Q2 2023 Linde PLC Earnings Call
Ladies and gentlemen, good day and thank you for standing by.
Welcome to the Wendy's second quarter, 2023 earnings teleconference and webcast.
At this time all participants are in a listen only mode. Please.
Please be advised that today's conference is being recorded.
After the speaker's presentation, there will be a question and answer session.
And I would now like to hand, the conference over to Mr. Juan Pelaez head of Investor Relations. Please go ahead Sir.
Yeah.
Thank you Abby.
Good morning, everyone and thank you for attending our 2023 second quarter earnings call and webcast won't be life of Investor Relations.
Joining this morning by Sanjiv, Lomba, Chief Executive Officer, and 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.
So Archie will provide some 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 now turn the call over to Sanjiv.
Thank you Juan.
Good morning, everyone.
Linda team once again delivered strong results despite the challenging environment.
For the second quarter, we grew EPS ex FX by 16% expanded margins 440 basis points and increased return on capital to 24, 9%.
These results don't just happen on their own.
They require a strong execution culture, and operating rhythm, which ensures that all 66000 employees are aligned to what's creating shareholder value.
I am proud of how we've demonstrated this resilience quarter after quarter, regardless of the economy.
Did this and we are seeing some economies stagnated start to soften as evidenced by recent data.
I'm not going to try and predict what the future is going to do because nobody really knows.
But I can tell you with some confidence that Lindsay will continue to manage what we can control and deliver on our commitments, which is reflected in our guidance for the year.
For example.
We are managing inflation by contractually passing through energy cost variances, while securing price increases which are aligned with local market trends.
This is a key part of our contractual structure and operating discipline that we've consistently demonstrated for decades.
On top of this we continuously optimize costs sort of robust productivity initiatives ultimately, it's the spread between price and cost which adds compound value.
After that our backlog that fuels growth.
We are currently executing our 7.8 billion dollar project backlog.
And on budget.
For me the healthy backlog contains quality customers with secured returns and is constantly turning over.
In the last 12 months alone.
We started up 22 projects valued at $2 $1 billion, while winning 38, new projects valued close to $3 billion.
Looking ahead investors can rest assured we'll wind projects that add value commensurate with the risk.
With this in mind, we continue to make good progress on the $50 billion of clean energy opportunities of which I expect 9% to 10 billion to be decided in the next few years.
We're also adhering to the long standing and proven capital allocation policy, which has consistently demonstrated industry, leading financial performance and shareholder returns.
We continue to see ample quality growth opportunities within our traditional industrial gases business.
This year, we made the largest acquisition in Linda history with next set.
Significantly enhancing our packaged gas presence in the fast growing southeastern United States.
I'm happy to say, it's performing well ahead of expectations and further validates our tuck in acquisition strategy.
In addition, we will consistently return capital to stock repurchases and increasing dividends.
Bullets to reward all of those.
And also ensure investment discipline.
Let me now wrap up with a quick overview of end markets, which you can find on slide three.
Starting with consumer related markets.
We have positive year on year organic growth, primarily driven by price increases.
Sequential trends are subject to seasonality.
So youll see less respiratory health care, but more beverage combination during warmer months.
Health care itself is growing mid single digit as expected and food and beverage continues to expand as we see more applications for food freezing and aquaculture.
While electronics was up versus prior year.
We see some sequential softness from law packaged and merchant sales into fabs, although the onsite volumes appear to be stable.
But the industrial markets, both manufacturing and metals and mining are growing 9%.
Led by price improvements as well as strength in battery production commercial space and carbon steel.
You can see that chemicals and energy is growing the least at only 1%.
And this is primarily driven by customer done rounds in the United States as well as lower demand in Europe .
I expect the U S to improve for the second half since the number of customers already back up.
But it's difficult to project, how European demand will develop.
You will recall that these contracts are underpinned by fixed payments. So a profit impact is mitigated.
In fact since our merger we have grown EPS in average of 19% from.
From 2019 due today.
This was achieved against the backdrop of a global pandemic supply chain constraints energy crisis military conflict and the largest inflation increase in decades.
It's because of this track record and the daily execution of our dedicated employees.
I continue to have confidence Linda will grow EPS double digit percent on average regardless of the economic environment.
I'll now turn the call over to Matt to walk you through the financial numbers.
Thanks Sanjay.
Slide four provides an overview of second quarter results.
Sales of $8 $2 billion are down 3% to last year, but flat sequentially.
The comparison has some noise related to movements in FX translation.
Engineering project timing divestitures and cost pass through.
As you know, we contractually pass through energy variances, which can cause fluctuations to revenue, but have no impact to profit dollars.
Excluding these items underlying price and volume are up 6% versus prior year and 3% versus first quarter.
Higher prices are the main driver of underlying sales growth.
With an increase of 7% versus 2022 and 1% sequentially.
Consistent with prior years pricing trends are representative of the weighted inflation rates across our countries of operation.
And while we're seeing some disinflation and more developed regions, we're not seeing deflation.
If the disinflation persists I'd expect moderating price increases going forward, especially as we lap prior year comps.
From a volume perspective sequential trends played out as expected with a 2% seasonal improvement but.
But year over year is down 1% despite positive contribution from the project backlog.
There are two contributing factors to the base volume decline.
About a quarter relates to lower onsite volumes in the U S Gulf Coast, where customers took more outages than last year.
Most customers are back up and running so we anticipate sequential volume growth into Q3.
The remaining decline primarily relates to EMEA, which had a 4% volume decrease led by onsite customers.
Despite the lower year over year volumes operating profit of $2.3 billion increased 15% and resulted in an operating margin of 27.9% representing.
Representing an increase of 440 basis points or 350 basis points, when excluding cost pass through.
This profit growth was achieved from a combination of higher pricing.
Fixed payment contracts to mitigate volume decline and a stable cost structure.
Every region achieved triple digit basis point margin increases when excluding cost pass through effects.
EPS of $3.57 rose, 15% from prior year or 16% when excluding the effects of currency.
As Sanjiv mentioned, we remain confident in our ability to deliver an average EPS growth rate of double digit percent.
Project Capex is increasing from a larger sale of gas backlog trends I expect to continue.
However, despite the higher Capex return on capital reached another new high at 24, 9%.
As our no Pat continues to grow at a rate faster than the capital base.
Slide five provides more color on capital management, including cash trends.
Second quarter operating cash flow of $2.2 billion was only up 1% from last year, Despite the higher earnings.
This is due to unfavorable cash tax timing, which increased almost $300 million in the quarter.
These outflows will stabilize for the second half and so I expect the ocs to EBIT DAU ratio for the balance of the year to be closer to the expected low 80% range.
Available operating cash flow, which we define as ocs less base Capex remained steady at $1 $6 billion per quarter, and thus provides ample liquidity to pursue our capital allocation policy.
You can see in the Pie chart.
Through six months, we generated $5 $4 billion of capital and returned a little more than half to shareholders, while investing the balance back into the business.
We believe this is a healthy ratio to achieve quality growth while rewarding owners.
And to be clear, we are not capital constrained in anyway, and thus, we'll pursue all growth investments, which meet our criteria.
I'll wrap up with guidance on slide six.
Uh huh.
We're raising full year guidance to a new range of $13 80 to $14 or 12% to 14% growth over 2022.
This represents an increase of 35 on the bottom end and 15 cents on the top of that.
The top end increase is primarily attributed to the better Q2 results while the second half assumption is consistent with last quarter.
Therefore at the 14 dollar figure assumes no economic improvement for the remainder of the year.
The bottom end increased more as we tightened the range from greater confidence on the year.
By default the bottom end assumes economic contractions and more negative volumes going forward.
Consistent with prior guidance. This does not represent our economic view, but rather is the baseline for the assumption.
Irrespective of what happens, we'll manage the business accordingly.
For the third quarter, we're providing an EPS guidance range of $3.48 to $3 58 up 12% to 15% versus prior year.
Consistent with the full year assumption the top end assumes a flat economy and below that implies more recessionary conditions.
Note that FX is a 2% tailwind for the third quarter, but has no impact to the full year.
To sum it up.
Regardless of the economic rhetoric or latest opinion on what part of the cycle. We're in.
Linda employees will continue to do what they do best.
Recently around the world, leading industrial gas and engineering company.
While creating long term compounding shareholder value.
I'll now turn the call over to Q&A.
Thank you.
If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star One a second time and we will pause for just a moment to compile the Q&A roster.
And we will take our first question from Duffy Fischer with Goldman Sachs. Your line is open.
Yes, good morning, guys a.
Question off of Matt's comment that you know we.
We may be getting towards the end of what's been a really nice pricing cycle, if that pricing increase drops back to kind of historic maybe 20 year trend line numbers, how do you continue to grow double digits and that kind of an environment.
Sure Duffy.
I think first to start with and as I mentioned and as you well know our pricing, we always view as a function of inflation and this will be the globally weighted average inflation.
So I think starting with that I won't tell you what our pricing will be its more a function of where you think inflation will be.
And when we look at the you know at least 10, if not 15 year trend arguably inflation right now is clearly higher than what it's been before especially when you think post 2008, we.
We definitely saw a significant disinflation and even deflation back in those years. So from that perspective, while we continue to expect to price to inflation and we are seeing disinflation in developed markets I still would expect our overall pricing to remain in line with overall inflation, which I expect we will continue to be.
Higher than what we've seen at least in the last 10 years.
Aside from that we as you know have a lot of other factors, including our backlog startup we have.
We'll see what happens with volume, but right now if we do see inflation abate in theory, you could probably see some volume start to come back.
And we will continue to have a lot of strong free cash flow that will deploy and everything from stock repurchases to things like acquisitions.
For a roll up strategy like Sanjiv had mentioned so overall as the economy moves you know with pricing and inflation. You may have also industrial production trends that could go the other way and that's what we've seen over the last several decades, and we'll see what happens going forward.
Fair enough and then.
Maybe on a couple of different numbers were about a year and to the inflation reduction act being passed and sanjiv kind of two times, you've come out with that $33 billion number last fall now.
Now kind of a more global 50 billion dollar number and kind of over a decade period, if those numbers come to fruition, how would you scope when we get to kind of maximum backlog and what that May look like and then what would kind of the capex shape look like over that decade long period as those projects roll through.
Our backlog.
Sure. So there are two parts to the backlog I'll I'll quickly cover the clean energy piece, which you are referring to on the IRA and other incentives we see around the World Duffy and then we will briefly just talk about the traditional end market, which tends to get forgotten a little bit, but we're also seeing interesting project pipeline of growth as well, but let's start with the clean energy piece and really.
The way I look at that backlog today is just looking at what is feeding into that potential backlog for the future and what are we currently developing that's likely to result in that backlog.
The answer to your question I think in brief is over the next five to seven years will continue to see this backlog growth, we'd like to see it grow added at a relative base increasing year on year and I think that's on the basis of the amount of activity we see.
Say to you we are still pursuing about 200 projects that I've referenced before we went out and told you in the U S. B I R. A is driving it.
A potential project pipeline for us, where we make decisions on about $30 billion over the next 10 years and I certainly see that backlog reflect as those decisions get made as we move forward I'm also happy to say that we are actually seeing most of those projects progressing extremely well in the U S and Canada and even outside in the middle East in Euro.
We're up as well.
Project development cycles kind of tend to take a little bit longer I explained that in the last earnings call. You know, there's there's a lead time anywhere between 12 to 24 months between our premiums ability of feasibility to feed them to get down to the final investment decision. So the timing tends to be a little bit lumpy, but you will see that happen as we as we move forward.
I'll also reiterate that I expect over the next few years decisions around 9% to 10 billion, which are more tangible in terms of projects that are currently getting developed all of that translates once those decisions happen into the backlog.
Duffy I'll, just go out and add a little bit of flavor on the traditional markets as well our traditional end markets are seeing a fair amount of strong proposal activity.
And this includes all the decarbonization that we just referred to the opportunity pipeline is spread across many end markets here, starting with electronics metals energy chemicals.
And includes a few Decaf division opportunities for us as well as.
As you know our current sale of gas backlog is about $4 4 billion.
That's after we adjusted for the $1 4 billion for the Singapore project. So we took that out as we are starting ramp up on that already.
About 50% of that backlog today is around our traditional end markets and we see potential for continued growth in there.
I expect the backlog probably towards the end of the year to be closer to about a 5 billion number.
Okay.
Great. Thank you guys.
We'll take our next question from Mike <unk> with Barclays. Your line is open.
Great. Thank you good morning, guys.
First I just wanted to ask on EMEA business has continued to grow earnings fairly well, while European economic and chemical indicators remain quite weak. So can you just talk about what's enabled you to outpace the broader market.
How are you your comfort around the sustainability of the sort of earnings level of growth.
In the context of if we assume the European economy remains sort of assets today.
Sure Mike So, let's go back a little bit and in time couple of years ago. The EMEA business went through a reasonably large restructure essentially intended to reset that golf space at that stage. We obviously couldnt look at the end of the war in Russia, all of the energy crisis or any of that but we just felt that it was about time that we.
We've got a reset on that cost base, and that's really what's holding us in a good step today, obviously, a lot of productivity actions productivity deeply embraced across that entire business today is paying out good dividends and obviously they've managed very disciplined pricing over this period as well, which was absolutely essential given what happened to energy costs et cetera.
I see.
EMEA performance and the team has done a fantastic job IC EMEA performance holding in and continuing to move forward I see them managing their their business in order to make sure that margins continue to hold our hopefully go up slightly as you would expect from our business.
Okay.
Great. Thank you and then just briefly a housekeeping question on electronics I believe TSMC delayed the start of their Arizona fab by about a year or so with that also delay your sales for that site by an equivalent amount.
Mike My expectation is we will stop that TSMC first plant second half of this year you know even before the fab actually stopped a lot of product is needed to make sure that tools are in place and test. It out. So that process has started all fabs go through a ramp process I suspect tsmc's announcements will probably related.
The other negotiations that we're having rather than the actual startup of the <unk> and how it progresses in terms of its ramp.
Alright, Thank you guys.
We will take our next question from Jeff Zekauskas with Jpmorgan. Your line is open.
Thanks very much.
That the multinational oil companies have been outsourcing hydrogen production to industrial gas companies because they believe that their returns on capital are higher in drilling for oil and gas.
But now that the inflation reduction act has been passed the returns on capital for them for producing their own hydrogen rise because they get a tax credit and we're beginning to see over a longer period of time the.
The multinational oil companies wanting to produce hydrogen.
So in your opinion when you look out over the next 10 years do you expect to see lower hydrogen demand from your traditional hydrogen customers that will probably back integrate or do you think that dynamic is different.
So Jeff I'd say to you that the dynamic from our perspective looks a little bit different than I'm going to kind of drill down a little bit into into the hypothesis you've laid out so let's look at it from a perspective of Lindsay perspective, and I'd say to you we see the following as it plays out related to hydrogen now.
Went back in time as they look into positive outsourcing that's absolutely right and the reason they had outsourced at from the economics was a fact that Lindsay handles those hydrogen plants extremely well, it's the core of our our.
It's our bread and butter part of our business, we know well, we manage those processes well, whereas in a large refinery or chemical complex those assets by themselves and really do not get optimized. So there is a value that gets unlocked by bringing up a very competent operator like lindy into the mix, but thats, how <unk> observation happened in the <unk>.
And I suspect will happen in the future as well.
Talk about the actual hypothesis that you've put forward not safety three things happened from a linear perspective.
What the fuel market, which thus far was managed and if hydrogen as a part of the fuel market. A few portfolio lending now has access to a much larger piece of cake. The buyer has grown if you will and our ability to tap into that because the hydrogen all played a role in that.
Creates a huge advantage.
The expectation is hydrogen market will grow to maybe about 150 billion over the next 10 to 15 years.
Again, the fuel market itself. If you if you look at the entire number is anywhere between six to seven trillion. So even a small slice of that buy makes it very interesting from a linear perspective, so we have a new market opening.
It is now available to us in some ways. The other piece I'd say to you is that the leverage hydrogen production for merchant requirements, let's let us describe that from an IOC NOC perspective, if that's what you're referring to I would say what is necessary as the installed base of assets if the network of pipelines and if the contract.
Customers hooked onto those pipelines, which obviously created that advantage. The reason I mentioned all of that is because Linda has the ability to scale that up and provide hydrogen to refiners. In addition to ensuring that surplus hydrogen that's taken and put into the pipeline network, providing a significant advantage and obviously getting us econ.
Ill make returns that would not be available on a standalone asset basis the.
Third point really is around risk debt.
And I'd say again, the benefit that Linda has in the U S. Gulf Coast, which you would but you saw Jeff a couple of weeks ago. The net wells that we have over there provides a high degree of redundancy using the cavalry using the multiple assets hooked onto the network, reducing the operational risk with single.
Loss, either sites or plants, and again that advantage that Linda carriers will be enormously valuable for all.
<unk> customers in the U S Gulf Coast, and I think they will they they value that today and as we continue to expand that network. They will value that even more as we move forward all of those provide the competitive advantage we're looking at.
However, I'll accept the point that I think as far as Iras there for a period of about 10 to 12 years, there will be some financial benefits that will accrue from either owning those assets, but in many of those cases people might own the assets in Austin Lindsay to either incorporate that into our network and <unk> operate and manage it as well again, providing greater opportunity for.
As you put that together I think that's essentially what the hydrogen kind of off the future is going to look like from a U S. Gulf Coast perspective replicated in many other parts of the world.
Okay. Thank you for that.
Arthur line you had this helpful comments in your slides.
Where are you said corporate costs are being offset by the helium business.
The other line used to lose $300 million back in.
2018, 2007, 2018, 2019, so that we've come to breakeven.
Really mean that that 300 million Delta is mostly positive helium prices overtime that continue going forward.
I'll, let Mike walk you through the math just to say that I'm not happy with where the other line is and it should be bigger than it is today.
Yeah.
Hey, Jeff.
So just maybe to start with what is in other REIT, that's probably the the good place to start. So currently what's in other is our our materials technology business, formerly called PST you may recall, the coatings business. It has what we call.
Wholesale our Interco helium business. So this is where we source globally. Since it is one of the very very few global products that we make and sell we source. It and then we sell it inter company to all of the regions.
Therefore, it's more of an intercompany type pricing structure.
A structure that we have with that and then obviously the end regions by it and intercompany we eliminate it and they get the end pricing in their regions for helium and then it has all of our global corporate costs to manage Lindy plc as a whole.
As you well know we divested just that used to be in there that is gone.
So that's what's in there today and and one thing we've always said for many years is to.
To your exact point in and I would kind of take 2018 with a grain of salt that was a transition year.
That was as you know a pro forma number one there were some elements that didn't fit particularly into the segments that needed to go in that section as we did pro forma at the time of the merger. So I would use 2019 as the better starting point because that is post the merger when we had I'd say more consistency across what was in there.
And when you think about it we've always said our goal is to make sure that these businesses and other which are not core industrial gas businesses can more than offset the corporate costs of this global organization and we're seeing that and we expect to continue to see that and it's a combination of the noncore businesses improving their performance, which they're absolutely do.
And it's also a combination of managing our corporate costs appropriately in light of what's going on in the world and what's going on in the segments. We support so that's how to think about that but we're going to continue to look to create value in the other segment like we do anywhere else in any other segment going forward.
Great. Thank you.
We'll take our next question from Nicola Tang with BNP. Your line is open.
Hi, everyone just one for me on margins.
You can see further margin.
<unk> upside into next year at group level, but I was wondering if you could talk a bit more about how that would play out from a regional perspective. So I'm thinking you know if there's pricing normalization in Europe .
Is there a situation where the European margins trend down from here, but then actually another region takes over to drive great margins.
I think like we've had questions on margins consistently as Youll recall and I've always said look your expectation and our expectation is we will expand margins year on year by about 30% to 50 basis points and that's kind of the trend that we want to see happen. Obviously this quarter delivered significantly higher than that across all <unk>.
Segments.
And that is good and as you know, it's driven by pricing and productivity and the base business continued to deliver great outcomes couple of highlights on that I'd say at the regional level America's hitting a 30 30 plus percent margin. That's that's a good point.
Got to make sure that EMEA and APAC are looking ahead to beating America. So they kind of have to set the target for the rest of EMEA margins, you're right. You're also a highlight for us in the quarter.
Nine 2%.
They have now grown over over since 2018 baseline they've grown about 1000 basis points and have grown consistently so the point that I made earlier on around the fact that we reset our cost base and in EMEA. The fact that we were pushing productivity and pricing.
It gives me a lot of confidence that we will try and hold.
That margin level and continue to try and look for that module improvement that I suggested on a year on year basis.
Why are they back is concerned we've also seen good margin.
The development since that baseline of 2018 to where we are today.
At 228% they were up about.
<unk> thousand 70 basis points and.
And again thats been fairly consistent over that period. So I fully expect that we will continue to work on our margin to work with that intent of delivering 30 to 50 basis points every year.
Alright. Thank you said are impressive.
Yeah.
And we'll take our next question from David Begleiter with Deutsche Bank. Your line is open.
Thank you good morning, Sanjeev productivity has been a key driver of earnings growth this year.
Minus what that number quantify that number this year and should it be similar next year as well.
Okay.
So all I'll tell you that productivity is something that sits right at the heart of you know.
How we manage our base business, David as you know well and essentially I mentioned in one of the earnings calls previously that we had about 14000 projects last year in 2022 for.
For the first half of this year, we have in excess of 8000 projects. So I feel pretty good about the fact that there is a continuous pipeline of productivity projects that continue to work through and actually deliver there is no silver bullet there isn't a single big thing that we do.
The aggregation of these 8000 plus projects that actually deliver results for us as we move forward. The way we think about the number on productivity is to look at its impact on the the cost base that it actually kind of leverages off so we measure that as a percentage to that cost stack.
And as things stand, we kind of look at a range of between 5% to 7% of cost stack.
And that's what then flows into the bottom line that we walk through.
Very good and just on the clean energy opportunity is there a market share you are thinking about that lindy should attain over a longer period of time.
To be honest, we don't think about the clean energy opportunity or the portfolio in terms of market share. We think in terms of selecting high quality projects that meet our investment criteria and that give us that allow us to leverage the asset base and the network that we have given us a competitive advantage and really to be honest. When we went out and gave you.
Some numbers around that $30 billion in terms of decisions, we're likely to make over the decade and in the U S or 50 billion across the world is driven really around the opportunity set and that's how I'd like to think about that the market share will be what it will be.
Really thinking about focusing on choosing the right opportunities and ensuring that we develop them well go through a proper feed in that process and actually execute well. These are advantages that our engineering team brings for US we do all of that we then have a substantive business as we move forward.
Thank you.
Yes.
We will take our next question from Tony Jones with Redburn. Your line is open.
Yeah.
And Mr. Jones. Your line is open please check your mute button.
Okay.
And hearing no response, we will move to our next question from Peter Clark with Society Generale. Your line is open.
Yes. Thank you hopefully you can hear me.
Two questions. The first one I've listened to the discussion on the pricing the inflation thing, but it feels like you've still got momentum at least into the third quarter. So I'm just wondering about sequential price into the third quarter. Then we will see from Q4, So I'm, assuming you've got something and then on the E. M E E.
Margin discussion I'm, Ryan thinking obviously on site was hit hard as soon as that presumably help the margin a little bit on mix. Just wondering how you see the second half in EMEA on bulk <unk> and on site because one of your competitors is a bit more confidence about the second half year on year Comping the on site.
Given the very strong comp and obviously energy costs lower in Europe , now a bit more confidence with the customer. So how do you see those things. Thank you.
Peter I'll go back and refer to the comment that Matt provided on pricing earlier on to say that we believe you know you've got established long term history of positive pricing coming out of Lindy.
We think globally weighted inflation is a great proxy for four lenders pricing in.
In Q2, you saw us deliver 7% globally weighted inflation for us was between five and 6%. So we are slightly ahead of that that momentum that you talk about I think is really built around the inflation and we've said that we are a good player on inflation and we will continue to progress with that I'll also just mention that pricing is really all about management action.
I mean, rather than relying on a set of indices, we proactively work on pricing to make sure that product pricing continues to grow and has expanded and that's really what you know where we're pricing them back comes through we don't rely on surcharges for sustainable pricing longer term.
As far as EMEA Biogen is concerned.
Without getting into the detail of how we see the margin split between the impact from different businesses, what I would say to you is you've seen some some very.
I would say and in some ways spectacular margins coming out of EMEA. It's it's a it's really been driven around mix of pricing and productivity running deepen that organization and I fully expect that that quality of business that we've now enhanced in EMEA will continue as we move forward and I think the mix.
Not really be that impactful for us really overall, you know our portfolio will deliver the margins that we're looking for.
I'll also make another point just to kind of remind folks that I think about margin and you've heard me say this before we constantly benchmark as an organization, we might even be obsessed by benchmarking and one of the things that I lay out for the business very often is just reminding them.
That in and I am using 2022 numbers, because thats kind of just the baseline we were using.
But when I take 2022 margin numbers.
In the Americas more than 10 countries had margins in excess of 30%.
In Europe , our EMEA that'd be just talked about 17 countries that margin more than 30% and APAC about seven countries at margins more than 30%. The reason I mentioned that to you is because our internal benchmark drives a lot of the behavior within the segments driving ourselves to make sure that we are improving the overall aggregate by targeting.
<unk>.
Getting to margins that get get to that 30% kind of target that we've got internally and which Americas are set for the rest of the segments as well.
Thank you do you think the on site we've implemented in the second half yourself in EMEA.
It's very difficult to predict what onsite will do I've said this in my in my opening comments as well, it's very difficult to predict what onsite will do in Europe at the moment, particularly chemicals and energy I do see an uptick on metals. So I do believe that metals will continue to show that momentum, but it is difficult to predict what chemicals and energy.
And it's going to be driven by multiple factors, including energy prices, but also what happens in terms of the winter and end of the weather.
Got it thank you.
And we will take our next question from Michael Sison with Wells Fargo. Your line is open.
Hey, good morning, guys.
Now historically volume.
Sort of drove some of the a good portion of adjusted EBIT growth.
And your volumes are down 1%, yet you're still able to generate pretty impressive operating profit growth and EPS crowd. So.
If volumes turned positive whenever they do.
Does that does your leverage get better from here or do you have to add cost to sort of support some of that volume growth.
Mike the way to think about this is really if you look at how we think about our EPS growth algorithm right and we've said this before there are there are two or three components that drive that.
Our base business drives a large part of that right. We expect our base business to deliver anywhere between 4% to 6% of that EPS growth that we talk about the target that we've set for ourselves of 10 plus percent EPS growth backlog given that backlog continues to grow at the moment probably are in the past you would expect backlog to provide between one to two.
Personal dps growth, we now see that with backlog growth going forward, that's going to range, probably between 1% to 3% probably at the top end given the higher capex backlog that Youll see and then we will have a little bit of an uplift from share buybacks, which will remain largely consistent about 2% you added all up that kind of gets you to the algorithm of 10 plus percent the base.
Delivering about 4% to 6% doesn't mix in the base business, you will see pricing youll see productivity and you'll see some volume, but volumes are down pricing and productivity has to do more when volumes pick up obviously, we see a little bit of cost come in but it will be modest productivity very very hard through that period as well. So it's a mix of base business.
4% to 6% it all kind of contribution to the EPS growth that you should be thinking about.
Understood and then for the second half or are your volumes I apologize if I missed this or they are they going to stay similar to the second quarter, they get or improve a little bit on a year over year basis, I know sequential I think you'd mentioned was going to be better and then how much volume growth you get from new projects in 'twenty four.
So.
As said before we are starting up projects.
And Sir.
There are about $2 billion, a large portion of that was the Singapore piece Thats already happened that is ramping up through the course of this year and the balance will happen in the second half. So youll see some backlog contributions through the course of the second half broadly on volumes I would say to you.
I expect why don't I, just do a quick walk around the world and give you a sense of what I'm seeing across in terms of expectation. So if you look at Americas, we are kind of largely flat for the quarter and Q2 adjusted for customer outages in the U S Gulf Coast and some software electronics.
Sales, mainly on rare gases the U S. Gulf coast customers have largely come back and they are ramping up production. So I expect positive volume sequentially. As a result of that much of sales I would say to you probably expect that to be flattish remember it's important I think sometimes we forget but the Americas business. Overall has showed steady recovery since COVID-19 we are at.
Levels, well above pre COVID-19.
So we are at somewhat of a high watermark and I'm seeing that flatten out a little bit.
And we feel pretty good about where that is as far as the U S. Packaged business is concerned.
We are also in Q2, we saw mid single digit growth.
Manufacturing saw some some upside and then that is offset by electronic sales being a little bit softer on the re gas side hard goods in Q2 were a bit of a mixed bag. We saw consumables wire et cetera grow we saw equipment sales come down little bit expectation that say for the U S package business would be flattish as we as we go.
Go into Q3 so.
All in I would say some upside from the HEICO business U S Gulf coast, but beyond that probably flat volumes as far as APAC is concerned.
I think it's a story of China and the rest of Asia, the rest of Asia, India, particularly IC growth continuing I see that momentum in the second half as well.
Obviously on a little bit softer, but will still grow but we'll be probably softer growth that we've seen and then there's a story of China I mean, as you know without getting to a lot of detail on China I would say to you. The highlights our year on year volumes are flat sequentially up 4% largely because there was a lunar new year in Q1.
Based on what I'm seeing I expect Q3 volumes to be flattish to your chemicals electronics.
Demand continues to be soft the government has earlier this week in fact on 24th announced a large intent of.
Stimulation of the economy in conjunction but really for our economy that size for us to see any any visible impact of that probably towards the end of the year.
And then we're left with EMEA in EMEA volumes I expect it will be consistent icon see anything that suggests that we will see a significant improvement in the second half I believe in Q3 as an example, adjusted for seasonal variations et cetera, you will see flattish volumes.
Okay. Thank you.
We will take our next question from Vincent Andrews with Morgan Stanley . Your line is open.
Thank you and good morning, everyone, Matt that might be overthinking. This a little bit but could you just maybe help me better understand historically your guidance midpoint had assumed.
No economic growth and now the high end assumes no economic growth. So what caused you to sort of change that framework.
Yes, we.
If you go back far enough, we have bounced a little bit around on that sometimes high end, sometimes middle end.
It just gets to a function of when we put the numbers together and we sort of how many quarters, we have left and what we see going on and also the sequential trends will play into that as well. So so right now I'd say, yeah. The high end I wouldn't look much further beyond that's just how the numbers are put together that's how the guidance range resulted.
And as you well know we're going to continue to do what we do to try and improve on that but right. Now. This is the guidance we have out there and to your exact point those are the base assumptions underlying it.
Okay fair enough if I could just ask.
The pricing equation is there a way we can think about the price you achieved in the second quarter and maybe what you're expecting to achieve in the third quarter. How much of that is lapping a prior price initiatives versus how much of that is sort of the implementation of new initiatives or is there a way you can help us think through that.
Sure Vince.
As Matt.
There is always around the world and you have to remember all of our pricing is incredibly local right. It's in the almost 100 countries around the world their individual initiatives.
We're all done based on individual contracts and so at any point in time, there are always price.
Adjustments actions contractual inflation adjustments occurring everywhere in the world at all times and so given that.
It's always going to have a component that carries into the next four quarters or three quarters and thats, what youre going to see so clearly to your point on a lapping basis. When you lap high global inflation periods and you do see this inflation then yes the comps get.
Little tougher that's natural that's normal, especially as what we're seeing in the developed some of the developed nations, but other than that there are continuous price items going on simply because of the contract structures.
I would say well, we absolutely expect to carry into next year. We are still seeing actions today and remember there are many countries that still have double digit inflation going on right now.
And so you have to you have to consider that as well because again, it's a very local approach.
Okay very helpful as usual I really appreciate it.
We will take our next question from Patrick Cunningham with Citi. Your line is open.
Hi, good morning, Thanks for taking.
Okay. Thank you. Thanks for taking my question in June you announced the contracts with one.
D captivating against us in terms of future opportunities to decaf to be using.
He is in Asia can you size the potential there for linear both in terms of backlog and the address.
Actual market and what future investments need to include additional investment E carbonization or are you agnostic from that standpoint.
So Patrick let me I didn't quite get your second question, but let me answer the first as well on <unk> and then maybe you can repeat that second question, let's start with <unk>. So what we announced was a D cap off ASU is now over the last 30 years, we've probably done most of the large ASU D cabs with customers that way.
Feel comfortable running.
Long term gas supply contract with so I don't think that I would say to you that there is a large market that we're expecting to see walk out on the <unk> side remember, we don't necessarily want to use <unk> as a way of providing financing to our customers. It's where there is a deeper integration into greater density for us at a particular <unk>.
And a high quality customer when that mix comes together, that's where it <unk> make sense for us. So we have selective opportunities that we're pursuing we have.
Pipeline around that but I wouldn't say to you that you should expect significant levels of opportunity going into the backlog as a consequence remind me of your second question again.
Yes got it and Thats just on the second part of my question I know the one Hyatt agreement included investments in de Carbonization and I know you mentioned that network density is the critical part there, but would you look for additional investment decarbonization, if there are future opportunities yes.
Yes, and where we are where we are.
Either encumbered with customers on Decarbonization, I'd say, Patrick that we have the technology portfolio. The operating skill set and where we are encumbered with customers on the industrial side. We think that's right in our wheelhouse, we have great carbon capture technology that we can utilize as we can either find a chemical think ara sequestration partner to work with and that.
Combination is really helpful. So we continue to do that I think there are some easier decarbonization cases in China as an example, where it's about making sure that we're moving from steam turbine driven.
<unk> two actually moving to just going on to the grid and using renewable renewable bar, that's the scope to emission reduction as well as better economic case in most cases, so I really what drove that to be a nice win win as we as we look and execute those projects.
Very helpful. Thank you.
And we'll take our next question from Kevin Mccarthy with vertical research partners. Your line is open.
Yes, good morning.
On Slide 13, you provided some helpful Pie charts to speak to your backlog composition and so did you really should just wondering if you could speak to how you would expect those pies to evolve over the next year or two for example, EMEA has been been quite small historically recent history anyway for understand.
Reasons, but would you expect that to grow materially as clean energy projects gained traction and curious within Asia Pacific.
What is the mix of clean energy versus more traditional projects that you're seeing there and your discussions and how you would expect that to evolve as well.
Okay.
Thanks, Kevin So let me address two points one is my expectation of that backlog. The pie itself is that it will continue to grow just to make sure that that's that's kind of understood, let's talk about the mix a little bit them.
As you know all the decarbonization piece, we went out and gave you guys. Some numbers, saying, we expect over a decade that about $30 billion in the U S and about $50 billion globally. So that is the ratio that I expect I expect the U S or Americas to be around 60% of that decarbonization by and I expect the balance.
To be between EMEA and APAC I do expect larger projects in EMEA. We are working on a number of them in middle East and Europe that I feel pretty good about that are progressing well and I think that you know as part of that the balance 40% as it were.
I do expect EMEA will have more than its fair share of that.
I'll also add and tell you that the Asia Pac Decarbonization effort is much smaller and slower they are behind the Americas and EMEA by a number of years at this point.
And I do not see the scale that I've seen in Americas and to some extent in EMEA of those projects as yet and I suspect there are probably three to five years away in terms of getting projects of that scale.
Okay. Thank you very much.
Yeah.
We will take our next question from Laurence Alexander with Jefferies. Your line is open.
Just a housekeeping question on packaged gases.
Pricing for rental fees of over in Europe and in the U S.
Compared to inflation or is it just sort of moving on.
At a low single digit rate, regardless of the background inflation environment or have you been moving it up ahead of inflation.
So both Europe and the U S package businesses are a reasonably large Morris as you know and we've been very consistent in our rental pricing actions that have happened over the last few years. So I think we you know ensure.
Ensure that there is more than recovery of inflation and we continue to have a very consistent policy around that.
Okay. Thank you.
Yes.
And we will take our next question from Steve Byrne with Bank of America. Your line is open.
Yes.
Continuing on that package gasses question.
Post the mix here.
Acquisition, what would you estimate your share of U S packaged gases business.
And how would you how would you compare your pricing power in that business now versus liquid bulk and.
Any indications on trends for hard goods and so forth that would give you an outlook for the U S economy.
Sure Steve So let me address both of those points separately lets talk about the packaged gases. The Nextera acquisition has been extremely good for US we've got a strong footprint in southeast U S, which is seeing a lot of growth in a lot of incoming investments as well so I feel pretty good about where we stand.
My comment on the market share would be that it isn't high enough. That's what I tell my guys and I'm going to tell you the same thing.
We don't particularly disclose market share numbers specifically.
But given the strength of the of the footprint that we have we have strong pricing power. We've demonstrated that over the last many years and that business is actually demonstrating pricing power reflecting into margin improvement consistently over the last many years, so I feel pretty good about where we stand over there.
Let's talk a little bit about hard goods. So hard goods is youre right in pointing out is a good leading indicator.
The last time, we spoke Ive mentioned that I was seeing a little bit and this was in the last earnings call. I had mentioned that I was seeing a little bit of softening on growth I can say to you today, we are seeing a bit of a mixed bag why isn't consumables are seeing some slightly positive growth as far as sales are concerned whereas on equipment sales.
We are seeing some declines and that is something that you could look at in terms of the amount of manufacturing activity and order books that you have but remember this is also a season, where many of the manufacturers do take.
Brakes, so sometimes prior to that we would see a little bit of softening of the market. So I'm not at all I am not going to pass adjustment just yet I'll hold and see what happens beyond September .
Thank you and then a question on clean energy.
Can you just roughly estimate the sizes of these buckets.
For you with respect to the opportunity for you obviously, you got a blue energy.
Blue hydrogen production and sales you've got green hydrogen, but you also have oxy fuel opportunities for big energy consumers you have I mean based decarbonization projects, how would you size those relative to each other.
Sustained.
The best way to describe that opportunity for us just to think about the three buckets that we traditionally talk about let me walk you through them first and then I can tell you. We're in a carbon capture as an example plays a role or not so the three buckets that would be normally track on mobility.
We track industrial applications, and we track energy carrier energy vector.
As far as mobility is concerned typically it's about 10% or less of our entire opportunity pipeline mulch.
Multiple projects smaller in size tends to be in more of the green side with hydrogen.
Hydrogen refueling stations package typically alongside that.
For carbon capture and sequestration and and that's where that that kind of opportunity. Please is a subset of the broader opportunity I mentioned.
Thank you.
And we will now take our final question from John Mcnulty with BMO capital markets. Your line is open.
Yeah. Thanks for taking my question send you a question just as a follow up to one of your earlier answers. You had mentioned that you were seeing some clean hydrogen or clean energy opportunities in the middle East I guess, how would you characterize these are these for domestic use or are they for export and if it's the ladder.
Do you see subsidies in place, whether it's from Europe , or Asian demand or what have you that that would facilitate the economics to make sense for for projects like that I guess can you can you help us to think about that.
Sure. So we have seen a couple of opportunities, which it'll play into both those buckets. John So we are seeing carbon capture sequestration opportunity that'd be a jointly working with around Glenn Schlumberger on feed is undergoing at the moment it should get to <unk> early in the new year, we were looking at a very large school bus garb.
Capture in fact, the first phase where we are currently working on is 11 million tons of C. O. Two a year out of a total project, which may be the world's largest carbon capture and sequestration project in three phases, adding up to 54 million tonnes per annum of of C. O two being sequester. So that's a domestic that's driven really around the <unk>.
Mystic decarbonization effort that the kingdom of Saudi Arabia's pursuing but also seeing projects in the kingdom and elsewhere in the middle East around the development of Blue ammonia now.
The economics of Blue ammonia coming out of coming out of the kingdom or the middle East more broadly is very very competitive. So although there are no direct abroad incentives available there a specific project based incentives that the government will provide and some of that you know some.
That product is them used to serve local market I'd say, probably a split about a third to two thirds tutors for export one third for local markets.
But the product that comes out of Blue ammonia in particular that comes out of the kingdom in other parts of the middle East is very competitive globally.
Got it thanks very much for the color.
And I would now like to turn the call back to <unk> for any additional or closing remarks.
Thank you again for participating today's call.
If you have any further questions. Please feel free to reach out have a safe day take care.
And ladies and gentlemen that will conclude today's conference call. We thank you for your participation and you may now disconnect.
[music].