Linde plc

Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2020 Lendi Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you need to press the star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press the star 0. I would now like to hand the conference over to your speaker today, Juan Pelage. Thank you, and please go ahead, sir.

Chris, thank you. Good morning, everyone, and thank you for sending our 2020 second quarter earnings call and webcast. I'm Juan Penaez, head of investor relations, and I'm joined this morning by Steve Angel, chief executive officer, and Matt White, chief financial officer. Today's presentation materials are available on our website at lindy.com in the investor section. Please read the forward-looking statement disclosure on page two 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 this presentation. Steve and Matt will now give us an update on Lindy's business outlook and second quarter performance, and then we'll be available to answer questions. Let me turn the call over to Steve now.

Thanks, Juan. Good morning, everyone. Matt will cover the numbers, which were obviously quite good, but just a few comments. We grew earnings per share versus Q1 and year over year. despite currency headwinds and weaker volumes. Cash flow was very strong. Return on capital continues to improve. Operating margins improved in every segment. In other words, Q2 was like any other quarter, except we had to deliver this one through a pandemic. Safety performance continued to improve while we battled COVID around the world. Plant reliability is at an all-time high. We brought several large projects online. Our hospital and home care businesses continue to play an important role around the world in the fight against this respiratory illness. We provided a lot of support in our communities through donations and in-kind gifts. This type of performance doesn't happen because corporate ordains it. It happens because 80,000 committed and highly capable Lindy employees do their jobs exceptionally well around the world. You turn to page three. We have talked about what makes Lindy resilient in the past. You can see that in a few bullets on the left-hand side of the page. The best-performing markets in Q2, not surprisingly, were more defensive. like healthcare, food, and electronics. And when combined with our commercial terms and conditions that guarantees us a steady stream of cash flow irrespective of volumes, you have what we demonstrated during Q2, a very resilient business. We are not directly part of any global supply chain. We source, produce, and sell locally. Our businesses are local, and they optimize their cost structure based on local market conditions. Regarding our backlog, it remains firm. We have seen some delays, which we are being compensated for. But the backlog has held together well, and it is all for high-quality customers you know well. We took additional cost actions in early March to ensure we could deliver the type of performance we could all be proud of. We eliminated discretionary costs. We made sure our productivity initiatives were delivering. We took advantage of every efficiency opportunity we could find. A good indication of how well the team executed in Q2 can be found in our SG&A results. which were down 14% year over year, and reached our lowest level at 11.9% of sales since our merger. You don't deliver the kind of cash flow we did this quarter without doing a good job on working capital management. And when you factor in CapEx efficiencies, we generated approximately $1 billion in free cash flow. Pricing continues to hold up well with positive price attainment in every business. So where do we stand today since our merger closed on March 1st of last year? Operating margins have improved over 300 basis points and return on capital 200 basis points. Earnings per share grew 23% last year, ex-currency translation, and has grown 11% ex-FX through the first half of this year. And based on our strong and stable cash flow, We raised the dividend another 10% this year, which marks the 27th straight year we've increased the dividend. And we have no intention of breaking that streak now. If you can turn to page four. So what are we trying to accomplish over the coming months and years? What is our core strategy? I broke it down to three simple sections. First of all, we want to continue to optimize the base business. We want to drive network density in our core geographies. We want to leverage digitalization initiatives to drive continuous improvement in every aspect of our business. We want to ensure we have best in class price management in every corner of the company. We want to streamline our business portfolio down to businesses we are confident we can operate the way we want to operate them. We are leveraged to any economic recovery. As I said, prices have remained stable, so all we need is more volume. The increased volume allows us to operate our plants and distribution networks more efficiently. And that SG&A reduction I spoke about earlier Those costs will not come back anytime soon. Needless to say, we will get leverage down the income statement with any improvement in economic activity. We are capitalizing on growth opportunities now and coming out of COVID. I expect to see several opportunities in electronics come to fruition in the coming months. And healthcare, which is 21% of total sales today, We'll continue to grow at a nice, say, 3% to 5% clip organically. And though the backlog is coming down somewhat as we start up new projects, the project work between Celagas and third party remains healthy at $8.6 billion. The last element of growth I wanted to talk about is one that seems to be dominating the airwaves these days, and that is clean energy. There's a lot of hype, marketing, and companies that want to burnish their ESG credentials. Some companies are just looking for a way out of their current predicament. And then you have companies like Lindy that are actually players in the hydrogen business today. Let me turn to page five. So why do we believe clean hydrogen is real? Key countries and regions around the world are leading the charge with regulations, targets, subsidies, and funding. You can see a list of those regulations on page 10. Why are they doing this? It is about decarbonizing their economies to address the challenges of climate change, of course. But it is also about resuscitating their economies post-COVID. They want GDP growth, and they want jobs for their people, and they don't want to outsource their green economy to anyone else. They want to build it all locally, if at all possible. The EU does acknowledge they will need to supplement their renewable power requirements from areas outside the EU, like North Africa, where they also have the ability to repurpose natural gas pipelines for renewable hydrogen. On page 10, you can see a map of the optimal renewable sources from around the world. Clearly, countries like the US and China have the ability to develop their own sources of renewable hydrogen for their own needs. In addition to renewable, There are quite a few countries advantaged in low-carbon sources, such as natural gas, that will continue to play an important role in the transition from gray to green hydrogen, as well as in the production of blue hydrogen, where the CO2 is captured in the hydrogen production process. You know, back to page five, there are challenges. First of all, you have to determine how these funding mechanisms will actually work. But more importantly, over the next decade, the cost of clean hydrogen at the point of use needs to drop at least 50 to 60 percent from where it is today to roughly $4 per kilogram. To reach that target, renewable power costs need to come down, along with the cost of electrolysis itself. This can be achieved by scaling up capacity, improving efficiencies, and developing greater standardization around the supporting infrastructure. This will not happen overnight, but it's certainly feasible within the next 10 years and something we can directly impact. Some form of carbon pricing will also need to be in place for clean hydrogen to compete against cheap fossil fuels in some sectors. And the market needs to develop, especially fuel cell electric vehicles for heavy haul trucking, which could become the largest target market for mobility by an order of magnitude. Our clean hydrogen strategy is not unlike our strategy for industrial gases. These markets are local and will evolve uniquely. For example, South Korea and Japan are focused on building their hydrogen economy first, irrespective of the carbon content or color of the hydrogen molecule. Green hydrogen will come later when it reaches scale and cost. China is focused on both gray and green hydrogen molecules. The EU wants green now. but privately admits gray or a transition through blue hydrogen will be necessary for a period of time. The U.S. hasn't declared yet, except for California, but the rest of the country will likely pursue all colors of the rainbow, although several are already following California's lead. We want to leverage and build on our existing integrated supply capabilities in each of these regions. In the appendix on page 11, illustrates our capabilities across the entire hydrogen value chain. I think you can see we are well positioned to participate as these markets develop. Emerging technologies, like PEM, electrolysis technology, needs to mature to bring clean hydrogen down the cost curve. We are partnered with leading technology companies like ITM Power to do just that and are already starting to see the benefits of such relationships. So I will end with the caption at the top of slide five. I say this can be a huge market by 2030. What needs to happen? It is a bit of chicken or the egg in the mobility market. You need fuel cell electric vehicle adoption to drive hydrogen growth, but you also need low-cost hydrogen and scaled infrastructure to enable fuel cell electric vehicle adoption. If 1% of all energy consumed by heavy haul trucking today was converted to fuel cell electric vehicles, that would be approximately a $20 billion per annum hydrogen market. The other demands for hydrogen are as an energy carrier, which many consider to be a key enabler for wide-scale use of renewable power, and hydrogen as a feedstock for industrial use, as well as building and industrial heat. All in all, there have been 35 applications modeled for clean hydrogen, about half of which should be competitive by 2030. As I mentioned earlier, there seems to be new entrants in clean energy by the day, many of whom are nontraditional players in the hydrogen space. But with our expertise, capabilities, local presence, and global reach, I'm confident we will capture our fair share of this market as it develops. That is why I say this will be a multibillion-dollar business for lending. And now I will turn it over to Matt to discuss our Q2 performance and outlook.