Q2 2024 Earnings Summary
- 1. Strong EPS Growth Despite Challenging Macroeconomic Conditions:* Linde has consistently delivered over 10% EPS growth even during industrial recessions, driven by its diverse earnings algorithm comprising backlog contributions (1%-2% EPS growth), proactive pricing and productivity measures (4%-6%), potential volume upticks, and share buybacks (2%). The company expresses high confidence in sustaining this growth going forward.
- 2. Resilient Business Model with Defensive Portfolio and Large Backlog:* Approximately 75% of Linde's business is locked into contracts or serves resilient end markets like food and beverage (which grew 8% year-over-year) and healthcare, providing stability even when industrial activity slows down. Additionally, a substantial $7.9 billion backlog of contracted projects underpins future growth, with significant projects like TSMC Phase 1 starting to contribute to earnings.
- 3. Strategic Investments and Competitive Advantages Positioning for Future Growth:* Linde is leveraging its significant pipeline network infrastructure in the U.S. Gulf Coast, developed over several decades, as a competitive advantage, particularly for future growth in low-carbon hydrogen developments. The company is also progressing with decarbonization initiatives, including a planned $3 billion investment to decarbonize its own operations, aligning with its long-term targets and potentially unlocking new growth opportunities in the energy transition.
- Lower order intake, with the order intake being the lowest since Q2 2020 at $300 million, as customers are taking longer to reach final investment decisions (FIDs), potentially impacting future growth.
- Deflationary conditions in China continue to create challenges, leading to pricing pressure, lower demand from the electronics segment, and increased helium supply from Russia affecting pricing.
- Sluggish industrial activity in the Americas, with hard goods sales declining year-over-year in the low single digits, indicating a softer manufacturing environment expected to continue for the next couple of quarters.
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Earnings Growth Despite Macro Weakness
Q: Can you sustain 10%+ EPS growth in a weak macro environment?
A: Management remains confident in delivering over 10% EPS growth despite the unsupportive macro backdrop. They attribute this to four key contributors: backlog start-ups contributing 1–2%, proactive pricing and productivity measures adding 4–6%, share buybacks providing 2%, and the potential for volume growth if industrial activity picks up. Even assuming zero volume growth, they believe their algorithm will achieve the target EPS growth. -
Interest Rates Impact on Projects
Q: Will declining interest rates alter your macro outlook or customer behavior?
A: Management suggests that lower interest rates could positively impact large capital-intensive projects by reducing CapEx costs, which are currently high due to inflation and rates. A decrease in rates may encourage customers to proceed with Final Investment Decisions (FIDs) on delayed projects, potentially improving industrial activity. -
Electronics Sector Outlook
Q: What's the outlook for electronics projects and AI opportunities?
A: Management expects continued momentum in electronics investments, driven by new fab capacity and the growing demands of AI and data centers. They are advancing projects with major players like TSMC in Phoenix and Samsung in Texas, and anticipate future announcements as contracts are signed. They remain well-positioned to capture growth in this sector. -
Helium Market Challenges
Q: Are helium pricing and volumes stabilizing in Asia Pacific?
A: The helium market in Asia Pacific is experiencing pricing pressure due to increased supply from Russia entering China. While Linde does not source helium from Russia, this additional supply has led to stabilization but requires monitoring. The company emphasizes the importance of a diverse supply and robust global business to navigate these challenges. -
Healthcare Business Pruning
Q: How much portfolio pruning remains in healthcare, and can you recoup inflation?
A: Management continues portfolio pruning in the healthcare segment, expecting actions to conclude by year-end. Long-term growth is projected at mid-single digits, supported by demographic trends. To manage inflation, they focus on productivity measures to maintain attractive margins. -
Pricing Strength in the Americas
Q: What's driving robust pricing in the Americas?
A: Pricing remains strong in both the U.S. and Latin America, tracking regional CPI trends. In Latin America, higher inflation rates contribute to elevated pricing levels. Management attributes this to proactive actions and expects this trend to continue. -
Decarbonization Investment Plans
Q: Is the $3 billion decarbonization plan on track?
A: Linde is progressing with its $3 billion plan to decarbonize operations. They are conducting FEED studies on SMRs to determine the best approaches for carbon capture and remain on schedule to meet their 2035 targets. -
Return on Invested Capital Outlook
Q: Will ROIC plateau or change with new investments?
A: Management aims to maintain industry-leading ROIC levels, potentially improving margins while growing in high-quality areas. They feel confident about their capital structure and believe that growth investments will not adversely affect ROIC. -
Defensive Business Strategy
Q: How will you handle worsening macro conditions?
A: Linde's business is inherently defensive, with approximately 75% of business contracted or locked in through on-site agreements, resilient end markets like food, beverage, and healthcare, and contracted rental streams. Management feels confident in their ability to navigate softer industrial activity and maintain growth. -
Order Intake and Bidding Activity
Q: Why was order intake the lowest since Q2 2020?
A: While order intake was low at $300 million, management notes that engineering teams are busy with front-end work like studies and FEEDs. Customers are taking longer to reach FIDs, causing delays in converting activity into orders.