Q3 2024 Linde PLC Earnings Call
Speaker Change: Ladies and gentlemen, good day and thank you for standing by. Welcome to the Lindi third quarter, 2024 earnings teleconference and webcast. At this time, all participants are in a listen only mode, and please be advised that today's conference is being recorded.
Speaker Change: 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.
Juan Pelaez: Happy Thank You. Good morning everyone and thank you for attending our 2024 third quarter earnings call and webcast.
Juan Pelaez: I'm Juan Pelaez, head of Investor Relations, and I'm joining this morning by Sanjiv Lamba. Chief Executive Officer, a map white chief financial officer.
Juan Pelaez: Today's presentation materials are available on our website at lindy.com in the investor section. Please read the forward-looking statement disclosure on page 2 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.
Speaker Change: Sanjiv will provide some opening remarks and then Matt will give an update on Lindy's third quarter financial performance and outlook, after which we will wrap up the Q&A.
Speaker Change: Let me now turn the call over to Sanjiv.
Sanjiv Lamba: Thanks Juan and good morning everyone.
Sanjiv Lamba: Third quarter results once again demonstrated the resilience and resolve of Linde employees across the globe.
Sanjiv Lamba: EPS, ROC, and operating margin reached new highs despite challenging economic conditions in most countries.
Sanjiv Lamba: But frankly, none of this came as a surprise. Some of you may recall that we anticipated sluggish industrial activity this quarter.
Sanjiv Lamba: and it played out as expected.
Sanjiv Lamba: Looking ahead, I have concerns regarding continued economic weakness.
Sanjiv Lamba: So, we've taken a series of proactive actions, including targeted cost reductions.
Sanjiv Lamba: Matt will provide more details on this charge, but it affects approximately two percent of the workforce globally and is expected to be mostly completed in the next few months.
Sanjiv Lamba: In light of these actions, it may be helpful to provide you additional color on the end market trends, which you can find on slide 3.
Sanjiv Lamba: Industrial-related ed markets have declined 1 to 2 percent sequentially from the second quarter.
Sanjiv Lamba: This trend is consistent with our prior comments, as well as the industrial-related macroeconomic statistics.
Sanjiv Lamba: However, we did experience some positive growth over prior year, including in North America, which at almost 40% of global sales continues to be a bright spot.
Sanjiv Lamba: On-site and merchant volumes are slightly up in the U.S.
Sanjiv Lamba: In addition, North American project activity continues to progress.
Sanjiv Lamba: This said, these positive trends contrast with most of EMEA and parts of APAC, primarily China.
Sanjiv Lamba: A combination of geopolitical tension and economic uncertainty has suppressed large ticket purchases.
Sanjiv Lamba: which tend to correlate with industrial markets such as steel, glass, and chemicals.
Sanjiv Lamba: Currently, we don't see any meaningful catalysts to reverse this trend for the remainder of this year.
Sanjiv Lamba: and thus have embedded this view in our guidance.
Sanjiv Lamba: We believe this is the most prudent position to take at this time.
Sanjiv Lamba: Conversely, consumer-related end markets are slightly positive versus second quarter with continued growth in food and beverage and stability in healthcare.
Sanjiv Lamba: Electronics was up a high single digit over the previous year.
Sanjiv Lamba: As expected, recovery in electronics continues to move forward, but at a lower clip.
Sanjiv Lamba: While recovery is slow,
Sanjiv Lamba: We fully expect electronics to provide sequential growth in the next quarter.
Sanjiv Lamba: including Project Backlog ramp-ups.
Sanjiv Lamba: Taken together, these trends point to a stagnant or slightly declining economic backdrop.
Sanjiv Lamba: However, the combination of actions on pricing, productivity, and costs combined with contractually secured project backlog and robust stock repurchases
Sanjiv Lamba: continue to support our ability to deliver shareholder value regardless of the challenges.
Sanjiv Lamba: In fact, our backlog in the third quarter hit $10 billion as we signed our largest sale of gas project in company history.
Sanjiv Lamba: This contract with Dow Chemical is a testament to our disciplined investment approach.
Sanjiv Lamba: to pursue and win projects in our core competence of reliable and cost-effective industrial gas supply.
Sanjiv Lamba: Slide four provides more details on this two billion plus
Sanjiv Lamba: Dollar investment for lending.
Sanjiv Lamba: Dow is embarking on an ambitious project.
Sanjiv Lamba: to achieve net zero scope one and two carbon emissions in their Alberta Canada complex.
Sanjiv Lamba: through a series of initiatives.
Sanjiv Lamba: including fuel switching from natural gas to low carbon or otherwise known as blue hydrogen.
Speaker Change: We're proud to be selected as the Industrial Gas Partner.
Speaker Change: to provide atmospheric gases, low-carbon hydrogen, and services for both CO2 capture and off-gas cleanup.
Speaker Change: For Phase 1, Lindy's total investment is expected to be over $2 billion.
Speaker Change: underpinned by a traditional over-the-fence gas supply contract that aligns with our investment criteria.
Speaker Change: We expect this project to start up in late 2028.
Speaker Change: I think it's important to note the size and scope we are undertaking.
Speaker Change: It's more than just low-carbon hydrogen production.
Speaker Change: A clean energy transition will draw upon several different LiNDA capabilities.
Speaker Change: expertise and product offerings since integrated gas management solutions are in greater demand.
Speaker Change: In addition to supplying Dow, this investment will enhance our existing footprint and provide substantial density for future extensions.
Speaker Change: In fact, we're already in conversations with future potential customers.
Speaker Change: Overall, we see a challenging economic future.
Speaker Change: but are well prepared.
Speaker Change: Lindy is heading into this uncertainty with the largest sale of gas backlog in company history. An incredibly strong balance sheet.
Speaker Change: and a lean and well-focused workforce.
Speaker Change: with a proven track record in successfully navigating difficult conditions time after time.
Speaker Change: And while I may not be bullish on the global economy, I have never been more confident in Lindy's ability to sustain industry-leading results while rewarding our owners.
Speaker Change: And I'll turn the call over to Matt to walk through our financial results.
Matt: Thanks, Sanjiv.
Matt: Third quarter results can be found on slide 5.
Matt: Sales of $8.4 billion are up 2% from last year and 1% sequentially.
Speaker Change: versus prior year, engineering increased sales 2% from higher project activity and higher demand for LNG infrastructure.
Speaker Change: while both cost pass-through and currency translation are down 1%.
Speaker Change: As a reminder, cost pass-through represents the contractual billing of energy changes to on-site customers.
Speaker Change: and has no impact to operating profit dollars.
Speaker Change: Excluding these items, organic sales are up 2% driven by price increases.
Speaker Change: Thank you for joining us.
Speaker Change: The volumes are flat as growth from the project backlog is mostly offset by weaker base volumes.
Speaker Change: As mentioned earlier, the global industrial environment remains stagnant as many economies continue to report flat to negative industrial production levels.
Speaker Change: Despite these trends, operating profit of $2.5 billion increased 7% from last year.
Speaker Change: resulting in an operating margin of 29.6% or 130 basis points higher.
Speaker Change: Project contribution, price, and cost productivity drove profit growth.
Speaker Change: EPS of $3.94 is up 9% from 2023, or 10% when excluding the impact of currency translation.
Speaker Change: These figures exclude a $150 million net restructuring charge.
Speaker Change: which represents severance costs for a two percent workforce reduction in the regions most affected by weaker volumes.
Speaker Change: We anticipate full run rate savings to be recognized in the second half of next year.
Speaker Change: Slide six provides an update on our capital management.
Speaker Change: Operating cash for the quarter was $2.7 billion, 8% above last year and 42% higher than the second quarter.
Speaker Change: As anticipated, we saw significant sequential improvement driven by interest, tax, and incentive timing.
Speaker Change: I expect to maintain this OCF level for the fourth quarter.
Speaker Change: Our capital allocation policy remains stable, with $3.4 billion invested into the business and $5.1 billion returned to shareholders.
Speaker Change: Thank you.
Speaker Change: In the third quarter, total CapEx spending is up 12% versus prior year, with project CapEx up 40% from executing the $7 billion sale of gas backlog.
Speaker Change: but base capex is down 4%.
Speaker Change: As a reminder, the Lindy Project Backlog only contains growth projects underpinned by a customer contract with fixed fee returns that are protected with termination provisions.
Speaker Change: Our definition is unique and the most stringent across the industry.
Speaker Change: The base CapEx decline is from productivity initiatives as well as better aligning non-backlogged spend with local market conditions.
Speaker Change: I'll wrap up with guidance on slide 7.
Speaker Change: For the fourth quarter, we're initiating an EPS guidance range of $3.86 to $3.96.
Speaker Change: or 8% to 10% growth from prior year.
Speaker Change: This range assumes an economic contraction at the midpoint since we have not seen sufficient indicators of near-term improvement.
Speaker Change: In addition, this range assumes no currency impact, although the U.S. dollar has strengthened noticeably in the last few weeks as we approach the U.S. presidential election.
Speaker Change: The full year range merely incorporates the Q4 guide, and thus becomes $15.40 to $15.50 for 9% to 10% growth, excluding a 1% FX headwind.
Speaker Change: The top end was reduced by 10 cents from prior quarter since we updated our sequential economic assumption from neutral to a contraction.
Speaker Change: While no one knows for sure what will happen, we believe this approach is prudent for this environment.
Speaker Change: Thank you.
Speaker Change: In summary, global industrial activity has been weak, and we do not anticipate near-term improvement.
Speaker Change: In fact, geopolitical tensions and regulatory uncertainty only appear to add volatility and potential downside events.
Speaker Change: However, as Sanjiv mentioned, we're prepared for this uncertainty.
Speaker Change: We have the strongest balance sheet in the industry with the most disciplined project backlog at 10 billion dollars ensuring high quality growth for years to come.
Speaker Change: We have a well-honed operating rhythm, enabling our employees to take decisive and timely actions for their respective markets.
Speaker Change: and we have the densest network across all three supply modes to capitalize on every growth opportunity.
Speaker Change: No matter what the future brings, I have confidence we will continue to deliver industry-leading performance.
Speaker Change: I'll now turn the call over to Q&A.
Speaker Change: For more information, go to www.FEMA.gov
Speaker Change: Thank you. And we'll now begin our question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.
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Speaker Change: If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: To be able to take as many questions as possible, we ask that you please limit yourself to one question.
Speaker Change: again it is star 1 if you would like to
Speaker Change: And your first question comes from the line of Mike Lighthead with Barclays. Your line is open.
Mike Lighthead: Great, thank you. Good morning team.
Mike Lighthead: I wanted to ask your guiding to economic contraction in the fourth quarter, and it seems like some of the cost actions you're taking this quarter.
Mike Lighthead: there's perhaps some incremental macro caution that you're positioning for heading into next year. So can you speak to where in your business, either regionally or end market, where you're seeing the most macro pressures today?
Speaker Change: Mike, I think as I said in my prepared remarks, you would have heard that I think describing the world, there aren't many bright spots. So really in essence, we are seeing...
Speaker Change: The European market, they may have more broadly clearly seen pressure, and that's reflected in the volume developments that we see in that market.
Speaker Change: We've seen China, where there was a short-lived euphoria around the stimulus. We know that the underlying industrial progression there is not reflecting that and unlikely to.
Speaker Change: I see a catalyst for change in the near term. So the bright sparks or bright spots, as I defined in those remarks, was really North America, primarily the U.S.
Speaker Change: which has proven to be very resilient thus far and you know is that a high watermark and we are hoping to see that slight sluggish or softness that we've seen hopefully move back into a more stable and steady growth rate.
Speaker Change: We have other smaller countries, India would be a good example, where we're seeing consistent growth. We continue to be, we are the market leader there, therefore we continue to be benefiting from that.
Speaker Change: Similarly, Mexico also benefiting, like India, from the nearshoring, reshoring strategies that people are deploying. So,
Speaker Change: Across the world, you know, we see broadly the industrial recession or industrial weaknesses that we've been talking about for many quarters now, Mike, as you would recall.
Speaker Change: This isn't new, and I think the actions we've taken now really are a reflection of our view of what we see the challenges going forward, but also the fact that there has been this long weakness in the industrial space.
Mike Lighthead: Great, thank you very much.
Speaker Change: And your next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open.
Vincent Andrews: Thank you very much and good morning. You announced the decaptivation of two ASUs in India earlier in the week or last week.
Vincent Andrews: Are you seeing more activity there or interest there just given the weakness in the economic activity? Are customers looking maybe to get some assets off their balance sheet or was that just something you've been looking at for a while and finally came to fruition?
Vince, why don't I talk about that specific opportunity first, and then I'll give you a slightly broader view of what I see around decaptivation globally.
Sanjiv Lamba: Let's start with the Tata decaptivation that we did. The plants were being constructed by the customer who had sourced the plants from a competitor. They were very keen that Linda take over those assets.
Vincent Andrews: Particularly because we were able to integrate them into our extensive network that exists today in Kalinganagar, Orissa, which is one of India's large steel enclaves.
Vincent Andrews: So we were able to provide a very innovative solution both from sourcing energy but also providing safe and reliable
Vincent Andrews: supply from our asset network, again, you know, leveraging that network density that we often speak about.
Vincent Andrews: It's a great project. We have a long-standing relationship with our customer.
Vincent Andrews: The project meets our investment criteria and enhances network density. I couldn't have asked for a better combination of factors to come together when I looked at that. That is what we look for in decaptivation.
Vincent Andrews: You might recall, you know, a few quarters ago now, we've done a recaptivation for Wanhua assets in Fujian in China. And all of these exact metrics of these conditions were satisfied for us to take that on board as well.
Vincent Andrews: So, broadly on decaptivation, I'd say to you, we probably, every year, this is not new, every year we assess anywhere between 8 to 10 opportunities for decaptivation.
We are selective about the ones we pursue because we see the ability to integrate them into our network and to leverage that benefit, both for creating great supply options for the customer, but more importantly, for creating value at our end as well. When network density is at play, we will certainly find these very, very attractive for us to take on.
Vincent Andrews: Thank you.
Your next question comes from the line of Duffy Fisher with Goldman Sachs. Your line is open.
Duffy Fisher: Yes, good morning. Question around the health care business. Earlier this year you were pruning some parts of that.
So, can you just walk us through, what's been pruned and what are we anniversarying? When does that anniversary end and is there more to come? And then maybe just a third one to tack on to that. What do you think the structural growth rate is for healthcare 25 and going forward?
Vincent Andrews: Thank you.
Thanks, Daffy. So let's go back to the healthcare piece now.
The headline over there is health care grew year-on-year, a small percentage, but it grew. And I think the home care part of our business, as you recall Duffy, we have two elements to the health care business.
hospital care which is a very stable business that we serve across the world and home care business that we participate in specific markets obviously a large market here in the US as well for home care
Much of our pruning of the portfolio and cleaning it up was all around the home care business largely in the US.
That, I would say to you, has largely been completed. In fact, you might recall in the last call, I said by the end of the year, I expect all of that cleanup to be completed. I think we will see that done by the end of the year. We are on track structurally, you know, to see growth rates.
between low single-digit to mid-single-digit in the healthcare space. That's kind of our expectation and I fully expect the healthcare business to be there as we look ahead.
Great, thank you guys.
Sanjiv Lamba: Sanjiv Lamba
And your next question comes from the line of David Begleiter with Deutsche Bank. Your line is open. Thank you. Good morning. Sanjiv and Matt, economic contraction in Q4, does that reflect seasonal slowdowns?
David Begleiter: as well as perhaps longer than normal planned shutdowns or is this over above what you would normally see seasonally and even extended year-end planned shutdowns?
Hey David, it's Matt. The way we think about it, to your point, it is sequential. So to your exact statement there, we view it as a sequential contraction.
And it would be across the base organic volumes. It would not be seasonal. As you know, we have a normal seasonal pattern. That we'd view as consistent. But if there are extended outages, we would view that as a weakness.
because you tend to have an average outage for certain, you could call it holiday periods.
And when you see those extend on the front and the back end, that usually is because the customer may not have the order intake or the workload.
to work at a harder pace. And so they tend to extend around outages. So...
It does not include seasonality, it is only the base volumes, but to that extent we definitely could see people extending outages given that. But I do want to just make sure I state that we don't know if this is right or wrong, this is just a view that's in the guidance.
obviously we're taking actions around it we're getting ahead of it if this does happen we feel we're prepared if we're wrong and things are better than then that would be you know potential upside for us
Speaker Change: Thank you.
Speaker Change: Thank you.
Your next question comes from the line of Peter Clark with Bernstein. Your line is open.
Good morning everyone. It's one on the target for the 8 to 10 billion investments, so well done on finally getting Dow Path to Zero signed into the backlog.
My understanding is that certainly some of your closer relationships are getting very positive.
Speaker Change: are increasingly positive on.
on the space and maybe...
Speaker Change: looking closely at signatures. Liara have been obviously very positive on U.S. blue ammonia.
Equinor I think have got some financing in place or some incentives in place in Europe put these companies very close to you particularly with BSFER and the free port feasibility study that has dragged out as well going on. Just if you can comment around that sort of scenario because you've still got the 8 to 10 billion out there, you're halfway there pretty much, you've obviously got some confidence you're going to get that target.
Speaker Change: Thanks Peter. So let's start off with just assessing where we stand against that 8 to 10 billion. I'll probably give you a slightly broader overview of what development we're seeing around hydrogen.
On the 8 to 10 million, as you rightly put it, you know, I feel pretty confident about where we are. We've signed up about half of that between OCI and obviously Dow Phase 1. Peter, you'll remember that Dow has a Phase 2, which we haven't obviously committed to just yet, but that will develop in its own course.
Alongside that, we are doing a lot of front-end work at the moment on a number of projects. You referenced a couple of those already.
Speaker Change: And as I see the developments around hydrogen more broadly, I feel pretty confident that that 8 to 10 billion number over the next few years looks pretty much intact and something that I feel confident about.
I will, however, just step back and give you a broader overview on what I'm seeing around hydrogen. And I think you probably see this as well, so this shouldn't come as a surprise at all. But we have been talking about hydrogen developments and saying that there is a high degree of euphoria. So what we're seeing today is indeed what we had expected.
I would segment the hygiene development into the following elements and say to you, you are seeing and hearing and reading about a number of project cancellations getting announced recently.
Speaker Change: In fact, most of them tend to be around what we call renewable hydrogen or otherwise known as green hydrogen.
I'm driven by a number of factors but key amongst them the fact that incentives are unclear, regulatory framework is still being threshed out.
Capital, you know, costs are elevated. People hadn't quite expected that or haven't done enough work when announcing projects early on to recognize that capital costs are on the rise. And last but not least, returns aren't as promising as people thought they might be. So in many ways that initial euphoria, you know, is dying down and being, you know, getting a bit of a sanity check or a reality check.
Speaker Change: And what you see as a consequence of that is...
substantive projects, high-quality projects which make economic sense are the ones that are still around. That's a good thing for hydrogen growth and development in the long term.
The good news is we are very selective on the projects we work on, and I feel pretty good about the projects that we currently are developing. Most of those, as you would expect, and as we've said before, are in the low-carbon hydrogen space, or what otherwise is known as blue hydrogen.
The technology is mature and available and scaled up today.
There is operating expertise around that and the end product is very cost competitive. All those factors become a key element when people are making decisions on, you know, how they manage their decarbonization projects which
are a challenge economically, as you know. So that's kind of where we see the trend today. And I'm pleased, actually, that that reality check is in place, because that's what we need for substantive development on the hydrogen space.
Speaker Change: Thank you.
And your next question comes from the line of Jeff Zocostos with J.P. Morgan. Your line is open.
Jeff Zocostos: Thanks very much. Your sequential prices were flat.
if you now we're in something of a deflationary environment so if you exclude the negative pricing if there was negative pricing in your on-site business
Was it the case that price mix
would have sequentially grown or maybe another way of saying it is did price mix sequentially grow in your packaged and merchant business during the quarter or was it flat?
Hey Jeff, it's Matt.
Maybe China might be deflationary, but so we're still seeing positive pricing across all of our base gases. And as you know, when we talk about 2% globally, the way to translate that, because we tend to calculate it primarily just for merchant and package, it's about double the number of what you're seeing in merchant and package. So to your point, we still continue to see both positive sequential and positive year-over-year pricing there.
Jeff Zocostos: Clearly something like helium, I think we all know the pricing there, is a little more globally based on supply-demand, and there it's maybe slightly declining to flat, and that could have an effect on there.
But also, when you look within the quarters...
Jeff Zocostos: You're just going to have some timing impacts. I tend not to be overly concerned on that. Certain contracts, you'll have anniversary dates that the increases happen, so you can see some timing and lumpiness. We still feel quite good about fourth quarter, where we stand, and where we'll be on that.
So, I'm not overly concerned, I think our pricing still continues to track with the globally weighted CPI that we see in our regions. And I think the disinflation will have a little bit of a lower number at the global level, but it'll still be positive and it'll still contribute.
Thank you very much.
David Begleiter, David Begleiter, David Begleiter
Speaker Change: And your next question comes from the line of Steve Byrne with Bank of America. Your line is open.
Steve Byrne: Yes, thank you. You're going to build this ATR for DOW, and you're going to reform...
T3 and T4 alkanes, not hydrogen, benzene, methane. Have you designed an APR like this before?
And if you need or want more hydrogen than will be required by Dow to heat their crackers, will you have the ability to reform natural gas in this ATR if you develop...
You know your own network of hydrogen customers in the area and then just lastly is this whole approach of reforming cracker byproducts, is this something you could see potentially employed down in the US Gulf?
Thanks team, great question. So I think this is where
You know, Lindy brings a huge amount of value, our ability to provide a technical solution that integrates various technology packages and kind of provides whatever is required by the end customer, so you clearly spotted that. I'm going to just maybe take a minute and talk through what we're actually doing. So on the ground, we're going to put two large assets.
To your point earlier, there is an ATR of $300 million a day, let's say, which is going to process natural gas, as you would expect normal ATRs to do.
and provide hydrogen as a consequence of that.
As you know, from an ATR technology perspective,
the autothermal reformer provides very high concentration, high purity CO2 off stream. So capturing that CO2 is the next step in our process.
which we can do coming out of the ATR very easily. So that's one piece to your point, have we kind of designed these before? Yes.
We are actually operating one in Clear Lake today and have been doing that for about 4-5 years in fact.
And it's, in fact, if anything, Halter Topsover provided that technology package to bring a lot of their customers because it's one of the best running ATRs anywhere in the world. So feel very good about the technology, having designed it before, and we are currently building it also at OCI. So have a good track record on that. Feel good about the ATR technology overall.
add on to that the second technology package, which is a PSA unit that we're putting, which takes the off-cash. Again, as you rightly pointed out, we will process the off-cash
We will clean it up, we'll provide that clean hydrogen back.
to DAO and we will provide the rest either as fuel or if there is CO2 coming out we will capture that as well and provide that for sequestration to DAO as well. So again, integrating that PSA unit plus the ATR is a very smart way of providing a great technical solution.
The point you made on the Gulf Coast or Texas, we actually already do this in the Gulf Coast. So we have a track record of having built these PSA units to take off gas coming from the cracker, clean it up, and provide it back to the customer. So we are actually applying some of those learnings that came out of that and creating a really, really solid solution here for Dow.
Speaker Change: Thank you.
Sanjiv Lamba: Sanjiv Lamba
And your next question comes from the line of Stephen Richardson with Evercore ISI. Your line is open.
chemicals and the like. Can you talk at all about any conversations you're having with customers or any how you think about that as kind of a risk or an opportunity from your assets on the continent and you know how those how those discussions
Sanjiv Lamba: traditionally go to the extent that you do have customers that do want to shut down or restructure.
So Steve you're absolutely right that you know in the press you read a lot about some of these some of these proposed actions that large companies are taking.
I can only tell you that currently we've not heard from any of our major customers in Europe discussing major closures, so
Not to say that we don't keep a close eye on it. We are obviously tracking that very very closely Recognizing the news that that's in the air, but as I think Stan we haven't had any of those conversations just yet
Speaker Change: I'll also go on to tell you that, and I think you know this already, but let me reiterate that.
When the customers do decide to undertake that path of shutdown, you know, we have solid contracts in place.
Thanks for confirming.
And your next question comes from the line of Mike Sison with Wells Fargo. Your line is open.
Hey, good morning guys. A lot of companies have talked about 25. I know it's a little bit early to give specific guidance, but a lot have hinted that they felt the first half of 25 would be similar to the second half of 24, which, as you depicted, not great.
Is that kind of what you see initially and then when you think about 25 in general is the growth algorithm You know fairly similar you got pricing potential, you know backlog and stock buybacks for now
So, Mike, I'm sure you're keen to hear from us on what 2025 will bring, but you'll have to hold on to...
that for a while because we'll come back in February and give you a very comprehensive view on that. As you might expect, we are internally putting a lot of...
Speaker Change: energy into doing our planning for the next year. And I think those plan meetings are going to happen in the next three weeks. So we'll spend a lot of time thinking about that, talking about that, and we'll come back in February and give you a much better view and a lot more granularity on how we see 2025.
And your next question comes from the line of John McNulty with BMO Capital Markets. Your line is open.
Yeah, good morning. Thanks for taking my question. So a question on the sale of gas backlog. So you you more than doubled it It's up, you know, almost four billion dollars just from the from the last quarter It looks like Dow is about half of that. I guess can you help us to think about
Speaker Change: the other half and kind of how to think about the mix of projects that are coming in. And I guess tied to that, the Dow project is out
relatively far for kind of your usual sale of gas backlog in terms of when it materializes. Can you speak to the timing or duration on the rest of the projects that you just added and if that's more traditional and comes in over the next whatever one and a half to two years?
Hey John, it's Matt. Yeah, so I would start with our traditional projects upon a signing announcement, usually it's about three years. That's I would say is a more normalized time frame from announcement to completion and startup. Sometimes it can be a little accelerated if you have what's called an extensive
Speaker Change: reimbursable feed where you're pre-ordering prior to announcement with reimbursement but for the most part I'd say it's about a three year on a traditional project.
So, to answer your question, I would say yes, the remainder of the backlog would be more of a normalized three-year on average for contribution, and some of the larger clean energy projects could be more four-plus because of the magnitude of the scope.
but again it's always going to be a function of how far along we are on feed prior to signing of contract.
John, I'll just add to tell you, to give you comfort that these projects, and you know my view on backlog, right, a shrinking backlog is a good thing.
Speaker Change: And that's what's happening this year. We're starting up about, I don't know, 29 to 30 projects this year.
And, you know, we'll see about a billion of that backlog, or just over a billion of that backlog come out, and we'll, you know, we brought in Dow at the moment and a few other projects come back into the backlog to grow it back up. So that's exactly how we should be thinking about backlog.
Speaker Change: Great, thanks very much for the call.
And your next question comes from the line of Patrick Cunningham with Citi. Your line is open.
Hi, good morning. Do you expect your capital allocation split to change in 2025 or 2026? I'm just curious on the path for repurchases over the next few years, you know, given you've added some chunkier projects in the backlog.
Speaker Change: Hey, Patrick, it's Matt. I'll start with the capital allocation process. No, absolutely no change, right? We view that as a long-term commitment on how we're going to allocate our capital. And so from that perspective, we fully expect it to be consistent for our ownership base.
Just as a reminder for those listening in of what our capital allocation policy is, I can just reiterate it, we have an underlying mandate to maintain a single A credit rating and raise the dividend every year. So that's our underlying mandate.
And after meeting that mandate, our priority is to invest in the business using our investment criteria. That's where we want to put our capital, but the projects have to meet our investment criteria.
and then whatever is left over are buybacks. So we will continue to apply that approach.
Speaker Change: Clearly, as we generate more excess free cash flow, buybacks will naturally increase.
But as we are seeing our sale of gas backlog rise, which it has now, to the $7 billion, that means there will be more CapEx that will have deployment of capital to build these projects.
We view that as a good thing. We view that as something for growth that meets our investment criteria. But from that perspective, I still right now feel our buybacks will be consistent next year with this year just because of the excess free cash flow generation.
And clearly when there are opportunities, and today being one, we'll continue to take advantage of those as well.
David Begleiter, David Begleiter, David Begleiter
Speaker Change: And your next question comes from the line of Josh Spector with UBS. Your line is open.
Josh Spector: Yeah, hi, good morning. I was wondering if you could talk about some of the moving parts in electronics. So, you know, strong performance year-on-year.
sequentially down slightly. You talked about improvement in the fourth quarter, but I'm not clear on your macro view if you're actually baking into the guidance or not. So can you talk about what happened within the quarter and what's actually baked into your guidance? Thanks.
Speaker Change: Go!
Speaker Change: So the electronic sales, as you point out Josh, are up 9% year-on-year. We mentioned that we saw directionally electronics recovery go down the path that we had expected it to. It's maybe a little bit slower than expectations, so from a more macro perspective, we see that in line with how expectations have been laid out.
We see the investment commitments that have been broadly made by the large OEMs being in place as we look ahead to the midterm.
What happened in the in the corner itself, sequentially, I mean the comment that you're or the question they're asking about the sequential movement, sequentially gas sales were up.
Speaker Change: The difference here was that we have an advanced material business, AMT or LAMT, which also serves aerospace and electronics with some components. The electronics components saw some de-stocking in the course of the quarter.
You know, the confidence we say that we will see electronics come back.
solid growth sequentially because of you know gases continue to be on the path of recovery and seeing that normalization on inventory happen for those components that we provide out of the LAMT part of the business which actually is reported in our global other segment I think.
Speaker Change: Okay, thank you.
And your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Your line is open.
Thank you and good morning. At the top of the conversation there was a lot of discussion about potential for macroeconomic contraction. I was wondering if you could speak to company-specific or idiosyncratic
sources of volume growth from your project pipeline. If we think about the project contributions over the next four or five quarters, do you think they'll be similar to the last year or so or higher or lower?
And maybe you can talk about, you know, the next significant startups that you would anticipate over the next few quarters as well.
So Kevin, I'll give you a high-level view and I'll let Matt give you a little bit more color on what we think from a numbers point of view as well. So, from a high-level perspective, I'd say to you, you know, within our project backlog are a number of secular trends. Electronics is a good example of that.
talked to Josh about, we see that element of the backlog continuing to provide the growth and the startups happen as we would expect.
We translate that, and I've said in the past.
Speaker Change: If you think about our EPS algorithm, about 1-3% of EPS growth will come from that backlog.
Speaker Change: And that remains consistent, I've also said previously that I expect that backlog to continue to grow. Certainly you can see that evidence this quarter itself when we're sitting at that $10 billion number of sale of gas backlog of $7 billion plus.
So again, that backlog translates into contracted growth, we will see that come through. I also mentioned that we see startups happen in the course of the year, this year we set about 30-odd projects.
being started up over a billion in backlog, getting converted to revenues and earnings, providing that 1-3% of the EPS growth that I talked about.
So I think that's kind of how we are looking at the backlog, thinking about it, some, you know, more secular. We are seeing some high growth geographies also in our backlog converting to
you know, revenues and earnings. A good example of that are projects in India, in the more traditional end markets, which are also converting, getting started, and I think helping support the EPS growth algorithm.
Was there anything else, Matt, you want to add? I mean, yeah, I could just kind of add even further color, I think, you know, to start with our algorithm, and Mike might ask this question, I mean, we still, it's fully intact is how we view that.
and when you think about how we look at growing our EPS in this environment, I think a simplified way we think about it is three buckets.
It's the management actions that we take, it's the capital allocation that we do, and it's the macro.
and so when you think about capital allocation specifically that includes our project backlog, that includes M&A, that includes buybacks because we're talking about EPS here so that is a use of capital, and it also would include any capital structure that we may do in terms of having synergies on either interest or tax.
and so consistently that has been four to six percent sort of contributory throughout the last couple decades.
And it's very stable and it's unrelated to the macro because these are either contractually committed that are independent for the macro Or it's a use of capital for the case of buybacks where ironically it's it's almost counter cyclical So when the macro gets weak, we tend to have more free cash and we have more opportunities for buybacks
So we continue to have a high degree of confidence on that capital allocation and the stability it brings in the algorithm and Similarly on the management actions, you know that tends to be mostly price less cost. It's a function of productivity It's a function of the actions we take
Speaker Change: and every local market around the world.
You know obviously getting ahead of that and having the right programs in place is important But we continue to have a high degree of confidence of the contribution of the management actions as well
Speaker Change: The macro is the piece that space, volumes, and effects.
Speaker Change: Clearly, we're seeing the dollar strengthen here, just given some of the uncertainty. And a strengthening dollar, unfortunately, usually comes with a weaker macro.
And so it tends to be, I'll say, positively correlated that when you see currency headwind for us, it usually comes with weaker industrial production levels. And when you see currency tailwind, it usually comes with stronger industrial production.
So when you think about that algo right now, we are being cautious on the macro from what we're seeing, looking ahead at least to the near term, but we continue to have tremendous confidence on the contribution from our capital allocation and from the management actions that we're going to take.
Speaker Change: Thank you.
And your next question comes from the line of John Roberts with Mizuho. Your line is open.
John Roberts: Thank you. When you do a new ASU, I think of the baseload customer typically being about half the demand after you build out the enclave.
Speaker Change: after you complete everything.
You build an ASU and an ATR in these new projects here. Can you sell out all the excess oxygen, all of the nitrogen, the argon, and what would the original on-site customer be in one of these projects after you build everything out?
John, that's a great question right at the heart of the network density conversations we tend to have in the in the company quite often and I think
Speaker Change: To your point on ASUs, we normally expect our anchor customer, when we put an onsite in, to take up about 70% or thereabouts, because that's kind of where we are able to operationally optimize the air separation plant, typically, and then obviously we try and keep the balance to create the density that we need, go further downstream, looking at merchant and potentially even package business.
and creating network density around that integrated model that we very often talk about.
The example of DAO, I think which is maybe what you're referencing over here, where we've got an ATR.
Speaker Change: Plus
the oxygen feeding into the ATR. So, remember over here...
Speaker Change: You know, the surplus oxygen is quite little, there is some nitrogen available. Again, we are providing some of those atmospheric gases, you know, back to Dow as well for their
for their consumption within their complex. So it really is a great example of where we've been able to get the anchor customer.
to take a large part of the product's slate, but...
We're also promoting density in the area, given that our established footprint in Alberta, we are able to leverage that to be able to place much, in fact, all of that product fairly quickly on the atmospheric side.
We also have a little bit of extra hydrogen beyond what Dow will be taking, right? Dow is an anchor customer.
And we will have surplus hydrogen left over, which we wanted to be able to build out the hydrogen network that we expect to have in Alberta. And in fact, my expectation is, as I referenced briefly in my
in my prepared remarks, is that we will build on that foundation that we've got in phase one of DAO to actually add capacity and build a significant hydrogen network in Alberta in the future. So for me in many ways, this is, you know, we're kind of literally building the foundation of what's going to be a very attractive network.
won't be at the same scale of what you see in the U.S. Gulf Coast, but my vision is that that's kind of directionally where we want to take the hydrogen network for Alberta as well.
Thank you.
Speaker Change: Thank you.
And your next question comes from the line of Lawrence Alexander with Jeffries. Your line is open.
Speaker Change: Hi, good morning. Thank you. This is actually Dan Rizzo on for Lawrence. You mentioned the the second phase or the next step with Dow which you're not committed to, but I was wondering just kind of
In a broad sense, is that like a magnitude larger if it were to happen after obviously after this one is up and running?
Speaker Change: Thank you.
Speaker Change: Right, so I think there is a there is an agreed timeline over which that decision will get made. Obviously we've done a lot of...
initial planning and done some thinking around how that phase will play out. We would expect that investment to be just maybe a little bit lower than what we have in the first phase.
As and when that decision happens over the next few years, we will hopefully see an investment of substance being put to build on the foundation that we laid with the first phase.
Okay, and then you mentioned obviously doing finishing up pruning in whole health care. Given what's happening elsewhere in other regions, is there opportunity for doing some pruning or kind of divesting in other other areas outside health care in different regions around the world such as the Europe where things are fairly soft still?
We're always evaluating our portfolio and, you know, there is a lot of action that happens. Obviously, it isn't large enough for much of that to have a lot of visibility, but two pieces of that portfolio puzzle that I want to tell you about briefly.
One is what we'd like to bring on to our portfolio, so token acquisitions are something that we execute on consistently every year. We have a
you know, a fairly healthy opportunity pipeline in that space, and in fact...
You know, we brought on a number of those token acquisitions this year as well. So we feel very good about the ability to bring them onto our, you know, platform, if you will, integrate them well and create value as a result of that. So that's the incoming piece. Then alongside that, we're constantly looking at our portfolio elements and looking at where we divest.
We've done that in the past as you're aware and you will continue to see us do that more broadly as well.
Speaker Change: Thank you.
And your next question comes from the line of Tony Jones with Redburn Atlantic. Your line is open.
Good morning everybody and thank you for taking my question. Just a quick one to squeeze in at the end. Can I check my quick math that the new cost reduction...
can lift EPS by around 1% to 2% if it's all gained in 2025. And following up with that, is that incremental or will be part of the normal 4% to 5% EPS growth from price versus management actions? Thank you.
Tony, it's Matt. I'll start with, you know, we expect this to be roughly a one-year return, so you could do the math on that.
And as mentioned in the prepared remarks, we expect the full run rate to take effect in the second half of next year.
Based on that, you won't get the full benefit in 2025, but we would anticipate a majority of the benefit to be in 2025.
But we view this all part of this management action effort that we need to do to get ahead of this environment. So clearly we see it as beneficial, we see it as incremental the next year, but this is all part of the effort we need to undertake, as I mentioned earlier, because our outlook on the macro is a bit weaker.
and so we view we need to make it up in some other areas of which management actions would be one.
Speaker Change: Thank you Matt, that's very helpful.
Thank you.
And your final question comes from the line of Mike Harrison with Seaport Research Partners. Your line is open.
Hi, good morning. You mentioned that big ticket purchases have been a little bit sluggish due to economic uncertainty. Can you comment on what you've seen in hard goods and equipment and automation demand in North America or other regions? And I'm curious, have you seen any change in customer behavior in response to lower interest rates?
Speaker Change: So Mike, let's talk about the hard goods business first and then we'll talk about interest rates.
Mike Lighthead: The biggest hard goods market for us really is here in the U.S.
Speaker Change: and this is a, you know, this is a trend we track very closely. As you heard me say previously, I think of it as a bit of a leading indicator. We are right in the middle of...
the industrial weakness that we've referenced a number of times in this call, because the hard goods numbers are actually reflecting that. We see about mid-single-digit declines on hard goods sales. Now, that is split, and to your point, there are some, you know, when we think about that,
Speaker Change: Sequentially there are some large automation purchases that swung one quarter to the other so that I think just does kind of change the numbers a little bit but there is an underlying weakness of the hard good side I think which is reflective of the industrial weakness we described more broadly across the manufacturing sector in particular.
And that's consistent with what we're seeing on hard goods elsewhere in the world as well, although our largest market is the U.S., as I mentioned to you.
Speaker Change: Thank you.
Speaker Change: Thank you. Thank you.
Our reference to also the large-ticket items, and I think, you know, which ties in with your question on consumer behavior, is that people across the world, and I think I'll talk about the rest of the world and then I'll come to the US market briefly,
Speaker Change: people across the world we're finding that there isn't the propensity to spend and you know decisions on large spend items just isn't happening.
As you would normally have expected, and that's particularly true of places like China, where consumer sentiment obviously is down.
Speaker Change: A little bit in Europe as well, where people see that economic weakness and recognize that there isn't a catalyst that's going to change that in the near term. So there is a degree of more caution that's reflected over there.
Hey, the consumer, you know, sentiment and behavior in the U.S. has been phenomenal. I think, you know, the economy has benefited tremendously from that. Obviously, we are seeing signals of some concerns around that, including some, you know, if you think about auto loans and other, you know, areas where delinquencies are on the rise.
Speaker Change: Bye.
We're not seeing anything to suggest that in anticipation of the Fed's actions
Speaker Change: That, you know, that sentiment is, is, is...
Speaker Change: Thank you. Thank you.
And I would now like to turn the call back to Mr. Juan Pelaez for any additional or closing remarks.
Juan Pelaez: Abby, thanks again for a great job today. Everyone else, thank you for participating in today's call. If you have any further questions, feel free to reach out. Have a very productive day. Thank you. Thank you.
Speaker Change: Thank you for watching.
And ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.