Linde plc — 2024 Q1

Duffy, you're right in suggesting that there is a general view on electronics that we are seeing an improvement. As you know, we -- it's about 10% -- just under 10% of our overall portfolio. About 30% of our backlog today is investment in electronics. All of that is playing out. Our view is towards the back end of this year, we expect that recovery that everyone is talking about, led by AI chips or data centers to actually gather momentum. We haven't baked anything into our guidance, as you're aware, but we do expect to see some momentum build up. We've seen a decent electronics performance in China, and we are seeing equally in the rest of Asia, a reasonable level of bottoming out, which hopefully then points to a recovery in the second half.

Sure. So let me start off by just giving you a broader picture of what I see around clean energy projects, and then I'll talk specifically about projects we are developing and then OCI. So overall, I'd say to you, I see momentum on clean energy projects moderating a little bit. We are seeing that there is a lot more effort now in upfront feasibility studies and field studies to ensure that there is greater diligence as projects are being taken to FID. In fact, McKinsey has done a study that shows that of the announcements that get made in this space only 6.8%. So let's say, 7% of projects make it to FID, which I think is a reflection of the high dying down and some high-quality projects then surfacing and moving forward.

So I'm going to let Matt talk a little bit about the guidance itself. Mike, what I might do is just maybe walk you guys around the world because really I think it's important to just share with you what we are seeing around the world, and I think it sets the tone for how we think about the guidance. So I'll start just very quickly and give you a brief on Americas.

Sure. So I think, Mike, I'll start with how we approach the guide is really no different than how we've been approaching it for the last 4 to 5 years. And to clarify, when we say no improvement in the economy, it really means from now -- from what we're seeing now. And so when you go back in the last couple of months, I'd say, as we mentioned in the prepared remarks, it's been stagnant to even declining in some regions. So we've updated for that and held that for the remainder of the year. So even though, like Sanjiv just mentioned, the year-over-year comps in the second half get easier, so from the 2023 baseline. So even though that may demonstrate positive numbers just given a softer baseline, that's not how we're thinking about it. We're thinking about it from the current status and how it moves forward more sequentially. So that's how we applied it.

I know you've said in the past that EMEA margins should be the highest. So we've finally gotten there as you can see. Now as Matt stated in his prepared remarks, EMEA margins are a combination of a number of factors that we've taken into account price, cost management, managing the spread, right? And I have to say a credit to the team, they do a good job of managing that pricing to inflation, identifying opportunities to manage both fixed and variable costs on an ongoing basis. We do a lot of work, including using AI around our power management, in particular, which is a big number, as you know.

Let me start off by just addressing the base volume piece. So I'd say the new projects added about 1 percentage point on growth and base volumes are down about minus 2%, I'd say to you, which as I've said before, reflect for us our globally weighted industrial production. I've also said before that we are not happy with where that number is, and that growth is also a key priority and focus for us, and we're pushing on many of those growth levers across the world. So I feel that we've got a number of actions in play at the moment, which is there to support base volume as we move forward.

David, you know how we think about our business, right? For us, as we are seeing the industrial environment around us, we are actually ensuring that we are taking productivity actions across the board, right? And CapEx is no different. So the CapEx reduction is really driven by CapEx optimization, both in our backlog and the base CapEx as well. And the teams around the world have scrubbed their CapEx numbers and they are kind of consistent with the weak industrial activity that we're seeing.

This is Steve Haynes on for Vincent. Just wanted to maybe come back to the Americas performance in the quarter and two of the bigger pieces of your pie there, manufacturing and health care were down. It sounds like maybe you walked away from some volume and also had some -- maybe some onetime issues into aerospace. So I would be interested if you kind of quantify the collective impact of those 2 items and what you're assuming for the balance of the year or just generally how we should be thinking about that.

Yes. So I mean, as I said earlier on, as I was talking about the Americas, we basically -- we did see -- let's start with the hard goods part of the business, which is related to the manufacturing piece. So hard goods were down mid-single digit. And yes, we've been taking a very close look at that equipment portfolio, and we've been rationalizing where we think it's appropriate. So we are seeing a reflection of that in the numbers there.

John, we look at every project on merit, and we will make -- as you know, we've said before, we are unique in the fact that we have that optionality between pursuing sale of gas versus sale of plants. So we look at fundamental economics around the project and then -- and look at the risk profile before we determine which way we go. Really, the project cost movement or capital cost inflation, that's broadly there in the marketplace isn't really a factor that gets considered over there. I think what we consider is the risk return profile. If it meets our investment criteria, we are happy to have that as the sale of gas backlog and you see that we are currently executing just under $5 billion of those. So it feels that we have that optionality as a really strong competitive advantage when we go to market for such projects.

Sure, let's start off with the decaptivation. So you're right, we've decaptivated a plant from one of the large steel customers, as I said earlier on in my prepared remarks, customers see the benefit of bringing those assets into our network, obviously, enhances reliability, enhances efficiency. And clearly, Linde is the preferred option when it comes to operating plants like this. So when we think about decaptivation for us, decaptivation opportunities have to meet the same investment criteria that we would set for our own investments. We are happy to purchase these assets where those conditions are met, where the quality of the asset and the quality of the customer are good.

We've said this in the past, I'm going to now just reiterate the point that there is no silver bullet around productivity. We run about 13,000 to 14,000 projects a year. A significant portion of those projects happen both in Americas and in EMEA. So there is a track record of taking those productivity projects and driving them hard to make sure that those benefits come through. The EMEA margins are reflecting that, right? There has been a lot of action both around managing total cash fixed cost with a lot of rigor around that and ensuring that productivity actions are happening and projects are being developed. The Americas across the board from U.S., Canada to Latin America have got a great organizational rigor around productivity projects, and we are seeing them ramp up, given the economic conditions.

Yes, John, sure. This is Matt. So you're absolutely right. We always think about it in terms of a spread, right, because there's different inflationary environments everywhere in the world. And our model is very, very local. So managing the spread is very important. And when you think about APAC, clearly, China does make up a large portion of that segment. And as I mentioned, in China, you are seeing some deflationary conditions. And this is the primary reason why we talked about taking cost actions out several quarters ago, which we've been undertaking. So the dynamic we're seeing in China, while volumes are flattish, like Sanjiv said, pricing is also flattish, and so costs are actually coming down. And that spread is still positive in that regard.

See, we are very committed to tuck-in acquisitions anywhere in the world. And to your point, network density is what guides that decision for us to be able to bring a tuck-in acquisition, enhance our network density and actually move that business forward is how we see a good growth opportunity. As you know, in the U.S., we have a track record of doing many of these. The last one that we did, which was which is large enough, I would argue, is nexAir, it's proven to be tremendously successful, looking really good as we integrate that business into Southeast U.S., and that's a very attractive market in which to do that.

I'll just go back and tell you that when we think about our backlog today and then we look at order intake, the backlog we've got is about $8.3 billion. It's currently under execution. We have a healthy order intake pipeline. I think engineering does just under $0.5 billion of order intake a quarter. That looks pretty much on track at the moment. Yes, we do take high-quality projects. There's no question on that. But we have a unique position in the fact that Linde's engineering business is one of the leading engineering entities and gas processing in our space, we are the leader and therefore, well sought after today by customers who would like to continue to build on relationships that we've maintained with them over the past. So I feel good about where we stand with the project intake as things stand. And if you look at the sale of gas backlog, I'll just do the math for you over here because I'll kind of underpin that for you as well in terms of order intake.

So on the sale of gas backlog, as I said, we are -- we developed projects over a period of time, and we will start up about $1.5 billion to $2 billion of projects that are already being executed, and we expect to add back into the sale of gas backlog and therefore, the order intake for engineering around the same level to try and get very close to the $5 billion mark by the end of the year. Does that clarify?

Right. So on H2 Green Steel, the agreed scope that we wanted to do was the air separation, and we are very happy with having that opportunity to supply them. They are going to be probably one of the larger green steel projects starting up in Europe probably earlier than most others. There are other projects that we are also pursuing. The scope depends on the agreement we have with the customer. And obviously, you know that we are very mindful about how we see electrolysis development. Obviously, renewable energy availability guides a lot of that as does reliability and the capital intensity around those projects. So we tend to -- pick and choose based on that. There are projects that we are currently developing in Europe around steel that include supply of hydrogen and in others, we stick to the industrial gas portion, which is air separation.

Yes. I'm sorry, could you repeat that? It was the outflow in Q1 related to what?

Yes. So to your exact point, when you look at the face of the cash flow, the AR year-on-year is unfavorable, about $250 million. And the majority of that was associated with some of this timing impact. As you can imagine, Good Friday was a bank holiday in most jurisdictions, even Holy Thursday, arguably in some in Latin America. And so that created a bit of a timing dynamic on the receivables. But when we monitored the first few weeks of April, we've definitely seen a rebound on that timing. And so I would expect to get that back in Q2 as we mentioned, and should get back on track. So really, the AR was the only thing that stuck out and it really was a function of this timing component because, as you know, these are all contractual customers. These are contractual terms, and they obviously need to pay to continue to get supply.

Let's start -- let's start with the project pipeline and it's a reflection on the backlog, Laurence. So I'll distinguish this between traditional projects and clean energy projects. On the traditional projects, we see a lot of project activity continue. I would say that elections aren't having a dramatic impact on timing. I think people are just being very intentional about the projects that they wish to pursue. I have said that in India, we saw a little bit of a slowdown in the business just given the ongoing elections, but that's just around logistics and day-to-day business as opposed to decisions being made from a long-term perspective.

Abby, thank you, and thank you, everyone else for participating in today's call. I hope you have a productive day. Stay safe. Bye.