Q1 2023 Linde plc Earnings Call
Yes.
[music].
Good day, and thank you for standing by and welcome to the Wendy's first quarter 2023 earnings teleconference and webcast.
At this time all participants are in a listen only mode.
Please be advised that today's conference is being recorded.
And after the Speakers' presentation, there will be a question and answer session.
I'd now like to hand, the conference over to Mr. Juan Pelaez head of Investor Relations. Please go ahead Sir.
Chris. Thank you good morning, everyone and thanks for attending our 2023 first quarter earnings call and webcast.
<unk> head of Investor Relations and I'm joined this morning by Sanjiv Lombok, Chief Executive Officer.
Matt White Chief Financial Officer.
Today's presentation materials are available on our website at <unk> dot com in the investors section.
Please read the forward looking statement disclosure on page two of the slides and note that it applies to all statements made during this teleconference.
The reconciliations of the adjusted numbers are in the appendix to this presentation.
Sanjiv will provide some opening remarks, and then Matt will give an update on <unk> first quarter financial performance and outlook after which we will wrap up with Q&A.
Let me now turn the call over to Sanjay.
Thanks, Paul and good morning, everyone.
We had a strong start to the year as linear employees once again delivered on their commitments irrespective of the geopolitical and economic headwinds.
Earnings per share operating margin and return on capital all reached new record highs.
Above pricing, coupled with dependable return on capital at more than compensated for a weaker economy.
Just like the last four years lenders ability to consistently deliver earnings growth in any environment is a testament to the resilient portfolio operating excellence and capital discipline.
And when global economies recover which they always Jim.
An opportunity to further leverage the base volume growth just as we've demonstrated in 2021.
However, during uncertain times like today.
We continue to execute our strategy.
Optimizing our base business every day.
Capitalizing on growth projects, including high quality clean energy projects.
All of this while maintaining our industrial gases model.
Bold with a disciplined approach to capital allocation.
Slide three provides a brief update on clean energy and.
Including key projects that are both under construction and an example of a project being developed.
Let me begin by reiterating our strategy with respect to clean energy and Youll notice it hasnt changed over the last three years, which it shouldn't.
Let's start with the first principle.
We will stick to the core of industrial gases model. This has been a cornerstone of our strategy for decades.
Experts at designing building operating and distributing industrial gases and equipment, we serve many markets where our customers are experts at what they do.
Making our customers more productive and competitive.
Our growth trends is what makes lindsay successful.
This has been true for the last hundred years and I expect it will continue to be true for the next hundred.
Another certainty within our industry is how customers demand the same three requirements for the gas supply with just safety reliability and lowest total cost of ownership.
This holds irrespective of the molecule the end market our supply mode.
This is why a key element of our strategy is to leverage our world class engineering capabilities and existing asset network of our $3 billion of hydrogen business to deliver the most reliable and lowest cost supply systems for our customers.
Following these principles, we have successfully won and advanced many clean energy projects.
Rich I'd like to highlight just a few.
The left side represents projects currently under construction.
These are projects with executed contracts fixed payments and incremental growth with predictable returns.
With project Capex of just under $2 billion, including the New OCI project in Texas with Lindy, we'll supply nitrogen and clean hydrogen by capturing cotwo for underground sequestration through our partner Exxonmobil.
Currently this project makes up the majority of clean energy projects in our backlog since most electrolyze our investments are designated for the merchant market and therefore consider base capex.
There are a few projects like the recently announced <unk> agreement that meet backlog criteria.
But even here, we support local network and supply high purity clean hydrogen to electronics and other industrial customers as well.
Currently we view these electrolysis.
Electrolyze projects as more deals in a local supply network for supply of merchant hydrogen.
They are often integrated into our existing hydrogen network, sometimes side by side.
Leveraging the same storage and transportation infrastructure, helping optimize distribution costs.
Furthermore, these projects leverage various electrolyze, it technologies, including <unk> and outline to provide the best fit to customer needs.
Sale of block is another avenue for Lindsay to participate in growth opportunities, which may have different customer demands or which may not benefit from integration with their existing supply network.
Now in addition to these projects being constructed we have over 200 different projects under development of.
Of course, the profitability of these projects being approved are won by US varies from project to project.
On the right side of the slide I'd like to highlight one such opportunity, which was recently made public by a customer.
Dow recently announced that it has selected Lindsay as industrial gas partner for supply of clean hydrogen and nitrogen for its proposed net zero carbon emissions integrated ethylene cracker site in Alberta, Canada.
Under the framework agreement Lindsay will complete the design and engineering for Linda owned and operated World scale Air separation Auto total reforma and carbon capture complex.
This complex will potentially be integrated with <unk> existing operations.
Got it.
Engineering work is underway and both companies are working to obtain their respective board approvals and regulatory approvals.
Final investment decision is anticipated by end of the year.
So I don't really have.
Many additional details until then.
We continue to work on a number of other projects aligned with our strategy to Decarbonize our own operations.
Customers Decarbonize their operations, such as the Dow project above.
And address new market needs such as the OCI project.
Overall total opportunities are likely to exceed $50 billion over the next decade.
Representing one of the best long term growth environments I've seen in a long time.
Of course time will tell how many we ultimately signed and announced.
But you can see we are making meaningful progress.
And despite the many differences across these projects.
Our full suite of offerings, coupled with a strong balance sheet will enable us to win more than our fair share.
But rest assured.
Our participation will consistently follow.
Strategy and proven investment criteria.
I'll now turn the call over to Matt to walk you through the financial numbers.
Thanks Sanjay.
Please turn to slide four for an overview of first quarter results.
The sales of $8 2 billion were flat with last year, but up 4% sequentially.
Versus prior year FX was a 3% headwind, although we continue to see foreign currencies strengthened as evidenced by the sequential tailwind.
Cost pass through was also a headwind as energy prices have fallen in most parts of the world.
As a reminder, we pass through power and natural gas cost contractually, which have no effect on profit dollars, but will impact profit margins.
Net divestitures resulted in a 2% decrease as the sale of chest and deconsolidation of Russia more than offset the recent next air acquisition in the United States.
Engineering is down 2% since we have not lap the impact from sanctioned Russian projects, which ceased Q2 of last year.
Excluding these items underlying sales increased 8% from last year and 3% sequentially.
Inflation levels remain elevated in most countries and thus are driving higher pricing.
As mentioned in prior calls globally weighted inflation tends to be the best proxy for our price changes.
Since most contracts have clauses that specifically address local inflation.
Volumes were flat from prior year as contribution from project startups offset lower base volumes.
When looking at segment base volumes.
<unk> are growing due to the U S.
APAC is mostly flat since volume recovery is offset by prior year equipment sales.
And EMEA is lower primarily from onsite customers adjusting to slower economic conditions.
From a supply perspective.
We continue to see resilient or growing packaged and merchant volumes.
Although certain onsite customers are lower from a combination of weaker conditions and planned turnarounds.
Sequential volumes are flat as U S pipeline recovery from Q4 weather offset seasonal slowdown in APAC and Latin America.
Despite flat volumes operating profit of $2 $2 billion increased 16% from prior year and 10% sequentially.
This growth was driven by project startups and prudent inflation management.
Through price increases and cost productivity efforts.
These actions resulted in a record operating margin of 26, 9%.
And you can see to the right that every segment contributed to this improvement.
In the appendix Youll notice the engineering segment once again delivered an operating margin in excess of 25%.
Above the low to mid teens, we view as a long term run rate.
Similar to last quarter. This is due to favorable timing from the wind down of sanctioned projects.
While this led to favorable benefits on the income statement. It also resulted in unfavorable cash timing, which I'll discuss on the next slide.
For the next few quarters engineering results may continue to be lumpy as we wind down the remaining projects. However, we did not include any potential profit upside in the earnings guidance.
EPS of $3 42 was.
It was 17% above last year or 20% higher when excluding the effects of currency.
This represents the 10th quarter in a row of growing EPS ex FX, 20% or more.
From a cash flow perspective.
Capex increased 28% from growth investments in both base and project Capex.
Furthermore, <unk> reached another record at 24% as.
As we continue to deliver double digit percent profit growth.
On a stable capital base.
Slide five provides more details on our first quarter capital management.
While cash trends are relatively steady.
Q1, operating cash flow to EBITDA ratio was 64% or 11% lower than last year.
The majority of this difference relates to timing of engineering working capital.
Both from a reduction in contract liabilities.
And an outflow from accruals and payables.
Said differently, we met a contractual milestone this quarter and thus booked current income related to a customer cash deposit received over a year ago.
In addition, we paid third party vendors for work related to that project.
Normally you wouldnt experience of cash flow swings of this magnitude.
But the lumpy and accelerated wind downs of sanction projects are creating this effect.
Excluding engineering timing.
Working capital levels remain quite healthy across the company.
Overall, I expect our long term operating cash flow to EBIT ratio to remain in the low to mid 80% range, but the next few quarters could be more volatile as we continue to wind down remaining projects.
And recall this ratio in 2021 was 96% driven by customer prepayments related to the sanctioned projects.
So the multiyear average is a better indicator of performance.
Available operating cash flow, which represents operating cash flow less base Capex is stable at approximately one 5 billion per quarter.
We continue to deploy cash to growth initiatives.
Dividends and share repurchases as part of our stated capital allocation policy.
I'll wrap up with guidance on slide six.
For full year 2023.
Raising guidance 30 at the bottom and top end.
For a new range of $13 45.
To $13 85.
This represents a growth rate of 9% to 13% versus 2022.
No we do not assume any FX impact since currencies have mostly recover.
The 30 <unk> raise comes from the outperformance of the first quarter.
In other words, we left alone the remaining quarters for now.
In addition, and consistent with our prior approach this assumes no economic improvement and hence no base volume improvement.
This does not represent our macro projection, but rather is just a placeholder.
So you can insert your own view of the economy and adjust accordingly.
If the economy improves we'll be above this range and if not we'll take actions to mitigate.
The second quarter EPS guidance range is $3 40 to.
<unk> to $3 50.
Representing 10% to 13% growth from 2022.
Or 11% to 14% when excluding a 1% FX headwind.
Similar to the full year. This assumes no economic improvement from current levels, although on a sequential basis. It reflects some seasonal recovery, partially offset by lower engineering.
Overall, we had a strong start but one quarter doesn't make a year.
We believe it's appropriate to remain cautious while continuing to manage the things within our control including price.
Cost and capital discipline.
But regardless of how the year unfolds, we're highly confident we can continue to deliver compound value for our shareholders by executing on the basics and.
Securing high quality customer contracts for long term growth.
I'll now turn the call over to Q&A.
Yeah.
Thank you if you would like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Michael <unk> with Barclays. Your line is open.
Yeah.
First question I wanted to focus on EMEA segment.
Can you just speak to the step change in profitability here. This quarter I. Appreciate you don't really give segment level guidance, but the business used to be running call. It $3 $400 million quarterly EBIT, we averaged around 500 million a quarter last year are now in a.
Pretty uneven macro environment, we broke 600 so.
Sort of the right run rate going forward or is there something else kind of underlying a snapback here.
Sure Mike.
Let me start off by just kind of going back and telling you how the EMEA business has been looking at actions that need to take management actions. So the underlying impact that we're seeing come through is driven by two levers pricing and productivity.
Productivity, our actions that they've been undertaken for an extended period of time as you're aware we've talked about it over the last couple of years now so they've reset that cost base effectively and continue to do that every quarter.
That obviously has an impact on the run rate that you're seeing going forward, but more importantly, we are obviously seeing some upside from pricing come through in.
And you might recall if you go back late.
Late 2021, but inflation started moving up we would explain to you that there is a catch up that happens around pricing, particularly in their own budget and packaged businesses of course in the current environment when energy costs are coming down as an example, we're getting some uplift as a result of that as well, which you can see that pricing number pretty impressive 13 <unk>.
<unk> posted so.
Youll have to keep those in account as you think about EMEA business, but underlying performance driven primarily around pricing and productivity.
Perfect. Thank you.
The next question is from Nicola Tang with BNP Paribas. Your line is open.
Hi, everyone and I wanted to talk a little bit more about this 50 billion dollar opportunity that you're talking about now in terms of clean hydrogen I think Nick Joseph Bachmann talks about that greater than 70 billion opportunity you're talking about the U S alone.
In today's three buckets of de Carbonize decarbonize customers in new market.
I was wondering if you could do the same on this expanded the extra 20 billion, which I guess is outside of the U S.
Perhaps in terms of geography, you could talk about where you expect to see the nice momentum in the next couple of Ibs intensive project signings.
Yeah.
Thanks, Nicholas So again just to remind you we I talked about earlier in my in my remarks 200 more than 200 projects that we're currently developing the way our segment that for you is by application that should help. So there are three key buckets in which we see these projects being developed there as the mobility bucket them.
There is industrial applications the ones in our wheelhouse the ones, where we are currently working with existing industrial customers to help them Decarbonize and then the last piece is really around energy and power, where hydrogen or its carrier ammonia or methanol will play a role.
So let's split them down.
But I think about 50% at $50 billion, let's split them down and say well mobility is around 10% of that we see industrial obligations really the dominant part of that opportunity set at about 60% and that the balances lodge, but fuel projects around energy and power. So that's one way to think about it as you know and.
As you mentioned, we've already reached out and said previously 30 billion plus in the U S driven of course with.
With momentum coming out of the IRA driving a lot of that development. So youll see the balance 20 odd billion that we're talking about.
Outside outside of the U S. We're seeing growth opportunities in our pipeline out of the middle East we are seeing growth opportunities come out of mainland Europe .
Some in the U K and then we are seeing a little bit of a buildup happened out of Australia and Asia, but it does look like they'll be behind the curve relative to what the U S and Europe is likely to see.
Yeah.
The next question is from Jeff Zekauskas with Jpmorgan. Your line is open.
Alright, thanks very much.
Hi.
In China.
Late January Exxonmobil indicated that it wanted to build de <unk>.
Hydrogen facility, our hydrogen complex in the United States.
That would generate about 1 billion standard cubic feet per day of hydrogen which is check.
Chuck ANTEC.
Can you talk about how you see the hydrogen market evolving in North America now that it seems that exxonmobil wants to enter it.
See other integrated oil companies is entering the hydrogen market as well.
Do you see them.
And hydrogen in a way that's different from the way you.
Sell it can you give us an idea of what that market looks like over the next few years competitively.
Sure Jeff.
So as you think about the evolution of the hydrogen market. There are three aspects to keep in mind.
First at a lot of the development around clean hydrogen is driven through a range of partnerships and youll recall.
Linda laid out our strategy, we said that partnerships are a key component of that and you heard me speak earlier mentioned that Exxonmobil will be a partner for us as we look at sequestering the cotwo downhole as well so that just just to keep in mind that thats one of those developments and we are actually partnering with.
A number of players including <unk>.
IOC and NOC that have an intent to try and develop their own.
Their own projects around hydrogen because they lean on us to provide either technology operating experience or indeed, sometimes the benefit of our network. So that's one the second thing to keep in mind is we have the ability to leverage our existing.
Infrastructure that we've built over decades.
Supports that $3 billion business that we have in the U S Gulf Coast.
And really I think thats, where our competitor advantage for Lindsay turns up very often other partners or potential partners reach out to us because they recognize the impact on vantage that we carry as a result of that infrastructure investment and want to partner with us as well. So that's the other piece to kind of keep in mind last a number.
Players will want to decarbonize their operations and what you're speaking about the specific example, Jeff is driven around decarbonization of their operations in Baytown.
Yeah.
Here, what they're attempting to do is to actually produce significant hydrogen you mentioned 1 billion scarf.
And a large portion if not most of that will actually go into decarbonizing their own operations. Obviously the support from 45 to <unk> makes that more attractive makes that hydrogen going in as an input into their crackers into their chemical systems downstream into the refining system a lot more attractive.
The pricing point of view and Youre seeing that as a development that's happening.
I'm pretty sure.
We're hopeful that we will have a role to play in those projects that people like Exxonmobil and others will undertake through the provision of our technology and operating capabilities as well.
And Jeff This is Matt maybe just one other thing I'd add I think another way to think about it is when you look at the hydrocarbon market today for sort of transportation and energy, it's somewhere in the order of six trillion dollar market and I My numbers may not be exact but it's something in that order and when you look at the industrial gas industry our participation.
And that market is a fraction of a percent.
So in my view a lot of that six trillion dollar market is what is being addressed and potentially converted to things like hydrogen and so if that happens I think that actually creates opportunities in areas that we had a very very small participation and in the past, but time will ultimately tell.
Thank you.
The next question is from Duffy Fischer with Goldman Sachs. Your line is open.
Yes, good morning.
The important thing to remember there is that these projects have a lifecycle that they need to go through before they get announced.
Beyond that you will then see another two and a half to three years and execution before final startup happen. So that's the way I think about the frequency that you would expect to see projects. These projects have been under development for a while and you kind of continue to see those announcements, reflecting the different stages of these projects IRA.
And as far as the guidance Duffy, So I'll start with and as you probably know when you think about two economic metrics that might be proxies to think about would be industrial production and then CPI for inflation.
I'm not going to tell you what we think because whatever it is it's wrong nobody knows what the future will bring on that but what I can say is we continue to <unk>.
Internally focused on a model that can quickly adapt to whatever does happen and clearly we're seeing inflation continued to be elevated and we need to make sure that we can locally manage that through our contract structures to capture that inflation through pricing to make sure that we can continue to.
Stay on top of that on the volume side, we are well positioned to capture when it recovers as you know we are a contractual business as Sanjay mentioned, we demonstrated that in 2021 with the recovery if and when that comes back we will be very well positioned to do that but for now we just left out there sort of.
Black no improvement view similar to what we've been doing over the last two to three years and we'll see how it plays out but I feel quite good that no matter what it does bring will be prepared to quickly adapt.
And manage it.
Okay. Thank you guys.
The next question is from David Begleiter with Deutsche Bank. Your line is open.
Thanks, and good morning, Sanjay just on EMEA, a pricing with energy prices now falling how should that flow through the energy price or the pricing realization in Q2, and the rest of the year.
So David I've mentioned briefly when responding to Mike earlier on that.
In terms of pricing as we've explained before I'll take I'll take a step back and just remind you that when we think about pricing, we think about our pass through mechanisms that as the onsite contracts.
Where we have a direct correlation between what happens to cost.
Energy costs in particular, but inflation, how we pass that through the balance is also a pricing mechanism. We had explained previously as inflation was picking up in 2021 that there is usually a lag that happens at the beginning of that cycle. We are now at the back end of that cycle, where youre seeing energy costs go down.
And again that same lag applies over here, we've said that lag is between one to two quarters and we're seeing a little bit of that lag.
And benefiting us of course in terms of the pricing that we're seeing on the merchant and package side of our business.
Of course.
Pricing takes a lot of hard work as I've said previously on a number of occasions and our team over there has done a tremendous job in making sure that we continue to push that base price through.
Of course instances, where <unk> had surcharges to the extent possible we have a continuous process of converting those surcharges into based product pricing and sharing that we have those price number that pricing action stick longer term as well.
Very good and just on the volumes do you expect volumes to be down for the rest of the year in all three quarters.
So.
Year on year, we are seeing some softness in EMEA volumes tends to be around the onsite business in particular chemicals and energy more specifically.
The question.
The volumes so youll competitor would also were pretty good.
In Europe I'm, assuming the side so just wondering.
It's a real driver between that margin you're seeing underlying in Europe . Thank you.
Yeah.
Thanks, Peter So on pricing I can say to you that <unk> seen robust pricing over the last three quarters consistently across all our segments and I think we're pretty happy with how pricing has played out I'm not going to get into the details around what is specifically happening around medical or health care fees across.
Across the board most of our businesses. Most end markets has seen strong pricing growth and I think we're pretty satisfied with where we are and we tend to lead the industry as far as that pricing growth is concerned.
In Europe package, that's a great question I think we watched this very carefully.
The good news is on the volume side.
Those volumes have been holding well.
And have been very resilient through the last 18 months or so so that's really been an important base pricing has been very good I mentioned EMEA pricing more broadly clearly the package side of that has benefited from that as well and has shown strong pricing performance over that entire period, including the first quarter that were that were now referenced.
Thing I certainly expect to see.
As industrial activity picks up so an important factor in all of that was stability and energy costs that seems to be in place at the moment. Peter I think it's still open what longer term impacts there might be but at least in the short to medium term, we are seeing that stability play a role in some level and very slight pickup.
If you will and as industrial activity across the board.
That certainly helps the merchant and package business. So I would expect to see that volume trend play out as we see those developments continue.
Yeah.
Thank you.
The next question is from Steve Byrne with Bank of America. Your line is open.
Yes. Thank you.
I would like to better understand the mechanisms by the pass through cost is there.
A month or multiple months delay and how that is pass through.
Given natural gas costs in the U S and Europe have plunged in Europe cost pass through was.
For fairly neutral is that is that another lag effect similar to the comment you made on European pricing, you'll have this lag effect. These two things combined do they did they represent.
Some operating profit in those regions in the first quarter.
Really was.
Driven by lag.
Steve So let me start off by just kind of.
Providing a headline that says as far as pass through is concerned there is no impact on our operating profit in dollar terms.
<unk> adds to the top.
And it doesn't add anything to the <unk> when it's on its way down as it is at the moment. It goes away from the top and doesn't add any any dollars from from an Ob point of view of course, it does impact the margin numbers and the mathematical computation of the margin does improve as a consequence of that when youre on a down cycle as far as.
Costs are concerned addressing a specific question contractually we are able to manage the pass through on I would say, what I would consider a real time basis effectively a contractual invoicing methodology would allow us to pass it on every every week fortnite or months, depending on how the contracts are structured so there isn't any.
Difficult lag as I mentioned on the pricing action for merchant and package, where there tends to be a lag of one to two quarters not in the case of pass through.
Okay. Thank you.
The next question is from Michael Sison with Wells Fargo. Your line is open.
Hey, guys nice start to the year.
That backlog will be for clean energy down the road and is there a limit on how much you can put in your backlog.
So Mike at the moment I think I referenced earlier, we've got about just under 2 billion. That's what the slide would show you in the sale of gas. We've got about just under $2 billion of backlog coming out of the galvanizing projects. If you will.
<unk>.
Our expectation is that in the next two to three years.
We'll be making investment decisions anywhere between 9% to $10 billion worth.
This is based on the projects, we are developing which are further advanced than others.
And those decisions depending on the ones that we pursue and win and sign up will then get more.
Moved into the backlog and would then start providing.
The impact that we look forward once the once they start up in due course.
So you can expect the backlog to continue to grow.
I do not expect it to pick up and down I expect it to be a reasonably steady growth in the backlog over the over the years ahead.
And that decision those decisions that we make in clean energy projects that I referenced before of anywhere between 9% to $10 billion over the next three years.
And what finally happened in that backlog.
Great. Thank you.
The next question is from Vincent Andrews with Morgan Stanley . Your line is open.
Thank you good morning, everyone I just wanted to ask on the buyback.
I would have guessed given the delisting from Frankfurt.
The big cash balance the end of the year.
To put more money to work in the first quarter and the buyback, but it didn't look like you had to so given that you are still sitting with a pretty large cash balance.
I guess you did the the.
Packaged gas acquisition, but how are you thinking about using that cash balance and the ink.
Incremental capital you generate free cash flow this year in terms of return of capital to shareholders.
Sure Vincent this is Matt.
Specifically to Q1, you may recall for pretty much the month of January we were officially blacked out.
Any buybacks at all.
Given the nature of the merger structure that was used to do the dealers. So we lost it.
About a month or so and therefore, we had less days to act, but we did get pretty I would say aggressive leading right up to it.
As we saw some good opportunity there, but looking forward. It really is just going to be a consistent approach to our long standing steady simple capital allocation model.
And to reiterate for those on the call. It starts with our underlying mandate, which is we're going to maintain a single a rating and grow the dividend every year that is a mandate and then our priority. After meeting that mandate is to invest in the business and that is anything that meets our investment criteria, it's acquisitions at stake assets projects and space.
Capex, we treat them the same as we should because these are long term investments and we need to evaluate them on risk return against our core model and then whatever is left over is going to be buybacks. So based on our current cash profiles. We continue to have substantial capital leftover and therefore, we will be <unk>.
And the market pretty much almost every day.
And as we continue to see opportunities will will step that up but that capital allocation policy will be very consistent through good macro times and bad macro times and Thats something that you can rely on for us for the long haul.
The next the next question is from Laurence Alexander with Jefferies. Your line is open.
Sure. This is Matt I can handle that.
As I mentioned in the prepared remarks, and first of all our approach is very consistent in how we've been approaching this for the last couple of years, frankly, and we believe our view of the economy is not going to be any more accurate than anyone else's. So we'll just put a baseline there no improvement and let you put your house view in whatever that may be.
So in the case of if the macro deteriorates, we will take actions to mitigate clearly we saw that in 2020, and we took actions and you may recall, our full year EPS growth rate in 2020 was close to 12% growth rate. So those actions did help mitigate what was a pretty unexpected macro.
Clients in the pandemic. Similarly last year in 2022, we saw some macro softness related to the energy crisis.
And obviously the invasion and so given those we have a track record of being able to act in case, those disruptions happen and as I mentioned to Duffy. That's how we build our operating rhythm is to be able to quickly respond when things are different in the macro than what was expected. So I view. This as the same time will tell but.
Our base is very local we can react locally to what happens locally because as you know the macro.
And every country may be different and that's that's how we need to approach it.
Thank you very much.
The next question is from Kevin Mccarthy with vertical research partners. Your line is open.
Yes. Good morning, Sanjay can you provide an update on your carbon off take strategy last quarter. I think you indicated you were in discussions with three companies and earlier. This month, we learned that you've chosen to partner with Exxonmobil. My understanding is that partnership relates to.
OCI Beaumont, specifically, so a couple of questions would be on the case of future blue hydrogen projects.
Do you need to navigate the off take.
Each time on a case by case basis, and also can you comment on the costs and recovery of those costs as.
As you negotiate these projects. Thank you.
Thanks, Kevin.
So the last time, we spoke about this I mentioned that there are two ways in which we look at.
The storage the capture and storage of tier two.
Particularly for Blue hydrogen projects in the U S and really thats driven around the IRS benefits that come out of 45, Q, providing that $85, but Donald <unk> two to be captured and sequestered.
And the two models I've mentioned was a tipping fee I E where Linda.
Lindsay what all the capture and would create a pipeline that would then provide.
Provide that <unk>.
To a partner who would take a tipping fee.
And sequester it manage that storage underground.
The other option was for us to sell this year or two that we have and allow the partner to take the benefit of whatever tax credits that come as Bob 45, Q through their ownership of the carbon capture and sequestration.
<unk> and the assets of the build in order to achieve that.
We've mentioned that we were in conversations with a number of players and as you read from the from the announcement, we selected that worked with Exxonmobil to continue down that path that's abated the OCI.
Oh, two coming out of the OCI assets and the production of Blue hydrogen would be passed on or off taken by Exxonmobil and sequestered by them and managed long term.
As we think about new projects and that we are currently developing we have an opportunity to work with partners, including Exxonmobil and others too.
To look at it on a case by case basis.
Given that we have a well established model with Exxonmobil, we will pursue that with them.
Period of seven years to make up that 12, and it will be have a tax credit that goes below the line I mean, recognizing that we're trying to build as much flexibility into the operating model that we want to pursue in those conversations were having.
One of those has been decided with exxonmobil to others will just follow and we've kind of worked out on a case by case basis.
Thank you very much.
Okay.
The next question is from Geoff Haire with UBS. Your line is open.
Yes.
Good morning.
A question on Asia I noticed thats on volumes you were sequentially down 4% I was wondering how that plays out for the rest of the year or there was something specific in Q1 and then just one small question additional if you don't mind.
The cash flow how does that play out for the rest of the year just given obviously as you want on the Russian businesses.
To respond to you on the cash flow so.
Just as a quick reminder, Jeff the first quarter in Asia is usually impacted by seasonality of the lunar new year has a big impact across that region. So youll see that and when you see sequential movements, that's something to keep in mind. However, let me just give you a kind of a snapshot of what we're seeing in Asia anyway year on year sales are growing they are pretty strong across.
The end market slide that we provided.
We think most of that is coming out of memory.
Feedback from customers suggest that we're likely to see.
That's kind of a normalization of activity in the second half probably towards the backend.
I've also mentioned previously and I think we see that trend continue Jeff in terms of China, Teal volumes being soft we continue to see that in Q1 as well.
And of course.
One of the things to keep in mind. When you think about the year on year movements is that we had some sale of equipment sale that happened last year, which kind of.
That doesn't help with the comps when you look at year on year, but sequentially, primarily Chinese new year impact or the lunar new year impact across the region.
And then the movement that I mentioned to you across the different end markets.
Yeah sure. Thanks, Sanjay so Jeff.
I can start with when you think about engineering. It follows what's called percentage of completion accounting and the basics of that for the most part we get paid in advance. So it's negative working capital, which is a good thing and essentially what happens is the customer will pay us in advance of a project and then we will debit cash and then.
We will credit what's called a contract liability and then over time, we work against that contract and then as we recognize that work that would go to the income statement and then we would reverse portion of that liability and it would go and be recognized as revenue.
And in a normal project Thats about a three maybe four year.
Very structured very well disciplined and defined.
Engineering build rate and that's what you've seen from us essentially since since the merger right for the last four years.
In the case of the sanctioned projects that obviously created an event.
<unk>, where we needed to immediately stopped all work in Q2 of last year now the good news is our contracts address this they have what's called a suspension clause.
But you can imagine in these contracts what we do primarily is what's called E&P engineering and procurement, we really don't do much construction so with the E. That's our labor internally in the Pea are things, we are procuring around the world from vendors in China, or Europe , or the United States. So when you get a contract in suspension like we've had due to sanctions you.
And so that's what's creating this volatility and what youll see in the 10-Q when we when we issue that later today is the total contract liabilities for engineering as of the balance sheet date. So end of March stands at about $4 billion. So again, what that means is we received 4 billion essentially in customer payments of which we have yet to.
To work off now within that one $8 billion or specifically part of projects that have been sanctioned so that's the kind of the number we're working within within that $1. Eight 1.2 is one specific project called RCA that will probably take some time to address my view is could be a.
Thank you do you think the new EPA greenhouse gas proposed rules for power plants will drive U S adoption of ammonia combustion.
Which could help your hydrogen backlog or do you think it's going to simply accelerate the replacement of coal fired power plants.
As part of the development to manage emissions around our own thermal power plants. The other piece of that is obviously being worked on at the moment is to see a direct injection of ammonia are 100% into new <unk> wood.
Initial results seem to suggest that it looks promising and therefore, I would see ammonia potentially benefit longer term.
As a direct power source for such part of it doesn't when they get kind of deployed and installed.
Lastly, there is always the option to consider it is hard to abate, but there is always the option to consider given the geology in the U S. In particular, the opportunity to try and capture even though it's small.
Kind of levels of CODI in the emissions to try and capture that and sequester it.
As another option, particularly made a little more attractive with the 45.
<unk>.
Tax credits that become available as well. So we think there'll be a combination of things that will happen. We are working with Oems on the ammonia injection. We are working with partners to look at ammonia developments to support that injection.
But all of that will take time to play out.
Thank you and nice quarter.
The next question is from Christopher Parkinson with Mizuho. Your line is open.
Great. Thank you. So much you hit on this a little on your backlog commentary and what you plan to deploy but can you just talk about the prioritization and about the $3 billion of capital.
Lindy specific projects.
Previously been highlighting thank you so much.
Okay.
Chris.
Youre right. So I mean, when we go back and look at what we put out earlier on when we talked about the 30 plus billion, we said decarbonizing our own operations, we expect to invest about $3 billion. We have about 11 assets in the U S. Gulf Coast that we think.
What qualifies for that there is active work happening and in fact later today will have a discussion on one of those first project that we're looking in that space I'd be upfront and tell you that I'm looking at a combination of two things when we make those decisions on that 3 billion that we talked about obviously the timing is in our control.
But what I am looking at is to make sure that we have an asset that has long term contracts underpinning. It so that I have the ability to generate blue hydrogen and provide that back into my customer network and the second is to just make sure that I have an effective.
Project that meets that investment criteria, we set out.
While I'm clearly committed to reducing our emissions for scope, one which is what happens when I decarbonize our own operations at the same time I'm also committed to making sure that we provide appropriate returns to our to our shareholders as a consequence of putting asset or money on the ground in terms of assets. We're trying to match those two to make sure that.
We have customers, who will have willingness to offtake the blue hydrogen and allow US to then go ahead with projects like that.
We expect to see that momentum building up in the next five to seven years, we will see a lot more of that happen.
Very helpful. Thank you so much.
The next question is from Andreas Heine with Stifel. Your line is open.
And most question have been answered only two small ones are left if I look on the EMEA margin and compounded with Americas and the difference if I look on Q1 is just 100 basis points.
As you outlined that the same margin is.
Function of energy prices and energy prices in Europe , obviously significantly higher than in the Americas I would come to the conclusion that at this stage.
Unit margin in EMEA is basically substantially higher in America.
Is that fair.
<unk> confusion.
And secondly could you give some flavor how big these dow contract might be as it is more of the energy part than the product itself delivering two I would assume that the Dow coach Inc.
Can be smaller than that OCI VSAT.
Good question.
And let me start with the Dow contract I'll, let Bob give you a little more a little more color on the margins, although I do want to remind everyone on the margin improvement we've seen in EMEA, which has been pretty pretty solid.
On the Dod contract OLED, all I can say at this stage is there are many learnings that we're getting out of the OCI contract that we are applying to what we see in the downside adult project that we're currently doing a feed on we feel pretty good about the size and scale in terms of that those learnings being applied over here, but really beyond that at this stage it's too.
Early to tell we will get to an <unk> before the end of the year.
I expect and I think at that stage, we'll be able to kind of properly define and tell you what that investment looks like and what the size of that asset looks like.
Just on margins before I hand over to Matt I, just wanted to remind you that sometimes people forget, but and I go back to quarter. Four 2018 now margins in EMEA were at about 17, 5%.
Since then we've seen EMEA margins improve every year, not just driven by energy, but driven by all the management actions that we thought with necessary by almost a thousand basis points.
Getting us to that $27 nine that we're talking about today. So there has been a fantastic.
The effort put in by the EMEA team and I do want to just love that effort and say that that gradual improvement has been has been absolutely spectacular in many ways, but anything else to add on the margins for sure.
So maybe it also kind of gets a little bit to mikes first question.
I think you can analyze the margins on the incremental lot of different ways, but from my perspective, I think the way to think about it is the broader longer term view and something we've set a lot on many calls going back for several years now which is when you look at the three geographic segments of <unk>.
And based on that view in theory, they should all be able to achieve similar margin profiles and to <unk> is the exact point 2018 as the baseline when we initially emerged we had very disparate margin profiles across three geographic.
Regions that we viewed Sn.
Essentially homogeneous fleet and through the years through a lot of great hard work. This is this is not something that's easy and its something that takes time.
In other regions as that sounds it's looking at.
Yes, actually we disagree with that I think we're talking about a couple of different things here and maybe we can we can sort of talk about them.
From a return perspective, the energy will make no difference to us when we look at project investments, we look at Unlevered. After tax IRR is and as you know in these investments we pass through energy so from that perspective, the energy price really does not have any bearing on how we look at cash returns separate.
And distinct when you are in a gas region that is high energy costs that may create high inflation and hence high pricing to your point and what we're seeing in EMEA as a higher pricing environment because of that inflation, but also realize there is a lot higher pass through in general, which also dilutes margins.
We will now take our final question from Mike Harrison with Seaport Research Partners. Your line is open.
Hi, good morning, Congrats on a nice quarter.
Im curious what youre seeing on the hard goods side in areas like capital equipment and robotics are you seeing any signs of a slowdown and my second question is now that you brought Max air into the fold maybe.
Maybe talk a little bit more about how that.
Deal is healthy to expand your footprint and drive potential synergies and do you see further opportunities.
To consolidate in U S packaged gases.
Okay.
Thanks, Mike.
Both good questions. So.
Let me start over the U S packaged gas business and again just to kind of.
Recap, we had double digit sales growth in the quarter, so that was pretty solid.
Even based volumes for both gases and hard goods grew mid single digits.
As we move as we move forward as well so.
Safety are not going to try and speculate but there'll be a recession and all but I'd say to you that whatever we are seeing at this point in time.
As far as next era is concerned firstly very happy with the fact that we closed it.
No.
Alright, thanks very much.