Q2 2022 Linde PLC Earnings Call
Is it long enough for you.
Good day and thank you for standing by welcome to the Linda P O see second quarter 2022 earnings teleconference.
At this time all participants are in a 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 conference over to Mr. Juan Pelaez head of Investor Relations for any additional or closing remarks. Please go ahead.
Thank you Elaine.
Good day everyone.
And thank you for attending our 2022 second quarter earnings call and webcast.
<unk> head of Investor Relations.
And I'm joined this morning by Sanjiv, Lambeau, 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 the opening remarks, and then Matt will give an update on <unk> second quarter financial performance and outlook.
After which we will wrap up with Q&A.
Let me turn the call over to Sanjay.
Thanks, Ron and good morning, everyone.
I'd like to start by addressing the 1 billion charge this quarter, primarily relates to the deconsolidation, our Russian subsidiaries impairing.
Impairing assets.
We take lightly.
However, the current situation in Russia is unprecedented.
Extraordinary sanctions and capital restrictions.
And while deconsolidation means we will not report <unk> results going forward, we are actively working to safely and economically scaled back operations, we fully intend to recover value for these assets, including potential divestitures, but it will take some time.
Despite this non cash accounting charge the global business continues to be resilient and performed quite well in the second quarter with strong pricing solid cash flows and margins expanding sequentially and year on year, excluding cost posture.
Slide three demonstrates the defensive nature of our model.
Then look familiar since many of these elements will presented in the second quarter of 2020.
So while it may change, but our business model does not.
We've been around for well over a 100, yes and through that.
Demonstrated our resiliency during some of the most difficult periods in modern history.
Approximately two thirds of the business is protected through contractual fixed payments such as facility fees and rent.
And sales to resilient end markets like food and beverage healthcare and electronics.
This portfolio provides tremendous downside protection during difficult times like the early two thousands recession, the great financial crisis the two.
2020, as pandemic and of course now in 2022.
In addition, strong cash generation, coupled with relentless price and cost management support our business with volumes contract.
And of course, we can benefit from a recovery as demonstrated after each recession.
These facts of like all geographic segments.
EMEA.
There appears to be some potential investor misconceptions around our business.
So you can see on the bottom right our exposure to EMEA.
And some additional color specifically to Germany.
We run our business in Europe like anywhere else in the world today.
Lastly, reliably and in Nevada contractually.
Contractually limit our financial exposure to customer volatility.
And I'm not going to speculate what will happen in Europe regarding the energy situation.
I have confidence in our business model and contracts that we can weather challenges.
And we will capitalize on opportunities that may lie ahead.
Now before I hand, it off to Matt I'd like to provide some color on end markets by segment.
Slide four shows our organic growth.
It's still quite positive across all end markets with the exception of healthcare, which is due to lapping COVID-19 related oxygen volumes in developing nations.
Overall growth was driven by pricing action project backlog, even as base volumes are relatively stable, although underlying trends by geographic segments very little.
Let me start off with the EMEA region since it seems to be getting more press recently.
Volumes were down 1% from last year, and flat sequentially, while price increased 12% and 3% respectively.
The team has done a great job pricing inflation while.
While keeping a tight lid on costs and I fully expect this to continue.
<unk> volumes have been quite stable from a combination of highly competitive top tier customer base and strong contracts.
Merchant and package are slightly down.
As a reduction in COVID-19 oxygen and lower manufacturing volumes more than offset growth in food and beverage metals and mining and electronics.
So far in July we haven't seen any material change from June trends, despite certain countries navigating their energy challenges.
You will recall in the second quarter of 2020.
Eurozone industrial production levels dropped roughly 20% Utica with Lockdowns.
At that time, our EMEA segment organically declined only 7%.
And since that time.
Segment operating profit has grown approximately 80%.
In other words the M.
Ta business has successfully navigated unprecedented economic shocks in the past and I see no reason why that won't continue going forward.
The APAC segment had another solid quarter, despite COVID-19 lockdowns in China.
Volumes increased 3% from prior year, and 5% sequentially, while prices improved 5% and 1%.
Also have customers across all end markets continue to run steady including China.
We saw similar trends in past recessions, which speaks to the quality of our customer base.
Now China merchant once we go from the production curtailment of small to medium sized customers, which was partially offset by merchant growth and other countries as well as higher packaged gas volumes, especially.
Speciality gases used in electronics, such as helium neon and Zimmer.
In July China merchant volumes have recovered to levels more consistent with normal run rates as we've been seeing but we haven't been seeing material COVID-19 impact at this time.
I do expect some volume ups and downs in the second half that should smooth out by the end yet.
Aside from China organic growth across Korea, South Pacific South and Southeast Asia remained healthy from a combination of project startups pricing actions and of course, our capability to supply gases across all three supply modes.
Our largest segment the Americas has some of the best growth trends and opportunities for the near term.
Organic growth of 9% from the last year include 3% volume and 6% price.
All major end markets have expanded led by food and beverage electronics manufacturing chemicals and energy.
Excluding Latin American healthcare trends related to Covid.
In the U S. Our integrated model across all three supply modes enables reliable and seamless gas supply for all customers regardless of size or end market. In fact, our U S. Packaged gas business has been one of our fastest growing businesses with underlying sales up 16%.
Prior year led by aerospace construction electronics and met Fab.
The underlying trend appears stable in July although we expect some normal seasonal slowing for the summer holidays.
Also we continue to see more project backlog of opportunities in the U S than anywhere else.
Recent wins for electronics have been the largest driver.
Progress on potential new U S Gulf coast projects, especially for Blue hydrogen are encouraging.
And as I look at our overall current sale of gas backlog report there are several projects, we expect to sign before the euro which could take this number closer to the 4 billion Mark.
Even after starting up close to a billion in projects during the course of the year.
Now I'd also like to highlight that we recently issued our annual sustainability report, which provides a comprehensive view of our FPGA based initiatives and tracks our progress.
I am pleased to see that in this quarter, we reported a reduction of 31% on a <unk> emissions versus the 2018 baseline well.
Well ahead of our projections to reach our target of 35% reduction by 2028.
But we realized that in intensity gold was not enough and therefore last year, we communicated our ambitious 35 by 35 goal.
As you know, we're committed and reducing absolute greenhouse gas emissions, 35% by the year 2035.
On the way to becoming climate neutral by 2050.
As you would expect a $35 35 target science space and aligned with the Paris accord goal.
Overall technical capability Unrivaled network density disciplined operating culture, and a committed team allows us to quickly capitalize on any growth opportunities that meet our investment criteria.
Now some investors mistakenly look at one or two countries in our portfolio and come to conclusions about growth prospects of profitability.
But what they miss is our ability to capture that growth anywhere in the world while simultaneously right sizing the businesses in an efficient manner.
This ability has enabled us to consistently deliver double digit EPS growth.
This year is no different.
The Linda model is well suited for a fast changing world and our performance will continues to demonstrate its resilience.
I'll now turn the call over to Matt to walk through the financial numbers.
Thanks Sanjay.
Before I jump into the numbers I'd like to explain the Russian deconsolidation and a little more detail.
Over $900 million of the charge relates to net Russian asset impairments.
Note. These assets have increased almost 25% in the last few months due to the strengthening of the Russian ruble.
There were several factors that led to this outcome, including the unprecedented sanctions and severe capital restrictions.
Deconsolidation essentially means we cease reporting any business activity on our financial statements.
However, we still own these assets and we will continue to scale back operations, while working to divest some industrial assets.
We will only recognize cash that can be repatriated from Russia into a consolidated lindy entity.
And as soon as we have stated we are laser focused to continuously extract economic value consistent with every other business we own.
Please turn to slide five for an overview of our second quarter results.
Sales of $8 $5 billion increased 12% from prior year and 3% sequentially.
Versus prior year contractual cost pass through increased 7% primarily from the onsite business, but this was partially offset by a currency translation decline of 5%.
Foreign currency is anticipated to remain a significant headwind, which I'll speak to later on the guidance slide.
Organic sales increased 9% from last year and 4% sequentially.
Gas volumes increased 2% primarily from project start ups.
Base volumes were relatively flat as increases in manufacturing food and beverage and electronics were mostly offset by lower healthcare volumes from Covid.
Pricing of 7% was broad based and once again demonstrated our ability to price and extraordinary inflation environments.
Recall this figure primarily represents merchant and packaged so underlying price increases are higher.
Operating profit of $2 billion resulted in a 23, 5% margin.
Excluding the effects of contractual cost pass through operating margins expanded 100 basis points from prior year and 80 basis points over the first quarter.
This represents the second quarter in a row that operating margins have sequentially improved.
[laughter] confirms the one to two quarter recovery lag we discussed late last year.
You can see the table showing operating margin trend by segment, excluding the effects of cost pass through.
It is important to highlight that Americas segment margin declined more than 100 basis points from one time charges incurred during the second quarter, which are classified as other expenses.
This will not repeat so I fully expect Americas margins to return to the normal run rate in the third quarter.
Separately APAC and EMEA continue to show solid margin expansion versus all periods as price and cost management continue to improve business quality.
You'll see in the appendix how global other segment had positive operating income.
As mentioned last quarter Q1 had one time charges, which we lapped.
And now Youre seeing the benefit of lower corporate cost coupled with higher volumes to the aerospace market and the coatings business.
Note, we are in the process of divesting the non core just business, which will result in lower sales and operating profit for this segment going forward.
EPS of $3 10 increase.
Increased 15% from last year or 20% excluding FX.
Despite the various geopolitical headwinds the business continues to generate EPS well in excess of our mid term commitment.
Return on capital reached 20%.
Most doubling from the 2018 merger baseline level.
This was accomplished from double digit earnings growth.
Strong cash generation and disciplined capital deployment.
All during a highly volatile economic environment.
Slide six provides more details on our capital management.
Available operating cash flow, which we define as operating cash flow less base capex that is used for maintenance or non contractually committed growth.
Has held steady during 2022 at one $5 billion per quarter.
During the second quarter alone, we deployed $3 billion of capital with approximately one quarter invested into the business.
And the remainder distributed back to shareholders as dividends and repurchases.
This approach is only possible with steady and reliable cash flow.
A highly valuable trade to have these days.
I'll wrap up with an updated outlook on slide seven.
Third quarter guidance range of $2 85.
To $2 95.
Represents year over year growth of 4% to 8%.
Or 10% to 14% when excluding an estimated 6% FX headwind.
The FX assumption was based on spot rates from a few weeks ago.
So it reflects some of the recent devaluations.
This sequential EPS decline of 15 cents from Q2 to the top end of the Q3 range.
Is driven by 10 cents of FX and five cents from the deconsolidation of Russia.
Therefore, this range assumes no base growth at the top end with recessionary conditions below that.
Consistent with prior guidance. This is not our prediction of the economy, but rather an assumption used in the figures you can insert your own view of the economy.
If it does better we'll be above this range.
And if it does worse, we'll take mitigating actions.
Full year EPS guidance range of $11 73.
To $11 93.
Is 10% to 12% above prior year or 15% to 17% when excluding the negative 5% currency impact.
This range was increased from last quarter since improved business performance more than offset the larger FX translation headwind.
Irrespective of the geopolitical landscape, we will relentlessly take actions to improve the business and outperform expectations.
As <unk> stated we have been doing this for over a century.
Consistent with prior crises I fully expect to not only overcome these challenges, but emerge even stronger than before.
And while the financial markets May temporarily underprice, our stock from misperceptions of the business model.
We'll continue to pursue quality growth.
While deploying excess cash towards stock repurchases.
All in an effort to reward long term shareholders.
I'll now turn the call over to Q&A.
Okay.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press the star Asterix K followed by one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment.
Once again, please press star one to ask a question.
Our first question today comes from Duffy Fischer of Goldman Sachs. Please go ahead.
Yes, good morning, congrats on a nice quarter.
First question is just around the price versus cost when you look out over the next one to two quarters, how much visibility do you have on your non pass through costs and the price that you've already taken is that enough that we should continue to see a positive spread on.
Price versus cost sequentially.
Over those next two quarters.
Thanks Duffy.
So let me just go back and maybe reiterate how we think about.
Staying ahead of that cost inflation, and how we're managing our pricing over the last many quarters.
Essentially you think about pricing in our industry and for us in three key buckets <unk> got the energy bucket, you've got the fuels bucket as you know we travel a lot of kilometers delivering product and then we've got essentially the wages bucket, which we manage quite actively.
Through the last four quarters and of course, if you go back into history over the last 20 years, we've demonstrated positive pricing.
Over that period, the last four quarters have shown we've been able to keep ahead of cost inflation, we've talked about a lag of one to two quarters. That's kind of the visibility. We had we continue to have the same visibility and in fact as you see margins over the last two quarters expand you know that that LIBOR wanted to two quarters being fully covered and reflecting in the margin.
Pension that we've been able to show across all the segments.
We do actively manage that spread Duffy to your point on how we look at pricing versus inflation.
It's something that we have good visibility on within the organization and we pursue quite actively with a monthly reviews et cetera that you're aware of.
Fair enough. Thank you.
And then just to dig in on Europe , a little bit if energy prices stay high.
What percent of your customers do you think have a long term issue and so it may be that you are made whole on your take or pay contract, but it may be that that customer just isn't viable do you have kind of a walking around number in your head is it 5%, 10%, 15% what percent of customers would struggle.
Two to remain in business, if let's say $25 an M N btu natural gas or higher.
So as I think maybe why don't I, just take a step back and just talk about what we saw in the markets in Q2, because thats a good starting point as you know energy prices have been higher for a while this is not this hasnt certainly peaked only in this year in fact that started last year well before the war itself and when I look at the end markets across.
Austin EMEA IC sales growing across all end markets accepting healthcare, which we talked about and our lapping the cobot volumes, particularly in eastern Europe and Middle East.
If I think about our distribution molds at the other way to look at the profile of the customers across all distribution modes, we saw sales growth while on site merchant and packaged obviously helped by strong pricing.
Pass through that you just referenced but also we saw volume that's healthcare continue to stay stable or move forward.
So when I think about the outlook and in my view is at this point in time, there isn't anything in the trend that we look at which is suggesting that people are fundamentally changing how they operate or are kind of not managing the challenges. Yes, a lot of them are looking at how to save cost.
Clearly.
I'll give you a good example of where we are working very closely with them to get that done. But also we are we are understanding that people are actively looking at their own pricing measures and we're seeing that across across most of the industries. We serve I'll give you. A quick example of how cost savings programs are running so clearly with natural gas costs being where they are people are now starting to.
Look at industrial gases to help them become more efficient increased throughput as worldwide that do that are good example of that is our oxy fuel offer that we have and recently, obviously, given where LNG prices are across the world, but in EMEA in particular, we've had a lot of traction with customers in the course of the first half of this year, helping them.
Improved their processes by injecting oxygen and substituting impart air, but also reducing their natural gas consumption as a consequence.
Wins already in the first half we've got at least 15 to 20.
Both of those that we're working on that's a good example of where we are using industrial gases to help people manage their cost base and address some of the points that you raised.
Great. Thank you guys.
Thank you next we move to Vincent Andrews from Morgan Stanley . Please go ahead.
Thank you good morning, everyone.
I'm wondering you know obviously a lot of questions over the last couple of months about what would happen. If there is a gas supply issue in Europe .
Maybe you just want to give us the sort of the state of the art on how your take or pay contracts work in and maybe in particular, how they would work in a situation as you work yourself unable to get electricity and operate your facilities.
Sure Vincent.
So I'm going to use Germany as an example, because it's kind of that's where everyone's attention seems to be at the moment and we tried to address this issue. When we showed you the defensiveness of our of our business right and we showed you Germany.
On slide three and the exposure we have over there so using Germany. As an example, I'll remind you Germany is about 5% of our company sales.
We said that two thirds of the German sales at the moment are what we would call defensive.
And we talked about those being underpinned by contracts.
We are supplying to Brazil markets when I talk about underpinned by contracts, we've got fixed facility feel rentals in place over there. So two thirds of the business is protected through that if you now look at what threat.
That's about one to one 5% of our overall sales. So I just wanted to kind of make sure that the magnitude of the volatility that we're talking about is actually limited from our perspective in the in the example of Germany to about one to one 5% of our overall Linda revenues.
Coming to the contract structures themselves all contracts basically have two components within them a fixed fee that allows us to recover on the capital and the operations that we do and then a pass through element that essentially passes through the feedstock that we use in this case natural gas we are very.
Confident on both the quality of customers, we serve because that is quite important in times like this but equally on the quality of the contracts in our enforceability of those contracts and those fixed fees that we have within the contracts that protect us.
What about in the event that you would not be able to operate your facility how would your contracts works absolutely, yes that should cover that Bob So you're essentially talking about our atmospherics business now if you talked about electricity earlier, all right and I just want to make the point obviously, we are in various <unk>.
Conversations with the German government around electricity and how the energy kind of allocations will happen just as a quick reminder, in all our countries, including Germany. We are one of the key players producing medical gases and safety critical process gases for instance, even if you.
<unk> done down operations, you need nitrogen as part of that even if you shut down operations you need nitrogen for safety purposes, because we produced gases, which are critical either from medical Lora process safety perspective, the German government to.
We illustrated one, but others as well allocate us on a preferential a priority basis and therefore, the unlikely event of us not being able to operate Vincent this is really very very miniscule.
So that is kind of from our perspective, what provides the confidence that we have those operations will continue to be operated and Vince. This is Matt I would just add one more thing to that this is why density is so critical in this industry because the density helps bring tremendous reliability in events like this so to your.
Question, we have the ability to run other assets now of course, you would have higher distribution and you would have higher distribution costs, which would need to be recovered via either surcharge mechanisms, but that option also presents itself that when you have a large density platform you can leverage other areas that you can still bring those critical gases now clearly it'll be at.
The distribution penalty, which you need to recovery, but you still have the reliability to ensure that supply. So that is another element why we view this density of our models so critical.
To enable times like these.
Thanks, very much for all the detail guys that's really helpful.
Thank you Nicholas <unk> from BNP Paribas Exxon has our next question. Please go ahead.
Hi, everyone.
Actually the first question was a bit of a follow up on the European situation, not specifically about the sort of shorter term trends, but just thinking longer term.
Are you would you expect to see them any of your customers rethink well no sorry potential customers rethink whether to make investment decisions in Europe , given the high such volatile.
And did you close environment.
Well I guess, our customers are looking at that investment criteria and looking at their risks and we would expect that customers will constantly look at that and look at diversifying their risk profile.
Wouldn't say to you right now that our customers would stop investing in Europe , absolutely not but I think they would want to understand the risks as they go about looking at those investments. What you will obviously also see is as you know.
The European transition around energy picks up momentum you will see more people then use that as a basis to try and understand how they can benefit from that and minimize the risk around their investments, but if.
I'm kind of giving you a straight answer to what I'm seeing today I'm not seeing a conversation on that would suggest that customers are walking away from investments in Europe .
Alright, great Thats clear.
Second question I think you sound, even your comments you mentioned.
The the what's right sizing, which I think you've talked about in the past I was wondering if you could talk a little bit more about I guess measures that you're trying to put in place at the moment to rightsize and in particular, maybe you could comment on I think there was a recent Reuters article talking about head count reduction in the engineering business.
So niccolo.
Let's just talk about engineering I was spending a lot of personal time over there with the team.
No.
I wanted to just kind of maybe walk you through three steps around engineering. So it kind of illustrates where we are step what you'd know that we went out last quarter and said to you guys that we would wind down our projects over there in compliance with sanctions and beyond we've completed that process and the team has obviously gone through that now last quarter. We also told you that there was a.
Very dramatic drop in the backlog for that business and clearly any business that goes through that kind of a change needs to ensure that they reset the cost base. In this case that significant reduction in backlog means that the engineering team is putting together deadlines for resetting the cost base to remain competitive and to achieve that.
The target margins that we've set for them, which are low to mid double digit margin expected longer term. So they are in the process of doing that and we have a plan that in the course of months now.
On restructuring that organization will it be in play.
I do want to add though if I may because we are an engineering just to say I was really pleased that in the last quarter. We saw order intake very encouraging at about $1 billion. So it was good to see that while we are managing our cost base actively right sizing that organization and ensuring we remain competitive longer term. We're also the short term rebuilding that.
Backlog with high quality projects and again seeing the team work on both of those fronts, if how Linda typically wants to see that business is operating.
And is there anything Steve in terms of right sizing and other parts of your business.
We are constantly right sizing we've said this before Nicola you might recall in my comments in previous quarters, what Ive said that one of the things. We do actively is constantly benchmark within segments and across segments and one of the reasons. We benchmark is because we want to understand where are the best practices and where.
The best ratios in terms of the individual productivity that we get.
Sales per employee operating profit per employee et cetera, I'm trying to apply those so we are actively doing processes across all our businesses and there are programs in place at the moment in APAC you are aware of the program in EMEA, we announced that last year. When we took a charge that we were going to reduce a significant number of heads in our German business. That's all.
In progress today, and similarly across Americas, we are undertaking similar benchmarking exercise as well so for us Thats a constant process, we don't call that a special program, we do that on an ongoing basis.
Thank you.
Thank you Mike <unk> from Barclays has our next question. Please go ahead.
Great. Thanks, Good morning, guys.
First question, maybe for Matt just wanted to follow up on the Americas onetime charges in <unk> I was hoping maybe you could give just a little bit more color on what that was and secondly, I. Just wanted to confirm those are included in the $910 million of EBIT in the quarter. So if I hold all else equal if you get some of that back next quarter EBIT with theoretically.
Be higher is that fair.
Yes, Mike So first of all your second question. Yes. You are correct. These are included in all the numbers everything we're showing on the segment. That's included and maybe a simple way to clarify it a little more that might help I would reference slide 20 in the appendix on the on the Investor slides that you have if you look at slide 21.
As you'll see and this is on a consolidated level is something that's called adjusted other income expense. So this is part of our adjusted.
The adjusted results that we gave you it's part of our adjusted EPS that we gave you and it represents costs that our other income and other expense and these are things that generally are not indicative of kind of the current normal operations, but they are part of operating profit. So they can include things like gain and loss on sale of assets.
It could include things like above the line kind of tax or legal type items that would have various accruals and when you look at the history of this number it is up and down and this is a normal type of pattern for a large multinational company like us in fact, you look at last year it ranged anywhere from income.
<unk> of $33 million to outflow expense of $7 million in any given quarter I'd say on an average year, we tend to be net positive could be $10 million to $20 million, but it is lumpy. So when you look at Q2 of this year. It was a $31 million expense and the Americas charges, we're talking about which there was a few in aggregate.
Or actually even greater than that number but this is one off.
I have absolutely no concerns over the American margin profile and we fully expect this all bounce back here in Q3 back to the normal run rates.
Great added map that the underlying Mike that the underlying <unk>.
Margins for Americas is growing.
Just in case I kind of read a couple of reports that seem to confuse that.
Yes, Okay. No that's great and then secondly, maybe just first LNG is just kind of wanted to touch on your electronics outlook. If I look at I think it makes up about 30% of your current backlog, but it's only about 80% of your current business. So.
You obviously are increasing your.
Towards that so could you maybe just talk about the attractiveness of the end market for them and be over say the next few years there.
Absolutely so as you've probably seen over the last few years, Mike we have grown that business that position and we now call. The resilient market has grown and clearly we are making massive investments having won a significant amount of the new fab investment that is happening for us there.
<unk> lives in three different ways, one we deal with some of the best quality customers in the industry on that so some of our largest customers are Samsung TSMC, Intel and others, Globalfoundries micron et cetera.
That's a good mix to have we have diversified our risk, but with top tier customers over there with great technologies. So that hub, we have a very unique offering in the sense that we are able to leverage our engineering group to be able to create the technology is best suited for the new Fabs that are coming up. So we believe we have a technology advantage.
Alongside our operating expertise are working closely with Fabs for decades, now, we're able to leverage that and we are winning more than our fair share in terms of the new projects that are coming up. So we feel good about the technology offering translating into a competitive advantage visibly available for us and then the last pieces there is a piece around spec.
Surety gases on electronics again, we have strong positions over there in previous calls we've talked about neon et cetera in all our strong position and the fact that we are integrated in our in our supply chain for some of those internally and not having to source a lot of those externally we are well positioned to be able to use those gases.
As a growth driver for us in the electronics space as well so overall feel pretty good about it feel that we really are winning more than our fair share here and feel good about where the industry is in the customers we're dealing with.
Great. Thank you.
Thank you we move to John Mcnulty of BMO capital markets. Please go ahead.
Yes, thanks for taking my question.
So I think maybe you can give us a little bit more color as to what youre seeing in China just post the lockdowns. If there are any specific end markets that are maybe surprising to the upside any there there may be a little slower to start maybe a little bit more color there would be helpful.
Absolutely John so.
Let me just kind of talk about what I'm seeing from a volume perspective break it down by our distribution most because thats, probably the best way to address that a little more granular. So let's look at onsite volumes, what we've seen in the second quarter, and then I'll talk a little bit kind of in terms of outlook also volumes have been stable right through the lockdown.
An important piece not high quality customers across end markets. Good onsite volumes have been.
<unk> held steady merchant volumes, obviously as you would expect through that period, given that there were restrictions through the lockdown process, including transportation distribution et cetera, we saw merchant volumes move down initially by end June we were back at pre lockdown levels as far as merchant volumes are concerned. So we saw that reasonably quick recovery.
Towards the backend of that of the quarter as well now as I look ahead I expect to see those onsite volumes remained stable.
I think if I am thinking about any volatility my view would be to the steel industry is the one area that I'm watching closely and if I see movement, that's where I expect that we will see some volatility.
As far as merchant volumes are concerned we might see a little bit of ups and downs, a little bit of variability on those volumes on the merchant side and largely because as you know you read about in the press they have for asymptomatic cases.
1 million people get tested or are lockdowns might come back in and out but for most part my expectation is over the course of the second half you will see all of that kind of sorted out and Youll see.
Normal merchant volume growth levels achieved back in China.
Got it.
Helpful. And then just maybe a question on APAC pricing because it's you've.
<unk> had a decent trajectory over the last couple of quarters, and Youre kind of hitting what looks like a strike that is higher than what we've seen before is that would you characterize that as broad based in terms of in terms of the pricing initiatives or are there a couple of couple of one offs on the specialty gases or what have you that might be that might be really using those numbers I guess, how should we how should we be thinking about that.
John for most part I'll tell you that that is broad based obviously, we have a couple of specialties in there and you know speciality isn't an Asia Pacific around electronics speeds helped us that pricing number but for most part that is broad based across all geographies and across all end markets.
Got it thanks very much for the color.
Thank you we move to Jeff Zekauskas of Jpmorgan. Please go ahead. Your line is open.
Thanks very much.
Hi.
Lindsay is roughly one times levered.
So if you were I don't know three times Levered, you could put another $20 billion of capital to work.
Do you have.
Our leverage level goal I know that you've got some C. Carbonization projects that are pending government.
Subsidies I don't know how large these are where do you think your leverage level is going to go and why youre going to make acquisitions over the next couple of years.
Hi, Jeff, It's Matt I can I can handle that one.
So just to probably really quickly restate as you may recall, our capital allocation policy, which I think is probably relevant for those on the call, but it starts with an overriding mandate and the mandate for US is to grow the dividend every year and maintain a single a.
Rating on our basically our credit rating and then our priority after that is to invest in the business and that includes acquisitions that includes projects that includes investing in base growth and then whatever is left of that from our cash we put towards stock repurchases, we follow that through all good times recession.
In times.
Irrespective of the macro environment, the resiliency and the defensiveness of our model enables us to continue to follow that so to your question. The specific answer it will be what an a rating is and you're absolutely right right. Now we're probably maybe one one lever I think the team did a good job to balance euro base debt with our.
Euro based EBITDA, we continue to grow double digits on our EBITDA and our operating income, which is enabling a strong growth and which is continuing to keep that metric suppressed. So we are deploying capital. We are buying back shares as you probably saw our year to date.
We are in excess of $3 billion.
But by no means are we ever going to be capital constrained on growth, we're going to go into every growth opportunity I don't care. If it's an acquisition of <unk>. A project are based project. If it meets our investment criteria, we're doing it and so theres no saving or waiting it's just a continual deployment of capital under this model, but the business continues to perform very well.
So it's just an ongoing effort to deploy all of this capital to generate.
Okay.
Hi.
One of the differences between Lindsay and the other industrial gas companies is that your SG&A expenses don't grow year over year and your competitors. Some are growing at a low double digit rate some are growing at a high single digit rate.
And I get that currencies are probably depressing SG&A levels, but.
What's the difference what is lindy doing or what is Lindsay doing thats differentiating itself versus the other industrial gas companies competitively.
Jeff I was going to preempt that question and answer are already ahead of your asking that but I'm going to I'm going to try and attempt to answer that we have the same conversation last quarter as well.
I would say to you that our expenses are down as you can see there is the FX impact in there, but primarily there is the action around managing our SG&A actively every month, which is what keeps it there.
And.
The benefit really comes from two key drivers as far as our SG&A numbers are concerned we have a very active productivity program and more recently using our digital tools. We've got a very active automation program you'll.
Do you see the benefits of those two flowing into simpler processes, ensuring that we take heads out where we can and should and including in our running productive programs at every level and I've said this before many times thousands of projects that look at every line item in each line item gets addressed and I'll give you a couple of kind of concrete.
Just to illustrate that so we're running a productivity program at the moment looking at our cost.
Our total cash fixed cost base, we call it the CFC across our businesses in Europe , we recognize the external challenges that that business faces every line item has an owner every owner has a target and thats. How you get that number down. That's reviewed every month I reviewed every other month with them and essentially that level of <unk>.
And the tension is what gets those costs and that's where you find wastage, you'll find duplication you find opportunities to improve processes. It's something that happens continuously we don't do that for a recession. We don't do that when we have a good time, we do that every day every month.
Okay, great. Thank you.
Yes.
Thank you, we'll move to John Roberts of Credit Suisse. Please go ahead.
Thank you and nice quarter.
After tax return on capital of 20% is at record levels and it is still going higher how does that compare with returns on new sale of gas projects and how high do you think it can go before customers start shifting to sale of plant instead.
Hi, John its Matt.
Maybe.
To explain probably why we're getting the 20%.
It might be better and then hopefully that will help address your question.
The way, our our expectation of risk reward and returns hasnt changed much and when I think about what returns we're getting on our onsite projects that also hasnt changed very much. The reason this metric continues to improve the obvious reason is the numerator, which is no pad is growing much faster than that.
Denominator, which is our capital base and the reason that's happening is the integrated model that we have is enabling our non capital intensive businesses and this includes our engineering business. This includes our package business, our merchant business and even some of the what I'll call. The global other businesses are growing at a very strong rate generating cash.
Cash without the need for capital. So it's the integration of the model that is enabling this return on capital performance rather than a singular view of what our return expectation is on a single project. This is why the density model. We view is so important for cash generation and return on capital and profitable.
Continual stable growth, which is how we deem a way to create value in this space. So that's really what's driving it. It's the integrated model. It's the density model and it's a lot of the non capital intensive businesses continuing to contribute rather than us changing our return expectations.
Okay, and then secondly to the higher gas prices actually benefit the hydrogen business. I think you are constantly improving the yields and efficiencies of your plants and I think you'll get to keep those energy savings. So even though the efficiency gains are small they're worth a lot more now with these kind of super high gas prices, so is that becoming material.
John I would suggest there are two ways to think about this there is a customer view and then there is the internal youre absolutely right on the internal view there.
Obviously, the higher the gas price the more benefit we get from our productivity program, our efficiency programs and that flows in and clearly when you look at margin expansion in our margin expansion as a consequence of actions we've taken pricing actions, we take on productivity all of that falls into that and kind of get <unk>.
Factored in the other piece that I'd just offer US there is another perspective of this which is what is happening with your customers are seeing higher gas prices. I gave the example of oxy fuel wins that we had in the first half 10 wins.
That was the momentum picking up on that here what tends to happen is as natural gas pricing moves up our customers are looking at ways to both reduce costs, but also substitute and thats, where our applications come into play and we have an opportunity then on the upside to try and understand where those volumes can be placed where you could get those mid.
Long term contracts for them to ensure that we're able to then sustain some of that growth that we want to see happen as a consequence of our applications as well.
Great. Thank you.
Thank you we move to Peter Clark of Societe Generale. Please go ahead.
Good morning, everyone.
On the U S packaged gas business, which obviously has been a great business for you.
And you've been winning share just wanted to check on the industrial gas side of that in the packaged gases that you actually still got growth there. So I'm, excluding health care and I'm, excluding electronics, because the number one.
We saw some softening.
I think in the second quarter, that's the first question.
So the the U S packaged gases business to your point is a very strong business you heard me talk about this before.
And we are still seeing mid to single mid to double digit.
Mid to high double digit growth on the gassy side right. When we talk about our package business, we tend to separate that into gases and hard goods and I have to say both segments growing reasonably well strong pricing and good volume growth continuing in that space.
Then the second question I will turn on Jays obviously.
Linda <unk> had a cracking there's six years ago, and then had to give up so I'm reading from this you definitely think it's going to happen, but we don't expect a big wooden pool, obviously, given the profitability in the UK outlook on logistics.
That's correct I mean, as you know we've been trying to do.
As you pointed out <unk> had the challenge of trying to get rid of it for a while non core business.
Single digit margins on this so we will see some some sales come off but from a profitability perspective.
It was a drag and then it'll help kind of get us out of that.
Got it thank you.
Thank you we now move to Christopher Parkinson of Mizuho for you next question. Please go ahead Sir.
Great. Thank you very much for taking my question just to get can we just get a very quick update on how you're viewing the helium market over the intermediate to long term just given the past events in Russia. The sale of the BLM assets I'd be very curious to just hear your perspectives over the next few years. Thank you so much.
Thanks, Chris.
A very global businesses, you know it's different in many ways to our more traditional.
That's real gases the ability to have multiple sources and diversify that helps now as I look ahead more broadly at the kind of overall industry level update you in the short term very tight.
Got it intermediate MIT.
Stacy you largely tied to the new sources come on and get fully ramped up longer term you might see that come back into some level of balance.
<unk>.
And when you think about sources coming on there is usually lead time anywhere between two to three three and a half years four sources to come online and then be available to you. There was an expectation in the market that sources in Russia would come online obviously with everything thats happening over there that's going to have its own set of challenges, which is why I say.
In the short to midterm, you should expect that market to remain tight as far as blm's concerned.
It's a little bit of a tragedy, it's been run so poorly everyone's been impacted by that as you know we.
We expect that as the government comes to a decision on how BLM goes forward there'll be some relief over there but really.
From being a very large source BLM has declined over the many years and therefore will probably not be the substantive source going going forward for us, we do see middle east, having having potential to kind of grow new sources, and we're seeing some traction over there already on that.
Very helpful and just as a quick follow up turning back to the electronics market in the semiconductors within that I guess into 8 billion market growing in the high single digits, perhaps even low doubles, just given your exposure across onsite spec bulk and everything that can flow in to the multiple facets there how much of that is it.
Really turning out to be a competitive advantage just given the outlook, especially in geographies outside of Asia. Thank you.
So I would say that in our recent win in TSMC for their first a couple of Fabs in the U S.
Was the ability to leverage both our technology offer and our existing relationship with TSMC out of Taiwan.
So that was a competitive advantage that we were able to leverage given our operating experience with them and given there are kind of confidence in what we offer but we do have a technology upside I mentioned this earlier on I feel from a technology and operating expertise point that we bring something that is super important for Fabs, which is high relies.
Verde on highly spec product you have to meet the spec every time and you have to be extremely reliable and that's where our competitive advantage given our own engineering division and their ability to do R&D on these on these new plants drives a lot of our innovation and drive some of that competitive advantage that we look at so I feel there is there is that advance.
<unk> with customers that we have and the relationships we carry advantage around the operating expertise that we have and then of course technology becomes the tipping point for us to have it.
Thank you very much.
Thank you, we now move to David Begleiter of Deutsche Bank. Please go ahead.
Thank you good morning.
Central Ahmad.
Youre hedging can you talk about your hedging hedging strategy in Europe and is there earnings headwind as you roll into next year, given the higher natural gas prices over there.
David we don't really hedge.
I'll, let Matt comment around the financial hedges, but as far as sourcing is concerned we essentially have contracts in place based on which we source both electricity.
Gas.
With that I would agree I mean, it's absolutely right. We don't we don't utilize financial hedges for commodities of any of any consequence of any materiality to sandys point, we just have commodity purchase contracts and then we have contractual structures with our customers for faster. So that is how we manage it around the world and that is how we will continue to manage it.
Understood and then just to go back to the first question on the on the take or pay contracts in Europe in Germany. If you guys can't operate due to natural gas curtailments do you still get paid your base facilities.
Yes.
Despite disruptions or volatility around the LNG piece, our contracts very clearly ensure that our conditions and sure we get paid based facility.
Excellent. Thank you very much.
Okay.
Thank you. Our final question today comes from Kevin Mccarthy of vertical Research partners. Please go ahead.
Yes, good morning, Sanjiv could you provide an update on clean hydrogen project activity you've talked in the past about 300 projects with $20 billion of potential and $5 billion to Linda on a probability adjusted basis.
How are things progressing with your industrial customers or opportunities in particular, and when do you think that the.
Flow into the pipeline will become more meaningful for you.
Thanks, Kevin So let me just headline that first and then talk a little bit about the progress thats happening. So at the headline level I'd say to you. We have between 290 to 300 projects that we're working on a large number of those projects tend to be on the on the mobility side. They are smaller projects. So I tend to focus a lot more around what I see on the industrial.
I've said before this is right in our wheelhouse that the customers, we work with extensively and who want to work with us as they move down the chain looking at either blue or green hydrogen or ammonia et cetera, and then there's the LNG export piece, which you will see some specific areas of development and again, there we are seeing larger projects.
Fewer number of calls relative to what we see in mobility, but larger projects and some of them come with substance and again in that space. We only work on projects, where we have got offtake agreements or potential off takers participating the project who have skin in the game for us Thats very critical in how we define our investor investment criteria.
For projects that we want to undertake in that space.
In terms of progress.
Actually Kevin these projects have a long and now talking about the industrial MB Mg exports piece in particular, they tend to have long lead.
Timelines driven around the fact that they have to do typically a pre feed study to try and understand the scope of what the project would look like then undertake a fee to try and get a better understanding of what the technical solution is and then to take it to a slide in that process itself between the pre feed and RFID could take anywhere between two to three and a half years, it's beyond that.
When you identify the order decision and investments that we are able to move forward and actually make the decisions.
And start deploying and putting that into our backlog. So I see good progress across a number of the projects that I have outlined to you on the industrial and the.
<unk>.
LNG exports site and of course, the smaller projects on the mobility. They are constantly moving and these are small hydrogen refueling stations are a small electrolyze it here or there and they are moving in and I feel good about that we're also seeing a whole new set of projects emerge around liquid hydrogen.
I feel pretty good about that liquid hydrogen Linda.
Linda has some great technology, we have a technology competitive advantage in that space and again, we are feeling the deploying that in creating a liquid hydrogen network ecosystem is going to be quite important for us as well. So look looking to see that develop further as well, but that's catching up basis as well in the in the projects that we're working through on the <unk>.
Call piece, you mentioned 20 billion I'd say, that's probably higher than that at this point in time and in terms of the total landscape of projects that we're looking at.
Thank you for that color and then secondly, if I may for for Matt can you speak to some of the assumptions that are embedded in your new EPS guidance range. It sounds like you're baking in some level of.
Negative macro activity at the South end of your range and also where are you marking currency amidst all the volatility thats occurred.
Sure Kevin I'll start with the FX side.
We will obviously, both the average rates at the end of each period like you are supposed to for U S. GAAP, but what we used for the guidance itself. We just took spot rates a few weeks ago now.
Looking back we probably took it more at a what looks like right now at least the bottom point, so where rates have come has been a little bit better.
So time will tell but we just had to make an assumption and that assumption was what we put in.
Obviously, we will book what the rates are when they when they are completed so right. Now this was a point in time, probably two to three weeks ago spot rates as far as the macro you're right at the top end right now it essentially has no no real volume growth the assumptions there have some puts and takes so we do have you would have.
Expect to be some natural sequential decline in places like EMEA for some of the holiday effects also just given what's going on there you may have some increases from certain project contribution or some other areas growing and that nets out to essentially no growth at the top and then as you go down that is mostly just lower volume assumptions and as I mentioned this is <unk>.
Not what we're predicting it's just what's baked into guidance and so if things turn out to be better that would be upside right. Now through July we really haven't seen much negative changes from June , but we'll have to see one month, so far doesn't make a quarter.
We will see how it plays out.
Thank you very much.
Okay.
Thank you and I'd like to turn the call back over to Mr. Juan Pelaez for any additional or closing remarks.
Thank you very much everyone for attending if you guys have any further questions feel free to reach out a great rest of your day.
Thanks, guys.
Thank you, ladies and gentlemen that will conclude today's conference call. Thank you for your participation you may now.
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