Linde plc

Ladies and gentlemen, good day and thank you for standing by. Welcome to the Lindy second quarter 2023 earnings teleconference and webcast. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. And I would now like to hand the conference over to Mr. Juan Pelayas, head of investor relations. Please go ahead, sir.

Thank you, Abby. Good morning, everyone, and thank you for attending our 2023 second quarter earnings calling webcast. I'm Juan Pelaez, head of investor relations, and I'm joined this morning by Sanjeev Lamba, 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 the teleconference. 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 Linde's second quarter financial performance and outlook, after which we will wrap up with Q&A.

Let me now turn the call over to Sanjeev. Thank you, Juan, and a very good morning, everyone.

The Linde team once again delivered strong results despite the challenging environment. For the second quarter, we grew EPS XFX by 16%, expanded margins 440 basis points, and increased return on capital to 24.9%. These results don't just happen on their own. They require a strong execution culture and operating rhythm, which ensures that all 66,000 employees are aligned towards creating shareholder value. I'm proud of how we've demonstrated this resilience quarter after quarter, regardless of the economy. To this end, we are seeing some economies stagnate or start to soften, as evidenced by recent data. Now, I'm not going to try and predict what the future is going to do, because no one really knows. But I can tell you with some confidence that Lindy will continue to manage what we can control and deliver on our commitments. which is reflected in our guidance for the year. For example, we are managing inflation by contractually passing through energy cost variances while securing price increases which are aligned with local market trends. This is a key part of our contractual structure and operating discipline that we've consistently demonstrated for decades. On top of this, we continuously optimize costs through robust productivity initiatives. Ultimately, it's the spread between price and cost which adds compound value. Add to that a backlog that fuels growth. We're currently executing our $7.8 billion project backlog on time and on budget. For me, a healthy backlog contains quality customers with secured returns and is constantly turning over. In the last 12 months alone, we started up 22 projects valued at $2.1 billion, while winning 38 new projects valued close to $3 billion. Looking ahead, investors can rest assured we'll win projects that add value commensurate with risk. With this in mind, we continue to make good progress on the $50 billion of clean energy opportunities of which I expect $9 to $10 billion to be decided in the next few years. We're also adhering to the longstanding and proven capital allocation policy, which has consistently demonstrated industry-leading financial performance and shareholder returns. We continue to see ample quality growth opportunities within our traditional industrial gases business. This year, we made the largest acquisition in Lindy's history with Nexair. significantly enhancing our packaged gas presence in the fast-growing southeastern United States. I'm happy to say it's performing well ahead of expectations and further validates our tuck-in acquisition strategy. In addition, we'll consistently return capital through stock repurchases and increasing dividends, both to reward owners and also ensure investment discipline. Let me now wrap up with a quick overview of end markets, which you can find on slide three. Starting with consumer-related markets, we have positive year-on-year organic growth primarily driven by price increases. Note, sequential trends are subject to seasonality, so you'll see less respiratory healthcare but more beverage carbonation during warmer months. Healthcare itself is growing mid-single-digit, as expected. and food and beverage continues to expand as we see more applications for food freezing and aquaculture. While electronics is up versus prior year, we see some sequential softness from lower packaged and merchant sales into fabs, although the on-site volumes appear to be stable. For the industrial markets, both manufacturing and metals and mining are growing 9%, led by price improvements as well as strength in battery production, commercial space, and carbon steel. You can see that chemicals and energy is growing the least, at only 1%. And this is primarily driven by customer turnarounds in the United States, as well as low demand in Europe. I expect the U.S. to improve for the second half, since a number of customers already back up. But it's difficult to project how European demand will develop. You will recall that these contracts are underpinned by fixed payments, so our profit impact is mitigated. Overall, the business continues to perform well as we adapt to local market conditions. In fact, since our merger, we've grown EPS an average of 19% per year from 2019 to today. This was achieved against a backdrop of a global pandemic, supply chain constraints, energy crisis, military conflict, and the largest inflation increase in decades. It's because of this track record and the daily execution of our dedicated employees that I continue to have confidence Linda will grow EPS double-digit percent on average, regardless of the economic environment. I'll now turn the call over to Matt to walk you through the financial numbers.

Thanks, Sanjeev. Slide four provides an overview of second quarter results. Sales of $8.2 billion are down 3% to last year, but flat sequentially. The comparison has some noise related to movements in FX translation, engineering project timing, divestitures, and cost pass-through. As you know, we contractually pass through energy variances, which can cause fluctuations to revenue, but have no impact to profit dollars. Excluding these items, underlying price and volume are up 6% versus prior year and 3% versus first quarter. Higher prices are the main driver of underlying sales growth, with an increase of 7% versus 2022 and 1% sequentially. Consistent with prior years, pricing trends are representative of the weighted inflation rates across our countries of operation. And while we're seeing some disinflation in more developed regions, we're not seeing deflation. If the disinflation persists, I'd expect moderating price increases going forward, especially as we lap prior year comps. From a volume perspective, sequential trends played out as expected with a 2% seasonal improvement. but year over year is down 1% despite positive contribution from the project backlog. There are two contributing factors to the base volume decline. About a quarter relates to lower onsite volumes in the U.S. Gulf Coast, where customers took more outages than last year. Most customers are back up and running, so we anticipate sequential volume growth into Q3. The remaining decline primarily relates to EMEA, which had a 4% volume decrease led by onsite customers. Despite the lower year-over-year volumes, operating profit of $2.3 billion increased 15% and resulted in an operating margin of 27.9%, representing an increase of 440 basis points or 350 basis points when excluding cost pass-through. This profit growth was achieved from a combination of higher pricing, fixed payment contracts to mitigate volume decline, and a stable cost structure. Every region achieved triple-digit basis point margin increases when excluding cost pass-through effects. EPS of $3.57 rose 15% from prior year or 16% when excluding the effects of currency. As Sanjeev mentioned, we remain confident in our ability to deliver an average EPS growth rate of double digit percent. Project CapEx is increasing from the larger sale of gas backlog, a trend I expect to continue. However, despite the higher CapEx, Return on capital reached another new high at 24.9%, as our NOPAT continues to grow at a rate faster than the capital base. Slide 5 provides more color on capital management, including cash trends. Second quarter operating cash flow of $2.2 billion was only up 1% from last year, despite the higher earnings. This is due to unfavorable cash tax timing, which increased almost $300 million in the quarter. These outflows will stabilize for the second half, and so I expect the OCF to EBITDA ratio for the balance of the year to be closer to the expected low 80% range. Available operating cash flow, which we define as OCF-less base capex, remains steady. at $1.6 billion per quarter and thus provides ample liquidity to pursue our capital allocation policy, which you can see in the pie chart. Through six months, we generated $5.4 billion of capital and returned a little more than half to shareholders while investing the balance back into the business. We believe this is a healthy ratio to achieve quality growth while rewarding owners. And to be clear, we are not capital constrained in any way, and thus will pursue all growth investments which meet our criteria. I'll wrap up with guidance on slide six. We're raising full year guidance to a new range of $13.80 to $14, or 12% to 14% growth over 2022. This represents an increase of $0.35 on the bottom end and $0.15 on the top end. The top end increase is primarily attributed to the better Q2 results, while the second half assumption is consistent with last quarter. Therefore, the $14 figure assumes no economic improvement for the remainder of the year. The bottom end increased more as we tighten the range from greater confidence on the year. By default, the bottom end assumes economic contractions and more negative volumes going forward. Consistent with prior guidance, this does not represent our economic view, but rather is the baseline for the assumption. Irrespective of what happens, we'll manage the business accordingly. For the third quarter, we're providing an EPS guidance range of $3.48 to $3.58, up 12% to 15% versus prior year. Consistent with the full year assumption, the top end assumes a flat economy, and below that implies more recessionary conditions. Note that FX is a 2% tailwind for the third quarter, but has no impact to the full year. To sum it up, regardless of the economic rhetoric or latest opinion on what part of the cycle we're in, Linde employees will continue to do what they do best, efficiently run the world's leading industrial gas and engineering company while creating long-term compounding shareholder value. I'll now turn the call over to Q&A.

Thank you. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. And we will pause for just a moment to compile the Q&A roster. And we will take our first question from Duffy Fisher with Goldman Sachs. Your line is open.

Yes, good morning, guys. Question off of Matt's comment that, you know, we may be getting towards the end of, you know, what's been a really nice pricing cycle. If that pricing increase drops back to kind of historic, maybe 20-year trendline numbers, how do you continue to grow double digits in that kind of an environment?

Sure, Duffy. This is Matt. I think first to start with, As I mentioned, as you well know, our pricing, we always view as a function of inflation, and this will be the globally weighted average inflation. So I think starting with that, I won't tell you what our pricing will be. It's more a function of where you think inflation will be. And when we look at the, you know, at least 10, if not, you know, 15 year trend, arguably inflation right now is clearly higher than what it's been before, especially when you think post 2008. we definitely saw significant disinflation and even deflation back in those years. So from that perspective, while we continue to expect a price to inflation and we are seeing disinflation in developed markets, I still would expect our overall pricing to remain in line with overall inflation, which I expect will continue to be higher than what we've seen at least in the last 10 years. Aside from that, we, as you know, have a lot of other factors, including our backlog startup we have, we'll see what happens with volume. But right now, if we do see inflation abate, in theory, you could probably see some volume start to come back. And we'll continue to have a lot of strong free cash flow that will deploy in everything from stock repurchases to things like acquisitions for a roll-up strategy like Sanjeev had mentioned. So Overall, as the economy moves, you know, with pricing and inflation, you may have also industrial production trends that could go the other way. And that's what we've seen over the last several decades. And we'll see what happens going forward.

Fair enough. And then maybe on the couple different numbers, we're about a year into the Inflation Reduction Act being passed. And Sanjeev, kind of two times you've come out with that $33 billion number last fall. now kind of a more global $50 billion number and kind of over a decade period. If those numbers come to fruition, how would you scope when we get to kind of maximum backlog and what that may look like? And then what would kind of the CapEx shape look like over that decade-long period as those projects roll through the backlog?

Sure. So there are two parts to the backlog. I'll quickly cover the clean energy piece, which you are referring to on the IRA and other incentives we see around the world, Duffy. And then we'll briefly just talk about the traditional end market, which tends to get forgotten a little bit, but where we are also seeing interesting project pipeline and growth as well. But let's start with the clean energy piece. And really the way I look at that backlog today is, you know, just looking at what is feeding into that potential backlog for the future and what are we currently developing that's likely to result in that backlog. The answer to your question, I think, in brief is over the next five to seven years, we'll continue to see this backlog grow. We'd like to see it grow at a relative pace, increasing year on year, and I think that's on the basis of the amount of activity we see. I'd say to you we're still pursuing about 200 projects that I've referenced before. We went out and told you in the U.S. we think the IRA is driving a potential project pipeline for us where we make decisions on about $30 billion over the next 10 years. And I certainly see that backlog reflect as those decisions get made as we move forward. I'm also happy to say that we are actually seeing most of those projects progressing extremely well in the US, in Canada, and even outside in the Middle East and Europe as well. These project development cycles kind of tend to take a little bit longer. I explained that in the last earnings call. There's a lead time anywhere between 12 to 24 months between a pre-feasibility, a feasibility, to a feed then to get down to the final investment decisions. So the timing tends to be a little bit lumpy, but you'll see that happen as we move forward. I'll also reiterate that I expect over the next few years, decisions around nine to 10 billion, which are more tangible in terms of projects that are currently getting developed. All of that then translates once those decisions happen into the backlog. Duffy, I'll just go on and add a little bit of flavor on the traditional markets as well. Our traditional end markets are seeing a fair amount of, you know, strong proposal activity. And this includes all the decarbonization that we just referred to. The opportunity pipeline is spread across many end markets here, starting with electronics, metals, energy, chemicals, and includes a few decaptivation opportunities for us as well. As you know, our current sale of gas backlog is about 4.4 billion. That's after we, you know, adjusted for the 1.4 billion for the Singapore project. So we took that out as we are starting ramp up on that already. About 50% of that backlog today is around our traditional end markets, and we see potential for continued growth in there.

I expect the backlog probably towards the end of the year to be closer to about a $5 billion number. Great. Thank you, guys.

And we'll take our next question from Mike Lighthead with Barclays. Your line is open.

Great. Thank you. Good morning, guys. First, I just wanted to ask on EMEA, this business has continued to grow earnings fairly well while European economic and chemical indicators remain quite weak. So can you just talk about what's enabled you to outpace the broader market and how your comfort around the sustainability of this sort of earnings level or growth just in the context of if we assume the European economy remains sort of as is today?

Sure, Mike. So let's go back a little bit. In time, a couple of years ago, the EMEA business went through a reasonably large restructure, essentially intended to reset their cost base. At that stage, we obviously couldn't look at the water rush or the energy crisis or any of that. But we just felt that it was about time that we got a reset on that cost base. And that's really what's holding us in a good step today. Obviously, a lot of productivity actions. Productively, deeply embraced across that entire business today is paying out good dividends. And obviously, they've managed very disciplined pricing over this period as well, which was absolutely essential given what happened to energy costs, et cetera. I see EMEA performance, and the team has done a fantastic job. I see EMEA performance holding and continuing to move forward. I see them managing their business in order to make sure that margins continue to hold. or hopefully go up slightly as you would expect from our business.

Great. Thank you. And then just briefly a housekeeping question on electronics. I believe TSMC delayed the start of their Arizona fab by about a year or so. Would that also delay your sales for that site by an equivalent amount? Thanks.

My expectation is we will start the TSMC first plant second half of this year. You know, even before the FAB actually starts, a lot of product is needed to make sure the tools are in place and tested out. So that process is started. All FABs go through a ramp process. I suspect TSMC's announcements were probably, you know, related to other negotiations they were having rather than the actual startup of the FAB and how it progresses in terms of its ramp.

Great. Thank you, guys.

We'll take our next question from Jeff Zekowskis with JP Morgan. Your line is open.

Thanks very much. The multinational oil companies have been outsourcing hydrogen production to industrial gas companies because they've believed that their returns on capital are higher in drilling for oil and gas. But now that the Inflation Reduction Act has been passed, the returns on capital for them for producing their own hydrogen rise because they get a tax credit. And we're beginning to see over a longer period of time the multinational oil companies wanting to produce hydrogen. So in your opinion, when you look out over the next 10 years, do you expect to see lower hydrogen demand from your traditional hydrogen customers that will probably back integrate? Or do you think the dynamic is different?

So Jeff, I'd say to you that the dynamic from our perspective looks a little bit different. And I'm going to kind of drill down a little bit into the hypothesis you've laid out. So let's look at it from our perspective, a Lindy perspective. And I'd say to you, we see the following as it plays out related to hydrogen. Now, you went back in time and said, look, in the past, they'd outsourced. And that's absolutely right. And the reason they'd outsourced, apart from the economics, was the fact that Lindy handles those hydrogen plants extremely well. It's the core of our, you know, it's a bread and butter part of our business. We know it well. We manage those processes well. Whereas in a large refinery or a chemical complex, you know, those assets sit by themselves and really do not get optimized. So there is a value that gets unlocked by bringing a very competent operator like Lindy into the mix. But that's how, you know, decaptivation happened in the past and I suspect will happen in the future as well. And let's talk about the actual hypothesis that you've put forward. And I'd say to you, three things happened from a Lindy perspective. One, the fuel market, which thus far was managed, you know, and if hydrogen is a part of the portfolio, Lindy now has access to a much larger piece of cake. You know, the pie has grown, if you will. And our ability to tap into that because hydrogen now plays a role in that, you know, creates a huge advantage. know the expectation is hydrogen market will grow to maybe about 150 billion over the next 10 to 15 years again the fuel market itself if you if you look at the entire number is anywhere between 6 to 7 trillion so you know even a small slice of that pie makes it very interesting from a lindy perspective so we have a new market opening that that's that's now available to us in some ways the other piece i say to you is that to leverage hydrogen production for merchant requirements let's let's describe that you know, from an IOC, NOC perspective, if that's what you're referring to, I'd say what is necessary is the installed base of assets. It's the network of pipelines, and it's the contracted customers hooked onto those pipelines, which obviously create that advantage. The reason I mention all of that is because Lindy has the ability to scale that up and provide hydrogen to refiners in addition to ensuring that surplus hydrogen that's taken and put into that pipeline network providing a significant advantage and obviously getting us economic returns, that would not be available on a standalone asset basis. The third point really is around risk debt. And I'd say, again, the benefit that Lindy has, and U.S. Gulf Coast, which you saw, Jeff, a couple of weeks ago, the network that we have over there provides a high degree of redundancy using the cavern, using the multiple assets hooked onto the network, reducing the operational risk with single, in a large scale, either sites or plants. And again, that advantage that Lindy carries will be enormously valuable for all customers in the US Gulf Coast. And I think they value that today. And as we continue to expand that network, they will value that even more as we move forward. All of those provide the competitive advantage we're looking at. However, I'll accept the point that I think as far as IRA is there, for a period of about 10 to 12 years, there will be some financial benefits that will accrue from either owning those assets But in many of those cases, people might own the assets and ask Lindy to either incorporate that into our network and or operate and manage it as well. Again, providing greater opportunity for us. You put that together, I think that's essentially what the hydrogen kind of of the future is going to look like from a U.S. Gulf Coast perspective, replicated in many other parts of the world.

Okay. Thank you for that. Your other line, you had this helpful comment in your slides. where you said corporate costs are being offset by the helium business. The other line used to lose 300 million back in 2018, 2019. So that we've come to break even. Does that really mean that that 300 million delta is mostly positive helium prices over time that continue going forward?

I'll let Matt walk you through the map just to say that I'm not happy with where the other line is, and it should be bigger than it is today. Hey, Jeff.

So just maybe to start with what is in other, right? That's probably the good place to start. So currently what's in other is our materials technology business, formerly called PST, you may recall, the coding business. Yep. It has what we call wholesale or our intercohelium business. So this is where we source globally since it is one of the very, very few global products that we make and sell. We source it and then we sell it intercompany to all of the regions. Therefore, it's more of an intercompany type pricing structure that we have with that. And then obviously the end regions buy it intercompany, we eliminate it, and they get the end pricing in their regions for helium. And then it has all of our global corporate costs to manage Lindy PLC as a whole. As you well know, we divested GIST that used to be in there that is gone. So that's what's in there today. And one thing we've always said for many years is, you know, to your exact point, and I would kind of take 2018 with a grain of salt. That was a transition year. That was, as you know, a pro forma number. There were some elements that didn't fit particularly into the segments that needed to go in that section as we did pro forma at the time of merger. So I would use 2019 as the better starting point because that is, you know, post the merger when we had, I'd say, more consistency across what was in there. And when you think about it, we've always said our goal is to make sure that these businesses and other which, you know, are not core industrial gas businesses can more than offset the corporate costs of this global organization. And we're seeing that, and we expect to continue to see that. And it's a combination of the non-core businesses improving their performance, which they're absolutely doing, and it's also a combination of managing our corporate costs appropriately in light of what's going on in the world and what's going on in the segments we support. So that's how to think about that, but we're going to continue to look to create value in the other segment like we do anywhere else in any other segment going forward.

Great. Thank you.

we'll take our next question from Nicola Tang with BNP. Your line is open.

Hi, everyone. Just one from me on margins. I understand you kind of see further margin upside into next year at a group level, but I was wondering if you could talk a bit more about how that would play out from a regional perspective. So I'm thinking, you know, if there's pricing normalization in Europe, is there a situation where European margins trend down from here, but then actually another region takes over to drive group margins?

Nikolai, we've had questions on margins consistently, as you'll recall. And I've always said, look, your expectation and our expectation is we will expand margins year on year by about 30 to 50 basis points. And that's kind of the trend that we want to see happen. Obviously, this quarter delivered significantly higher than that across all segments. And that is good. And as you know, it's driven by pricing and productivity and the base business continuing to deliver, you know, kind of great outcomes. A couple of highlights on that, I'd say at the regional level, America is hitting a 30-plus percent margin. That's a good point. We've got to make sure that EMEA and APAC are looking ahead to beating America, so they kind of have to set the target for the rest. EMEA margins, you're right, also a highlight for us in the quarter at 29.2%. They've now grown over since the 2018 baseline, they've grown about 1,000 basis and they've grown consistently. So the point that I made earlier on around the fact that we reset our cost base in EMEA, the fact that we were pushing productivity and pricing, you know, gives me a lot of confidence that we will try and hold that margin level and continue to try and look for that marginal improvement that I suggested on a year-on-year basis. As far as APAC is concerned, we've also seen good margin kind of development, you know, since that baseline of 2018 to where we are today. At 28%, they're up about 1,070 basis points. And again, that's been fairly consistent over that period. So I fully expect that we will continue to work on our margin to work with that intent of delivering 30 to 50 basis points every year.

All right. Thank you.

Certainly impressive. And we'll take our next question from David Begleiter with Deutsche Bank. Your line is open.

Thank you. Good morning. Sanjeev, productivity has been a key driver of earnings growth this year. Can you remind us what that number, quantify that number this year, and should it be similar next year as well?

I'll tell you that productivity is something that sits right at the heart of how we manage our base business, David, as you know well. You know, essentially, I mentioned in one of the earnings calls previously that we had about 14,000 projects last year in 2022. For the first half of this year, we have in excess of 8,000 projects. So I feel pretty good about the fact that there is a continuous pipeline of productivity projects that continue to work through and actually deliver. There is no silver bullet. There isn't a single big thing that we do. It's the aggregation of these 8,000 plus projects that actually deliver results for us as we move forward. The way we think about the number on productivity is to look at its impact on the cost base that it actually, you know, kind of leverages off. So we measure that as a percentage to that cost stack. And as things stand, you know, we kind of look at a range of between 5% to 7% of cost stack. And that's what then flows into, you know, the bottom line that we work through.

Very good. And just on the clean energy opportunity aspect, Is there a market share you're thinking about that Lindy should attain over a longer period of time?

To be honest, we don't think about the clean energy opportunity or the portfolio in terms of market share. We think in terms of selecting high-quality projects that meet our investment criteria and that allow us to leverage the asset base and the network that we have, giving us competitive advantage. And really, to be honest, when we went out and gave you some numbers around that $30 billion in terms of decisions we're likely to make over the decade in the U.S. of $50 billion across the world, is driven really around the opportunity set. And that's how I'd like to think about that. The market share will be what it will be. Really thinking about focusing on choosing the right opportunities and ensuring that we develop them well, go through a proper feed and FID process, and actually execute well. These are advantages that our engineering team brings for us. We do all of that. We then have a substantive business as we move forward. Thank you.

We will take our next question from Tony Jones with Redburn. Your line is open. And Mr. Jones, your line is open. Please check your mute button.

and hearing no response we will move to our next question from peter clark with society general your line is open yes thank you hopefully you can hear me um i've got um two questions the first one i've listened to the discussion on the pricing the inflation thing but it feels like you've still got momentum at least into the third quarter so i'm just wondering about sequential price into the third quarter then we'll see from q4 so i'm assuming you've got something And then on the EMA margin discussion, I'm right in thinking obviously on-site was hit harder, so that presumably helped the margin a little bit on mix. Just wondering how you see the second half in EMMEA on bulk and cylinders and on on-site, because one of your competitors is a bit more confident about the second half year-on-year comp in the on-sites. given the very soft comp and obviously energy costs a lot lower in Europe now, a bit more confidence with the customer. So how do you see those things? Thank you.

Peter, I'll go back and refer to the comment that Matt provided on pricing earlier on to say that we believe, you know, you've got an established long-term history of positive pricing coming out of Lindy. We think globally weighted inflation is a great proxy for Lindy's pricing. In Q2, you saw us deliver 7%. globally weighted inflation for us was between 5% and 6%. So we're slightly ahead of that. That momentum that you talk about, I think, is really built around the inflation. And we've said that we are a good player on inflation, and we'll continue to progress with that. I'll also just mention that pricing is really all about management action. I mean, rather than relying on a set of indices, we proactively work on pricing to make sure that product pricing continues to grow and is expanded. And that's really where pricing impact comes through. We don't rely on surcharges for sustainable pricing longer term. As far as the mayor margin is concerned, without getting into the detail of how we see the margin split between the impact from different businesses, what I'd say to you is, you've seen some very I would say, in some ways, spectacular margins coming out of EMEA. It's really been driven around a mix of pricing and productivity running deep in that organization. And I fully expect that that quality of business that we've now enhanced in EMEA will continue as we move forward. And I think the mix will not really be that impactful for us, really. Overall, our portfolio will deliver the margin that we're looking for. I'll also make another point just to kind of reminds folks that as I think about margin, and you've heard me say this before, we constantly benchmark as an organization. We might even be obsessed by benchmarking. And one of the things that I lay out for the business very often is just reminding them that, and I'm using 2022 numbers because that's kind of just the baseline we were using, that when I take 2022 margin numbers, in the Americas, more than 10 countries had margins in excess of 30%. In Europe or EMEA that we just talked about, 17 countries had margin more than 30%. And in APAC, about seven countries had margins more than 30%. The reason I mentioned that to you is because our internal benchmark drives a lot of the behavior within these segments, driving ourselves to make sure that we're improving the overall aggregate by targeting, you know, getting to margins that get to that 30% kind of target that we've got internally and which America has set for the rest of the segments as well.

Thank you. Do you think the onsite will be better in the second half yourself in the EME?

It's very difficult to predict what onsite will do. I said this in my opening comments as well. It's very difficult to predict what onsite will do in Europe at the moment, particularly chemicals and energy. I do see an uptick on metals. So I do believe that metals will continue to show that momentum, but it is difficult to predict what chemicals and energy will do. And it's going to be driven by multiple factors, including energy prices, but also what happens in terms of the winter and the weather.

Got it. Thank you.

And we will take our next question from Michael Sisson with Wells Fargo. Your line is open.

Hey, good morning, guys. Historically, volume sort of drove a good portion of your adjusted EBIT growth. And your volumes are down 1%. Yet you're still able to generate pretty impressive operating profit growth and EPS growth. So if volumes turn positive whenever they do, does your leverage get better from here, or do you have to add costs to sort of support some of that volume growth?

Mike, the way to think about this is really, you know, if you look at how we think about our EPS growth algorithm, right, and we've said this before, there are two or three components that drive that. Our base business drives a large part of that. We expect our base business to deliver anywhere between 4% to 6% of that EPS growth that we talk about, the target that we've set for ourselves of 10% plus EPS growth. Backlog, given that backlog continues to grow, at the moment probably or in the past, you would expect backlog to provide between 1% to 2% of EPS growth. We now see that with backlog growth going forward, that's going to range probably between 1% to 3%, probably at the top end given the higher CapEx backlog that you'll see. And then we'll have a little bit of an uplift from share buybacks, which will remain largely consistent about 2%. You add it all up, that kind of gets you to the algorithm of 10 plus percent, the base business delivering about 4 to 6%. There's a mix in the base business. You'll see pricing, you'll see productivity, and you'll see some volume. When volumes are down, pricing and productivity have to do more. When volumes pick up, Obviously, we see a little bit of cost come in, but, you know, we manage productivity very, very hard through that period as well. So it's that mix of base business, 4% to 6%, you know, kind of contribution to the EPS growth that you should be thinking about.

Understood. And then for the second half, are your volumes, I apologize for misses, are they going to stay similar to the second quarter? Are they going to improve a little bit on a year-over-year basis? I know sequential, I think you mentioned, was going to be better, and then How much volume growth will you get from new projects in 24?

So as we said before, you know, we are starting up projects all in for this year, about 2 billion. A large portion of that was a Singapore piece that's already happened that is ramping up through the course of this year. And the balance will happen in the second half. So you'll see some backlog contributions through the course of the second half. Broadly on volumes, I'd say to you, I expect Why don't I just do a quick walk around the world and give you a sense of what I'm seeing across in terms of expectations. So if you look at America's, we were kind of largely flat for the quarter in Q2, adjusted for customer outages in the U.S. Gulf Coast and some softer electronics sales, mainly on rare gases. The U.S. Gulf Coast customers have largely come back and they're ramping up production. So I expect positive volume sequentially as a result of that. Merchant sales, I'd say to you, probably expect that to be flattish. Remember, it's important, I think sometimes we forget, but the America's business overall has shown steady recovery since COVID. We are at levels well above pre-COVID. So we are at somewhat of a high watermark, and I'm seeing that flatten out a little bit, and we feel pretty good about where that is. As far as the U.S. package business is concerned, I'd say we are in Q2. We saw mid-single-digit growth. Manufacturing saw some upside, and then that is offset by electronic sales being a little bit softer on the rare gases side. Hard goods in Q2 were a bit of a mixed bag. We saw consumables, wire, et cetera, grow. We saw equipment sales come down a little bit. Expectations, I'd say, for the U.S. package business would be flattish as we go into Q3. So all in, I'd say some upside from the HICO business, U.S. Gulf Coast, but beyond that, probably flat volumes. As far as APAC is concerned, really, I think it's a story of China and the rest of Asia. The rest of Asia, India particularly, I see growth continuing. I see that momentum in the second half as well. ASEAN, a little bit softer, will still grow, but will be probably softer growth than we've seen. And then there's the story of China. I mean, as you know, without getting into a lot of detail on China, I'd say to you the highlights are year-on-year volumes are flat, sequentially up 4%, largely because there was a lunar new year in Q1. Based on what I'm seeing, I expect Q3 volumes to be flattish. Steel, chemicals, electronics demands continues to be soft. The government has earlier this week, in fact, on 24th, announced a large intent of stimulation of the economy and consumption. But really, for an economy that size, for us to see any visible impact of that, probably towards the end of the year. And then we are left with EMEA. And EMEA volumes, I expect, will be consistent. I can't see anything that suggests that we'll see a significant improvement in the second half. I believe in Q3 as an example, adjusted for seasonal variations, et cetera, you'll see flattish volumes.

Thank you.

And we will take our next question from Vincent Andrews with Morgan Stanley. Your line is open.

Thank you, and good morning, everyone. Matt, I might be overthinking this a little bit, but could you just maybe help me better understand historically your guidance midpoint had assumed no economic growth, and now the high end assumes no economic growth. So what caused you to sort of change that framework?

Yeah, Vince, we have, if you go back far enough, we have bounced a little bit around on that, sometimes high end, sometimes middle end. Um, it just gets to a function of when we, we put the numbers together and we sort of how many quarters we have left and what we see going on and also the sequential trends will play into that as well. So. So, right now, I'd say, yeah, the high end, I wouldn't look much further beyond. That's just how the numbers are put together. That's how the guidance range resulted. And as you well know, we're going to continue to do what we do to try and improve on that. But right now, this is the guidance we have out there. And to your exact point, those are the base assumptions underlying it.

Okay, fair enough. If I could just ask on the pricing equation, is there a way we can think about the price you achieved in the second quarter and maybe what you expect to achieve in the third quarter? How much of that you know, is lapping of prior price initiatives versus how much of that is sort of the implementation of new initiatives? Is there a way you can help us think through that?

Sure. This is Matt. You know, there's always around the world and you have to remember all of our pricing is incredibly local, right? It's in the, you know, almost 100 countries around the world. They're individual initiatives. They are all done based on individual contracts. And so at any point in time there are always price adjustments, actions, contractual inflation adjustments occurring everywhere in the world at all times. And so given that, it's always going to have a component that carries into the next four quarters or three quarters, and that's what you're going to see. So clearly, to your point, on a lapping basis, when you lap high global inflation periods and you do see disinflation, then yes, the comps get a little tougher. That's natural. That's normal, especially as what we're seeing in the developed, some of the developed nations. But other than that, there are continuous price items going on simply because of the contract structures. So I would say, well, we absolutely expect to carry into next year. We are still seeing actions today. And remember, there are many countries that still have double digit inflation going on right now. And so you have to consider that as well because, again, it's a very local approach.

Okay. Very helpful as usual. I really appreciate it.

We will take our next question from Patrick Cunningham with Citi.

Your line is open.

Hi. Good morning.

Thanks for taking my question. In June, you announced the contracts with WANFAW. for de-captivating ASUs. In terms of future opportunities to de-captivate ASUs in Asia, can you size the potential there for Lindy, both in terms of backlog and the addressable market? And would future investments need to include additional investment in decarbonization, or are you agnostic from that standpoint?

So Patrick, let me, I did quite get your second question, but let me answer the first as well on decap and then maybe you can repeat that second question. Let's start with Vangva. So what we announced was a decap of ASUs. Now, over the last 30 years, we've probably done most of the large ASU decaps with customers that we feel comfortable running a long-term gas supply contract with. So I don't think that I'd say to you that there is a large market that we're expecting to see work out on the decap side. We don't necessarily want to use DCAP as a way of providing financing to our customers. It's where there is a deeper integration into greater density for us in a particular market and a high-quality customer. When that mix comes together, that's where DCAP makes sense for us. So we have selective opportunities that we are pursuing. We have a pipeline around that. But I wouldn't say to you that you should expect significant levels of opportunity going into the backlog as a consequence. Remind me of your second question again.

Yeah, yeah, I got it. And that's, you know, just on the second part of my question, I know the OneHot agreement included investments in decarbonization. And I know you mentioned that, you know, network density is the critical part there. But would you look for, you know, additional investment in decarbonization if there are future opportunities? Thank you. Yes.

Yes. And where we are either incumbent with customers, you know, on decarbonization, I'd say, Patrick, that You know, we have the technology portfolio, the operating skill set, and where we are incumbent with customers on the industrial side. We think that's right in our wheelhouse. We have great carbon capture technology that we can utilize. We can either find a chemical sink or a sequestration partner to work with. And that combination is really helpful. So we continue to do that. I think there are some easier decarbonization cases in China, as an example, where it's about making sure that we're moving from steam turbine driven equipment to actually moving to just going onto the grid and using renewable power. That's a scope to emission reduction as well as better economic case in most cases. So I really want – turns out to be a nice win-win as we look and execute those projects. Very helpful. Thank you.

We will take our next question from Kevin McCarthy with Vertical Research Partners. Your line is open.

Yes, good morning. On slide 13, you provide some helpful pie charts that speak to your backlog composition. And so I just wonder if you could speak to how you would expect those pies to evolve over the next year or two. For example, EMEA has been quite small historically, recent history anyway, for understandable reasons. But would you expect that to grow materially as clean energy projects gain traction and curious within Asia Pacific, what is the mix of clean energy versus more traditional projects that you're seeing there in your discussions and how you would expect that to evolve as well?

Thanks, Kevin. So let me address two points. One, my expectation on that backlog, the pie itself, is that it will continue to grow, just to make sure that that's kind of understood. Let's talk about the mix a little bit then. As you know, on the decarbonization piece, we went out and gave you guys some numbers saying we expect over a decade that about 30 billion in the U.S. and about 50 billion globally. So that is the ratio that I expect. I expect the U.S. or Americas to be around 60% of that decarbonization pie. And I expect the balance to be between EMEA and APAC. I do expect larger projects in EMEA. We're working on a number of them in Middle East and Europe that I feel pretty good about that are progressing well. And I think that as part of that, the balance 40%, as it were, I do expect EMEA will have more than its fair share of that. I'll also add and tell you that the Asia-Pac decarbonization effort is much smaller and slower. They are behind the Americas and EMEA by a number of years at this point. And I do not see the scale that I see in Americas And to some extent, they may are on those projects as yet. And I suspect they are probably three to five years away in terms of getting projects of that scale. Okay. Thank you very much.

We'll take our next question from Lawrence Alexander with Jefferies. Your line is open.

Just a housekeeping question on packaged gases. How is pricing for rental fees evolving in Europe and in the U.S.? ? compared to inflation? Is it just sort of moving at a low single-digit rate regardless of the background inflation environment, or have you been moving it up ahead of inflation?

So both Europe and the U.S. packaged businesses are reasonably large, Maurice, as you know, and we've been very consistent in our rental pricing actions that have happened over the last few years. So I think we, you know, and sure, that there is more than recovery of inflation, and we continue to have a very consistent policy around that.

Okay, thank you.

And we will take our next question from Steve Byrne with Bank of America. Your line is open.

Yeah, just continuing on that packaged gases question, post the Nexair acquisition, what would you estimate your share of U.S. packaged gases business And how would you compare your pricing power in that business now versus liquid bulk and any indications on trends for hard goods and so forth that would give you an outlook for the U.S. economy?

Sure, Steve. So let me address both those points separately. Let's talk about the packaged gases. The Nexstar acquisition has been extremely good for us. We've got a strong footprint in Southeastern US, which is seeing a lot of growth and a lot of incoming investments as well. So I feel pretty good about where we stand. My comment on the market share would be that it isn't high enough. That's what I tell my guys. And I'm going to tell you the same thing. We don't particularly disclose market share numbers specifically. But given the strength of the footprint that we have, we have strong pricing power. We've demonstrated that over the last many years. And that business is actually demonstrating pricing power, reflecting into margin improvement consistently over the last many years. So I feel pretty good about where we stand over there. Let's talk a little bit about hard goods. So hard goods, as you're right in pointing out, is a good leading indicator. The last time we spoke, I'd mentioned that I was seeing a little bit, and this was in the last earnings call, I'd mentioned that I was seeing a little bit of softening on growth. I can say to you today, we are seeing a bit of a mixed bag. Why isn't consumables are seeing some slightly positive growth as far as sales are concerned, whereas on equipment sales, we are seeing some declines. And that is something that you could look at in terms of the amount of manufacturing activity and order books that you have. But remember, this is also a season where many of the manufacturers do take you know, breaks. So sometimes, you know, prior to that, we would see a little bit of softening in the market. So I'm not going to pass a judgment just yet. I'll hold and see what happens beyond September.

Thank you. And a question on clean energy. Can you just roughly estimate the sizes of these buckets for you with respect to the opportunity for you Obviously, you've got blue hydrogen production and sales. You've got green hydrogen. But you also have oxy-fuel opportunities for big energy consumers. You have amine-based decarbonization projects. How would you size those relative to each other?

So Steve, the best way to describe that opportunity for us is to think about the three buckets that we traditionally talk about. Let me walk you through them first, and I can tell you where carbon capture, as an example, plays a role or not. So the three buckets that we normally track are mobility, we track industrial applications, and we track energy carrier, energy vector. As far as mobility is concerned, typically it's about 10% or less of our entire opportunity pipeline. multiple projects, smaller in size, tends to be more on the green side with hydrogen refueling stations packaged typically alongside that. Sixty percent of that opportunity set that we see today is all around industrial applications. This is large blue projects, a few green as well, but dominated by blue that sits right in the middle of in the wheelhouse, in the heart of our incumbent positions that we have with many industrial customers where we're helping them decarbonize their operations by providing hydrogen and or in some cases by providing carbon capture and utilization or sequestration opportunities. That's 60% of that opportunity set that we currently see. And then the last 30% is really around using hydrogen as an energy source, and generating hydrogen in some cases, liquefying it in other cases, transforming that into ammonia or methanol, and then moving it in some cases long distance to ensure that markets that require ammonia and methanol or clean ammonia and methanol have access to those products. That's how I see most of those play out. Both in the industrial applications as well as on the energy side, we see a role for carbon capture and sequestration. And that's where that kind of opportunity plays, is a subset of the broader opportunity I mentioned. Thank you.

And we will now take our final question from John McNulty with BMO Capital Markets. Your line is open.

Yeah, thanks for taking my question. Sanjeev, a question just as a follow-up to one of your earlier answers. You had mentioned that you were seeing some clean hydrogen or clean energy opportunities in the Middle East. I guess, how would you characterize these? Are these for domestic use or are they for export? And if it's the latter, do you see subsidies in place, whether it's from Europe or Asian demand or what have you, that would facilitate the economics to make sense for projects like that? I guess, can you help us to think about that?

Sure. So we are seeing a couple of opportunities which play into both those buckets. John. So we are seeing carbon capture sequestration opportunity that we are jointly working with Aramco and Schlumberger on. A feed is undergoing at the moment. It should get to FID early in the new year, where we're looking at a very large scope of carbon capture. In fact, the first phase where we're currently working on is 11 million tons of CO2 a year out of a total project, which may be the world's largest carbon capture and sequestration project in three phases, adding up to 54 million tons per annum of CO2 being sequestered. So that's a domestic, you know, that's driven really around the domestic decarbonization effort that the Kingdom of Saudi Arabia is pursuing. We're also seeing projects in the Kingdom and elsewhere in Middle East around the development of blue ammonia. Now, the economics of blue ammonia coming out of the Kingdom or the Middle East more broadly is very, very competitive. although there are no direct or broad incentives available there are specific project-based incentives that the government will provide and and some of that you know some of that product is then used to serve local markets i'd say probably a split about a third to two-thirds two-thirds for export one-third for local markets but the product that comes out of blue ammonia in particular that comes out of the kingdom and other parts of Middle East is very competitive globally.

Got it. Thanks very much for the call.

And I would now like to turn the call back to Juan Pelias for any additional or closing remarks.

Thank you again for participating in today's call. If you have any further questions, please feel free to reach out. Have a safe day. Take care.

And ladies and gentlemen, that will conclude today's conference call. We thank you for your participation and you may now disconnect.