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    Linde PLC (LIN)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$400.63Last close (Feb 5, 2024)
    Post-Earnings Price$414.89Open (Feb 6, 2024)
    Price Change
    $14.26(+3.56%)

    What went well

    • Linde expects to deliver over 10% EPS growth in 2024, driven by backlog contributions at the top end of the 1-2% range, share buybacks contributing approximately 2 percentage points, and management actions in pricing, productivity, and total cost management.
    • The company's sale of gas backlog is anticipated to grow with $8-10 billion in new projects over the next few years, particularly in clean energy and decarbonization, positioning Linde for high-quality future growth.
    • Despite challenges in the EMEA region, Linde has achieved strong profit growth and expects margins to improve in 2024, supported by a resilient base business and large project opportunities led by decarbonization efforts.

    What went wrong

    • Slow recovery and lack of momentum in China could hinder Linde's growth, as management does not expect significant improvement in 2024, particularly in key sectors like steel and manufacturing.
    • Potential deindustrialization and negative volume trends in EMEA may pose risks to maintaining margins and future growth. Management acknowledges the region hasn't been a growth story, and long-term deindustrialization could impact profitability.
    • Flat volumes over multiple quarters indicate limited organic growth, with volumes being flat for the last five quarters, despite high returns on capital, suggesting limitations in growth opportunities without accepting lower-return investments.

    Q&A Summary

    1. China Outlook
      Q: What's the outlook for China in 2024?
      A: Linde sees continued softness in China, which accounts for 7% of their total sales. They observe a lack of momentum in industrials and don't anticipate a significant recovery in 2024. Key sectors like steel are shrinking, with crude steel down 4% in Q4 due to property market weaknesses. While automotive showed growth of 17% in Q4, driven by EVs, overall manufacturing remains lackluster. Electronics saw mild recovery but face geopolitical risks, with only a mild recovery expected in the first half of the year.

    2. Margin and Pricing Trends
      Q: How are margins and pricing expected to trend in 2024?
      A: Linde expects margins to remain very secure, with no significant changes from 2023. Pricing is tracking globally weighted inflation, and despite disinflation in some regions, they anticipate higher pricing levels than seen in the last decade. Ongoing pricing actions and discipline are expected to continue, leading to margin improvements in 2024.

    3. Capital Expenditure Increase
      Q: What's driving the higher CapEx guidance for 2024?
      A: The increase in CapEx to $4.5 to $5 billion is driven by more capital-intensive growth projects. This includes their largest project with OCI and the final stages of electronics projects construction. Early equipment ordering and the higher capital requirements of energy transformation initiatives are contributing factors.

    4. Returns on Capital vs. Volume Growth
      Q: With high returns on capital but flat volumes, would you accept lower returns for growth?
      A: Linde focuses on Internal Rate of Return (IRR) for investment decisions, not just Return on Capital (ROC). They are open to investing in lower ROC projects if they meet IRR criteria. While ROC may plateau or decline slightly due to capital-intensive growth, they aim to maintain healthy ROC and margins while growing EPS and cash flow.

    5. Green Hydrogen Projects
      Q: Why avoid large green hydrogen projects currently?
      A: Linde believes electrolyzer technology needs 5 to 7 years to improve in reliability and capital efficiency for large-scale green hydrogen projects. Until then, they focus on small to medium-sized electrolyzer complexes serving merchant demand. They are also scaling up their liquid hydrogen technology to support future growth.

    6. EMEA Margins and Outlook
      Q: What's behind the EMEA margin performance and outlook?
      A: In Q4, EMEA margins were impacted by one-time costs and volume declines. Linde expects margins to improve in 2024, with volumes stabilizing. Despite deindustrialization concerns, EMEA remains a resilient market with opportunities in decarbonization projects. They anticipate it will continue contributing to EPS growth.

    7. Sale of Gas Backlog Growth
      Q: How do you see your sale of gas backlog trending?
      A: The sale of gas backlog is expected to continue growing, driven by traditional on-site projects and an increasing portion from decarbonization efforts. Linde anticipates momentum translating into projects worth $8 to $10 billion over the next few years. They are winning more than their fair share in markets like India.

    8. Total Shareholder Return Drivers
      Q: How do buybacks and dividends factor into TSR?
      A: Linde views both buybacks and dividends as integral to their capital allocation strategy. They commit to growing the dividend annually but do not target a specific dividend yield. Excess cash enables continued stock buybacks, and they treat capital equally whether it's for buybacks or growth projects.

    9. India as Growth Opportunity
      Q: Should we see India as a new growth driver over China?
      A: India is an important and growing market for Linde, where they've operated for 90 years. They are well-positioned to capitalize on opportunities there. However, due to the scale of assets in China, it will continue to be a significant market for them.

    10. Helium Market Outlook
      Q: What's the outlook for the helium market?
      A: Helium represents very low single-digit revenues for Linde. The market is globally balanced with some regional imbalances. In Q4, volumes saw low single-digit declines while pricing remained steady. They expect helium volumes to remain largely balanced in 2024, mirroring electronics market trends.

    11. Hydrogen Customer Types and Premiums
      Q: Who are the customers for liquid green hydrogen?
      A: Large on-site customers prefer low-risk options like blue hydrogen due to reliability and cost-effectiveness. Green hydrogen via electrolyzers lacks the necessary reliability and scale for large long-term agreements. Small volumes of green hydrogen are being used in mobility applications, but widespread adoption awaits technological improvements.

    12. No-Growth Economic Assumption
      Q: Are you seeing more growth than implied in your no-growth guidance?
      A: Linde's guidance assumes zero economic growth for base volumes in 2024. While the backlog and pricing contribute positively, they maintain a conservative assumption on base volume growth, consistent with industrial production metrics.

    13. Retrofitting Existing Assets
      Q: How much of your clean energy pipeline involves retrofitting existing assets?
      A: Linde plans to invest about $3 billion in retrofitting and repurposing existing assets with carbon capture to produce blue hydrogen. This is part of a broader $8 to $10 billion clean energy investment pipeline over the next few years.

    14. Food and Beverage Growth
      Q: What's driving growth in the food and beverage segment?
      A: The 9% year-over-year growth is driven by innovations in food freezing and strong beverage carbonation sales. CO₂ pricing supports this growth, but they currently see no linkage between the 45Q tax credits and CO₂ pricing. Linde expects continued strong growth due to application development and resilient demand in this sector.

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