The Linde team has reported strong financial results for the second quarter of 2023, with EPS increasing by 16%, margins expanding by 440 basis points, and return on capital reaching 24.9%. Juan Pelaez, Head of Investor Relations, and Sanjiv Lamba, Chief Executive Officer, are joined by Matt White, Chief Financial Officer, for the earnings call and webcast. The presentation materials are available on the website and a forward-looking statement is included on Page 2. Sanjiv Lamba will provide opening remarks, and Matt White will provide an update on financial performance and outlook, before a Q&A session.

Linde is managing inflation and optimizing costs, executing a $7.8 billion project backlog, and winning new projects valued at close to $3 billion. They are also adhering to their proven capital allocation policy and made the largest acquisition in Linde's history with nexAir. This acquisition is performing better than expected and further validates their tuck-in acquisition strategy.

The company has had positive year-on-year organic growth in consumer-related markets, driven by price increases. Industrial markets are growing 9%, driven by price improvements and strength in battery production, commercial space and carbon steel. Chemicals and energy is growing the least at 1%, due to customer turnarounds in the US and lower demand in Europe. Despite a backdrop of a global pandemic, supply chain constraints, energy crisis, military conflict and inflation, the company has grown EPS an average of 19% per year from 2019 to today.

In the second quarter, Linde saw a 3% decrease in sales from the previous year and a flat growth sequentially. This was due to noise from FX translations, engineering, project timing, divestitures, and cost pass-throughs. Excluding these items, underlying price and volume increased 6% and 3% respectively versus prior year and first quarter. The main driver of underlying sales growth was an increase of 7% in prices, while volume was down 1% due to lower on-site volumes in the U.S. Gulf Coast and a 4% decrease in EMEA.

Sanjiv mentioned that the company is confident in its ability to deliver double-digit percent average EPS growth. Operating profit of $2.3 billion increased 15%, resulting in an operating margin of 27.9%. This was achieved from higher pricing, fixed payment contracts, and a stable cost structure. The return on capital reached a new high of 24.9%. Operating cash flow was up 1% from last year due to unfavorable cash tax timing, but available operating cash flow remained steady. Through 6 months, the company generated $5.4 billion of capital and returned a little more than half to shareholders while investing the balance back into the business.

Matt White explains that the company is raising their full year guidance to a range of $13.80 to $14 or 12% to 14% growth over 2022, with the top end increase attributed to better Q2 results and the bottom end increase due to greater confidence in the year. He provides guidance for the third quarter of $3.48 to $3.58, up 12-15% versus prior year, and explains that Linde employees will continue to efficiently run the company and create value regardless of the economic cycle.

The speaker is discussing how their pricing is a function of inflation, and that they expect it to remain in line with inflation, which is higher than it has been in the last 10 years. They also have a backlog startup, and are expecting free cash flow to be deployed in stock repurchases and acquisitions. They are also discussing the inflation Reduction Act, which has been passed a year ago, and the $33 billion and $50 billion numbers which have been mentioned in the past. They are asking how the maximum backlog may look if these numbers come to fruition.

Sanjiv Lamba explains that over the next 5-7 years, the clean energy project backlog is expected to grow at a steady rate, driven by 200 projects currently in development. These projects, which are located in the US, Canada, Middle East, and Europe, have a lead time of 12-24 months between prefeasibility and the final investment decision.

Sanjiv Lamba explains that the EMEA business has been able to outpace the broader market in terms of earnings growth, despite the weak European economic and chemical indicators. He attributes this success to a restructure two years ago that reset the cost base, allowing them to remain competitive.

The multinational oil companies have been outsourcing hydrogen production to industrial gas companies in order to focus on drilling for oil and gas, which they believe provide higher returns on capital. TSMC has started the process of setting up their Arizona fab and they expect the first plant to be operational in the second half of the year.

Linde has the advantage of managing the hydrogen plants efficiently, which has allowed them to outsource in the past. However, with the Inflation Reduction Act, the returns on capital for producing their own hydrogen have increased due to the tax credit. This gives Linde access to a larger fuel market, which increases their ability to tap into the hydrogen market, creating a huge advantage.

Linde has the potential to grow the hydrogen market to around $150 billion in the next 10-15 years, and has the advantage of a network of pipelines and contracted customers, which would provide economic returns that would not be available otherwise. Linde's network in the US Gulf Coast also provides a high degree of redundancy and reduces operational risk, which customers value. This provides a competitive advantage for Linde.

In Other, Linde plc includes their Materials Technology business, formerly called PST, their wholesale or inter-co helium business, and their global corporate costs. The inter-co helium business involves sourcing the product globally and selling it to the regions. GIST was divested, and Matt White walked Jeff Zekauskas through the math to explain that the $300 million delta has mostly been positive due to helium prices over time.

Sanjiv Lamba explains that 2018 was a transition year and 2019 is a better starting point to look at when considering the performance of the company. He also states that their goal is to make sure that the non-core businesses offset the corporate costs, and they are seeing that happen. Finally, he mentions that they are looking to create value in the other segments and that there could be further margin upside in the group level in the coming year, though it is yet to be seen how this will play out regionally.

Sanjiv discussed the expectation of expanding margins year-on-year by 30-50 basis points. He highlighted that across all segments, the quarter delivered significantly higher than that. He then discussed the margin developments in the America, EMEA, and APAC regions. He also discussed productivity as a key driver of earnings growth this year and the expectation that it should be similar next year.

Sanjiv Lamba explains that the company is focusing on productivity, with 14,000 projects in 2022 and 8,000 projects in the first half of this year. They measure the impact of productivity on the cost base as a percentage and aim for 5-7%. When it comes to clean energy, they are selecting high-quality projects that leverage their asset base and network, with an estimated $30 billion in decisions to be made in the US over the decade and $50 billion across the world. They do not focus on market share.

Sanjiv Lamba answered Peter Clark's two questions regarding Linde's pricing and EMEA margins. He mentioned that Linde has a long-term history of positive pricing and that they achieved 7% globally weighted inflation in Q2, which was slightly higher than the 5-6% range they had expected. He also mentioned that their competitor was more confident about the second half of the year in terms of on-site margins due to lower energy costs in Europe.

The speaker discusses how pricing is managed proactively to ensure it grows and expands, and that EMEA has seen impressive margins due to a mix of pricing and productivity. He also mentions that the organization is constantly benchmarking and that in 2022, many countries had margins above 30%.

Sanjiv Lamba explains that it is difficult to predict the on-site performance in Europe, particularly in chemicals and energy. He does see an uptick in metals, but the performance of chemicals and energy will be driven by a multiple of factors, including energy prices and weather. He also explains that the EPS growth algorithm of the company is driven by the base business, which is expected to deliver 4-6% of the 10-plus percent EPS growth target.

Sanjiv Lamba explains that backlog growth is expected to provide between 1% to 3% of EPS growth, with share buybacks providing an additional 2%. The base business is expected to contribute 4% to 6% of the EPS growth. In terms of volumes, Lamba expects them to stay similar to the second quarter year-over-year, but will be better sequentially. Additionally, there will be backlog contributions in the second half from $2 billion worth of new projects.

In Q2, Americas saw flat sales due to customer outages in the U.S. Gulf Coast and softer electronics sales. The Gulf Coast customers have since returned and are ramping up production, leading to positive volume growth in Q3. The U.S. package business saw mid-single-digit growth in Q2 and is expected to be flattish in Q3. In Asia, India is expected to continue its growth momentum while ASEAN is expected to be softer. In China, year-on-year volumes were flat sequentially, up 4%, and Q3 volumes are expected to be flattish due to soft demand in chemicals and electronics.

Matt White of the company explains that the guidance range they have out is based on the assumption of no economic growth. He also explains that the pricing equation achieved in the second quarter and what they are expecting in the third quarter can be used to think about the guidance range.

Matt White explains that pricing adjustments and contract inflation occur in almost 100 countries around the world and that there is always a component that carries into the next 4-3 quarters. He mentions that when the company laps high global inflation periods, the comps become tougher. He also mentions that there are still double-digit inflation in some countries and that Linde is still seeing price actions. Patrick Cunningham then asks about the potential of decaptivating ASUs in Asia in terms of backlog and addressable market.

Sanjiv Lamba explains that Wanhua's investment in decarbonization was part of a larger plan to increase network density and provide high-quality customer service. He states that they are selective when it comes to decarbonization opportunities and that they prefer to use it as a way of providing financing to their customers. He also notes that they have the technology and skills to provide carbon capture technology and are looking for partners to help with sequestration.

Sanjiv Lamba explains his expectation that the company's backlog will continue to grow in the future. He also expects that the decarbonization pie will be split between the U.S., EMEA, and APAC, with the U.S. making up around 60%. He is optimistic about larger projects in the Middle East and Europe.

Sanjiv Lamba addressed Steve Byrne's questions about the packaged gases business post-nexAir acquisition. He stated that the acquisition has been beneficial for them and that they have ensured that their rental pricing actions recover inflation. He also estimated their share of the U.S. packaged gases business and compared their pricing power in that business to liquid bulk. Finally, he gave indications on trends for hard goods that could give an outlook for the U.S. economy.

The speaker is discussing their market share and how they have seen positive growth in consumables but declines in equipment sales. They are not passing judgment yet, but will wait to see what happens in September. They are then asked to estimate the size of the opportunity for clean energy, which includes blue hydrogen production and sales, green hydrogen, oxyfuel opportunities, and mean based decarbonization projects.

Sanjiv Lamba explains the three buckets that they typically track: mobility (10%), industrial applications (60%), and energy carrier/vector (30%). Mobility projects are typically smaller and greener, while industrial applications are larger and bluer. Carbon capture and utilization or sequestration can play a role in both industrial applications and energy sources.

Sanjiv Lamba discusses two clean energy opportunities in the Middle East: carbon capture and sequestration and blue ammonia. The carbon capture and sequestration project is the largest in the world and is driven by the Kingdom of Saudi Arabia's domestic decarbonization efforts. Blue ammonia is also competitive in the global market, with a third of the product used for local markets and two thirds exported. The government provides project-based incentives to facilitate the economics of these projects.

John McNulty thanked the operator for the color and Juan Pelaez thanked the participants for their participation. The operator then concluded the conference call.

This summary was generated with AI and may contain some inaccuracies.