Q1 2022 Linde PLC Earnings Call
[music].
Good day and thank you for standing by welcome to the Linde plc first quarter 'twenty to 'twenty two earnings teleconference. At this time all participants are in listen only mode. Please be advised that today's conference is being recorded after the speaker's presentation. There will be a question and answer session.
I would now like to hand, the call over to Mr. One realize head of Investor Relations. Please go ahead Sir.
Thanks, There Gabe.
Yeah.
Good morning, everyone and thank you for attending our 2022 first quarter earnings call and webcast popularize habit head of Investor Relations and I'm joined this morning by Sanjiv at Mamba, Chief Executive Officer, and Matt White, Chief Financial Officer.
Today's presentation materials are available on our website at linear dot com in the investors section. Please read the forward looking statement disclosure on page two of the slides and note that it applies to all statements made during this teleconference.
The reconciliations of the adjusted numbers are in the appendix to this presentation.
Sanjiv will provide some opening remarks, and then Matt will give an update on <unk> first quarter financial performance and outlook after which we will wrap up with Q&A.
Let me now turn the call over to Satya.
Thanks, Sean and good morning, everyone.
I'd like to start off by addressing the recent global events and the tragedy occurring in Ukraine.
The senseless invasion has caused widespread casualties and destruction at a level not seen in Europe for generations.
As a global company integrating but then countless communities across the globe Linda must do its part to help.
I'm happy to report that all of our 121 Ukrainian employees are safe.
And I'm incredibly proud of the courage and determination they've demonstrated throughout the crisis.
Including several who have chosen to continue producing and delivering lifesaving medical gases.
We're supporting their needs directly and indirectly.
Through contributions of approximately $2 million.
I can only pray that all of the global pressure and support is enough to bring this war to win that and allow the efforts to begin towards healing and rebuilding Ukraine.
Given these circumstances, we are scaling back gas operations in Russia.
We have already seen supply to certain customers and initiated the divestment process for some industrial assets.
All in an effort to reduce our footprint, which is already quite small at approximately 1% of sales.
Furthermore, we have stopped new investments and business development, while winding down several engineering projects.
Given this we have remote second half Russian earnings contribution from the guidance Matt.
Mark will speak more on this.
However, we are scaling back responsibly.
As we continue to support our employees and their efforts to supply critical gases for medical and safety needs.
Now in the light of uncertain economic climate I thought it'd be helpful to highlight trends, we're seeing by end markets and geography.
Let me now go on to slide three.
But it gives you a summary of Q1 growth rates by key end markets.
Two overarching points.
Panic growth of 9% from a strong 2021 foundation and broad based increases across both consumer and industrial related end markets.
At 17% of sales health care trends are roughly flat.
As greater medical procedures in the developed markets were offset by lower hospital oxygen in developing markets, such as Latin America and Eastern Europe .
Fortunately it appears COVID-19 oxygen needs are abating.
So I expect health care to return to its long term growth rate of mid single digit percentage as we continue to expand patient offerings for both hospital and home.
Food and beverage continues robust year on year growth.
Most parts of the World have returned to restaurant dining as well as increased obligations for both food and beverage production.
This resilient markets should grow low to mid single digit percent.
The sequential trends are down due to normal seasonality from fourth quarter holiday season.
Electronics at 9% of sales remains one of our fastest growing end markets, especially in Americas and APAC.
Primary gas is sold to these customers are ultra high purity nitrogen hydrogen helium and rare gases that includes Neal which represents less than 1% of total sales.
However, given the amount of attention. This molecule has recently received its fair to say that we are well positioned as one of the largest producers of neon in the world, but the vast majority of it being refined at our own site in the U S and Germany.
We are of course working closely with our customers to address their increased demand.
The electronics market grew 13% versus last year with a mix of underlying growth and project start ups and I fully expect to announce more new project wins during the course of this year.
Turning to industrial end markets.
Chemicals and energy at 24% of sales grew double digit led by the Americas, which drove more than half of that increase.
Seeing very strong demand across all phases of energy development as U S. Refining rates are close to record levels driving even more demand for hydrogen and other gases. In addition merchant hydrogen volumes rose by almost 60% from the last year in support of clean energy initiatives.
Our chemical customers in the U S. As some of the lowest cost producers in the world industrial high demand for their end products, requiring significant onside gas supply.
The current combination of high energy prices and transition to clean energy should drive continued growth in this end market for years to come.
So at this point, we are currently reviewing close to 300 clean energy projects with a probability weighted spend exceeding $5 billion for these clean energy projects.
So I feel quite good about our prospects for future growth in this space.
Metals and mining at 14% of sales grew 7% from last year, and 5% sequentially as lower volumes in China were more than offset by other regions increasing their production to meet global demand.
Americas improved sequentially and from prior year as U S based steel mills increased production in support of higher industrial activity.
In APAC lower Chinese steel volumes were mostly offset by higher production from other countries.
As a wall races to replace Russian based mining metals and energy sources I expect to see our customers continue to increase their production and investment levels.
Finally, the manufacturing end market grew 11% from last year and 4% sequentially.
Versus prior year growth was broad based in every segment, but led by the Americas from increased aerospace and general manufacturing.
Last week, we announced another new long term agreement with a major space launch company to provide rocket propulsion gases out of our recently expanded Florida plant.
Currently rocket and satellite propulsion demand is at its highest level, we've ever seen going as far back as the NASA as a pilot program.
Linda is proud to be leading industrial gas supplier to all key players in the U S based program.
Looking ahead, there are clearly concerns around energy security, especially in Europe , which could result in persistent inflation additional.
Additionally, shortages of Russian source commodities, coupled with Chinese production curtailments from Covid could put additional pressure on global production levels.
Regardless of what ultimately happens in the economy.
Linda has demonstrated time and time again that we weather the storm better than most.
We have a committed team of high performance Sculpsure and an integrated network across all three supply modes.
That's why I'm confident Linda will continue being the best performing industrial gases and engineering company in the World.
Now I'd like to turn the call over to Matt to walk through the financial numbers.
Thanks Rajiv.
Please turn to slide four for an overview of the first quarter results.
Sales of $8 $2 billion increased 13% from prior year.
But declined 1% sequentially from the fourth quarter.
Versus prior year cost pass through increased 6% from the contractual billing of higher energy costs.
Currency translation reduced sales by 3% from a stronger U S dollar primarily against the Euro and pound Sterling.
Excluding these items organic sales grew 9% from 3% more volume split between the project backlog and base.
6% more pricing as we continue to price to inflation.
Recall that actual price increases are much higher for the combined packaged and merchant gases.
Sequentially, when excluding the 1% currency headwind.
Organic sales increased 2% as 3% higher pricing was partially offset by a 1% decline in volume.
The volume decline was driven by lower EMEA medical oxygen and seasonal effects from food and beverage Chinese new year and southern Hemisphere LPG.
Engineering volumes are up 1% from prior year, but down 2% sequentially as we have begun winding down several Russian projects and we expect that trend to continue into Q2.
Operating profit of $1 $9 billion increased 13% from 2021 and 3% sequentially.
The operating margin of 23, 2% is roughly flat with prior year.
But up 100 basis points from the fourth quarter.
The contractual cost pass through has no effect on operating profit dollars, but will impact operating margins as we adjust both sales and cost with energy prices.
Excluding this effect operating margins are up 130 basis points from prior year and 120 basis points sequentially.
You can see the table to the right showing underlying margins by geographic segment with almost all up triple digits across both periods.
Despite the unprecedented geopolitical events and subsequent inflationary pressure.
The business quality continues to improve.
And we anticipate that margins.
X cost pass through.
Should increase going forward.
You may have noticed the higher than normal engineering segment margins at 19, 6%.
And lower than normal global other operating profit at a 44 million dollar loss.
These are driven by project timing differences and one off costs, which both should return to normal run rate levels by the second quarter.
EPS of $2 93.
Increased 18% from last year, and 6% sequentially as we continue to demonstrate strong leverage down the entire income statement.
Disciplined capital management is supporting lower interest costs and a reduced share count.
Which I'll speak to more on the next slide.
The final number I'd like to highlight is return on capital, which represents one of the most important financial metrics in our industry.
Three years ago. This figure was 10.4%.
Today, we're at 18.9% and still growing.
This progress doesn't happen overnight.
It requires a sustained high performance culture across all levels of the business.
We're quite confident that Lindy is.
And we will continue to be a long term value compound with a healthy blend of high quality growth tremendous resilience.
And significant shareholder returns.
Slide five provides more color on our capital management trends.
Q1, operating cash flow of $2 billion was slightly below last year due to unfavorable working capital timing in January and February .
While March was a much stronger months.
It wasn't enough to catch up.
I expect improvements in Q2, as our DSO and <unk> levels are still quite stable.
Also recall that Q1 tends to be one of the weakest quarters of the year due to cash payment timing.
Engineering cash flow was positive in Q1, but down year over year on project payment timing.
In light of the accelerated Russian project wind Downs I.
I expect more payments outflows to vendors as we closed out several projects consistent with how all projects are closed out but at a significantly faster pace.
Overall, I still anticipate a full year operating cash flow to EBITDA ratio in the low to mid 80% range.
As far as how we deploy that cash we announced a 10% dividend increase for 2022.
Which marks the 29th consecutive year of dividend increases.
We also announced a new $10 billion share repurchase program on February 20th.
Of which we've already spent $1 $7 billion by the end of April .
And of course, we will always reinvest in the business, which is our priority.
Our capital.
Despite the economic challenges, we still have access to low cost capital as evidenced by our most recent bond deal.
We issued over 2 billion euros across three tranches.
And as you can see the attractive pricing we.
We had a weighted average maturity of 10 years with a weighted average coupon of one 4%.
Irrespective of the economic climate, we will maintain a steady and predictable capital allocation policy.
To invest in the business.
While rewarding shareholders.
I'll finish up on slide six which provides the updated earnings outlook.
Second quarter guidance range of $2 90.
To $3 represents 7% to 11% growth over prior year.
Or 10% to 14% when excluding currency translation impact.
For the full year, the new guidance range is $11 65 to.
$211 90.
Our 9% to 11% growth rate from 2021.
For 11% to 13% when adjusting for currency.
Both estimates have two key underlying assumptions.
First.
There is no assumed base economic growth at the midpoint.
Consistent with last quarter. This is not our economic projection, but rather a placeholder for the guidance.
You can insert your own view of the economy. If it does better we will do better and if it does worse.
We'll take actions to mitigate.
Second we have removed contribution of Russian earnings by the second half of the year.
As we continue to wind down engineering projects six certain operations.
And sell industrial assets, we felt it was appropriate to remove Russia and earnings from the outlook and associated projects from the backlog.
These actions are ongoing so we anticipate some residual earnings in Q2, which are projected to cease by Q3.
While this is a fluid situation with many complexities we are committed to following all sanctions and scaling down operations in a safe manner.
Overall, despite economic uncertainties, we are raising the full year outlook.
In fact, as Sanjay mentioned, Linda has demonstrated industry, leading performance year after year.
We only need to look at the last three years to prove that.
At the start of 2019, when some investors doubted the merits of the merger.
We quickly came together as one and grew EPS, 19%.
<unk> in the year at an all time high stock price.
Moving into 2020, when the pandemic struck.
<unk> stock was sold off from apparent concerns of too much cyclicality without enough resiliency.
Only to ultimately achieve 12% EPS growth.
We finished the year at a new all time high stock price.
And when 2021 began.
Linda stop was once again sold off.
This time from a parent concerns of too much resiliency.
Without enough cyclicality.
And yet we grew EPS by 30%.
And once again finished the year at another new all time high stock price.
Now in 2020 to Linda.
Linda stock has been sold off again from concerns of economic uncertainty and high inflation.
Time will tell how we ultimately finish this year.
But personally.
I like our odds.
I'll now turn the call over to Q&A.
Thank you, ladies and gentlemen to ask a question at this time, please stay home by pressing star one on your telephone keypad. Please make sure mute function on your phone is switched off to allow your signal to reach of equipment. If you wish to cancel your request. Please press star two again, please press star one to ask a question.
Our first question comes from Mike Sison from Wells Fargo. Please go ahead.
Hey, guys nice start to the year.
I guess at the midpoint when you're talking about no assumed economic growth split what type of volume growth slow will you will you'll be able to generate and maybe talk about each of the regions is as you sort of walk us through that.
Hey, Mike So.
This is sanjiv I just wanted to kind of first lay out the guidance point that Matt just talked about and then talk a little bit about what we see in the regions going across.
So Matt pointed out that at the midpoint of our full year guidance. We have currently assumed there is no help from the economy at all right. So that's a zero percent kind of <unk>.
Volume benefit that we're getting over there and he has also suggested that you can go ahead and put your assumption on what you think the economy is going to do.
And recognize that.
That end result might look like if the economy does better than that obviously, we will do better if it doesn't again to just kind of reiterate what he said we will take mitigation actions as you've seen us do previously.
No I think I wanted to just kind of relate that and then move on and talk about the end markets.
And I really give you a sense of how I see the three important segments that we have I think that'll give you a sense of what the market is currently looking at so let's start over the Americas.
Strong underlying demand and there we are seeing that reflected across.
All the key end markets, we participate in chemicals and refining are doing extremely well.
It has been flat, but you know there is a there is an offset of increase elective procedures versus a slight decline certainly in Latin America. If you will on the Covid.
Need for medical oxygen as well, which is a good thing in truth.
And then we are.
We're obviously seeing semiconductor continue to see growth as well manufacturing and largely kind of manifested through our packaged in hard goods side of the business doing extremely well the U S package and hardgoods kind of running at about well double digit growth for for the quarter again, which has been fairly consistent over the last few quarters.
I want to maybe highlight refining specifically by May up about 30% year on year for us a very strong solid growth coming out of refining obviously, we're seeing that includes some start up impact there for us as well, but we're seeing refineries run flat out utilization rates above 90% crack spreads.
38.
At the moment, we haven't seen these levels in mid mid two thousands if you will so again, all looking pretty strong from the underlying demand patterns, we see out of the Americas I'll move on quickly to APAC and just tell you that we see broad based consistent.
Underlying demand growth I'm going to talk about China for a moment and briefly cover that as well.
But broad based across the rest of Asia Pacific.
And kind.
Kind of reasonably strong and stable underlying demand demand as we see the markets today.
Clearly you are reading the press you know all about Lockdowns et cetera, we are seeing those lockdowns play out into Q2, if you will.
I'm finding the onsite side of our business holding reasonably well, yes. There is some impact on the merchant side small and medium enterprises, obviously, a little bit more impacted over there we did see.
The.
The volumes kind of take a little bit of a drop early on in April , but they have stabilized still a little bit short of where we expect them to be my forecast for the rest of the quarter, we aren't likely to see anything significant happened over there and just so you know we factored that into our guidance as well.
Lastly, EMEA and that really is a bit of a wildcard I would tell you I have been surprised by how the EMEA business has held up the onsite volumes as well as the merchant side of the business huge resiliency over there. Obviously, you know what's happening to energy prices and you can see our pricing numbers in EMEA as well, making sure that we're pricing to inflation.
<unk> and <unk>.
Even <unk>.
<unk> up on prior catch ups that we talked about we said to you previously we kind of catch up on pricing or one or two quarters, you can see that come through and obviously the operating margins ex pass through demonstrating that up 130 basis points year on year sequentially 120 basis points up across every every segment that we have as well.
So again pretty solid in terms of the quarter, one really I think the the unknown. There is what happens to energy more broadly and of course, you hear the news about what happens to natural gas sourcing et cetera, I am not going to speculate there.
Just as.
As far as the underlying business itself is concerned on how we're managing and I'm really pleased with how the EMEA guys. The team is managing that and they are they will walk through every contingency that happens we've got a strong team over there are able to do that.
So it's been exhaustive as an answer but I just thought I would kind of give you the broader perspective.
No. Thanks for that and just a quick follow up you know industrial gases tends to help customers reduce their.
Energy costs. So your sale of gas backlog has been pretty steady at $3 5 billion are you seeing.
It's sort of more bidding potential in and does the backlog potentially go up as in this inflationary environment.
Absolutely Mike So the short answer to that is yes, we are seeing a lot more proposal activity.
On the on the sale of gas backlog, just a reminder, that about $1 billion of that is coming off this year, which means we are starting up projects best kind of projects I like that gets started off bring bring revenue in earnings in the.
Of course of the year. So that's good to see we're filling that back up with the 1 billion more of project wins that we expect or are kind of developing in fairly advanced and I expect I do expect actually that backlog to continue to creep up and move in the right direction. So yeah lots more activity.
Across a whole range of end markets as well energy refining chemicals electronics manufacturing. So again broad based solid proposal activity, which I think will translate into wind, which is obviously how quickly we can lock that in.
Thank you.
Our next question comes from Kevin Mccarthy from vertical Research partners. Please go ahead.
Yes. Good morning, Sanjiv can you comment on your outlook for return on capital you had an impressive level of 18, 9% in the quarter can you continue to move that higher and how do you view R. O C. In the concepts of rising interest rates or are you starting to be.
Higher cost of debt for example into your project bidding and have you seen that.
In the marketplace as well as it relates to your peers.
Hey, Kevin I'll kind of quickly give you a response to that I think and then get Matt who is passionate about this I'm going to let them, let them I will walk through this as well.
<unk> I've said this before you've kind of heard and I've been quoted on this truth serum for an industry like ours.
Sometimes surprised when I look at our peer group that we really do stand out Theres a lot of hard work that goes into that managing both the numerator and the denominator remains critical.
And we do that day in and day out as you know that's how we run our business United We'd run. It every day to make sure that we kind of get through all of that so these are record.
Rossi levels for our industry, our industry hasn't seen this record incomes from that daily operational aspects of the business and then managing a very disciplined capital approach and all of that kind of feeds into that our aspiration will remain to continue to grow that.
But obviously as you know is a function of.
The various factors that go into play that I mentioned earlier on and as we see Capex does not happen and the ramps take place there will always be some catch up that happens around the royalty fees, Matt Yeah sure. Kevin I can just add a few points to that I think as far as the outlook, it's probably safe to say, we're over achieving with what some of your <unk>.
Expectations probably work.
And the obvious answer is we're growing earnings faster than our capital base, but I think the underlying thing to take into consideration as we are less capital intensive than I think people realize we have a lot of avenues of growth that don't require significant capital, we're demonstrating that through our end markets, we're demonstrating that through our.
Supply modes of package and some of the other services, we have and we see continued opportunity to see expansion of return on capital through significant growth that does not require significant capital now of course, we have great opportunities for large projects that we're going to pursue and that we're going to.
Win, but we also have a very diverse business that allows us strong year in year out growth without the need of significant capital in and as far as the inflation impact on what you asked we get asked this question when rates rise when rates fall, we get asked over and over again.
We have the same answer which is we take a very long term view right. When we lock in these projects. These are 15 20 year views.
And we don't try to estimate what inflation or rates will do rather we protect ourselves against inflation on how we contract both on the execution and the long term fees that we will charge for facility fees. So given that we build a model that is independent of what.
Fed to do around the world and how inflation is structured and I think our results recently have demonstrated that and I think our results during the disinflationary periods.
Post the great financial crisis showed that so from that perspective, we build it agnostic of it and just to generate value for the long term.
Thank you for that and Matt Secondly, if I may can you walk us through the financial.
Financial impact from your exit in Russia as it relates to to earnings and also any cash flows associated with the exit costs there.
Sure Kevin.
To be clear on how we did this it starts with the guidance and what we wanted to do in the guidance. As we stated is by the second half remove any impact from Russia and that includes projects or our business and the gas which is about 1% as we stated on the prepared remarks, it's a fluid situation.
<unk>. This is something that we are committed to scaling back we're committed to reducing our footprint. Obviously following all the sanctions and it's something that we're continuously working on but we wanted to take the prudent and conservative view of removing that impact going forward. As we stated the gas business is about little less than 1% of sales and <unk>.
Responding operating profit and assets.
The engineering business, obviously, you saw the effect on the backlog of those projects and they're continuing to work through from a cash perspective I would separate the two pieces. There is obviously the normal aspect as I mentioned, where when you wind down projects in this type of percent completion business. It is a normal outflow that as a normal part of this business.
Paid upfront and then as you work the project down you pay your vendors and you cover the cost to build that project. We fully expect that same effect. It will just be on a more accelerated path than what it normally would have been separately on the deposits that we have upfront at this stage, we see the need for them that is.
Something we don't see a significant effect other than obviously working through paying vendors and paying the cost to wind down the projects and as I stated, we still anticipate that operating cash flow to EBITDA will be low to mid <unk> for this year considering all of these items. So that's how I think you should think about it and model it.
Very good thank you.
P J <unk> Citi. Please go ahead.
Yes, hi, good morning.
Sanjay as some have suggested that with the rise of natural gas prices in Europe .
Cost of Green hydrogen today is same as cost of green hydrogen.
So you would think that Europe would accelerate green hydrogen, which would make sense from sort of energy security standpoint.
Have you seen any any increased discussions and initial orders or anything about.
Green hydrogen in Europe .
P. J that's a good question, obviously very topical at the moment. So what we are seeing is clearly the intent in Europe , even prior to this to this current crisis.
The intent in Europe to move down the path of Green, obviously that.
That difference between Green and Gray is narrowing certainly in Europe . The constraint. So from a policy point of view clearly we see that.
There is greater momentum if anything coming out of this current crisis, leading to that green roadmap.
The challenge PGA lies in the ability to scale up green production and the ability to access renewable energy and the ability to get all of that together then produce hydrogen and find the carrier that makes it cost effective once it's landed at scale and that's where the challenge lies so.
We are we are obviously working closely with a number of different customers, who are very keen to go down that path. You would have seen announcements. We made we got two into 100 megawatts. So thats a 200 megawatt order from <unk> to walk to kind of get their energy balance up from a green hydrogen point of view, but again all of those projects take time and the scale.
Ability continues to be a little bit of a challenge.
Thank you and I have a question on neon.
You mentioned you have supply in the U S and Germany, I believe you were adding some new capacity as well.
And then can you talk about sort of supply demand of neon I know a lot of that was in Ukraine. And then also you talked about onshoring and electronics or onshoring, you're seeing big.
Big clients.
The supply in the U S to supply.
Then it comes up.
BJ show ourselves. So let me just take a step back and give you the overview and then let's get into the details in terms of where we stand.
So the overview is about a third of the world's refined neon comes out of Ukraine, and Russia about a third.
Most most players around the world have that have that sourcing built into their model. We are lucky in that our refining capacities really sit in Germany in U S and feed the entire world.
So our kind of dependence on Ukraine, and Russia is in the mid teens, if you will relative to other people being around a third that positions us well obviously prior to all of this happening in terms of the water in Ukraine last year, we had already made decisions recognizing that semiconductor growth.
And in fact, even space will likely to make red gas demand continue to grow so we're going to see some of that capacity come online. This year and some early next year as well as far as things stand you'd referenced Germany and the U S. We produce refined neon in Germany, and the U S in multiple locations.
Which ensures that we are able to meet the entire global demand out of these locations of course, we can also meet all the onshoring needs.
Our customers like Intel Samsung TSMC and others have in terms of coming out of either Germany or the U S. As well. So we are very well positioned and we are of course, the largest producer of refined neon in the world.
Thank you.
Thank you. Our next question comes from Jeff Zekauskas from Jpmorgan. Please go ahead.
Thanks very much.
Hi.
When I look at your electronics sales.
Sales growth it seems that you're taking market share in that area as best as I can tell.
Is that true.
At Air products and are located in Lindsey are all very very competent companies that supply the electronics industry.
Is there something that you can now technically too that the.
The other two companies find it more difficult to do or are the wins that youre achieving.
More of the result of intangibles.
Service or better customer relationships.
Thanks, Jeff So the electronics wins that we had last year, Jeff and you've heard me say this before in the last quarter as well.
You did about $1 billion worth of project wins last year.
And I may not have said this already but I'm going to just say this now which is that I expect that we'll have a healthy project backlog growth. This year from electronics as well. So clearly it does point to the fact that we are we are providing a solution to our customers that is very appealing for them and thats really a combination I think you hit on all of the Ela.
<unk> within that we have some great technology.
We've been able to take the relationships that we had with the praxair relationship with Samsung with Linda's relationship with TSMC and both dealing with Intel we have been able to take that and be able to kind of create both solutions leveraging relationships and of course operational excellence, which is critical.
As far as electronics.
This is concerned those fabs want to see highly reliable extremely safe operations, and we are able to package all of that and bring it to bear to get those win rates up where we'd like to see them.
Okay. Okay.
To follow up.
When I look at your income statement.
It seems that your SG&A costs again.
I think last year, they were about flat and this year at least in the first quarter. They are up a couple of percent Theres really no movement.
Research and development expenses.
How do you keep your overhead growing at such a slow rate.
I'm going to kind of touch on the principle of that and just kind of tell you. How we look at that business. Every every every day essentially Jeff as you've probably heard me say it before so when we think about how we manage our business and how we leverage what comes out of the topline right down to the bottom we think about it coming through our variable margin, so that's where the.
Productivity measures kick in and then tight management of total cash fixed costs, that's something that gets.
Attention every month, it's something that our guys are managing every day and as part of that the sales and admin costs are something we spend a lot of time scrutinizing.
Now how does productivity play a rollover that Jeff you've heard me talk about digital solutions previously one of the things, we do extremely well around our productivity actions, particularly when it comes to the fixed cost base is actively provide a lot of digital solutions into that space to make sure you're automating to make sure that you are taking out.
Where possible, we're taking out heads, where possibly taking out effort and I think all of that plays into that effort around managing your total cash fixed cost and within that the subset being SG&A.
So I won't say to you that is rocket science there Jeff is just the grind of managing that every day.
It looks like rocket science to me okay. Thanks, so much.
I could get excited about rocket, but we'll talk about that later.
Thank you. Our next question comes from Nicola Tang from BNP Paribas. Please go ahead.
Hi, everyone. Thank you.
I wanted to ask a little bit more around kind of an energy security and.
Energy diversification, which has obviously been a topic in Europe , and particularly on the back of the conflict.
And we talked a little bit about clean hydrogen at already on this call, but I was wondering if you could discuss whether.
Linda could play a part in terms of helping to diversify energy energy sources say through LNG for example, which is part of the use we probably your initiatives and then the second question also related to energy security is if we did you know hypothetically fee.
Energy rationalization will curtailments.
In terms of access to your Russian gas et cetera can you discuss what the impact might be on Linda in that scenario. If for example, you would you would take or pay contracts on the onsite business still be valid.
This does can sometimes get more thank you.
Thanks, Nicola So let me start off by just talking about the energy diversity actions that are happening across Europe in particular, as we speak and the role we can play in that so we have actually as you think about it as more capacity gets released on the engineering side, we have now the ability to go out and.
Provide a greater focus around supporting governments and countries in their search for that energy diversity, So and I clearly see us playing a role around the LNG development that happens given that we have that core competence around that and obviously we are in dialogue at the moment with a number of governments and looking and developing.
That will help support that now that does take a little bit of time as you know these are complex projects, but we are pleased that we have a role to play in there of course use.
Focus on and the rebar.
Kind of effort and policy statement clearly have set out the intent of how.
Diversified energy portfolio will become crucial.
You talked a little bit about clean hydrogen earlier on I do see that in all our discussions that we're having with a number of these governments that that intent will translate into action I have to tell you that I am a little more.
I'm a little more optimistic now that there will be a role between green and Blue I think the recognition around the fact that group blue hydrogen are blue ammonia will provide a good bridge to ultimately going Green, which is what we think a pragmatic policy direction would look like I am seeing that there is.
A little more traction to that and there is a general realization that scale up on blue can happen more quickly now all of this does mean however.
That there will be a combination of local projects, many of which will be green and.
And imported in.
Elements, so carriers that will provide either ammonia as an energy sources as an example, our hydrogen itself either pipe or in liquid form and we see again.
Theres greater openness to understanding how those logistical challenges will get dealt with.
Across countries.
And kind of setting our regimes just as Germany has using contract for differences as an example to try and make sure that they get access to this.
These developments that happened elsewhere in the world, allowing that import market to actually be set up and build infrastructure that then allows that distribution of that energy to take place as well. So all in I would say to you that Linda has a role to play both from our point of view all the engineering that we can provide into that space and also in participating in the <unk>.
Downstream effort that happen one set of LNG is made available. So I do feel good about that I have to be honest and tell you, though that all of this does take longer than people would like it to take all of us would like to see this happened in the next few months. Unfortunately.
Things tend to take years rather than months.
Now just talking about the energy curtailment piece that you briefly referenced obviously as you would expect we have a business continuity planning effort.
Europe .
Most of our countries in fact and.
In Germany in particular, we've run a number of different scenarios. We are actively engaged with both the power and natural gas providers, but also with the governments locally.
There is as you would appreciate there is a part of our business the air separation side, where we are providing crucial.
Products, including medical oxygen to hospitals, which gets prioritized by government. So we appreciate that they understand that criticality of that and then on the on the other side. We don't have any any direct exposure to Russian natural gas, but we do recognize that some of our customers will do that and we're kind of working with governments and customers to make sure.
That we have those contingency plans in place.
Can also.
The Polish example is top of mind for everyone. Just to give you a kind of sense on that from our perspective, we will see little or no impact from those developments.
Thank you and maybe I can give you an opportunity to talk about <unk> and just ask a little bit.
Business.
ICL on helium you've announced this off take agreement.
With ripple it says from 'twenty to 'twenty four onwards can you talk a little bit about your expectations for the helium market given I think there's some supply disruptions elsewhere.
And just remind us maybe how big of an exposure is thank.
Thank you.
Sure. So thanks, Nicole I appreciate that question and I'm going to talk about rockets first get excited about it and then touch on helium a little bit and wrap it up so as far as rockets are concerned aerospace for us represents about 2% of our sales.
And at some point I think we're going to designate its own end market. It's been growing strong double digit for us for quite some time and.
And Linda is the largest supplier in this in this entire sector. So we're.
Quite proud of that our rockets consume many gases in wireless primarily liquid oxygen liquid hydrogen some helium often liquid nitrogen for densification of the fuel that is used we also used krypton Zane on too.
Help satellites with their propulsion systems to keep them in all of it.
In addition to that the reason I get excited is because here, we were able to bring the full benefit of lenders portfolio and we provide atomized powders for advanced manufacturing or three D. Printing is as it were for specific components and parts and we also provide some specialized coatings out of our PSD units. So all in.
It's kind of a comprehensive package of solutions that we can bring to these companies and obviously they greatly appreciate that and I expect this to grow as you can see from the number of launches you see.
In the news every other week now so it's a good growth market. We're excited about it we have some great tremendous solutions are a year and that really positions us extremely well in the U S market is growing leaps and bounds.
On helium itself as you know helium is short there are two major components of the moment kind of driving that there is BLM in the U S, which has the most significant impact and most people were banking on some helium coming out of a more in Russia.
We recognize that that's going to be delayed so it's likely for the rest of this year I expect helium remained quite tight we're obviously seeing that the incremental costs and pricing reflect a lot of that.
We speak so.
From.
From our perspective, we didn't have any Russian helium in our sourcing last year, we have a good balance of <unk>.
Of sources across the world multiple sources to exactly manage these kinds of issues that ultimately come up so managing dozens of sources, ensuring that we can mitigate that risk and meeting our customers' needs.
Is really kind of where helium is that and we're seeing pricing trends hold up I expect that to hold up for the rest of the year as well given the tightness in the market.
Thank you.
Thank you. Our next question comes from Peter Clark from Societe Generale. Please go ahead.
Hi, Yes. Good morning, everyone is first one for Mike actually you made some very good points about the selloff that Linda seems to suffer much more than its closest peer.
It tends to be in the fourth quarter of the year.
Great as the opportunity for the share buybacks and you've always made it clear when there's a correction in the share price you go in big.
You could certainly argue the share price remains depressed you be big entering Q2.
The pace of share buybacks is going to continue quite a pace.
Unless the shares correct upwards.
That's the first question.
Peter sure. So I can say, we have very healthy cash flow as you know we follow our very disciplined capital allocation policy, which.
To repeat for those on the call is we have a mandate to maintain and <unk> raised the dividend our priority is to invest in the business and all of the excess cash goes to our buybacks and right now we still have a lot of excess cash we expect a lot of excess cash and we have the $10 billion authorization program. So to your point, we did about $1 seven.
Dollars or so in Q1.
We are in blackout right now into the <unk>. One just given we are into the earnings will be active again come Monday, and yes, we will continue to sweep excess cash to the buybacks and we see that as a great opportunity right now frankly based on the pricing. So we will be active and we will be in the market every day.
Excellent.
One for you Sanjiv on Europe , I think you made the comment you're surprised it held up so well I think in terms of the activity may be I don't know, but some.
Certainly one of your peers pointed to the boat gassy, starting to get sluggish through the quarter.
I'm just wondering your thoughts on Europe , particularly when I look at <unk> I guess, you should pricing must be something like 20% now as you pass on this energy surge just wondering how you feel about the demand that look in Europe , particularly thank you.
Thanks, Peter So that was the point I was making that I was really pleased to see how resilient the merchant I E. The bulk and packaged side of the business had been right through the first quarter. Despite the fact that we had to put significant.
Price increases through as a result of the energy cost increase that we saw.
So that's held up reasonably well Peter.
Hesitant to try and speculate what that market might do there are of course, a number of variables in that market, but I was surprised pleasantly that had been held and had been quite resilient and expect.
To say that as we as we move beyond the first quarter.
That trend hasn't changed.
Any significant way thus far.
Alright. So there is no there is no evidence of demand disruption in basis points on pricing or anything like that.
All I look at it as a volume trend line at the moment Peter.
Peter and that's not suggesting that for now.
Thank you.
Thank you. Our next question comes from John Mcnulty BMO capital markets. Please go ahead.
Yes. Good morning, Thanks for taking my question.
Sanjiv. So early in your remarks, you kind of highlighted on slide three of the various business segments and you mentioned healthcare was arguably maybe.
As did quite put it this way, but over earning just given COVID-19 and that might come off a bit and it may continue it sounds like to come off at least a little bit can you help us to understand in terms of the other major end markets that you serve where they are relative to kind of the pre COVID-19 levels in terms of in terms of volumes are there.
Some that are still kind of noticeably below I think indicated food and beverage we're seeing a nice recovery not quite sure. If that's back to normal yet or not but maybe you can give us some color as to relative to kind of quote unquote normal expectations are normal volumes, where each of the each of those businesses are at this point.
Sure John So let me first clarify health care and then let me talk about some of the other end markets as well. So on healthcare we saw the trend was flat and really what I was emphasizing was in the developed countries I'm finding that elective surgeries are increasing as you know this had been kind of put on hold through the COVID-19 period. They are all coming back that's where a lot of the oxygen.
Usage is there and then we are finding cobot volumes offsetting by by declining, particularly in the in the emerging markets. So that trend is why we are seeing the flattish kind of volume around the health care piece and I said earlier I expect healthcare will be back at its kind of long term trend of mid single digit.
And in due course.
Coming back to your other question around pre COVID-19 levels versus where we are on all our end markets and I'll say to you more broadly most end markets across <unk>.
Most geographies are at or above pre COVID-19 levels. So we've seen we've seen good recovery, we've seen that embedded in the in those in those different markets and we've been quite pleased to see that recover you saw most of that in 2020 , one as well and clearly the momentum as you can see from that slide three that I put up there is a lot of green on that flight.
Which is which is a good sign as you can see.
So if I kind of maybe pick up a couple of electronics no need to comment on that as you know, it's well above pre COVID-19 levels and has been a highly resilient and continues to grow and as I said earlier I expect that growth to continue momentum around investments is still there and we are winning more than our fair share of that so I feel good about that.
The ones that I think people kind of watching carefully chemicals and energy again very strong.
Very strong market movement over here, we are finding that <unk>.
70% year on year growth pretty solid number out there John but also as I think about our footprint in the U S and just to emphasize this this is where I see the growth going to be as we go forward.
That is crucial because.
The U S refiners in the U S. Chemical companies have a natural advantage from competitive natural gas pricing that gives them that ability to export into markets elsewhere, where that energy price increases make local production lot less competitive and I expect that momentum to continue in the mid two.
So the next two to five years, if you will.
Metals and mining again impacted really around the Chinese curtailments, the dual control policy et cetera, which is helping the rest of the world Big production up and again I'm seeing continued investment in that space, We will see some decarbonization efforts happened in that space as well, which will provide a different kind of growth for us.
But notwithstanding that again, we expect to see that continue manufacturing is where a lot of people have questions. Obviously supply chain challenges chip shortages for auto et cetera, and again the underlying growth over there the underlying demand looks solid.
And we feel good about where that stands today, obviously, we'll have to watch carefully how IP develops and thats going to kind of be driven in part by how manufacturing continues to demonstrate that Brazilians.
Got it. Thanks, thanks very much for the color definitely definitely helps fill in some blanks.
And we'll now take our last question today from Mike <unk> from Barclays. Please go ahead.
Alright, Thanks for squeezing me in here just one from me question for Sanjay I just wanted to ask on the 300 or so decarbonization projects Youre looking at I think last quarter you size the probability adjusted investment potential at around $4 billion or so and then today I believe you said $5 billion. So just really just trying to get a sense of are there more.
Projects Youre looking out now or just getting more confident in some of these projects actually getting to realization.
Mike the number of projects that held around 300.
That I spoke about last quarter as well what tends to happen Israeli the portfolio of projects shown quite a bit as you would expect and we are adding some larger projects up I'm really pleased that on the industrial side I am seeing a lot more activity that's right in the wheelhouse. We are incumbent in many of those positions were working with existing customers.
And that really gives me a lot more confidence and as you know we are very discerning around.
The projects that we want to do because we feel that we want to have an offtake or part of that kind of contractual positioning around clean energy and then we need to have the ability to be able to solve that whether it's through a green from technologies that we can access easily and have a demonstrated operational capability on you put all of that together, that's kind of what's leading to that 5 billion.
Number I wouldn't read too much into four and $5 billion to be honest.
Absolute number is in <unk>.
We put a fairly stringent probably the adjustments to that portfolio to get to that five.
It's likely more than five to be honest.
And I feel good about the quality of projects. We are seeing and there is you are right in pointing out that there is higher degree of certainty around those as we continue to work with our customers and partners on them.
Great. Thanks.
Thank you.
Please I would like to hand, the call back over to our speakers for any additional or closing remarks.
Yes.
Certainly thank you. Thank you everyone online really appreciate it if you have any further questions. Please feel free to reach out to have a great rest of your day take care.
Thanks, guys. Thank you.
This concludes today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.