Earnings Call Transcript
LINDE PLC (LIN)
Earnings Call Transcript - LIN Q2 2024
Operator, Operator
Good day and thank you for standing by and welcome to the Linde Second Quarter 2024 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. And after the speakers presentation there will be a question-and-answer session. I'd now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.
Juan Pelaez, Head of Investor Relations
Adam, thank you. Good morning, everyone and thanks for attending our 2024 second 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 of this presentation. Sanjiv 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 Sanjiv.
Sanjiv Lamba, CEO
Thanks, Juan and a very good morning, everyone. Linde employees once again delivered high-quality growth despite the stagnant trends of global industrial activity. Second quarter EPS of $3.85, operating margins of 29.3% and return on capital of 25.7% all reached new highs, driven by the unwavering efforts of our 66,000 employees who actively manage what we can control. Turning to volume trends; you'll notice we were flat year-on-year. Last quarter, we described potential challenges in the industrial macro. And for the most part, it has played out as expected. This is why we initiated the self-help actions which enable us to create shareholder value in any environment. That being said, the current quarter experienced a 3% sequential volume growth. And while some of this relates to seasonality, certain regions had organic volume improvements. While this is a positive sign, we are still not assuming any meaningful economic recovery in the guidance. Some may view this as overly cautious. But given the uncertain environment, I believe it's prudent to take this approach. As you know, when industrial activity recovers, our network density will enable us to supply that additional volume to our existing and new customers. Until then, we will continue with disciplined pricing and proactive actions to ensure earnings growth in this environment. Slide 3 provides more color on end market growth trends. Starting with consumer-related end markets, food and beverage continues the strong resilient growth trend at 8% over the prior year, in part attributed to Linde's total systems approach. This includes growing demand for higher quality and more innovative frozen foods, food packaging safety and dry ice for meal delivery services as consumers opt for convenience meals. In addition, beverage carbonation and associated services continue to grow as consumers dine out. Our electronics sales represent 9% of our consolidated sales. But there's a substantial portion of our 50% nonconsolidated JVs that supply this end market and are not included in this number, primarily in Taiwan. The 7% growth sequentially and year-over-year was driven by a combination of project backlog start-ups and base growth in the U.S. and Asia. In the U.S., we started up our Phase 1 supply system in Phoenix, Arizona for TSMC. Due to this, more than half of this project CapEx has now been removed from the backlog, driving the slight net decline versus the prior quarter. I've always said that a healthy project backlog is one that turns over frequently with projects starting on time, contributing to earnings as per contract. In addition, base volumes improved moderately in the U.S., China, and Korea. As you know from the last quarter, we signaled this was possible. So I'm encouraged to see volume levels starting to recover now. Healthcare is down 1% from prior year and flat sequentially. Consistent with last quarter, this is primarily due to our efforts to continue rationalizing home care products and service offerings that don't meet the business criteria, especially in the United States. We still anticipate the underlying demographic trends to drive mid-single-digit percent growth but some of the ongoing portfolio pruning will partially offset that. Turning now to the industrial end markets; chemicals and energy grew 5% from North American activity, primarily in the U.S. Gulf Coast, hydrogen as well as Mexican energy services. We supply some of the most cost-competitive customers in the world and their higher production rates reflect their share of the global market. Looking forward, this end market will likely be the largest beneficiary of the project backlog, especially around clean energy projects. While OCI represents just one example, there are several more that comprise the $8 billion to $10 billion of near-term pipeline opportunities which we are pursuing and making good progress. Metals and mining is slightly down year-over-year, mainly from North American steel volumes which have decreased, primarily serving the automotive and construction markets. This is a normal cycle we've seen over the years, not unexpected, although there could be some future growth opportunities as more infrastructure and energy projects break ground. Finally, the manufacturing end market is trending up 4%, primarily on pricing actions as volumes are fairly steady across most geographies. Aside from some specific manufacturing sectors like aerospace or battery production, this end market mostly coincides with global industrial production which remains flat. Overall, Linde employees continue to do what they do best, manage an industrial gas business with leading results that create value for our shareholders regardless of the economic climate. Despite the challenging conditions, Linde delivered high-quality growth, executed on $8 billion project backlog and further positioned the company for future growth. I remain confident in Linde's ability to successfully navigate the near-term uncertainty while ensuring longer-term leading performance that our owners expect. I'll now turn the call over to Matt to walk through our financial results.
Matt White, CFO
Thanks, Sanjiv. Slide 4 provides consolidated results for the second quarter. Sales of $8.3 billion were up 1% from last year and 2% sequentially. Foreign currency and cost pass-through, both continue to present headwinds at minus 3% year-over-year and minus 2% from the first quarter. As a reminder, contractual cost pass-through is simply the energy cost variance we bill to on-site customers and thus has no impact to operating profit dollars. Furthermore, FX translation likely will remain a headwind as the U.S. dollar continues to strengthen against the majority of foreign currencies. Excluding these items, organic sales are up 3% over last year and 4% sequentially. Pricing trends continue to follow globally weighted inflation with the strongest contribution from Americas and EMEA. APAC levels are more stable as lower helium prices mostly offset increases from the remaining countries with no contribution from China due to deflationary conditions. Volume was flat from 2023 as growth from the project backlog was offset by weaker base volumes. As Sanjiv mentioned, we did experience a sequential volume improvement of 3% from a combination of project start-ups, organic growth and seasonality. Time will tell if the organic growth trend persists. But for now we are excluding any further improvement in the earnings guidance. Operating profit of $2.4 billion grew 6%, resulting in an operating margin of 29.3%; all gas segments expanded margins year-over-year and sequentially, with EMEA leading at 33.7%. As we stated many times, each segment has opportunities to improve margins and there are no structural reasons why laggards cannot converge to the current leader over time. EPS of $3.85 increased 8% or 10% when excluding the 2% FX headwind. Further details of cash flow and capital allocation can be found on Slide 5. You can see the operating cash flow trend to the left, including this quarter's $1.9 billion which is 10% below last year. The primary driver relates to unfavorable timing of our engineering project prepayments. When you look at the face of the cash flow statement, you can see that contract assets and liabilities which represents these project prepayments are unfavorable more than $300 million. This quarter-to-quarter volatility is a normal part of the engineering project cycle. Aside from the engineering projects, we are seeing more seasonal effects on interest and tax payments. We have significantly more euro bond cash payments which are once per year as well as cash tax payments in the first half of the year. This will result in more back-end loaded operating cash flow, similar to last year. Overall, I remain quite confident on cash generation of the gas business but I do expect continued volatility regarding timing of customer prepayments for engineering projects. As far as capital allocation, year-to-date, we returned $3.8 billion to shareholders and invested $2.3 billion into the business. Regardless of the economic climate, we'll continue to adhere to our time-tested capital policy of an underlying mandate to maintain a single A credit rating while raising the dividend every year, a priority to invest back into the business subject to our long-term investment criteria and a commitment to sweep remaining funds toward stock repurchases. I'll wrap up with guidance on Slide 6. For the third quarter, we're providing an EPS guidance range of $3.82 to $3.92 or 6% to 9% growth when excluding a 1% FX headwind. Consistent with prior quarters, this assumes no economic improvement at the midpoint. The updated full year range is now $15.40 to $15.60 or 9% to 11% growth when excluding a 1% FX headwind. For the full year, we simply raised the prior guidance range by $0.10 on the bottom end, while leaving the top end as is. Consistent with statements last quarter, we have not seen enough encouraging signs to be bullish on the second half economic activity. So we are essentially leaving the guide intact while raising the bottom end for our recent Q2 performance. Rest assured, if the economy does better, we'll capture that incremental benefit. And if it does worse, we will take actions to mitigate the impact to earnings. Here at Linde, we have a culture to plan for the worst but hope for the best. Employees around the world have been taking proactive measures to ensure we can deliver on our commitments regardless of the economy. This disciplined operating rhythm coupled with our relentless focus to create shareholder value, gives us confidence to, once again, weather the uncertainty and maintain industry-leading results. I'll now turn the call over to Q&A.
Operator, Operator
Our first question comes from the line of Michael Leithead of Barclays.
Michael Leithead, Analyst
Great. Big picture question, just when we look at your results and your peers, it doesn't seem like there's much industrial gas demand out there right now. And Linde has done a great job in the past, say, few years of continuing to grow earnings double digit despite that, in large part, some of the self-help actions that you've taken. I guess if we're stuck in this no-growth environment for a bit or near term and we're already at a pretty efficient baseline, can you just talk through your confidence and how you expect to continue driving 10%-plus earnings growth just in this macro backdrop?
Sanjiv Lamba, CEO
Thanks, Mike. You're correct that the macroeconomic environment isn't particularly favorable right now. If we look back over the past four or five quarters, we've observed the impact of the macro environment, and what I describe as an industrial recession. Regardless of debates about GDP, we are focused on the trends in the industrial production index. During this time, we have navigated through an industrial recession and have still been able to achieve the EPS growth you mentioned. We’ve also ensured that our organization is proactive and ready to act based on these indices. One of our strengths is the ability to see across various end markets and regions, allowing us to react swiftly. This agility partially explains our current position of consistently delivering EPS growth over a prolonged period. I believe this approach will continue in the future, as it is an area where we have deep understanding. We have a proven ability in this regard, and I expect you will witness that unfold. Referring to the EPS growth model we've discussed before, I am confident that we can sustain over 10 percent EPS growth in most economic conditions, if not all. To summarize, there are four key factors that contribute to achieving that 10-plus percent EPS growth. First, backlog. The backlog and the ongoing start-ups, which we have been consistently managing, contribute about 1 to 2 percent to our EPS growth. The backlog is increasing, and I anticipate that its contribution will rise accordingly. The second factor is what we practice daily: pricing and productivity. We have detailed this in previous discussions, so I won't repeat everything, but we expect that more than half of our EPS growth will stem from proactive management in these areas, accounting for about 4 to 6 percent of the growth. Third is volume. Currently, our guidance assumes zero volume growth at the midpoint, but any increase in industrial activity will positively affect us, as demonstrated in 2021 when a slight rebound led to a 30 percent EPS growth. Even without volume contributions, our model suggests we can still achieve the over 10 percent EPS growth. Lastly, we generate significant cash, and after reinvesting in the business, surplus cash is used for share buybacks, contributing around 2 percent of EPS growth. When combined, I am highly confident that we can consistently achieve the 10-plus percent EPS growth for this year and beyond.
Operator, Operator
Our next question is from David Begleiter at Deutsche Bank.
David Begleiter, Analyst
Sanjiv and Matt, the sequential volume growth of 3% in the quarter was positive. The volume comparison in Q3 is not hard, maybe even easy, at minus 2%. So why wouldn't we see volume growth for Linde in Q3 year-over-year?
Matt White, CFO
David, it's Matt. I think to your exact point, we absolutely see the comps getting easier in the back half. So on a year-over-year basis, you might see neutral to positive just because the prior year comp is a little easier. But our view of no macro improvement that we're laying out is more on a sequential basis. So to your exact point, even if you see little to no macro improvement sequentially, it still could result in potentially neutral to positive year-on-year just because of the comps that you're up against. So the comps do get easier in the back half. That's absolutely correct on a year-over-year basis. But we're taking our standard approach which is on a forward-looking sequential basis, assume no economic pick-up and then we'll just need to manage to the reality of whatever happens, good or bad.
David Begleiter, Analyst
And just one more question. The order intake was the lowest, I think, since Q2 2020 at $300 million. I know it's lumpy but is bidding activity lower or less than it was 6 or 12 months ago?
Sanjiv Lamba, CEO
David, our folks in engineering are very busy and there is a lot of front-end work currently that is happening around studies, FEEDs and so on and so forth. So we're seeing activity at the front end being very, very busy. What we are seeing at the moment and the delay tends to be moving from that front-end activity which is whether it's a FEED or a study to actually getting to FID. And we certainly see customers taking a little bit longer to getting to that FID piece. So a lot of activity isn't translating just yet to FIDs. We've said this before in the last call as well, we are seeing people taking a little more time before they get to an FID decision on some of these large projects.
Operator, Operator
Our next question is from Duffy Fischer with Goldman Sachs.
Duffy Fischer, Analyst
Can we dig in a little bit on healthcare? Again, traditionally, you think about healthcare kind of growing year in and year out a little bit, how much pruning do you have left, roughly how much of the portfolio needs to go away? When do you think that's done? And then when you get to that mid-single digits, what's the breakdown of that price versus volume? And can you recoup inflation in that business like you can in your other businesses?
Sanjiv Lamba, CEO
All right, Duffy. Let me first explain what is happening with the pruning. We have been reviewing that portfolio and taking action, which we've mentioned in the last quarter. Those actions are ongoing. I expect that by the end of the year, you will see some of those actions becoming less relevant. That's something to keep in mind. In the long term, I believe demographics will support the mid-single-digit growth expectation for healthcare. Currently, we see that aligning with our expectations, and demographics will drive both hospital care, which is a significant part of our business, and the home care sector in selected geographies where we operate. Regarding inflation, this business heavily depends on productivity actions; thus, we find that inflation and productivity must work together for us to achieve the necessary pricing and maintain attractive margins in the business.
Operator, Operator
Our next question is from Peter Clark with Bernstein.
Peter Clark, Analyst
I have two questions, but they are somewhat related. First, regarding the ExxonMobil contract that Air Liquide announced, it’s clear that achieving the return target involves a significant increase in argon merchant availability, where they claim a 50% increase. I understand this may not be immediate and could take over four years, but what kind of impact could that have on the market? Given that argon supply has been tight, this additional capacity could come on line relatively quickly. My second question relates to that deal allowing access to the pipelines. They likely have the capability for this, and it seems you might be more constrained than they are with your Gulf Coast pipelines. Would you consider offering access to pipelines in certain regions for the right contracts?
Sanjiv Lamba, CEO
Thank you, Peter. The U.S. market is one of our largest merchant markets, and there is currently strong growth in demand. We are also increasing our capacity. We anticipate that the market will continue to experience a shortage of argon for a significant period. From my perspective, the market remains stable and offers growth opportunities, with molecules being absorbed quickly. Our outlook on the market is optimistic, and I expect that as new products are introduced, they will be integrated into the market at a reasonable rate. Regarding pipeline access, I will share our perspective without speculating on Air Liquide's strategy. Over the past 30 to 40 years, we have built a substantial pipeline network that supports our business and growth in the U.S. Gulf Coast. This network is crucial for continuing growth, especially with the expected developments in low carbon hydrogen. Our competitive advantage is rooted in the infrastructure we have created, and we aim to leverage it effectively, as demonstrated with the OCI project, to ensure ongoing success and significant growth in that area. I am very optimistic about the opportunities in the U.S. Gulf Coast and see potential for further development of our infrastructure, including the construction of additional caverns, as part of our strategy for future growth.
Operator, Operator
Our next question comes from Vincent Andrews with Morgan Stanley.
Vincent Andrews, Analyst
I usually don’t view your business as influenced by interest rates, but we’ve seen an extraordinary rise in rates recently, and now it appears we’re shifting towards a decrease. I’m curious about your perspective on whether a reduction in rates for the remainder of this year and into next year would impact your overall outlook. Additionally, do you believe it would affect your customers' willingness or ability to proceed with FID projects in collaboration with you?
Sanjiv Lamba, CEO
Vince, I'm going to let Matt talk to you about this, it's a topic he's very passionate about and then I'll maybe add to that. Go ahead, Matt.
Matt White, CFO
Thanks, Sanjiv. As you know, Vince, it's difficult to make definitive predictions, but we certainly have our thoughts. In my view, the rapid increase in interest rates has impacted large durable goods and significant capital investments the most. Customers involved in these sectors have felt the strain. For instance, consumer loans, including home and auto loans, have seen their costs effectively double, which has significantly affected purchasing power for these durable goods that require more materials like plastics, metals, glass, and cement. This situation, as Sanjiv pointed out, has contributed to the notably weak industrial production PMI numbers over the past 18 months. Many countries have experienced an industrial recession, primarily affecting customers who are more sensitive to interest rates. Additionally, there has been somewhat reduced government infrastructure spending, largely tied up in various incentive packages that lacked clarity. This uncertainty has prolonged decision-making. Conversely, consumers have remained resilient in areas of spending that are less impacted by interest rates, particularly in services. However, it seems that this consumer strength is beginning to slow down now. Theoretically, we could see GDP contract, which would indicate a true recession. If interest rates were to decrease at that point, it might stimulate demand for durable goods and large capital purchases, improving conditions for projects. Currently, customers are eager to proceed but face high CapEx costs due to inflation and rising rates. A reversal in this trend could foster stability and reasonable pricing, potentially allowing some projects to finally move forward and secure contracts. While this is speculative, I see it as a positive sign that lower rates could help push some of these projects over the final hurdle for approval.
Operator, Operator
Our next question comes from the line of Laurent Favre with BNP Paribas.
Laurent Favre, Analyst
My question is around electronics. Sanjiv, you mentioned that TSMC start up and I was thinking that we haven't seen any announcements of new projects in electronics in a while. So I was wondering if you could talk about the opportunity from here for new projects? And also, if there's anything you can see or say on the incremental opportunity from AI and data centers?
Sanjiv Lamba, CEO
Thanks, Laurent. Both of those questions are excellent and something we referenced in the last call when we noted that we were noticing some early signals related to the recovery in electronics. I would say we have seen that during the quarter, but these are still early signs. There is more to develop over the remaining part of the year. Now, regarding projects, we have commenced Phase 1 of TSMC in Phoenix. We are making good progress on the Samsung project in Taylor, Texas, and we are also constructing several other plants for Intel around the globe. Additionally, we are observing a resurgence in Asian demand, with new projects being announced there as well. Over time, as these projects are contracted, we maintain a high level of discipline regarding our announcements, but you will see updates that reflect several of these investments as contracts are finalized. I anticipate that electronics will continue to gain momentum in terms of new investments and fab capacity. This growth will partly be fueled by large data demands driven by AI needs. Although the enthusiasm around AI might have waned somewhat recently, it is expected to remain a powerful tool that could transform industries and markets, leading to investment in data centers, complemented by chip production from fabs. I still foresee this momentum continuing, and I expect major semiconductor manufacturers to keep investing. While some may face short-term challenges, including recent news, the long-term outlook remains strong, and we are well positioned to capture more than our fair share in this market.
Operator, Operator
Our next question comes from Steve Byrne with Bank of America.
Steve Byrne, Analyst
Yes, Matt, you mentioned in your remarks about the challenges in helium in your Asia Pac business. Just curious whether that is stabilizing? Or do you see further erosion in either pricing or volumes there? And perhaps it would more broadly, can you talk about your helium fundamentals in the other regions? Are they quite different from the impact from this Russian supply? And what exactly is the portion that is in your corporate segment? I assume that's some kind of export volume. Perhaps you can highlight what exactly is the driver there?
Matt White, CFO
Sure, Steve. Helium accounts for a low single-digit percentage of our overall sales, which gives you an idea of its contribution to our business. Helium pricing is unique as it is driven by global supply and demand, unlike most of our products that are tied to inflation through contracts. Currently, the Asia Pacific region is experiencing significant pricing pressure mainly due to Russian supply, although we do not source from Russia as we canceled that contract a couple of years ago. This Russian supply is primarily affecting China, while Asia Pacific, particularly the electronics sector, is a major consumer of helium. Some areas, like Korea, are seeing slower demand, which, along with the Russian supply, has put pressure on pricing. While prices are stabilizing now, it's important to monitor the situation. Historically, having a diverse supply and a strong global presence across all markets has provided us with stability in this business, and I believe this will continue. Regarding the helium component in our other segment, helium operates as a global business, which means we sell it internally to all our gas segments. The internal pricing is shown in the other segment and is based on a cost-plus structure that gets eliminated. The majority of helium profits will appear in the individual gas segments. Fluctuations in helium costs will impact the other segment more, while pricing changes will generally reflect in the geographic gas segments for end market pricing. That outlines how we approach our segment structure.
Operator, Operator
Our next question comes from Mike Sison with Wells Fargo.
Mike Sison, Analyst
Just curious, Sanjiv, if you think about the ISM and stuff, it didn't look really great the last couple of days. What if things get worse sequentially into the third and the fourth? How do you think your portfolio will or strategy will change? And how does that sort of change the maybe order backlogs and stuff?
Sanjiv Lamba, CEO
All right, Mike. I'll break that up into a couple of different discussions. First, let's discuss the business itself. You'll remember we talked a few quarters ago about our business profile being defensive. We explained that a mix of factors gives us the robustness and resilience in our business portfolio. A key factor is our contracted on-site business, which has performed well even during the challenging period of the energy crisis in Europe. Contracts have been fulfilled, demonstrating the defensive nature and resilience of our operations. Another aspect is the resilient end markets we serve, particularly food and beverage, which are not affected by manufacturing PMIs. We observed an 8% year-on-year growth in food and beverage, and I expect this trend to continue. In healthcare, we are addressing some portfolio issues, but we anticipate mid-single-digit growth moving forward, which adds to our resilience regardless of fluctuations in manufacturing and industrial activity. Furthermore, we have contracted rental streams that are tied to activity levels. When you combine all this, it means that nearly three-quarters of our business is contracted and secured through various methods, maintaining our defensive stance. Regarding industrial activity and manufacturing PMI, our defensive nature is expected to remain strong as we move ahead. You also asked about backlog. Currently, our backlog stands at $7.9 billion, and we're actively managing it. In the first half of the year, we're launching between $1.5 billion and $2 billion worth of projects, with about half already underway. This backlog represents contracted growth with specific timelines, ensuring we generate revenue from these projects regardless of customer changes. We have confidence in the quality of the backlog we’re executing. For instance, we've started the TSMC Phase 1 project, which will begin contributing to earnings based on our contracts. This highlights another resilient aspect of our operations. Overall, this gives you a sense of how we view resilience as a foundation for our business moving forward.
Operator, Operator
Our next question comes from Josh Spector with UBS.
Josh Spector, Analyst
I was wondering if you could talk about pricing specifically in the Americas. I think it's been a source of strength for you guys and some of your competitors that have reported. So just curious, one, if that's more of a U.S. phenomenon or if that's more South or Central America where you're getting more pricing? And two, I guess, with energy prices semi-stable, demand kind of semi-stable what's driving some of that sequential acceleration in pricing within the region?
Sanjiv Lamba, CEO
Thank you, Josh. I would like to recap our pricing strategy briefly. Historically, our long-term pricing trend has aligned closely with or slightly surpassed the globally weighted CPI. This trend has been stable for the past 15 to 20 years, showing positive pricing which reflects what we've observed in global CPI. It serves as a reliable indicator of our pricing outlook moving forward. As you consider pricing, keep this in mind as it will guide our future pricing strategies. Currently, pricing remains strong in the Americas, with positive results in both the U.S. and Latin American markets. This trend is consistent and has been validated over multiple quarters, particularly in the past five years. There are no unusual circumstances affecting this situation; rather, our management actions are driving these pricing results in the Americas. Both the Americas and EMEA regions are tracking with their respective weighted CPI. In APAC, we are experiencing some pricing challenges at the moment, and that is our current focus. The situation in China, with its deflation, is not advantageous, but we are actively working on our pricing initiatives in that area as well.
Josh Spector, Analyst
Okay. I mean that's helpful. I guess maybe one more follow-up around that is just so when I think about CPI and that being something to look towards, again, I guess, focusing on the Americas, I mean with your mix, your pricing is up, call it, mid-single digit year-over-year in Americas and maybe it's up, I don't know, 3% to 4% on a merchant level sequentially, I guess what CPI indicator is going up at that rate on a quarter-over-quarter basis?
Matt White, CFO
Yes. Sure, Josh. It's Matt. I think you have to remember, when you think about Americas, you have all of South America, to your point which we have leading positions in just about every country there. So whether it's Brazil or Central America, like Mexico, other countries in South America, Argentina, you've got Chile, Colombia, you are continuing to see inflation rates that are much higher than what you would see in a U.S. scenario. So that is all aligned and relative to that and something we do track consistently. I mean, as you well know, just look at recently the devaluations you've seen across a wide basket of LatAm currencies and that is being offset through higher inflation local in these countries. So it is driving that. It is part of that. Now, at times, yes, you may see some different quarter-to-quarter sequential variances just because on the timing, the pricing goes through to inflation that could create a little bit of a noise. But when we look at the CPI tracking, we tend to look at it on an annualized basis because that's a little bit cleaner on timing. But as Sanjiv said, it continues to track quite closely. It's something that we look at country by country. And when you look at the balance of inflation levels you're seeing, especially in LatAm, they continue to be elevated, especially vis-à-vis a country like U.S. or a region like Europe.
Operator, Operator
Our next question comes from Jeff Zekauskas with JPMorgan.
Jeff Zekauskas, Analyst
A couple of years ago, you mentioned a $3 billion investment opportunity to decarbonize Linde, focusing on producing more blue hydrogen and transitioning to ATRs or changing to SMRs. How much have you invested in this initiative? Does the $3 billion estimate still hold? Have there been any delays, or is everything proceeding as planned?
Sanjiv Lamba, CEO
Thank you, Jeff. We have outlined our decarbonization strategy and roadmap. This includes three key components. The first component involves a $50 billion investment over 10 years. Initially, we estimated that $3 billion would be allocated to decarbonizing our operations. A significant part of our effort will focus on helping our customers decarbonize, which is the second component. The third component involves exploring new opportunities for hydrogen as an energy vector and for export purposes. Currently, we are primarily focused on the first component, which you mentioned. We operate a large fleet of steam methane reformers in the U.S. Gulf Coast, connected by a 500-mile pipeline serving 60 to 80 major customers for hydrogen. We are working on various stages of Front-End Engineering Design studies for these SMRs to determine the best approach for decarbonization. There are several technical methods available, including post-combustion and syngas capture. The FEED studies are in progress, and I believe we will move forward with these over the next few years, aligning with our 2035 targets. We expect to develop business cases as we reach more technical conclusions from the FEED studies. The actual investment may be around the initially estimated $3 billion or more, depending on the results of the studies. Therefore, we will wait for the FEED results, but I would say we are in the right range.
Jeff Zekauskas, Analyst
Okay. I understand that your volumes in the Americas were flat year-over-year. However, could you break it down into packaged, merchant, and on-site categories and share the volume changes for the second quarter?
Sanjiv Lamba, CEO
So Jeff, let me discuss what we're observing in the Americas, as it will give you an idea of the volume trends and hopefully address your question. To start, the U.S. market has shown remarkable resilience, which has caught many by surprise. However, we are starting to notice a slowdown in industrial activity, indicating softer demand growth in the marketplace, as referenced by the PMI figures. In the previous quarter, we mentioned witnessing this sluggishness in the market. A notable exception is the demand for hydrogen, which remains at very high levels and is expected to stay strong for the remainder of the year. This is reflective of trends in the chemicals and energy sectors. Regarding the on-site segment you were inquiring about, one of its key components comes from the high volumes of HyCO. Another important indicator I monitor is the hard goods from the U.S. packaged business. I've mentioned before that hard goods are a leading indicator of manufacturing and industrial activity. In this quarter, there was a year-over-year decline in hard goods sales in the low single digits, which is a clear sign of a weaker manufacturing environment, and I anticipate this trend to continue for at least the next couple of quarters. However, hard goods stayed flat sequentially, indicating no worsening from quarter to quarter, but still showing softer year-on-year changes. This gives you insight into our packaged business as well. Overall, these two factors provide a fair view of how volumes are playing out among on-site, merchant, and packaged business.
Operator, Operator
Our next question comes from Patrick Cunningham with Citigroup.
Eric Zhang, Analyst
This is Eric Zhang on for Patrick. Deflationary conditions in China continue to be an issue. Can you talk about the cost actions you're taking in the region? And how has pricing trended?
Sanjiv Lamba, CEO
Sure. I'll start by highlighting that in China, we work with some Tier 1 customers who typically hold a strong cost position and have remained stable during this downturn. Thus, having high-quality customers in China is crucial for the stability and performance of our business there. Regarding cost actions, we began addressing growth concerns in China about 18 months ago by treating the China business as a mature one. We have been actively managing fixed costs and enhancing productivity. This is not a recent initiative; we've been using this period to reset our cost base in China, with much of the necessary work already completed. I am quite optimistic about the current state of the cost structure, although there is always room for improvement. The productivity programs we are implementing in China, such as those utilizing AI, illustrate our management efforts well. For example, many companies in China have had to hire safety officers due to new regulatory requirements to monitor plants and record data for audits. In contrast, we at Linde have carefully considered our approach. Currently, we are launching a program called Smart Plants that employs drones and robots to perform gauge readings and pressure checks automatically, eliminating the need for additional personnel and controlling employee costs. This is just one of numerous initiatives we have underway that smartly enhance productivity while effectively addressing our cost structure. On the pricing front, China is experiencing deflation. Our goal is to maintain a pricing increase around the 2% mark, and that's what our team is currently striving for. There are two aspects to consider regarding pricing. In the industrial, merchant, and packaged sectors, we are seeing positive pricing trends, but this is being counterbalanced by lower prices for helium and rare gases, primarily due to reduced demand from the electronics sector and the influx of helium from Russia into China, which has led to a surplus and affected pricing. However, industrial pricing actions remain robust, and I am confident about the team's momentum in this area as we continue to make progress.
Operator, Operator
Our next question comes from Kevin McCarthy with Vertical Research Partners.
Kevin McCarthy, Analyst
A few questions on capital deployment for Matt. Your pace of repurchases accelerated a bit in the quarter. And in the prepared remarks, I think you talked about a potential harvest of some project prepays in the back half of the year. So could you comment on the likely glide path of repurchases that you would foresee in coming quarters and maybe contrast that with potential for bolt-on deal activity within the guardrails of your single A rating?
Matt White, CFO
Sure, Kevin. I think obviously, I stated our capital allocation policy which you know well in the prepared remarks and that's been consistent going back many, many years and we expect it to remain consistent. And within that, repurchases are absolutely an integral part of that. And it's something that we expect to be every day in the market. To your point, we have a significant amount of room on the single A rating. That's obvious given our metrics where they stand right now. And I do expect, as I mentioned, to see a fairly nice pick-up in operating cash flow in the back half of this year, just given some of the timing of things that are going to be better in the back half than they were in the first half. But that all being said, our repurchase plan will look out generally for four quarters forward. We will determine a number that we want to deploy in cash based on the capital allocation policy. And then we'll execute inside the quarter and sometimes we'll accelerate when we see opportunities in the stock. And we definitely saw that this last quarter. So we did accelerate and we repurchased $1.4 billion recently and we got good execution and we felt good pricing. So the overall plan will continue to be part of the equation and our cash and our capital allocation. But day to day, we will accelerate or change our patterns based on what we see in the market. And as you know, we did that back during the COVID times, we did that back during the great financial crisis, where we saw some significant opportunities to come in. And if we see anything like that, again, we absolutely will take advantage of it going forward. For mergers and acquisitions, that's something we will always assess for smaller additions. You can see in our recent cash flow statement that we've engaged in more M&A activity. Most of it will likely be in North America, with some potentially in our APAC packaged gas business. These smaller additions present significant synergies and thus have a very low risk factor. Additionally, we are observing more opportunities for divestitures, though our investment criteria for those remain unchanged. We'll see if opportunities arise with our Tier 1 customers, but consistently, our capital allocation policy focuses on reinvesting back into the business, and M&A is definitely a key component of that.
Operator, Operator
We will now take our final question from John Roberts with Mizuho.
John Roberts, Analyst
Matt, I think you've talked before about return on invested capital plateauing here. Does it stay high or maybe even drift a little higher as long as earnings are driven by productivity in the consumer-based markets? And then when the cyclical markets start to recover and the energy transition investments come in, it starts to come down? Or do you think it plateaus high here, even when cyclicals do start to come back and the energy transition investments come in?
Matt White, CFO
Yes, John. To your point, our margins and return on capital are industry-leading. In terms of return on capital, we are likely at least twice as high as our nearest competitor. We aim to continue growing while maintaining or potentially improving our margins and return on capital, all while focusing on high-quality growth. Each segment has room for improvement, and we anticipate eventual convergence in margins, which we plan to capitalize on. Regarding return on capital, it's calculated by dividing net operating profit after tax by the capital base. Our capital allocation policy remains consistent, and I’m confident about the long-term capital base. The numerator will depend on our growth rate; with higher growth, we expect increases in that number, while lower growth may result in stagnation. We are pleased with our current levels and have recently increased them by another 10 or 20 basis points due to our growth rate. However, return on capital does not dictate our investment decisions. We prioritize cash internal rate of return after tax, using it as the basis for our investment decisions, whether in mergers and acquisitions or projects. This approach is centered on achieving a premium over our weighted average cost of capital while adjusting for risk. This won't hinder our growth, but return on capital remains an important metric for investors, and we intend to maintain our industry leadership in this area.
Juan Pelaez, Head of Investor Relations
Adam, thanks. Nice job. Thank you, everyone, for participating in today's call. If you have any further questions, feel free to reach out. Stay safe.
Operator, Operator
Ladies and gentlemen, that concludes today's call. You may now disconnect. Thank you.