Q3 2022 Linde PLC Earnings Call
Political uncertainty and rising interest rates.
You can see operating cash flow trends with Q3 being the highest of 2022.
Up 24% sequentially and 3% from last year.
In addition available cash flow, which we define as operating cash flow less base capex.
Main steady.
At one $5 billion to $2 billion per quarter.
Recall that base Capex represents all non project investments.
Of which approximately half are dedicated to growth initiatives.
The right part of the slide shows how we deployed year to date cash flow.
As a reminder, our capital allocation policy is simple.
Stable.
We have a mandate to maintain an a credit rating while growing the dividend each year.
Our priority is to invest in core business opportunities that meet our criteria.
And any leftover cash is used for stock repurchases.
Currently our metrics are better than our single a credit rating and thus we are actively recapitalizing the balance sheet.
Year to date investments have totaled $2 $4 billion between Capex and acquisitions of.
Of which I anticipate an acceleration based on the current set of opportunities.
Finally, we have returned $6 3 billion back to shareholders in the form of dividends and stock repurchases.
An increase of 31% from last year.
This slide clearly demonstrates that irrespective of the macro climate.
Linda will continue to drive steady long term quality growth.
While sharing a substantial portion with our owners each year.
I'll wrap up with guidance on slide seven.
For the fourth quarter EPS is anticipated to be $2 82.
To $2 90.
Or 9% to 13% growth, excluding an estimated 8% currency headwind.
This represents a 25 cent or 8% sequential decline from Q3 to the midpoint.
There are three major assumptions driving this.
First.
4% of the decline is driven by engineering project timing.
Engineering results are naturally lumpy due to project progress and.
And we had a sizable Americas project billing in Q3.
And while the engineering business has been streamlining the organization and rebuilding the backlog to maintain strong competitiveness and quality results.
I still expect Q4 to have lower sales and profit from this timing.
Second we anticipate currency rates to worsen driving down sequential EPS by another 2%.
Rates seem to stabilize in October , but we'll have to wait until January to see where they ultimately finish.
Finally, we completed the divestiture of the non core just business at the end of September .
This had a minor effect at 1%, but we provided more details in the appendix. So you can better model the future impact.
No. We are also assuming no base growth at the top end of Q4 guidance and thus recessionary conditions at the midpoint.
Consistent with prior quarters. This economic assumption is merely a placeholder.
So if conditions are better, we'll do better and if they're worse, we'll take actions to mitigate.
The full year guidance of $11 93.
To $12 three.
Represents 17% to 18% growth from last year when excluding currency.
The midpoint of the range is 15% higher than last quarter, driven by better Q3 results.
Overall, the lending team continues to execute despite the global challenges.
We've demonstrated resilient high quality performance through recessionary conditions.
And 2023 will be no exception.
So regardless of what you read in the news.
You can count on Lindy to deliver.
I'll now turn the call over to Q&A.
Thank you if you wish to ask a question. Please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our questions again. Please press star one to ask a question. We will now take our first question from Peter Clark from Society.
Please go ahead.
Yes.
Hey, everyone. Good morning, sorry, you called out good inflation management.
The gassy regions and I know.
You broking, the right marketing scheme, I think over a year ago to try and push best practices. Just wondering what you added from that and how you think he gave you an advantage over our heads up against the competition and this price inflation environment. Thank you.
Peter There are two things that I would say that that happened as a consequence of inflation coming through.
You might recall beat of that very early in the process. We said that we were looking at inflation and working through it not believing it's transitioning I think thats, obviously been proven now and we brought in the Latam teams is one example of best practice within the group share that more broadly.
Different stabilizer of the year Peter is all about execution and we have a relentless execution culture, that's what drive that pricing every day you know.
As well that our performance culture require that every month, we sit down and review the progress that's been made and that cadence of operating rhythm of doing that is the other piece that I think drive.
Pricing as we as we look at it decisions are made every day and they are not made every every week or every month because they know that they are at the end of the month, we have to have a conversation about the decisions, we've made and any deviation that come out of that it is really under driven by our underwritten by the performance culture of the organization.
And can I sneak in one on the European small customers medium sized customer industrial customer.
Are you seeing any change in behavior returnable, because it sounds like companies getting quite concerned about how the small customers are suffering in the current environment.
Yes.
There are a couple of ways to address that as I look at the different end markets and obviously, we are paying a lot of attention to the medium and small sized customers across Europe .
Two factors have been particularly look at one is what's happening to receivables and I can confirm to you that cash generation to receivables remain within with an expectation, which I think is a very important indicator as to how the markets are currently responding I'm not going to predict what's likely to happen in the next quarter or beyond but I can say for now that I think we've seen.
Seen that accounts receivable reflect certain amount of resilience across that customer base as well. The other piece I. Just mentioned to you is when you look at EMEA volumes and I know youll see a minus three over there.
You strip out the significant pandemic impact that came out of the healthcare, but most other end markets volumes remained reasonably stable, yes, they've softened a little but there remained reasonably stable and that includes a small and medium sized customers as well.
Got it great. Thank you very much.
We will now take our next question from Duffy Fischer from Goldman Sachs. Please go ahead.
Yes, good morning, guys.
A couple of questions around your slide four and the inflation reduction Act. So first if you look out maybe two or three years, how much can it absolutely grow your backlog do you think what kind of bogey should we have for backlog increase.
Second what percent of that do you think will end up being sale of gas versus sale of plant and then just the last one relative to the size of your typical projects historically, what do you think the average size of the projects around the IRA will be.
Thanks Duffy.
Let me start off with the backlog question, but as you will recall Duffy in the past calls Ive talked about a probability weighted number of about $5 billion. That's obviously a global number.
Today, when I look at that number thats trending close to 7% to 9 billion remember we tend to be quite conservative. These are decisions in the next two to three years and I am expecting something of the order of $7 billion to $9 billion in actual decisions around projects in the next couple of years related to this obviously accelerated and bought by the IRI at those decisions that obviously.
And up in the backlog given the size of these projects.
As far as sale of gas and sale of plot is concerned.
<unk>.
Our industry, we have the unique advantage of being able to do both capability to execute both and ensure that both of them actually enhanced our returns. So from that perspective that optionality is something that I, certainly want to keep and I want to make sure that we work our way through the quality of the projects the risks associated with that before we make that final call.
All our customers and developers recognize that and actually appreciate the fact that we have that flexibility to offer as well so I'm not going to give you a kind of percentage in terms of what youll see auto sale of gas versus plant. It is fair to say as a principle, though that principally we like sale of gas as the as the base model and it's very.
We find that the risks are probably a little bit different to what we would expect.
That's where we would opt out then for the sale of plant model.
Largely on the size of projects that say to you as you look at this.
Number of 30 plus billion that we're talking about youre going to see projects, probably 20% to 25 large projects happen to make up that number that kind of gives you a bit of an average view. There is no particular size that I can attribute to these projects the range depending on the scope of the project itself.
Terrific. Thank you guys.
We will now take our next question from Stephen Richardson from Evercore ISI. Please go ahead.
Hi, Good morning, I appreciate the comments on limiting your expertise to.
The industrial gases and limiting some of the exposure in the subsurface a couple of questions on that where would your scope of capex and in these projects synergies in terms of how you're thinking about the minute.
Great Blue kind of hydrogen setup and then also do you think that that subsea partner needs to be part of the project consortium or is this something that you think you can secure for a fee.
Thanks, Steve So let me talk about the scope. So typically carbon capture is absolutely within our scope in almost every instance that has capability that we bring there is proprietary technology that we are pushing hard at at the moment, we think we've got some wall.
Leading technology that we call high Salt PSA is these are <unk> Psa that absorbed that Seo to capture it and allow us to then take it forward for storage and sequestration, so quite quite excited and that's a part of the technology that we want to make sure we'll always be within that scope beyond that.
Ensuring that view pressurize and transport that Cotwo is something that we also would like to do typically but are more flexible on this.
As part of the scope that we would obviously give to our partner would be all around that's year to going downhole and what happens is that zero to beyond that including monitoring and a longer term et cetera.
As far as the approach to subsurface partnerships are concerned there are various models, Steve that we would follow.
There's a whole range from consortium approach.
That we've been working on already and hopefully we'll announce in the near term to having having them as being.
Partners joint venture partners within the project itself. So that whole range is available to us we find that depending on the market in the end the actual project scope.
That kind of best defines where that partnership is then.
Put together.
That's great and if I could have a quick follow up just on how you're thinking about the decarbonize customers again, we appreciate all the all the detail here, but if we think about onsite in the Americas for example, and hydrogen.
Is it right to think that you've got a natural jump off point at the end of contracts, where you can start opening the conversation about okay can we convert this to a blue project Blue hydrogen project and what that looks like or is the incentive now so high that the customers are coming to us, saying can we work together on some interim solution just.
<unk>, what the contract tenor if anything.
It could mean for the timing of this buildout.
Steve It's definitely the latter where a number of customers.
We are very actively engaged in conversations with us what tends to happen is you have to think about this as an incremental service offer if you like on an existing asset when we talk about Decarbonize Linda as an as an example, that's where we would capture cotwo, our existing facilities and transform that.
Gray hydrogen of today into blue hydrogen that goes into the network and feed the existing customers.
So thats kind of one way to think about it and Thats, where we are seeing a number of customers quite interested given the strength of our network and the asset footprint that we have in the U S. Gulf Coast. In addition to that there will be conversations for sure that happened. It just depends on the timing of the contracts in many cases.
The underlying the underlying takeaway from this that I want you to kind of keep in mind is there is urgency in the customer base to want to progress given that both 45 Q1 40 <unk> in many ways is actually pushing them to try and monetize the benefit that comes out of this decarbonization.
Effort that IRS supporting.
Thanks, so much.
We will now take our next question from Steve Byrne from Bank of America. Please go ahead.
Yes. Thank you I recall <unk> you made some comments during the summer about what what at least I perceived you had as kind of a long term longer term estimate of the.
The production costs for Green Blue and Green hydrogen as I recall it being.
$1, a kilogram dollars 50 for Blu $4 50 for green perhaps.
I didn't hear that correctly, but that was all pre IRI.
And I would suspect Youre Niagara Falls project might actually have cost structure below that $4 50, So post iras. These three.
It looks like they are getting pretty close would you share that view.
And where do you see.
The most incremental demand in development right now is it.
The blue seems like a bit of a layup for your pipeline customers, but where do you see the demand for green coming from.
Right.
Steve you've got good memory or good notes as the case might be so it was 134 gray $1 50 for Blue and about 444 Green Dot offered I think.
Couple of quarters ago, and that was all of that I think natural gas price, if I'm not wrong of around $3 50.
Obviously natural gas prices changed along the way as well, but the mood point over here that you make.
I will validate for you is gray and blue upcoming close to parity today with the benefit of the 45 <unk> in place.
They are almost at parity I would say as far as green as concerned with the 45 <unk> three.
<unk> is pretty attractive.
The issue with Green remains scalability, and I'll talk a bit more about blue and green dot context, but from a cost point of view that full 40 is now trending at anywhere between $2 50 to three.
So it has come down substantially.
But again because of lack of scale and the availability of cheap renewable energy that pricing for green remains a little bit higher than what I would see as long term inflection point, which you've heard me talk about 150 as a long term inflection point for us to see huge acceleration happens not quite there, but certainly heading in the right direction as far as <unk>.
It themselves.
Going on to where I see this development moving in and really I think for me Blue today is available at scale.
Technology, that's tested and it's an offering thats available in the market today, which is why a lot of the conversations I referenced in my previous answer are being driven because that ability is available today the.
The challenge with Green remains the ability to scale up.
And get access to reliable renewable energy at reasonable costs that combination isn't quite here and while the 45 out of the IRA give some really good incentive.
Yes.
Max three $3 per kg of green hydrogen.
Unfortunately.
The embedded land really is around scale up to getting that to a point of inflection and significant exploration. So you summarize that I expect a decade plus of blue.
A great bridge to ultimately large scale industrial scale Green, which is reliably available at costs, where that conversion makes a lot of sense.
Thank you.
We will now take our next question from Mike <unk> from Barclays. Please go ahead.
Great. Thanks, just three quick ones for me.
Thank you made a comment about recapitalizing the balance sheet since ebitdas growing I'm, assuming that should mean buybacks should be growing faster from here I guess, one is that correct too with the ideal leverage ratio, obviously with staying within your kind of credit parameters you'd like to be and maybe three just a quick housekeeping.
Do you include buyback benefits in your <unk> guidance or is that just using a third quarter share count.
Hi, Mike So taking them in order, yes, you are correct recapitalize the balance sheet essentially means.
Essentially reduce our equity through buybacks.
And that would imply the debt going up so that is absolutely correct as far as the ideal leverage ratio again, you are correct the single a.
Under the S&P scale and a 200 Moody's is what we are aiming for and as you know they do have their own proprietary metrics, which rely on certain adjustments for things like capitalized leases and pensions, but when looking at what I call the simplified.
The metric that we use which today, we're showing at one one times on a debt to EBITDA.
I think you can get that in the mid twos are higher as options and we've seen that in the past clearly you'd have to work with the rating agencies to ensure your rates. The ratings are still aligned but I think that is definitely a feasible area.
And then as far as guidance yet generally when we look at that we sort of take that on kind of our share count there might be a little bit of benefit of some of the buyback, but realize as you know probably the buyback the way it affects into the into the EPS, it's sort of a cumulative effect. So what youre doing in any given quarter tends to have more of a lag.
Anyways.
So it was more of a function of what we've done to now and maybe a little bit of what we do in the fourth quarter and then what we do in the fourth quarter will have a bigger impact in Q1 and going forward, so there'll be a little bit in there.
But it'll be more a function of what we completed here in the third quarter.
Great. Thank you.
We will now take our next question from Nicholas Your line is open. Please go ahead.
You talked a little bit about the buy im sorry, the contribution into 2023 could you confirm that and Exelon is still on track for next year and I think you talked about a 1% volume impact in Q3.
Can you give us a sense, what we should expect for next year. Thank you.
Thanks.
I didn't get the question entirely but I heard Exxon and sale of gas for next year and I wanted to just confirm to you that that project is progressing on track and we expect to have that from a commercial structure in place for next year and you'll see that reflected next year as well.
You get the second part of your question Nicola.
I was just asking for the overall.
Project startup contribution in 2023.
Right.
Back to see a similar startup contribution obviously up by what we see from an exon perspective, which is a single large project that you would see.
But you should expect excluding that we should expect the same level of start ups next year as this year, which we said earlier on was about $1 billion of startups in the course of this year.
Got it thank you.
We will now take our next question from Jeff Zekauskas from Jpmorgan. Please go ahead.
Thanks very much.
In the third quarter sequentially.
To your.
Okay.
Your price versus raw materials to that margin widen out.
Or did it shrink.
And.
Can you speak to the effect of higher interest rates on wind and its interest expense sportswear or its returns overtime.
Jeff I'll take the first question and ask Matt to talk you through what we're seeing on the interest side of things so the.
A way to kind of best describe it is as you will see sequentially our margins in the Americas improved.
APAC was stable and slightly up.
And we did have a lag in the in the EMEA region, which obviously you have seen as well.
We put a table on the EMEA slide just to just to explain that.
So, yes as far as <unk>.
Sequentially, our recovery was more than offsetting inflation at Americas, and APAC were able to reflect that we are seeing some record pricing there in EMEA, we had record pricing of 14%. This obviously excludes any any any pass through 14%, but despite that there is a lag we're seeing electricity price increases in EMEA and <unk>.
Germany, and UK and <unk> in 60%.
That lag will be there for a month or so as you've seen from previous quarters and I fully expect the team in EMEA is very conscious of that and working through both pricing and cost actions to make sure we have recovery as we move forward.
And Jeff This is Matt so on the interest expense, maybe I can provide a high level answer and then get to your specific question. So when thinking about I'd say modeling interest expense. There's really two components to think about one is going to be essentially what youre, referring to which is our current debt.
<unk> and net debt structure, so the cash.
Whether it's variable or fixed and then the interest effect on that both as interest income and interest outflow, but secondly, we do have some FX volatility that always occurs in our interest line. Some is related to the derivatives. We have an intercompany loans. This would be the points that you may have that move up and down based on currencies, but the bigger volatility will act.
Should we be unhedged intercompany loans, where.
Where they get mark to market to the interest line based on whatever the prevailing interest rates are so they do tend to create volatility on the interest line. The unhedged loans, they actually have no effect on cash because theyre intercompany.
So when you exclude that I would say our run rate interest number is somewhere in the sort of low <unk> to mid <unk> right now and what we have is when you think about our capital structure right now.
Our cash which is earning deposit interest is.
Somewhat close to our variable debt, which right now is mostly commercial paper the rest of our debt is fixed its bonds.
So what I would anticipate right now is you wouldn't see much of a material change in that until the next bond issuance and at that point, obviously, when you do that new bond issuance, you will have a yield and what the prevailing markets are and then that will be layered in and you essentially will then have certain maturing bonds that might be.
Lower interest rates so from my perspective, what Youre seeing today is most of the volatility of FX rates and then as we go to the bond market in the future at least based on the prevailing rates I would expect to see net interest start to rise.
Great. Thanks, so much.
We will now take our next question from David Begleiter from Deutsche Bank. Please go ahead.
Thank you.
Back to slide four Sanjeev, how should we thinking about the returns on these projects and how is the competition shaping up for these projects is it more or less intensely nutritional projects first.
First question can we see returns actually above your normalized rate given the.
Uniqueness of these projects.
David as far as via concern. These projects have to meet the same investment criteria that we set out so when we say that we want we expect returns to be commensurate with the risk. There is no free possible clean energy projects. They have to provide the same return profile that we see vis vis.
The risk that we're taking on board. So you can rest assure that our return profiles will reflect that on an ongoing basis as well as far as competition is concerned.
I think competition is a little bit varied in the space as you as you will appreciate we have a range of players who.
All have a role to play we are seeing partnerships shape up as maybe.
Critical part of the offering that comes to market as far as Decarbonization is concern and we believe strongly that I think good partnerships make a lot of sense for us as well both in managing our risk profile and our subsurface is a good example of that but also alongside that ensuring that we've got people that skin in the game, particularly sometimes bringing in.
I'll take a rain as a partner to make sure they've got skin in the game and that offtake piece really have some some data as we move forward. So.
A range of there is not it's an evolving market space and we'll watch it to see how the competition piece evolves as the moment, that's kind of what we're seeing.
Very good interest in Europe on your take or pay contracts. What are you seeing any issues with any contracts given the current elevated energy price environment.
Simple answer to that is no.
We have strong takeaway contracts there are some customers who are below take or pay at the moment in Europe , but those contracts are being enforced and payments are happening.
Great. Thank you very much.
Yeah.
Okay.
Next question from Vincent Andrews from Morgan Stanley Go ahead.
Thank you and good morning, everyone.
Just wanted to circle back on the balance sheet question and.
Mark to market from you on where you think Linda can borrow at these days and then how that feeds into as your.
Discussing new projects how are you baking in.
Higher financing costs in terms of <unk>.
Project returns and the like.
Yes.
Sure Vince I think with the projects.
To me, we don't take the current prevailing rates and bake it in in that perspective, and the reason is as you know, we're making 15 20 year investments in embedded with that we already incorporate inflation recovery on the facility fees. So when you tend to see elevated rates that does come back.
Through the inflation adjustment mechanisms as it is any ways and we don't need to debt finance. These projects as we build them as you know they take several years to build anyways. So from that perspective, we've been through many many decades as you well know on interest rate cycles, and our long term model continues to be quite Brazil.
With the contractual inflation recovery that enables to equivalate that as far as borrowing rates.
<unk>.
Yes, we're a single a but lately we've been tended to be more double a or better on the spreads.
When we decided to go to the market I would expect our spreads should be some of the better ones you would see but of course, it's from a benchmark that is higher today. So you can take the benchmark today and just take some of the spreads we've seen demonstrated kind of our rating or better and thats sort of what we would borrow at but.
But at this point.
Feel pretty good about our access to capital and still get some of the lowest cost capital around.
Okay. Good to hear thanks, so much.
Yeah.
We will now take our next question from Laurence Alexander from Jefferies. Please go ahead.
Hi, This is Dan Rizzo on for Laurence. Thank you for taking my question.
You talked a bit about the return on capital for the for the for investments I was just wondering with the new opportunities and Gray Green and Blue hydrogen if at this point if we should assume it's the return on capital is below.
Traditional products, which should exceed it within the next five to 10 years or how we should think about return on capital on these new opportunities.
Okay.
So in terms of return on capital, Let me go back to the question.
Funded to earlier by saying that the investment criteria that we've set out for our projects.
Double digit Unlevered returns is what we would look at obviously commensurate with the risk that we take on.
That is that is what is reflected in the projects that we currently look at and approved and that is reflected therefore, the return on capital that you see within our business today I expect these projects to continue to support that return on capital elements in our Investor Our investment criteria has not changed for projects in the clean energy space, whether it's blue.
Green obviously, there is some support available through the IRI that holds that return of support that return profile as well.
And of course accelerates decision, making from a customer's point of view.
And maybe I could just add one more point then.
When we make our decisions we make it on essentially a cash basis, an IRR unlevered after tax cash basis, so that won't change as you know the RFC is more of an accounting metric. So I wouldn't look at that 21, 8% and a benchmark in any way or in any form I mean, obviously, we're getting benefits there from the non capital portion of our business today.
Which we expect to continue going forward, but when we make project decisions as Sanjay mentioned, it's more on an IRR basis.
How we think about that.
Alright, Thank you very much.
We will now take our next question from Geoff Haire.
From UBS. Your line is open. Please go ahead.
Good morning, Thank you for the opportunity to ask questions I'm going to fly the flag for Europe slightly.
With a lot of talk about the inflation rock snacks in the U S.
How does that influence post politicians thinking in Europe from what you understand in terms of changing the way investments are done for low carbon hydrogen and Europe .
That's a great question Jeff.
It's topical as well because I had.
Over the last couple of days I've had a number of conversations but political leadership.
In different parts of Europe .
Two things.
The IRA I think came as a surprise to many people including.
Many of the political leadership in Europe , and they have recognized that it has a galvanizing effect in terms of moving the pace at which change happens on clean energy in the U S. And obviously are envious of that change given that European Commission requires time.
A fair amount of work to kind of be able to get to its point of decision making.
The other piece I think is that that that awareness is then led them to recognize that some urgent actions on needed I'll give you two quick examples of conversations I mean, not called them in detail, but I'll, let you know that the.
The fact that Europe was all about green hydrogen only clearly has changed and there is a greater acceptance of the fact that blue provides a very.
Very effective bridge to getting to clean energy in due course today in Europe , just needs energy they are burning more coal than they had planned for as you know.
So really that that pragmatism, which was lacking in the past on making sure that low carbon intensity hydrogen was welcomed into Europe on par. There was no. There was no discrimination against blue versus Green et cetera, I think that's something that's a change that I think is fundamental and we will see some of that and the fact that Europe also recognized.
That while they can talk about.
About developing projects in Europe , they desperately need to ensure that they have processes in place to import significant amounts of.
Clean energy and this gave blue green hydrogen ammonia et cetera into Europe to be able to leverage and build infrastructure needed is the other change that I am expecting to see in the near term. So I would say the IRA has provided some real soul searching opportunity for Europe , and they are going to do something about it.
Thank you.
Okay.
We will now take our next question from John Roberts. Your line is open. Please go ahead.
Thank you if you add sequestration to hydrogen for an existing refinery customer do you expect that existing refinery customer to pay a premium for blue hydrogen.
We just expect to get the credits to cover the cost of adding sequestration and how did the existing contracts anticipate this I'm just trying to understand from the customer's perspective, how this is going to work.
John when we look at customers and discussions that we're having the customers are themselves trying to leverage that glu hydrogen into their own.
Product slate in some cases moving towards more renewable fuels, which then attract.
Significant unattractive.
Further benefits that come out of places like California, as an example, so.
Moving to renewable fuels accessing California's low carbon.
Standard framework.
Accessing further incentives allows them to consider premiums that would become available.
And pay for on the Blue hydrogen as well.
But in truth that say to you that if I look at broad based.
Adoption of Blue hydrogen the IRS provides through the 45 to <unk> credit a significant benefit in terms of accelerating that decision and does.
From our point of return perspective does support the return to moving to blue hydrogen even with marginal premiums on it.
Thank you.
We will now take our next question from Kevin Mccarthy from vertical Research partners. Your line is open. Please go ahead.
Good morning. This is Cory Murphy on for Kevin in your packaged gases business can you comment on what Youre seeing in terms of demand for hard goods.
Posed to.
Gas and rent.
I would call it a hard goods tend to be a leading indicator. So curious if you're seeing any trends in the business that would portend slower macro growth ahead. Thank you.
Thanks, So Argos business bulk of the buckets that I've said to you both gases Zahn hub business are both.
Growing double digit as as things stand.
On the hard goods side, we look at two different aspects of it but when you talk about kind of leading indicators to what we're seeing around economic activity, we see both on equipment sales as well as consumable sales and I can tell you.
See demand and growth on the equipment side as well would suggest that people are still putting some cash on the ground to make sure that they are able to catch up with.
With many of the supply chain issues that have plagued manufacturing more broadly.
So I still at this point in time still feel pretty good about where we are seeing hard goods development things done.
I'm talking about the U S. Here.
Got it thank you.
Okay.
We will now take our next question from Mike Sison from Wells Fargo. Please go ahead.
Hey, guys.
Nice quarter, just curious sort of impressed that youre volumes remain positive given recessionary conditions or no growth.
If if.
If demand firmly goes negative in 'twenty three what do you think your volume outlook with sort of unfold.
In that scenario.
Hey, Mike I'd love to speculate, but I am not going to do that.
We'll come back to you in the next quarter, you know and we will give you a full outlook for 2023, we're going to go through our own very detailed planning exercise and I'll have the guys in here from all over the world over a three day period, where we'll run through each one of their planning processes. A lot of these assumptions will get tested and challenge in the course of that.
But again I just want to.
The point that you make is is that resilient stands out Mike.
And sometimes people take that for granted but in our case, we recognize in our volumes showing through as just another element of that resilience. In addition to the fact that I explained at the last earnings call our defensive business model, including the contractual structure that we have even when volumes are down we're able to actually Brazil much of a profit in our tops.
Line as well.
Again, just just a recognition of that is quite important in these times, particularly.
But we'll give you more in the next quarter for sure.
Okay. Thank you.
We will now take our final question from Mike Harrison from Seaport Research Partners. Please go ahead.
Hi, Good morning, I have two questions first of all in Europe any thoughts on the recent decline in natural gas prices and what that could mean for your costs are you going to realize some of that and then the second question is around electronics you acknowledged.
Set there.
Some negative headlines around semiconductor producers curious for some additional color on the near term and longer term.
Impacts that might have on your electronics business. If there is some reduction in capital spending.
From those fabs. Thank you.
Thanks, Mike So.
On natural gas very quickly on EMEA, obviously, we've seen continued volatility around natural gas pricing, we've been able to push that through our contractual.
Cost pass through structure, we will we will continue to do the same if natural gas prices come down significantly margins will get enhanced as a consequence as you know it's a clear map in our own help us through <unk>.
Really no concerns from our perspective, obviously lower natural gas pricing will help the broader economy and hopefully some some economic tailwind as a result of that which should be positive for us as far as.
Electronics segment is concerned let me kind of break that up into into two parts.
Let's start with the long term in terms of investments being made and the chips Act out of the U S and a similar act out of out of Europe , pushing to have localized investments in their regions continues to drive.
Investments as we move forward in conversations with some of our largest customers more recently I have seen commitments from them all staying at the same level, if not increasing their investment levels some of them tend to invest counter cyclical.
That's been a strategy that's worked well for them and I expect to see those levels remain fairly stable in the midterm I'd say so that's.
From now to the next four to five years.
Of course, we are winning more than our fair share of those and I feel good about the fact that we'll see continued growth as a result of that.
In the near term.
Most of our large customers continue to consume which is what the.
Pointed comment I made earlier on that despite what you read in the breadth of.
Our consumers continue to consume gases at every fab that we supply.
And that's a really good position to be in.
There are some <unk>.
Turns around China that have HUD from from investors as well and again I wanted to confirm that our volumes in China continued to be an impacted by current embargoes and so on and so forth that might exist. They might have an effect on on longer term investments in China.
But.
We are yet to kind of.
That reflected in that in the demand pull that we see from the markets.
I would now like to turn the call back to Guam for any additional or closing remarks.
Celia Thank you and thank you everyone on line for participating in today's call.
Please feel free to reach out if you have any further questions have a great rest of your day take care.
Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.