Linde plc

first quarter earnings calling webcast. I'm Juan Pelaez, head of investor relations, and I'm joined this morning by Sanjeev Landa, chief executive officer, and Matt White, chief financial officer. Today's presentation materials are on our website at the lindy.com in the investor section. Please read the forward-looking statement disclosures on page two of the slides and note that it applies to all statements made during this talk conference. The reconciliations of the adjusted numbers are in the appendix to this presentation. Sanjeev will provide some opening remarks, and then Matt will give an update on Lindy's first quarter financial performance and outlook, after which we will wrap up with Q&A. Let me now turn the call over to Sanjeev.

Thanks, Juan, and very good morning, everyone. Last quarter, we took a fairly cautious view on the economy, and unfortunately, things mostly played out as anticipated. Yet, despite those headwinds, Lindy employees once again delivered resilient results by growing APS XFX by 8%, expanding operating margins 120 basis points to 30.1%, and maintaining industry-leading ROC at 25.7%. It's during volatile and uncertain times like today when the Linde operating model truly stands out. To demonstrate that, slide three provides an overview of the defensive nature of our business. Some of you may recall this slide. That is because we presented a version of it in April 2020, another period when financial markets were gripped with fear and uncertainty. Lindy managed through a challenging 2020 and demonstrated its resiliency by growing EPS 12% that year. And I fully expect this defensiveness to be on display for 2025 and beyond. Now, we define defensive sales as businesses which contain at least one of the three categories. The first category represents resilient end markets that tend to be independent of economic trends, such as healthcare, electronics, or food and beverage. Over the last few decades, we have found these end markets remain quite stable, even during the most challenging periods, while also offering nice opportunities for growth throughout various economic sites. The second category represents on-site customers from any end market who pay fixed facility fees that are independent of volumes. These fees are contractually required to recover a capital investment and a part of virtually every on-site agreement. This structure gives us significant learning stability, which has been proven during the most difficult times. And the final category relates to rental payments on our owned assets, such as tanks, cylinders, and equipment. Although the asset network requires upfront capital outlay, the contractual rental fees help recover the initial investment, regardless of gas consumption. Individually, these categories have proven to provide resilient revenues and cash flow, underpinned by our dense supply networks around the world, especially during times of economic stress. So the dark blue shading on the slide represents these three defensive categories, which together account for almost two-thirds of global gas sales. Additionally, this split is almost identical in every segment, further reinforcing the consistency of our business model in every geography. And this is ultimately validated by the chart on the right, showing a 12% EPS compound annual growth rate over the last three decades. Overall, the model has proven itself and stood the test of time. And I don't see that changing anytime soon. But looking at the current environment, we're seeing more negative than positive developments. So it may be helpful if I can provide some color on the first quarter trends by segment. Starting in APAC, China trends have remained consistent when adjusting for seasonally weaker Q1. We're still seeing strength in battery and electronics, although rare gases and helium prices remained lower than prior year. Regarding the industrial end markets, we continue seeing softness across most, although our customers are primarily tier one producers and thus have been much more stable. Furrier is mostly tied to the electronics sector, and our largest customer there recently announced further expansion, resulting in a new project win for Libby. Australia has seen weaker manufacturing trends, directly impacting packaged gas volumes, while India, on the other hand, remains one of the better growth regions globally. Moving to EMEA, we have not seen any meaningful improvement in industrial activity, despite some of the recent positive news regarding increased government spending. However, I'm encouraged by the more pragmatic discussions around decarbonization, which could help accelerate potential growth opportunities. Furthermore, they're very well positioned for any economic recovery or increased infrastructure spending. The America segment has been more of a mixed bag. On one hand, Canada and US packaged gases are seeing some weakness from manufacturing uncertainty. On the other hand, US bulk North Latin America volumes continue to grow low to mid-single-digit percent. America has the highest segment price increase at 3%, reflecting the inflationary pressure we see in this segment. I fully expect us to stay ahead of any inflationary pressure through a combination of contractual pricing clauses as well as our productivity programs. The quarter ended with a strong backlog of $10 billion. of which more than $7 billion is sale of gas projects, all underpinned by long-term contracts with secured returns, driving future growth. You may recall from our prior earnings call that project contribution is part of our EPS growth algorithm. And despite the uncertainty, I expect we will continue to announce new wins in the quarters ahead. In summary, the rapid changes in global trade policy are having a dampening effect on overall industrial activity. So I anticipate more volatility in end-market trends until there is greater clarity and stability. And while no one can predict what will happen next week, let alone next quarter, I'm confident Lindy will navigate the uncertainty by not only leveraging our operating rhythm to quickly adapt, but also continuing to deliver high-quality growth. I'll now turn the call over to Matt to walk through our financial results. Thanks, Sanjeev.

First quarter results can be found on slide four. Sales of $8.1 billion were flat prior year and down 2% sequentially. Versus prior year, the foreign currency headwind was volatile, starting at 4% but ending with 2% for an overall first quarter average of 3%. Cost pass-through increased 1% from higher natural gas pricing, but had minimal effect on profit. Net acquisitions contributed 1%, primarily from packaged gas tuck-ins in North America, as we continue to see attractive roll-up opportunities justified by cost synergies. Excluding these items, underlying sales increased 1% from last year. as higher pricing was partially offset by lower volumes. Pricing tracked with globally weighted inflation everywhere except for APAC, which was impacted by lower prices in helium and rare gases. Volumes declined 1%, as 2% lower base volumes were partially offset by contribution from the project backlog. As Sanjeev mentioned, industrial activity remains sluggish in most geographies, and therefore has dragged down base volumes. Sequentially, underlying sales are down 1% as higher pricing is more than offset by lower volumes. The lower volume is primarily driven by seasonal factors, especially in APAP, although we did experience weaker trends in certain packaged gas markets. operating profit at $2.4 billion increased 4% and resulted in a margin of 30.1% or 120 basis points higher than prior year. All segments expanded operating margin as management actions and pricing and cost productivity more than compensated weaker base volumes. Despite the economic challenges, we expect management actions to continue to support profit growth and margin expansion. EPS of $3.95 was 5% over prior year or 8% when excluding the effects of currency translation. We finished the quarter at the top end of the guidance range due to slightly better FX as benefits from costs and pricing actions were mostly offset by weaker volumes. CapEx of $1.3 billion was equally split between base CapEx and project backlog. As a reminder, Linde has the most stringent project backlog definition in the industry, which requires incremental growth underpinned by fixed fees and contract clauses to protect the overall return. Base CapEx includes all other growth investments not meeting our backlog definition, as well as maintenance and replacement spend. The 58% increase in Project CapEx supports the record $7 billion sale of gas backlog. We're actively constructing the two largest projects in our history, so I anticipate elevated levels for a few more quarters. Conversely, base capex has declined from lower volumes and productivity actions. Slide five provides further details on quarterly capital management. The operating cash flow trend can be seen to the left, with the most recent quarter of $2.2 billion increasing 11% above last year. Note the first half is weaker due to seasonality of cash payment timing for interest, taxes, and incentives. For 2025, I anticipate a similar trend as last year. Discipline capital allocation is a hallmark of lending culture, and the pie chart to the right demonstrates the balance across investing into the business and returning capital to shareholders. During the quarter, we raised the annual dividend by 8%, representing 32 straight years of dividend growth with an average rate of 13%. We also repurchased $1.1 billion of stock while reinvesting almost $1.3 billion back into the business. The steady capital allocation model is underpinned by quality credit metrics and access to low-cost funding, as evidenced by our most recent 3% average bond coupon. In uncertain and volatile times like today, having a Fortress balance sheet is critical for not only maintaining stability, but also capitalizing on growth and share repurchase opportunities as they arrive. I'll wrap up with a guidance update on slide six. For second quarter, the EPS guidance range is $3.95 to $4.05. This represents 3% to 5% growth or 5% to 7% when excluding a 2% currency headwind. This range assumes recessionary conditions at the midpoint, translating to roughly 2% EPS headwind from lower volumes. Therefore, while the assumed FX headwind improved by 2%, we offset that benefit with an equivalent volume contraction at the midpoint. Consistent with our normal approach, this is merely an economic placeholder based on current trends. If things are better, we'll perform better. And if worse, we'll take actions to mitigate. However, it's important to note this range still follows our long-term EPS growth algorithm with double-digit percent growth from capital allocation and management actions partially offset by the current unfavorable economic impact, including currency translation. The full-year guide follows the same approach as Q2, resulting in an updated range of $16.20 to $16.50. FX improved by 2%, but was offset by an equally negative volume assumption at the midpoint. All in, we're holding the original guidance midpoint, but are narrowing the range by a nickel on each end due to less remaining quarters. Overall, we believe it's prudent to remain guarded in this environment. but do not mistake our prudence for complacency. We continue to manage the things within our control by taking proactive actions and adhering to our long-term proven capital allocation strategy. Additionally, we're leveraging our secure balance sheet, engineering capabilities, and unrivaled supply network to capture opportunities that will position us for the future. And eventually, the economy will recover, at which point Lindy will be well positioned to benefit, with 2021 being the most recent example. Until that time, investors can rest assured knowing that our employees will continue to exemplify the no excuses execution culture, which has been the bedrock of our long-term compound value creation. I'll now turn the call over to Q&A.