up 400 basis points.
Year over year. So so we are passing it through as our contracts.
Enable but it will be dilutive.
As far as operating cash flow, yes to your point the $300 million that was incremental year over year, it's about.
$250 million sequentially with the impact of taxes and that is purely timing just when payments were made.
In addition, working capital probably was about 100 or so million unfavorable part of that is growth and we are growing so we're consuming a bit of working capital, but when I look.
Our cash conversion cycles, our dsos theyre quite good across the board.
The other piece is simply engineering timing as you saw engineering was consuming a bit of their backlog.
That is on a cash cycle you tend to have a more of a negative downside, but as Sanjay mentioned, we have a high degree of confidence of.
Our.
Backlog included sale of plants. So we feel that's something looking forward will turn around and I feel pretty good about where our Q3 cash flow will be of making some of this timing backup both on working capital as well as cash taxes.
Thanks.
Okay.
Thank you.
The entire <unk>. Our next question comes from Markus Mayer from Baader Bank. Your line is open.
Yeah. Good morning, gentlemen, 2 questions from my side first of all of the U.
You are now.
The true business given the recovery of the oil price Blaster already a positive effect on United churn from our recovery business.
And if not what kind of oil price you think you need to 1 of your business.
The need to see a recovery there.
The company back to 2014 levels and the second question would be on the effect of startups, you expect to see and also the next year.
You can basically the strip.
2 parts of the underlying business because of this new business.
Thanks, Marcus so.
Your question on nitrogen.
Yes.
The recovery using using nitrogen as you know we've got a.
A couple of large customers of do that that's been in a fairly stable through the spirit.
So we haven't really seen a significant volatility in that it's been.
Stable and walks right through the.
The geology is small because that as you are using nitrogen for enhanced recovery you have been in that process linked to that you can really step out of our provided a lot of volatility.
Great for the field, so you'll see that at fairly stable levels.
In terms of startups, yes, we do have a number of startups happening as you know from time to time, we kind of really the.
Provide of press press release that covered some of those I don't want to name the name them, but we do have a few happening towards the end of this year and yes, the beginning of next year as well.
There'll be a few more startups that will happen.
But the kind of magnitude of growth.
Can you give us some kind of indication.
So 1 way to think about that Marcus is I'll bring you back to something that we've said in the Boston and just gives you a correlation which is when I think about our EPS growth I'd say.
Our backlog and therefore that really that backlog getting convert into the startup provides us roughly a 2 percentage point over a 3 to 4 year period, that's what we're likely to see from the backlog the began behalf.
And that's 1 way to think about how the startup impact comes through down to the EPS level.
Okay. Thank you.
Yeah.
Yeah.
Thank you.
Our next question comes from John Mcnulty from BMO capital markets. Your line is open.
Yes. Good morning, Thanks for taking my question. So I guess 2 of them tied to the same topic, which would be inflation. So obviously, we're in a really kind of almost.
<unk> market can you remind us in terms of the backlog that you've got in the in the projects that are in that backlog how much of the equipment. The materials et cetera have already been locked up so that you don't have to worry about inflation and what percent is.
Maybe not necessarily locked in at this point that we have to kind of think about.
Sure.
John So let me get into a point of of securing of project, whether it's on the sale of gas of the sale of plant side by then we get into a very.
A fairly detailed costing mechanism and we lock in our cost of that stage, but all of the Oems in particular.
But all of the sub vendors as well so when we are in the backlog stage.
Most of our costs are already locked in pretty much. So that should give you a sense of kind of how we stand as we are seeing inflationary trends now we already factoring that all of those in into the proposals that would be of developing and.
<unk> of the customers. So again, we have good mechanisms in place a lot of experience of having managers job to make sure that that coverage is very strong end of very diligent process of rigorous process around it and our engineering team.
Got it.
That's helpful and then I guess just.
The kind of tied into that given this inflationary environment. It does look like your European business. Your Asia business. We saw some price acceleration is that something given the inflation levels that we're seeing that we could we could see further acceleration from.
From the pricing that you're putting through and I know, it's pretty lofty already but.
Can we can.
Providing even more of that just given the given the environment, how should we think about that.
So John that's of Great question.
As we've kind of.
Sean 3% overall pricing comes through you know that a large part of the pricing comes through the merchant and package business.
And.
Can we see very little of that really comes through the onsite line. So therefore, you can do the math and you'll you'll get to a number that sort of mid single digits on average on pricing across those.
Different segments, particularly from merchant and package now our team has done a fabulous job of making sure that we remain ahead of the curve as far as inflation comes.
We've been telling you this for about 2 quarters now and I expect that team to continue to do that as we move forward. So for us making sure that we are working that pricing vivo of having those conversations with our customers as.
As we see those inflationary trends continue to come through it remains the right on top of mind for us.
Got it thanks.
And I appreciate it.
Thank you. Our next question comes from Vincent Andrews from Morgan Stanley. Your line is open.
Thank you.
Just a question you know the the $1 billion a day.
This cash.
That backs that you talked about could you just talk to us.
Much of a sort of what.
How sort of robust that.
The menu of opportunity is why you choose it to be of 1 billion versus why isn't the $500 million or 2 billion of it.
As far as the I can see.
Ahead of the returns there compare to the traditional.
<unk> Capex backlog.
Sure.
The great question I'm glad you asked that question because I've been itching to talk a little bit about small on sites.
So that's the good leader there. So let me first just the slide that so essentially.
When we have.
Projects and I think small also has a great example of that just industry.
Illustrate the point here we have.
We have long term contracts of these are contracted.
<unk>.
Kind of secured cash flows in the but individually these are less than 5 million each typically.
What we call our small on site.
They have the sharper execution timelines they are accretive good solid.
The returns.
These are projects, we'd love to do every day and the reason of our of particularly to talk about at the they also is because.
The first half of this year with the plenty of more than 25 of these projects already we've signed up more than 25.
Small onsite projects already now that of 50% jump over last year.
Last year, the about 50% higher than that and I loved these projects because great solid returns.
Good strong execution. These are packaged plans. So we can go in there and work on them very quickly and which is why we get that execution advantage as well.
And I think the other point to just make over here and wildlife.
The most points I think we think about the module being over and that's true, but here's an example of revenue synergies that we talked about we've never really kind of you know we never really put a number to it but this is a good example of how the revenue synergies from the merger of flowing through but we brought in 2 suites of technologies, giving us a really strong position.
Peter let space and the Leverages, the actively and kind of winning these deals that you see us book.
Now all of these come through the base Capex. So I'm excited about that number of $1 billion I am there isn't the cap to it than that flexes with what the business does and what the needs of the market are and clearly we will flex.
<unk> with what we see in the market. The months all of this news is those investments have to meet our investment criteria. That's all it needs the quality projects any day any time happy to do small low base.
I hope that helps things.
That was great and maybe just as a follow up and I might be reading more into it.
And I should but net.
Combining sort of the sale of gas backlog in the sale of plant backlog.
Feels to me, you're sort of bringing the sale of plant business.
A little bit more of the front of the stage than perhaps the spend in the past.
I see clearly that that's the lower margin business, but it's a it's.
Obviously the capex.
That's your business versus the sale of gas. So I'm just I'm just wondering am I correct that you're you're kind of thinking about the engineering business, having more prominence on a go forward basis do you have a plan there.
Just sort of.
Improve the margins and the returns or is there more we're going to be hearing about it in the quarters and years to come.
Light.
That's a great question. So let me just take a step back if I may and just talk about the concept of how we think about our business and opportunities right. So the starting point for US is we want to be able to participate in the full range of opportunities that we see in the marketplace.
And to do that I have a unique competitive advantage, which I am going to let.
Average, which is the ability to offer an attractive sale of gas model or in some cases, where that customer looking at those 2 model is not not particularly keen on that to be able to offer and get the business with the sale of plant model right. So either proposal for me works quite well now the profile of that a little bit different of your right in saying.
Doing an EPC type structure.
For us as is asset light. It is obviously accretive it's cash flow positive for us. So we do think our engineering capabilities of the fact that we have those capabilities executing dean and day out.
Tremendous level is.
A really strong competitive advantage that we have and we want to make sure that we leverage that as much as we need to know.
I do want to just make sure that you understand and recognize that we are giving prominence to 1 of the other.
These are 2.
These are kind of 2 <unk>.
<unk>.
That I have and I views those options.
I need to and where I can.
Exercise them and do what's best for the for the organization now there are 2 kind of underpinning principle from day, 1 I want to be able to approach every opportunity in my space that I have.
Have the advantage and the ability to execute on and 2 I want to maintain discipline and my investment criteria and I think this is that unique advantage that we get bringing the 2 together.
Excellent. Thank you very much I appreciate it.
Yes.
Thank you our next question.
<unk> comes from Mike <unk> from Wells Fargo. Your line is open.
Hey, good morning, nice nice quarter there.
Historically inflationary environments tend to be good for for industrial gas demand in the and I'm just curious given where we're at in this inflationary cycle do you think.
There could be kind of sort of a step up in the the multiplier for demand for industrial gases as we head into the next couple of years.
Okay.
Hey, Mike that's a good question. So when we think about inflation typically we spend most of our time talking about what happened of the pricing side, but youre right inflation.
<unk> environments, we actually like inflation is as you've heard us say before.
Largely because on the pricing side, we have the ability to pass up.
Much of the inflation through our contractual structures.
Onto the customers in all sorts of good opportunity for us to open the conversation on pricing now.
Typically when we see inflationary environments.
We do see some some industrial activity pickup in recoveries happen in constraints that lead to the that inflationary environment, That's where we play actively in yes, I think in some areas. We will see some of that play out into into demand on the demand side as well.
Great. Thank you.
Thank you. Our next question comes from Kevin Mccarthy from vertical Research partners. Your line is open.
Good morning of Sunshine and I was wondering if you could provide an update on the snap deal that you announced in December of last year to develop green hydrogen projects in Europe, how is that partnership going in the early.
Is is the paradigm to move inexpensive energy from Northern Africa up to the European continent, and and if so.
What are the barriers if any to making more substantial capital investments in that arena does it have to do with technology and production economics.
Omics or perhaps more on the commercial side, maybe you can flesh out how you see the future there.
Thanks, Kevin that's a really good question.
So the partnership of <unk> has gone well and we of like minded in our view of how.
The market needs of the hydrogen.
<unk>.
In Europe in particular mainland Europe needs to be met and that you're kind of common understanding and common appreciation of what needs to happen is critical for that partnership development to move forward to getting something substantial happened now as with all good things Kevin These things.
In time and there is as you are aware of a lot of funding activity happening in Europe as we speak.
And as part of that I think we are waiting and watching to see how that develops. So that's in terms of how the partnership itself is moving forward I wanted to just take a bit of time and talk about the other part of the question, which.
What do we see us as elements of double either encourage or create barriers for some of these.
Stan show of developments too to accelerate and get the momentum here.
Yes.
Unfortunately, I'll be repeating myself, a little bit here, but and I said earlier on.
As of.
Nicholas question that you need a couple of things to be happening and in tandem Red 1 you need to see the regulatory environment with some deep come into place in Europe, we do have that but but I must admit at the same time that of this complex.
Once the bureaucratic, but it's almost out of it has number.
But sort of control the goes through a country process for US then at the European Union level, and then some allocations will happen and there's a whole suite of activities that need to happen before some of that funding and incentives become actually available for you to be able to go out and make these substantial developments happened so the.
Of administers that whole piece that is just it's part of the process of.
Of the technology side. The other piece that I mentioned, you need a roadmap of where you can develop on the assumptions and Europe's kind of chosen the path of green.
My view is that scale will happen on blue hydrogen before.
That happens on Green there is absolutely no doubt in my mind that that is true today and will be true for a number of years to come.
Technology for scaling up on Blue exists today, Linda provides that whole suite of technologies to day to be able to do that so on the green side, which is very Europe's kind of move forward in.
I want the selected but certainly lean towards we will need to see that technology development to scale happen I think that as the technology roadmap, that's kind of 3 to 5 years out you need low cost renewable energy again, that's the development that's in progress.
But available everywhere in.
The Europe as you know, which is why this whole concept of Africa becomes sort of attractive and Northern Africa and in particular and you also need effective technology roadmap for the electrolysis.
To be able to bring that capital and the efficiency up to a point the capital down the efficiency up to get.
To a point, where you can then create a cost.
Tejas position for Green I see both of those book work in progress. We are actively involved in all of those activities as we move forward, but it is still work in progress.
Very helpful. Thank you Sir.
Thank.
Thank you and we'll take our last question from Laurence Alexander from Jefferies. Your line is open.
Good morning can you just elaborate on the discussion around pricing are you seeing existing onsite customers start.
The opening contract negotiations of renewals.
Earlier than normal to get.
In front of the inflationary cycle.
Hey, Jeff Lawrence Sorry, it's Matt.
I'd say no things are pretty consistent with as you'd expect I mean normal pattern is usually a 2 to 3 years prior to the exploration you begin to talk about the renewal and any type of inflationary environments.
I don't have any impact on that.
Okay. Thank you.
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 Juan <unk> for any closing remarks.
Crystal. Thank you and thank you for everyone on the line from participating in today's call do you have any questions.
Feel free to reach out of a great day.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a wonderful day.
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