Linde PLC Q4 FY2024 Earnings Call

Abby, thank you. Good morning, everyone, and thanks for attending our 2024 fourth quarter earnings call and webcast. I'm 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 to this presentation. Sanjiv will provide some opening remarks, and then Matt will give an update on Linde's fourth quarter financial performance and 2025 outlook, after which, we will wrap up with Q&A. Let me now turn the call over to Sanjiv.

Thanks, Juan, and good morning, everyone. Looking back, 2024 was another successful year for the Linde organization. I'd like to personally thank the 65,000-plus employees for their relentless drive to deliver shareholder value while they live our core values every day. This isn't something that happens overnight, nor can it be copied or driven top-down from a handful of individuals. Rather, it is a result stemming from decades-long culture, mindset, and operating growth. It can best be exemplified by the results shown on Slide 3. From my perspective, there are four key categories that Linde must excel at, day in and day out, to maintain our long-term industry-leading position. Of course, we must deliver on our key financial metrics and remain responsible stewards of our owners' capital, that's a given. But we have a sustainable leadership position for that, and the long term requires continued investment in our people and surrounding communities, as well as doing our part to help improve the environment. Finally, we must position ourselves for the future to ensure resilient and continuous growth and improvement. We can never be complacent based on past performance. I want to start with our people and communities because Linde's success has always been, and always will be, attributed to our employees' ownership mentality and collective efforts. We continuously strive to be good corporate citizens in the thousands of communities where we live and work. Also, having a safe and diverse workplace is a top priority to ensure Linde's competitiveness for many years to come. You can see the improvements we've made from an already leading position. More work is to be done, and I fully expect to leverage technology in that effort, but I am pleased to see the progress made to date. While people and communities are a priority, efforts towards ensuring a sustainable environment are becoming more challenging every day. It’s fair to say we’re seeing more extreme weather now than in prior years. Here at Linde, we will continue to do our part to help the environment through an increased focus on low carbon power. Linde increased its active low carbon and renewable energy consumption by 19% year-over-year. In 2024, over 40% of our total power consumption is now low carbon-based. These are just a few of the many accomplishments, and I want to encourage you to read our annual report for many more. Furthermore, it is rewarding to see our sustainability efforts being recognized by some of the most prestigious names such as the Dow Jones, which included Linde in its sustainability world index for the 22nd consecutive year. In addition, we've prided ourselves in helping our customers avoid more than double our CO2 emissions through the use of our products and services. But there is much more work ahead to achieve our ambitious sustainability goals, including reducing our greenhouse gas emissions by 35% by 2035. Turning to financial performance, Linde once again led the industry across key metrics: 25.9% ROC, EBIT margins increased 190 basis points to 29.5%, and EPS increased by 10% as FX and $7 billion of capital were returned to shareholders from significant excess free cash flow. These are the best metrics in the industry, some by a wide margin. This provides us with pride and ownership, but we also recognize this is the past. Valuations are derived from a combination of past performance and future expectations. We must continuously position ourselves for future growth, regardless of macroeconomic conditions. Positioning for future growth starts with a concise strategy and a capital allocation policy. At Linde, we know that the investments we make and the ones we avoid are equally important because mistakes in this industry can have long-lasting consequences. This is why sticking to our core business while maintaining disciplined contract terms is critical to building safe, reliable, and profitable supply infrastructure. The year ended with more than $10 billion in backlog, including a record sale of gas backlog of $7 billion. Included in this is a $2-plus billion win in Canada, which is a great example of a high-quality project in a core geography. This project normally has a fixed payment structure with predicted returns that materially improve our local supply density in a fast-growing vision for clean energy. I fully expect to announce new projects and customers in the near future. However, growing in industrial gases is about more than just mega projects. We must continue to keep our eye on smaller opportunities, ensuring they add attractive annuity-like growth. During 2024, we once again set a record for small on-site wins, signing 59 long-term agreements for a total of 64 plants, all of which will increase reliability and strengthen our network density. Acquisitions of small tuck-in packaged gas opportunities also remain an important part of synergized growth with 18 signed transactions, generating annualized revenues of approximately $200 million. All in all, 2024 was another successful year despite many challenges. That said, it's time to move forward and look ahead. All of you have seen the new earnings guidance for 2025, and therefore, I believe it's important to reiterate the components of our long-standing EPS growth algorithm on Slide 4. For many years now, we've defined our EPS growth into three categories, both capital allocation and management actions are within our control, while the economy is not. Capital allocation represents contributions from a long-standing and stable capital management policy. The main elements include our contractual project backlog, share repurchases, small bolt-on acquisitions, and capital structure efficiencies, generally achieved through interest and tax management. It's important to note that our backlog definition is unique in the industry as it only includes incremental growth from contractually committed customers with fixed payment elements and termination provisions to ensure a minimum return on capital. While no other company follows this strict interpretation, it certainly provides greater certainty of backlog EPS contribution in any environment. Similarly, the majority of acquisitions are justified on cost synergies only and therefore, provide a high degree of confidence on capital return and thus EPS generation. Finally, share repurchases offer an attractive and flexible use of excess free cash flow, as project start-up and acquisition cadence ebb and flow, enabling a highly consistent EPS contribution from overall capital allocation. All of these elements have historically contributed to 4% to 6% EPS growth, and I feel confident this will continue for the years to come. Management actions represent the daily self-help initiatives our employees undertake to ensure growth regardless of the macro climate. Digital solutions and AI are increasingly supporting productivity, price, and cost management, which are controllable initiatives deeply embedded into our culture and operating rhythm, allowing us to grow earnings regardless of the economy. History has proven these to be the largest compound value generators as they are not directly correlated to overall economic activity. This combination of capital allocation and management actions is expected to deliver 10-plus percent EPS growth each year with margin expansion, and 2025 is no exception. Whether pre or post-merger, these two components have been the dominant drivers of our long-term double-digit EPS growth CAGR. While I remain confident in our ability to deliver on this 10%, we are constantly striving to find more opportunities to improve. Conversely, we cannot control the third category, which represents macroeconomic factors. For Linde, there are two factors that matter the most: foreign exchange rates and industrial production as a proxy for base volume trends. Recall that we are a U.S. dollar-functional company with approximately two-thirds of earnings denominated in foreign currencies and thus exposed to FX translation. Similarly, while our customers are often under long-term contracts with fixed facility fees, the incremental gas consumed is a function of their production rates, which typically highly correlate to industrial demand. Hence, why Global IP is a generic proxy for our customer gas consumption of base volumes. The current 2025 guidance range assumes a 4% FX translation headwind, while the midpoint of the range assumes 0% IP growth environment. Overall, it's clear that the growth algorithm is well intact, but we do have our work cut out regarding unfavorable FX translation. This does not come as a surprise, as you may recall from our statements last quarter, and subsequent self-help actions that we initiated. Furthermore, we will continue to identify and execute additional management actions to mitigate macro weakness. Eventually, these economic headwinds will convert to tailwinds, as they always do. Until then, you can be rest assured that the team in the organization will focus on creating shareholder value and maintaining our long-term industry leadership, no matter the environment. I'll turn the call over to Matt to walk through our financial results.

Thanks, Sanjiv. Fourth quarter results can be found on Slide 5. Sales of $8.3 billion are flat to prior year and down 1% sequentially. For both the prior year and sequential comparisons, foreign currency translation was a 2% headwind. Excluding FX and cost pass-through, underlying sales grew 2% versus last year and were flat from the third quarter. Price increases of 2% over 2023 and 1% sequentially continue to track with globally weighted inflation. The volume growth was flat as contributions from the project backlog in the Americas and APAC offset lower base volumes in EMEA. The sequential volume decline is primarily attributed to softer EMEA metals and mining volumes and seasonality factors in APAC. In general, economic trends mostly followed our prior guidance, although the FX impact was worse than expected due to a significant strengthening of the U.S. dollar toward the back half of the fourth quarter. Operating profit of $2.5 billion grew 9% and resulted in a 29.9% margin, primarily from management actions around price, cost, and productivity. EPS of $3.97 grew 11%, or 13% excluding FX. The 9% CapEx increase is entirely driven by contractual projects, as base CapEx decreased from a combination of currency, productivity, and lower base volumes. I anticipate this trend to continue as we execute on the record $7 billion sale of gas backlog to support future growth. Further details on capital management can be found on Slide 6. Full year operating cash flow ended at $9.4 billion, with almost 60% occurring in the second half. As mentioned in prior calls, I expect this split to remain due to seasonality of specific cash outflows, including incentive payments, taxes, and interest. The pie chart on the right shows the full year capital allocation. We invested $5 billion back into the business, with half underpinned by secured high-quality growth opportunities. Additionally, we returned $7 billion to shareholders in the form of dividends and stock repurchases. Returning this amount of capital to our owners year after year requires a disciplined capital allocation policy and a very healthy balance sheet. Two things that are much easier said than done. I'll wrap up with guidance on Slide 7. We're initiating full-year EPS guidance of $16.15 to $16.55, representing 4% to 7% growth or 8% to 11% when excluding an estimated 4% currency headwind. As mentioned earlier, the 4% impact is from the accounting translation of foreign earnings, which experienced a rapid strengthening of the U.S. dollar towards the end of 2024. Recall this is merely a projection as we're required to book the actual month's average rate to the income statement. The methodology used for this estimate is consistent with prior practice by using the forward curves on a weighted basis for each foreign currency at the start of the month. Historically, large currency devaluations have often been followed by periods of more significant local inflation, with 2022 being a recent example. If that occurs, I'd anticipate incremental pricing opportunities to recover the currency devaluation impact. These potential pricing opportunities are not baked into the guidance range at this time since the amount or timing of subsequent inflation is difficult to estimate. The midpoint of this range assumes no economic improvement from the current environment and thus assumes flat base volumes. As Sanjiv mentioned, our base volumes derived from customer supply contracts. Their growth is a function of gas consumption from our contracted tanks and cylinders. Hence, why local industrial production tends to be the best proxy. First quarter EPS guidance range is $3.85 to $3.95, with similar assumptions to the full year. At this time, we believe it's appropriate to remain prudent with a more cautious economic outlook. If things turn out better, so too will our results. Conversely, if they worsen, we will take additional mitigating actions. But regardless of the economy, I'm confident Linde will continue to create shareholder value through our time-tested execution culture, disciplined capital allocation, and proven management actions. This has been embedded in our DNA for decades. And over the years, while many have claimed they could simply copy this model, all have failed, because here at Linde, we’re often imitated but never duplicated. I'll now turn the call over to Q&A.

And your first question comes from the line of Mike Leithead with Barclays.

Sanjiv, there's a lot of political noise out there right now between tariff potential, new administration, and some pullback on green energy funding. How have your discussions with potential project partners evolved? Have those discussions slowed down or picked up at all?

So Mike, as we've referenced in previous calls, we have seen people take a little bit more time and apply a bit more rigor before going to FID. I think it's a good thing because you need that when you're doing multibillion-dollar projects. I think we're seeing that pace continue. Built in there, obviously, is some uncertainty around the regulatory framework and requirements regarding what the new administration may or may not do. The one thing I do want to emphasize, though, particularly in the context of clean hydrogen, is that people tend to think about the IRA and the discussions around what happens with the IRA under the new administration. Within the IRA, there is a specific provision, an IRS provision, in fact, called 45Q, which predates the IRA and goes back to around 2008 when it was implemented. About 90% of the projects we are developing in the U.S. are actually looking at 45Q as a potential incentive, and we feel fairly confident that this structure around 45Q will remain, particularly since it predates the IRA. Generally, we're seeing people take a bit more time to get to FID, and they are actually being a little more rigorous in their approach before making a final decision on putting capital on the ground. The other point I'd quickly add is that, as you are aware, we previously discussed $8 billion to $10 billion in clean energy investments from a Linde perspective. We're about halfway there, given the large projects we've already announced in North America. We're obviously continuing to develop projects elsewhere. These two projects we are currently working on are both likely to see another phase, which means that we will see equivalent investment there, plus additional projects. So when I look at the overall pipeline, I feel pretty good about the quality of projects we are pursuing, and the path to getting to that $8 billion to $10 billion of investments over the next few years looks pretty much intact.

And your next question comes from the line of Steven Haynes with Morgan Stanley.

It looks like exiting the year, your EMEA margins are now about 200 basis points ahead of Americas, maybe 100 ex the cost pass-through. Do you think your Americas margins will gain ground in '25?

Thanks, Steven. Historically, about five years ago, many of you asked when Americas margins were leading. I want to repeat again today that our business is homogeneous, and there is no impediment to reaching the highest margins we see anywhere in our business. Each of our segments has a country or a business with a margin with a significant number in front of it. We encourage our segments to analyze what those successful businesses with 40-plus percent margins are doing to ensure we can bridge the gap. To answer your question, both for Americas and APAC, my expectation is that margins will continue to improve. As I mentioned earlier, you should expect to see margin expansion in 2025 for Linde plc overall, which aggregates the different segments. I would say that the margin expansion range is between 20 to 50 basis points. Typically, we expect that long term. We've been delivering well in excess of that, and that sets up some expectations. But expect margin expansion as each segment continues to grow margins.

And your next question comes from the line of Duffy Fisher with Goldman Sachs.

You talked about IP being your biggest KPI. Roughly, what is the leverage if IP is up or down 1%? How much EPS does that generally drive for you? Also, what are you seeing around the world regarding IP? I know guiding to flat is prudent, but where do you see potential for better or worse outcomes?

I'll let Matt talk a little bit about the IP correlation, and then I'll give you a perspective globally.

Yes, Duffy. To start, we split our volumes into project and base. Our project volumes solely track our startup, which is independent of any IP or macroeconomic factors and is purely contractual based on the fixed element. Regarding base volumes, we have the rental, which is fixed regardless. That gets back to the resiliency of our model. About 65% of our revenues are fairly resilient. Of the gases they take, whether in bulk or compressed, the usage will depend on their production. This aligns with IP as the best proxy. We see higher IP leverage in developing countries where they are expanding more compared to developed nations, where it's closer to a 1:1 ratio. Globally, we've been seeing IP close to zero, maybe tens of bps across our businesses, especially in EMEA, where it's a drag, while the Americas have been decent, and China can vary quite a bit.

Thanks, Matt, and let me provide a perspective on global markets. It's important for me to break this down by resilient end markets and geographies. Starting with resilient end markets, we expect low to mid-single-digit growth driven primarily by electronics and food and beverage. The industrial sector is more cyclical and is expected to experience lower volumes, particularly in metals and chemicals. For the Americas, low single-digit growth is expected, with the industrial sector also anticipated to remain flat. U.S. volumes and sales are likely at a high watermark this year, with the first half showing flattish growth, while increased momentum is expected in the second half. In Europe, we expect continued softness, especially in Western Europe, with lower volumes in metals and manufacturing sectors. Looking to Asia Pacific, particularly China, our expectation is stability and flat growth. The electronics sector in China is the one area that is growing and will continue to receive support from the government.

And your next question comes from the line of David Begleiter with Deutsche Bank.

It's David Huang here for Dave. What are your concerns with any changes in Linde's playbook now with new management? Could that be a negative? Has the shift away from focusing too much on mega projects potentially lead to a more rational industry pricing environment?

I didn't catch your entire question, but I will answer it regardless. Linde has a leadership position in the market due to several factors. As I mentioned in my prepared remarks, you cannot replicate what Linde has developed over many decades. This is built into our operational rhythm, performance culture, and the networks we've built globally. Because of our network density, we've been able to achieve margin improvements and maintain strong customer relationships. That's demonstrated by the margin expansion over the past five years. We will continue to strengthen this, regardless of what others choose to focus on.

And your next question comes from the line of Laurent Favre with BNP Paribas.

Got a question on health care, where I think you've been around 0% organic growth every quarter in 2024. What have you seen on price versus volumes? Is there any specific area providing a significant headwind? And what are your thoughts for 2025?

Thanks, Laurent. In the health care space, we expect long-term mid-single-digit growth. The sector comprises two subsegments: hospital care and home care. We have been rationalizing our home care business in the U.S., and the numbers reflect some impacts from this. Currently, the hospital care business is performing well. In the home care segment, we are seeing productivity improvements due to the inflationary environment, and I am pleased to see progress. At some point, we will see the effects of these rationalizations, and long-term growth should align with our expectations.

Can I follow up on the project side? We spoke mostly about projects related to decarbonization. Are there significant moves in electronics projects?

Twenty percent of my all-time record sale of gas backlog belongs to electronics. We are actively executing on electronics projects as we speak, and we will be announcing new wins very shortly. I'm confident in our position in the electronics sector, especially following a recent board visit to our Phoenix facility serving TSMC, which has been a successful project for them. We are making headway and continue to win more contracts.

And your next question comes from the line of Jeff Zekauskas at JPMorgan.

In 2024, your cash flow from operations was up 1%, even though your EPS grew about 10%. Was that number depressed? For 2025, do you expect cash flow from operations to grow higher or lower? Regarding the overall industrial gas market, is market share constant among major players, or are you gaining or losing share?

I'll let Matt address cash flows, and then I'll tackle the market share.

Yes, Jeff. Regarding OCF, we typically look at EBITDA rates to OCF rates. These should grow similarly. Our goal for OCF to EBITDA is usually in the low 80s. Over the past 24 months, we had an unwinding of our engineering portfolio, which led to a large influx of cash that stopped, creating a significant outflow. Much of this stemmed from contractual liabilities unwinding without generating cash. This has affected OCF growth relative to EBITDA. We’ve substantially moved through this, and I expect 2025 to be more aligned. This is standard for the engineering business as projects typically stretch over four years, but the current cycle became more compressed.

Regarding market share, to be honest, we don't dwell much on it. It can be segmented down for discussions, but we focus on our record sale of gas backlog of $7 billion+ as an indicator of market direction. We are winning a considerable share of large projects, which are contracted growth with solid terms. Market share is less relevant for our merchant and pack gas businesses. Instead, we emphasize network density, which allows us to maintain our market-leading position and margin expansion. I feel good about our networks and the strength of our market position.

And your next question comes from the line of Steve Byrne with Bank of America Merrill Lynch.

I wanted to understand the 59 small on-site wins better. How do these compare to long on-site contracts in terms of terms and returns? Can you comment on the types of gases driving these small on-sites?

That's a fantastic question, Steve, and I appreciate you bringing it up. We've signed 59 long-term contracts and are building 64 plants in the last 12 months, breaking our previous record. Now let's discuss the profile of these small on-sites. They generate annuity income, and we anticipate starting one plant each week. Regarding returns, the terms vary between 10 to 15 years, similar to large on-site contracts. However, the execution timeline is shorter, typically taking 9 to 15 months for deployment. We use both oxygen and nitrogen, and in the future, electrolyzer-based hydrogen will become part of our small on-site portfolio. The returns on small on-sites are generally above those for large projects. We have focused on this segment for the past four to five years, and the benefits are evident in our recent contract signings.

And your next question comes from the line of Michael Sison with Wells Fargo.

This is Avi on for Mike. I wondered if you could break down contributions from pricing versus productivity and cost management in your forward-looking guidance.

Avi, it's Matt. We don't typically break that out. As Sanjiv mentioned regarding our algorithm, the basis of guidance is roughly a 50-50 split. Historically, management actions have contributed more significantly. However, we view both elements in tandem, given the variation in inflation. The local spread of price versus cost inflation is critical, as a positive spread is part of the compound value creation of our model. For guidance purposes, assume it splits evenly, with about 5% from management actions and 5% from capital allocation.

And your next question comes from the line of John McNulty with BMO Capital Markets.

A question around the $10 billion backlog between the sale of gas and equipment. How much of the equipment at this point is locked in where we don't have to worry about tariffs or the strong dollar? How should we think about that?

Thanks, John. The $10 billion backlog, about $3.1 billion or $3.2 billion of it is on the SOE side, with balance in the sale of gas. As for tariffs, our contractual protections typically handle that, so we have firm pricing with contractors. We recently analyzed the US projects, and the impact of tariffs is minimal. Historically, tariffs did not affect our firm offers during procurement. Furthermore, devaluation of currencies often more than offsets any tariff impact, if significant. We’ve effectively managed past tariff situations and are confident in our current project stance.

And your next question comes from the line of Peter Clark with Bernstein.

I see you've adjusted your guidance slightly based on FX impacts, particularly in profitable markets like Mexico and Brazil. How should we think around tariffs and FX risks there?

You're correct, the currencies in key markets like Brazil and Mexico have faced significant devaluation. Additionally, we have seen substantial appreciation of the U.S. dollar, particularly towards the end of the quarter. While we're exposed to FX risks, it's also relevant to consider the local dynamics in respective markets that may mitigate those impacts. We feel good about our positioning to capture our products' demand, regardless of tariff implications. The situation requires ongoing monitoring.

And your next question comes from the line of Patrick Cunningham with Citi.

On the step-up in CapEx for 2025, is most of that driven by the two large projects, and will this step-up be more significant in 2026 as well?

Patrick, the step-up in CapEx is indeed driven by our record $7.1 billion sale of gas backlog, which includes those large clean energy projects alongside other opportunities in electronics. This is fundamentally what's driving our expected increase in CapEx.

And your next question comes from the line of John Roberts with Mizuho.

Your competitor had a large nonrecurring helium sale in the quarter. Does this take down industry helium prices?

The helium market continues to display characteristics we have seen throughout 2024. There are areas where helium is in surplus, such as Asia, where a portion of imports is sourced from Russia, affecting that market. Demand remains flattish with some softness in electronics and MRI sectors. Pricing is stable, without significant movements or unexpected corrections. While I won't comment on individual transactions, there are constant shifts in helium supply and demand, but nothing that should dramatically impact the market.

Your next question comes from the line of Kevin McCarthy with Vertical Research.

This is Matt on for Kevin McCarthy. Could you provide details on the new CCS hub in Jabal? How large is the investment, and do you see this turning into a foundational hub for additional investments?

Matt, this is a three-way joint venture developing a significant CCS project in Saudi Arabia, with partners Saudi Aramco and SRB. The first phase will sequester between 9 million to 11 million tonnes of CO2 annually, with the potential for additional phases. This project could become the world's largest CCS project, capturing as much as 54 million tonnes of CO2 per year. While the capital amount is being assessed, I expect FID soon and subsequent details will follow. We aim to also explore a blue hydrogen project leveraging this CCS infrastructure once it meets investment criteria.

And we will now take our final question from the line of Laurence Alexander with Jefferies.

This is Dan Rizzo for Laurence. What is your view on the depth of the pipeline of potential hydrogen projects, particularly in the EU and Japan?

I mentioned earlier that people are being more rigorous with FID decisions for large projects. However, I feel good about the strength of our pipeline, especially in North America and the Middle East, alongside potential projects in Europe with partners like Equinor. Specifically for Japan, there are limited projects since it is seen as an important market for importing clean hydrogen or its derivatives, but developments in Japan remain minimal. In Europe, discussions about clean hydrogen have increased, yet the challenging regulatory framework is resulting in delays. Consequently, European aspirations for hydrogen needs may not be fully met given the time required to navigate this environment.

Abby, thank you, and thank you, everyone, for participating in today's call. If you have any further questions, feel free to reach out directly. Take care.

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.