Linde plc (NASDAQ:LIN) Q1 2024 Earnings Call Transcript

Linde plc (NASDAQ:LIN) Q1 2024 Earnings Call Transcript May 2, 2024

Linde plc misses on earnings expectations. Reported EPS is $3.35 EPS, expectations were $3.68. Linde plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good day, and thank you for standing by. Welcome to the Linde's First Quarter 2024 Earnings Call and Webcast. [Operator Instructions] And please be advised that today's conference is being recorded. [Operator Instructions] And I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.

Juan Pelaez: Abby, thank you and good morning, everyone. Thanks for attending our 2024 first quarter earnings call and webcast. I am Juan Pelaez, Head of Investor Relations. And I'm joined this morning by Sanjiv Lamba, Chief Executive Officer; and Matt White, Chief Financial Officer. Today's presentation materials are available on our website at linde.com in the Investors 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 of the presentation. Sanjiv will provide some opening remarks, and then Matt will give an update on Linde's first quarter financial performance and outlook, after which, we will wrap up the Q&A. Let me now turn the call over to Sanjiv.

Sanjiv Lamba: Thanks, Juan, and a very good morning, everyone. The Linde team delivered another solid quarter despite stagnant economic conditions across most regions. EPS of $3.75 grew 10%. ROC increased to 25.6% and operating margins reached 28.9%. These all represent record levels even though volumes declined 1%. Over the last few quarters, we have seen a row of negative base volumes, which are tracking the stagnant to declining manufacturing environment, especially in EMEA. While volumes continue to track local industrial production, we know there is more we must do to grow. So while pricing remains an important lever for us, we're also focused on other growth opportunities like small on-site, applications technology and investments, including acquisitions, to grow our network density, even as we trim certain areas of the portfolio, like equipment hard goods, which typically suffer in economic downturns.

Add to that, the contracted backlog, and we have a solid growth pipeline for the next few years ahead. Let me provide you with some additional color on the trends and opportunities by key end markets, which you can find on Slide 3. I'll start with the consumer-related markets, which have proven their resiliency time after time. Healthcare has been quite stable year-on-year. While we continue to see sleep, respiratory and oxygen demand growing, sales have been partially offset by some rationalization of home care equipment offerings in the Americas and EMEA, which don't meet the investment criteria. Food and beverage grew nicely at 6%. This is mostly driven by food freezing, beverage carbonation and aquaculture. We continue to see opportunities associated with the high quality and more sustainable foods.

Even though we don't talk much about our food and beverage business, I'm excited to see good growth opportunities ahead. Electronics is up 1%, with two key trends, which mostly offset each other. On the one hand, we continue to see good growth from project startups, which have delivered fairly steady results mostly in APAC. On the other hand, this growth was offset in part by lower packaged and merchant volumes to fabs as production levels were softer. The current trend suggests that this has largely bottomed out with expectations of recovery growing. From where I stand, I have some optimism that we'll see volumes pick up again in the second half of the year. Some of this will be driven by the growing demand for AI chips and new data centers.

This is not baked into our guidance at this time. Turning to industrial end markets. Metals and Mining are flat as pricing increases are offset by volume declines. EMEA steel mills account for the majority of volume reduction due to weaker industrial activity but protected by strong contracts. At the same time, we are seeing project backlog opportunities pick up for new low-carbon electric arc furnaces or EAF as well as existing steel customers exploring ways to reduce their carbon footprint. Linde has recently signed a long-term agreement with H2 Green Steel to supply industrial gases for the world's first large-scale green steel production plant in Northern Sweden. In addition, Tier 1 producers like Baowu in China have expanded their relationship with Linde, by decaptivating their ASUs into our existing supply network further increasing supply reliability and efficiency.

We continue to work closely with our CE customers on a range of projects from supporting expansions to decarbonization. Chemicals and Energy were up 4%, driven mostly by higher on-site volumes in the Americas and APAC. U.S. Gulf Coast refining and petrochemical customers ran better this quarter when compared to the planned outages last year, helped today by healthy spreads and access to low-cost natural gas. Furthermore, we continue to see growing interest around decarbonization projects. The manufacturing end market was up 1%. Most of that is pricing. Manufacturing volumes are down year-on-year. The volume decline is split between EMEA and the U.S. EMEA has experienced broad-based declines in industrial production due to geopolitical and energy challenges.

In the U.S., manufacturing sales are about flat when excluding the timing of gases supplied to the aerospace sector. Elsewhere, underlying manufacturing volumes have been stable to slightly up across a variety of key sectors, including battery manufacturing, pulp and paper, and merchant scale clean energy opportunities. A good example is our recent announcement to invest in an electrolyzer to grow our merchant hydrogen network density in Brazil and help customers decarbonize. Looking ahead, our base volumes are expected to track local industrial production, including in there are some encouraging secular growth trends such as batteries, aerospace and clean energy. Also, resilient end markets such as food and beverage and healthcare will continue to grow mid-single digit, driven by demographics and consumer demand.

Furthermore, we have a healthy backlog of approximately $5 billion which will continue contributing to earnings for the next couple of years. However, I'm not expecting near-term improvement in industrial production, especially in certain parts of EMEA. These flat economic conditions are embedded in the guidance assumptions at the midpoint, which Matt will discuss in more detail. Overall, I remain confident that we will continue to be nimble and actively manage the balance between volume, price and productivity to grow earnings even in the sluggish economic conditions. And when industrial production levels rebound, as they always do, Linde will be very well positioned to leverage this growth. I'll now turn the call over to Matt to walk through the financial results.

Matt White: Thanks, Sanjiv. Slide 4 provides consolidated results for the first quarter. Sales of $8.1 billion declined 1% from prior year and 2% sequentially. When excluding the impact of cost pass-through and engineering project timing, underlying sales increased 1% over last year but remained flat sequentially. Price continues to drive underlying sales growth with a positive contribution of 2% year-over-year. As discussed in prior calls, pricing is localized for most products and thus is highly correlated to local inflation levels. And while we've seen some disinflation, including deflation in China, levels have stabilized as evidenced by the small sequential price increase. Volumes are down 1% versus prior year and the fourth quarter.

While we continue to see positive growth from the project backlog, base volumes are down primarily from negative industrial production, as mentioned by Sanjiv. In addition, we've pruned some noncore offerings in industrial and home care hard goods based on distribution economics, which is consistent with historical approach. Despite lower volumes, operating profit of $2.3 billion increased 6% from 2023, resulting in a margin of 28.9% or 200 basis points higher. You can see margins by segment when excluding the effects of cost pass-through with EMEA continuing to lead due to a combination of price and cost management. EPS of $3.75 increased 10% as a lower share count and favorable tax rate were partially offset by higher net interest. CapEx up 26% over prior year, driven by project backlog timing.

Despite this, we are taking actions to tighten overall CapEx levels and thus have lowered the 2024 full year estimate to $4 billion to $4.5 billion. Slide 5 includes more detail on capital management, including operating cash flow trends. OCF of $2 billion was slightly above last year, but 28% below the fourth quarter. There are two important points to highlight regarding this trend. First, Q1 is always our lowest seasonal quarter due to timing of working capital and incentive payments. Second, 2024 had Good Friday as the last weekday of March, resulting in unfavorable collection timing. This appears on the cash statement as more accounts receivable outflow. But we've seen a recovery in April, which should get us back on track by the end of Q2.

Despite this timing issue, free cash flow remains healthy as we continue to execute our proven capital allocation policy, including $1 billion of share repurchases in the quarter. We also issued €2.3 billion of long-term debt at attractive rates, enabling us to term out more expensive U.S. dollar commercial paper. These actions continue to reinforce that Linde's strong balance sheet and steady free cash flow are invaluable, especially during times like today. I'll wrap up with guidance on Slide 6. For the second quarter, we're initiating an EPS guidance range of $3.70 to $3.80 or 5% to 7% growth when excluding a 1% assumed FX headwind. Consistent with last quarter, this assumes no economic improvement at the midpoint. For the full year, we're updating our prior guidance to a range of $15.30 to $15.60 or 9% to 11% growth excluding a 1% FX headwind.

We slightly adjusted the prior range by narrowing both the top and bottom ends by $0.05. Thus maintaining the midpoint, which still assumes no economic improvement. When looking at the macroeconomic and geopolitical landscape, we have not seen any catalyst to warrant a meaningful change in the guidance range at this time. We believe it's appropriate to remain cautious on the remainder of the year until we see tangible evidence of an industrial recovery. Until then, you can rest assured we'll manage the things within our control to continue driving compound shareholder value. I'll now turn the call over to Q&A.

Operator: [Operator Instructions] And your first question comes from Duffy Fischer with Goldman Sachs. Your line is open.

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