Earnings Call Transcript - LIN Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Linde earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Juan Pelaez. Sir, you may begin.

Juan Pelaez, Head of Investor Relations

Thanks, Chris. Good morning, everyone, and thank you for attending our 2020 third quarter earnings call and webcast. I am Juan Pelaez, Head of Investor Relations, and I am joined this morning by Steve Angel, Chief Executive Officer, Matt White, Chief Financial Officer, and Sanjiv Lamba, Chief Operating 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 two of the slide and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are in the appendix of this presentation. Steve and Matt will now give an update on Linde's quarter performance, and we will then be available to answer questions. Let me turn the call over to Steve.

Steve Angel, CEO

Thanks, Juan, and good morning, everyone. Another outstanding performance by the Linde team worldwide. I am especially thinking about all our employees who have been delivering products, servicing customers, filling cylinders, operating plants, building plants, and taking care of patients, and they have been doing that uninterrupted from the beginning of this pandemic. You can see we delivered very strong financial performance this quarter. We achieved record operating margins in all our gas segments, driven by good cost and price management and better volumes that we were able to leverage down the income statement. Based on our fourth quarter guidance, we expect to deliver 12% earnings per share growth for the full year on top of 23% growth last year, excluding foreign exchange. As expected, the more resilient markets we serve—healthcare, electronics, and food freezing—continued to perform well. Our fixed fee contracts have protected us from volume reductions in the more cyclical end markets. Geographically, all segments showed volume improvement versus Q2 but still remain below pre-COVID levels. Going into Q4, I expect volumes in Asia, led by China, Taiwan, and South Korea, to be positive, both sequentially and year-over-year. However, we see growth flattening out sequentially in both the Americas and Europe, as COVID cases continue to rise or remain at elevated levels. The impact is most pronounced in our metals and manufacturing market segments. This is consistent with published macroeconomic data and what you are hearing from other companies. I know there is a lot of interest regarding 2021. I think we will all acknowledge COVID is a bit of a wild card at this point. What I am confident in is the resiliency of our integrated supply business model, which we have been clearly demonstrating. Our ability to achieve positive pricing in any environment, the strength of our backlog, and our ability to achieve cost efficiencies on an ongoing basis give me confidence. Assuming stable volumes, I am confident that we will deliver another year of double-digit earnings growth in 2021. This is all I can share regarding 2021 today, but we will provide a more detailed outlook on our next earnings call. You can see in the appendix a chart that tracks our performance against the 35% greenhouse gas intensity reduction goal we announced in February. With a 19% reduction to date versus our 2018 baseline year, we are clearly well on our way towards achieving our goal. Additionally, with us on the call today is Sanjiv Lamba, who we recently announced is our new Chief Operating Officer. A little bit about Sanjiv: he has spent his entire career in industrial gases, beginning with BOC, then Linde AG, and upon our merger, Linde PLC. It is fair to say he has survived and thrived in three different administrations and two major integrations. He is deeply knowledgeable of all three modes of industrial gas supply: on-site, merchant, and packaged gases, and has been a strong advocate for our strategy of building network density in core geographies. Under his leadership, APAC has improved operating margins by over 500 basis points over the last two years, driven by cost efficiencies, good price management, and the rollout of digitalization initiatives. The integration between legacy Praxair and Linde AG in Asia was completed ahead of schedule and generated substantial benefits for the company. Another indication of the success of the merger and Sanjiv's leadership is our employee survey results, which were quite positive across the entire Asia population. On the project side, 70% of our sale of gas backlog today is in Asia, and many of those projects were won as a result of Sanjiv's leadership. In terms of clean energy, Sanjiv has been a strong advocate. We have more project activity in Asia today than in any other part of the world, and I expect Asia to be the region where we first see meaningful results. Sanjiv has been a staunch supporter of all our corporate values: safety, integrity, diversity, community, and sustainability. I expect him to continue to work diligently to improve our performance in all of these areas. As you saw in the announcement, Sanjiv will be responsible for the Americas, APAC, and EMEA regional operating segments, as well as Linde Engineering, Lincare, and global functions. He will relocate to Danbury, Connecticut. With that, I will turn it over to Sanjiv to say a few words.

Sanjiv Lamba, COO

Thanks, Steve, and good morning, everyone. I wanted to be given this opportunity, and I really appreciate the vote of confidence from Steve and the entire Board of Directors. As Steve said, with my 30-plus years in the industrial gases space, I can say with some pride that Linde today is an exceptional company with a strong operating culture and a laser focus on sustainably creating value for our shareholders. I also believe Linde is uniquely positioned to leverage its technology to generate quality growth while making our customers more efficient and sustainable, indeed making our planet and our world more productive. I look forward to working closely with Steve, the leadership team, and indeed our talented employees around the world to continue to drive growth and high-quality results for our shareholders. As I transition into the new role, I hope to get a chance to meet most of you, at least virtually, in the coming month. I will now turn it over to Matt to discuss the Q3 performance and outlook.

Matt White, CFO

Thanks, Sanjiv, and good morning, everyone. The third quarter results can be found on slide three. Sales of $6.9 billion were 2% below prior year but 7% higher sequentially. Versus prior year, volumes were down 3% as lower base volumes, primarily in the manufacturing end-market, more than offset the positive contributions from project startups in APAC and Americas. While it's difficult to know the exact impact from COVID, we estimate the Q3 effect to be a mid-single-digit percentage decrease. Despite the lower year-over-year volumes, we had a solid sequential improvement, with gas volumes increasing 6% from recovery in food and beverage, refining, and chemicals in the more cyclical markets of metals and manufacturing. At the consolidated level, engineering sales were flat with the prior year but down 3% from the second quarter. This was primarily due to project timing, as the sale of equipment backlog has held relatively steady at $4.9 billion. Pricing trends continued to be positive with increases of 2% over the prior year and 1% over the second quarter. All geographic segments achieved higher pricing as local management took action to recover cost inflation. You will notice that the year-over-year impact from foreign exchange was 0%, due primarily to a stronger Euro and Chinese RMB, mostly offset by weaker Latin American currencies. Sequentially, foreign exchange was a 3% tailwind as the dollar depreciated across most foreign currencies. Operating profit of $1.5 billion or 22.1% of sales rose 9% from 2019 and 15% sequentially. Versus prior year, operating profit grew from a combination of higher pricing, cost management, and defensive revenues in the form of resilient end-markets and fixed contract payments. In fact, operating margins expanded by 230 basis points from 2019, our fifth consecutive quarter of expanding margins by more than 200 basis points. Sequentially, operating profit grew 15% and margins increased 140 basis points from strong profit leverage on the higher volumes. As demonstrated this quarter, our business has a unique combination of downside protection with fixed payments and resilient end-markets, yet upside potential on economic recovery. Diluted EPS of $2.15 was 11% higher than prior year and 13% higher sequentially. Frankly, I don't expect you will find many industrial or material companies that can claim year-over-year double-digit percent EPS growth in this environment, which speaks to the high-performance culture and quality of the Linde business model. Further validation of our performance can be found in the cash flow trends. Q3 operating cash flow of $1.9 billion increased from both the prior year and second quarter, confirming a continued high conversion of earnings to cash flow and resulting in an operating cash flow to EBITDA ratio of 84%. Equally important is the disciplined capital deployment, evidenced by prudent CapEx investments and a consistently rising return on capital, which reached a record 12.8% this quarter. Base CapEx, which represents all non-backlog spending, has increased from smaller on-site growth projects, primarily serving the manufacturing end-market, including paper and glass. However, project CapEx, which represents contractual growth with spending over $5 million, has declined primarily due to startups. While our ability to start up on time speaks to the quality of our customers and contracts, I do anticipate the overall backlog to decline into 2021, similar to the trends we saw in 2009 and 2015 following capital cycle corrections. But recall that following those corrections, customer project spending rebounded and subsequently led to significant project backlog growth, including a record year in 2011. Using history as a guide, I expect the capital cycle will eventually recover and provide future growth opportunities. Return on capital is the ultimate metric for this industry, and we have consistently demonstrated a prudent balance of growth and quality. Poor contract management and misallocation of CapEx can lead to significant cash losses, potentially even greater than the initial investment. This explains why Linde is laser-focused on a consistent proven investment process to stay within our core expertise, a dense integrated supply network while properly balancing diversification, risk, and return. Now while we had a solid third quarter performance, I believe it's just as important to discuss our longer-range trends, which you can find on slide four. From a financial perspective, our owners want a company that will deliver high-quality growth while prudently managing capital and generating excess cash to fund growth and shareholder distributions. When looking at our results since the merger in Q4 of 2018, that's exactly what you find. The top half of this slide demonstrates high-quality growth. In just under two years, we expanded EBIT margins by 600 basis points and grew quarterly EPS by 42%. Most companies would be pleased with this performance by itself. Yet we accomplished it with a commitment to capital discipline. Year-to-date in 2020, operating cash flow is up 27%, and free cash flow has more than doubled. This enables funding of growth and shareholder distributions, including a 10% dividend increase and over $2 billion of share repurchases. Furthermore, return on capital has increased by 250 basis points from the merger date. It's also important to note that financial performance wasn't our only focus. We are living our core values through improved safety performance, employee diversity, and carbon reduction, all detailed in our 2020 sustainability report issued in July. Many people tend to forget that we achieved these results while integrating two complex multinational companies during a global pandemic. In fact, while some stated we would not be successful, I continue to look forward to what we will accomplish next. I will now wrap up with our updated 2020 guidance, which you can find on slide five. For the fourth quarter, we are estimating EPS in the range of $2.11 to $2.16. Excluding the 1% foreign exchange headwind assumption, this range represents 13% to 15% growth over 2019. We are anticipating flat volumes sequentially as incremental project contribution is expected to be mostly offset by seasonally lower sales and engineering project timing. We believe this range is appropriate in light of the continued uncertainty around the pandemic and subsequent economic impact. Full year guidance is now $8.05 to $8.10, which includes an estimated 2% foreign exchange headwind. This updated range falls within our February 2020 pre-COVID estimate of $8 to $8.25. In summary, irrespective of global challenges, we expect to grow full year EPS 12% excluding currency and thus deliver on our original 2020 financial commitment. I would now like to turn the call over to Q&A.

Operator, Operator

Our first question comes from Duffy Fischer of Barclays. Your line is open.

Duffy Fischer, Analyst

Yes. Good morning, fellows. First question, if we could just go to the slide that Matt was just on, slide four, the chart in the upper left-hand corner just showing the profit margin expansion. Could you talk about the size of the buckets that contributed to that? How much was price? How much was integration? How much was just cost cutting at respective companies? And then is there anything in that improvement that would be transitory that might become a headwind when you think of something like maybe in Lincare you might be over earning because COVID is a respiratory disease? Maybe that's got better business this year than it might a year or so from now? So anything in there that we would need to overcome to keep that as either a base or base to grow from?

Steve Angel, CEO

Well, the way I would answer that, Duffy, is in any given year, you are going to have some headwinds, you are going to have maybe some tailwinds, and then the rest of the year you just got to go execute. Pricing is always an element of this. If you go back during this time frame, I am sure it was about 2%. We always get pricing in this business, and we will get it going forward as well. So I think that is a factor. Certainly, good cost management through this last quarter and several quarters, which is very important as a result of COVID. We did have some merger synergies which, frankly, I don't look at anymore because they are kind of in the rearview mirror for us. Right now, we are just working on cost efficiencies in every business, and that will sustain us going forward. I am confident in our ability to continue to drive operating margins with continued price improvement, good cost management, and productivity programs, all while leveraging any volume that comes our way. From Q2 to Q3, we were able to take that volume and translate it into even higher levels of margin down the income statement. Of course, we have some large project contributions to look forward to as we have a fairly healthy backlog today. So we will continue that trend you referred to in the upper left-hand side.

Duffy Fischer, Analyst

Perfect. And then, if you could maybe just look at merchant and package and kind of walk through the three big geographies and what you are seeing volume-wise there and how that looks today?

Steve Angel, CEO

Well, I think package is more impacted by manufacturing. So manufacturing globally has been suffering more so than other market segments. If I look inside that number and if you looked at the United States, for example, you would see that hard goods are weaker than gas. You probably still have negative double-digit year-over-year hard goods volumes. But on the gas side, it would be much better, say low negative single-digit. You kind of have those trends. On the merchant side, it can be affected by resilient markets, it often is. If you were to look at the U.S. and Europe, healthcare and food freezing are large markets for us, and those markets have held up very well, as Matt spoke about, and as you can see in that end-market chart in the back. If you were to look at Asia, you would see the electronics markets, where we do provide merchant liquid in electronics markets, hold up quite well. So generally speaking, the merchant market would be better because of the resilient end-market exposure. Package gas is a little weaker because of manufacturing. In both cases, the fixed fee structures have held up exceptionally well.

Operator, Operator

Bob Koort, Analyst

Thank you very much. Steve or Matt, I wanted to ask you guys about hydrogen a little bit here. Obviously, there's been a lot of fanfare about this market. But wondering how it fits in, Matt, with your description of investing with high returns on capital and exploiting your core dense network? Is it something you can lend itself with or are you going to do more rifle shots, asking how you think about that market opportunity?

Matt White, CFO

I would say rifle shots, very focused shots based on end-market presence, end-market infrastructure, customers we know, and most cases, we are already supplying. To me, these look very much like the normal fare industrial gas over-the-fence projects; the only difference is clean hydrogen is the product. That's the only difference.

Steve Angel, CEO

Yes. Just to add to that, Bob, as you can imagine, it's an asset-intensive growth area. We view that as our strength to manage these assets and get good returns relative to the risk. We don't see that any different than how the rest of the industrial gas business runs and is operated.

Bob Koort, Analyst

That's helpful. Thanks. And Steve, I know last time you guys named the COO, he only was there for about a year, and then there was a succession. Should we read into this that you are planning on heading out at some point in the not-so-distant future? Or can we rely on you sticking around a while longer?

Steve Angel, CEO

One day I will head out, but there is nothing decided or planned. But you can rest assured, one day I will not be here.

Peter Clark, Analyst

Hi guys. Thank you. Good morning everyone, and welcome, Sanjiv. I have got a quick query in terms of guidance. Obviously, you are at the top end, the way you were guiding back in February. And since then we had the pandemic develop across the world. Obviously, you took a bigger volume hit. Clearly, productivity has been a key thing. But for you, Steve, would you say the way that Linde PLC has adjusted to this would be the same as Praxair, i.e., the organization has pretty much adjusted to the way you would like to see it? And then the follow-up to that is obviously for Sanjiv because I think way back in Q2 2019, we were told Asia was off the mark very quickly in terms of adjusting and productivity benefits. I am just wondering how you see the difference at Linde PLC, the main differences anyway against Linde AG and perhaps even BOC? Thank you.

Steve Angel, CEO

So I will take the first part of the question and then turn it over to Sanjiv. Quite frankly, across the board, at Linde PLC, people did what they needed to do to address the challenges of COVID, whether that was jumping through hoops to take care of patients. There was a recent article about what our drivers and our team did in India to provide oxygen to all those hospitals in need. From a cost management standpoint, I would say everybody stepped up to the challenge and there really is no differentiation in terms of legacy organizations.

Sanjiv Lamba, COO

Thanks, Peter. My observation on the productivity piece would really go something like this. In Linde PLC, the main difference I see is, we find productivity as a fundamental part of our business process. It's entirely embedded. It's not a program as we might have run in Linde AG or an initiative that's separate from the business. It doesn't sit on top. It fits within the business. It's something we do every day. There are thousands of projects that we have that build and deliver on these productivity efforts and the overall benefits that we see. I think that's kind of the fundamental difference between what I've seen in the past and what we are now going through in Linde PLC.

Nicola Tang, Analyst

Hi everyone. Thanks for the presentation and thanks for taking my questions. And congrats, Sanjiv, on the promotion. Firstly, I want to talk about the backlog. Matt, in your remarks, you were commenting on a decline in the backlog into 2021. I was wondering if you could talk about the existing backlog as well? And do you see any delays in your existing backlog at the moment? When I look at your revised CapEx guidance, I see you have taken it down very slightly. Is that related at all to project delays or cancellations? Or is that low-end non-project spend? And then I had a second question on the buyback. Should I pause there?

Steve Angel, CEO

You can keep going; I will take the first one and let Matt handle the second one. Most likely, I haven't heard your question yet, but most likely.

Nicola Tang, Analyst

Okay. The second question was, the original commitment around the buyback, I think, was $6 billion by February 2021. I know that you paused in Q2, but you restarted it in Q3. It seems to be at a bit of a lower pace than in previous months. If my calculation is correct, I think you have about $1.7 billion of the buyback remaining. I was wondering if you are still committed to completing this within the original timeframe of February 2021? Or whether you are trying to be a bit more practical about the pace, perhaps related to the equity market or perhaps market conditions for decaps or projects?

Steve Angel, CEO

Okay. So this is Steve. I will take the first part on the backlog. The backlog number we publish is a function of projects that we have signed that come into the backlog and projects that have started up which comes out of the backlog. You have got to kind of divorce that from an annualized CapEx spend rate. But what Matt was saying is, we can look at projects we are starting up next year, and that's a good thing, right. That's why we closed those projects so we could get them started up and see the revenue and the returns. Based on how many we will be starting up and based on our best estimate in terms of when we will replenish or add projects to the backlog, it is likely that number could come down. Now, it could also bounce around some because, again, this is lumpy. So that's really what he is referring to. If we think just really about where we think projects are going to come from or where they are coming from, electronics is quite strong for reasons that you are all very much aware of. If anything, electronics opportunity pipeline is getting stronger over time. Clearly, clean energy, we are looking at quite a few projects; it is a question of timing. The rest of the project opportunity slate is really more a function of demand. There are projects that we know customers would like to do but right now their balance sheets, their businesses are fairly weak, and they are going to wait until demand comes back. This kind of goes back to Matt's earlier point that when demand comes back, all kinds of projects tend to flow back into the pipeline system. With respect to delays, I don't expect to see much in the way of further delays other than what we have seen, which was very mild compared to what you have heard others talk about. We are pretty confident about the status of certainly all the big projects that we have in the pipeline today. I don't anticipate any further delays; we feel very good about when we will start seeing the commercial benefits from those investments. In regard to a little lower CapEx spend, I would say certainly all the project opportunities we are pursuing. This would be non-growth spend that we have been continuing to manage closely every day, refining savings here and there, which is what we always expected would happen as we focus more on non-growth CapEx spend. But inside that number, the base CapEx number, growth related to pulp and paper projects, glass, lithium-ion battery projects, small on-site projects, is quite strong. That has been a very favorable trend throughout COVID.

Matt White, CFO

Thanks, Stephen. Hi, Nicola. Yes, I will just add one point to Steve before I go to the buyback question. Just to clarify, our definition of backlog is different; the definitions are not consistent in this industry. I want to make sure you understand that our backlog has a more stringent definition. It must be growth; it must be contractually secured over $5 million. This means we don't put Memorandums of Understanding or Letters of Intent. We don't include merchant-only type projects. To Steve's point, even within our base CapEx spending, a little less than half of that is for growth, along with very good growth for on-site projects below $5 million. We are seeing a lot of good growth opportunities that may not meet our backlog definition but we see significant returns and are pursuing them. Regarding the share buybacks, a couple points: first, the expiration, I wouldn't look too deeply into that regarding February; that's more of a technicality required under the European MAR requirements. A better way to think about how we look at buybacks is that they are integral to our capital allocation policy. We always look to maintain our A rating and grow the dividend every year. After that, our priority is growth, which could be acquisitions, projects, etc. We tend to have excess capital left, and that, in turn, goes to buybacks. Our expectation is to continue to have open buyback programs. As for why we were likely a little off track compared to the $6 billion, obviously, with COVID, we turned it off for about a quarter. But this is something we've been in the market now every day since August, restarting. Our approach is to be in the market every day and go heavier at times when we see opportunities. That will be integral to our capital allocation policy.

Nicola Tang, Analyst

All right. Thank you.

Steve Angel, CEO

Chris, do we have any more questions?

David Begleiter, Analyst

Thank you. Steve, there were some concerns that weakness in refining might impact your Americas results and margins. That didn't appear to be the case. Can you talk about what happened with your refining business in Q3 and what drove the strong margin expansion in the Americas in Q3 as well? Thank you.

Steve Angel, CEO

Yes. The first part of your question is regarding concerns that refining may have negatively affected our margins. Is that correct?

David Begleiter, Analyst

Yes. In the Americas, yes.

Steve Angel, CEO

Okay. So the Americas is a big region, so there are many elements to it. But let me just say that a 28% operating margin is not bad. So how did we get there? Good pricing, good cost management, and the team reacted very quickly. We finished out some of the integration opportunities we had earlier. We certainly saw some benefits from that. The Americas has always been very strong on productivity programs. The fixed fee structure, take-or-pays, all held up well throughout this period. The resilient end-markets, particularly in healthcare, food freezing in the Americas, contributed significantly to our performance. Regarding refining, although volumes were down year-over-year in Q3, they were up sequentially from Q2. There is some noise in that because of a series of hurricanes that affected Lake Charles. October looks a little better, given September's impact. The volumes are down year-over-year, but good commercial terms and conditions of all our contracts protect us. The biggest issue in refining is that diesel fuel side has been strong, while gas sides have been weaker. But refinery utilization is recovering, where it needs to be higher to be profitable. Overall, we are in pretty good shape.

David Begleiter, Analyst

And Steve, lastly, just on the European shutdowns. Have you seen any impact yet? And anyway to quantify the impacts in Q4 for you guys?

Steve Angel, CEO

I think the answer to that is we have to watch it pretty closely because a lot of these shutdowns have just begun going into effect. I can look at volumes and see that medical oxygen is doing very well, as it's been strong in October. That typically trends with COVID case rates; when the rates go up, we see oxygen sales go up. There likely was some build ahead, knowing shutdowns were coming, so we had better volumes than we'd ordinarily see. However, we anticipate flat sales in Q4, as the shutdowns in Europe will drag volumes down as expected, but the medical side will remain strong.

John McNulty, Analyst

Yes. Thanks for taking my question. So, maybe a question around how to think about the backlog and potential for activity? I think, look, every recession is a little bit different. And this one obviously was deeper than the 2009 recession. But it seems to have snapped back maybe a little bit more quickly. I guess, how are you thinking about the progression of how your backlog or when your backlog may actually start to improve, just given the differences in recessions? Is there a way to think about that at this point?

Steve Angel, CEO

It's hard for me to forecast that. I think electronics projects are going to be there, and I am pretty confident about that. I think the only question about clean energy is the timing of some of these projects. If I look at all the projects we track, the number is well into the billions of dollars. But how many of these go forward and at what pace, I think remains to be seen. Over the next three years, we will probably spend $1 billion of CapEx against clean energy, but that's based on my assumptions regarding timing for when some of these projects are likely to break loose. Obviously, we are working on far more than that, but I think that's a reasonable internal expectation. Regarding the rest of the backlog, it's a function of demand, so if demand comes back, you will see some oil and gas companies, for example, start to spend money on decarbonization projects really with or without regulations. They want to, but they are not in a financial position to do that today. It really hinges more on demand, I would say.

John McNulty, Analyst

Got it. Fair enough. And I guess, maybe top that. So 2Q obviously was a pretty big drop, and three bounced back pretty solidly. When you think about the take-or-pay thresholds that you have, it does sound like that helped a lot in 2Q and maybe a bit in 3Q. Is there a way to think about what percentage of the business is at that watermark or above now, where incremental volumes actually do fall directly to the bottom line versus maybe not? How should we think about that?

Matt White, CFO

Yes, John, this is Matt. You may recall when we spoke last quarter about 65% of the defensive sales, with about half of that protected contractually. A large portion, in addition to the take-or-pay, is also rent. The rent continues throughout on the package. On the on-site, regarding take-or-pay, we do have a few at that level, primarily in South America. You see a little more in certain markets like metals today that are running at lower levels, but these are pretty traditional and consistent with past cycles. For the most part, though, the South America environment has a few in Europe. Our working capital performance and cash flows confirm that we continue to get paid, much of which due to our connections to top-tier players in those markets. This insulates us, and we expect these levels to recover as we've seen in prior cycles.

Jeff Zekauskas, Analyst

Thanks very much. Two questions. Has the focus of cost-cutting been in the United States, and should we expect to see it more in Europe and the other areas in subsequent quarters? And second, in terms of your sequential price improvement, is it broad-based? Are oxygen and nitrogen prices up sequentially, or is it more eccentric and maybe that's tied to hydrogen or something like that?

Steve Angel, CEO

There has been some contribution year-over-year from helium, probably somewhere in the order of 25% to 30% contribution to pricing. But sequentially, probably none because that price increase was obtained in prior quarters. We wouldn't see much in sequential help from helium. The answer to your question is really more broad. I've looked at all of our packaging gas businesses; they've experienced good price increases and realization. Merchant liquid shows good price realization across the board; it's not just one specific product driving price increases. If it was driven by one or two products, it wouldn't be as sustainable as a broad-based improvement. We've been focusing on it from a broad base. On cost-cutting, certainly in places like the Americas, we've been responding a little more quickly, and yes, even in Asia. But in Europe, it's taken a little longer. We've been working through the process there, which we always knew needed to happen. I think the process is a good one because it forces you to become detailed and granular in terms of what cost actions you’re taking and why. We've been progressing well here in EMEA, and there may be more opportunity over the long term for operating margin improvement there—indeed, that's probable.

Steve Byrne, Analyst

Yes. Thank you. Steve, you mentioned the medical oxygen being strong due to COVID. Another one of your medical gases is nitric oxide. You have one competitor, Mallinckrodt, that filed for bankruptcy a few weeks ago. Do you see potential for meaningful share gains with that product? While I know you can't advocate off-label use, doctors have the liberty to do that. Are you seeing any growth in that product, just driven to treat COVID patients?

Steve Angel, CEO

Well, Steve, you know a lot about this topic. Clearly, Mallinckrodt had practically all the market share at one time, which is why we chose to enter this space. The business is growing nicely. We are seeing nice receptivity to the marketplace. Clearly, that competitor, Mallinckrodt, wants to hang on to what they had, but as anticipated, their growth has been somewhat muted recently because of COVID. The need to engage—make presentations, set up equipment, provide cylinders—has been slowed somewhat. The demand for nitric oxide remains, and while I can't answer your question regarding its efficacy against COVID, I am aware that some studies indicate it is effective against COVID.

Steve Byrne, Analyst

And one on your backlog of sale of gas. What fraction of it would you say, whether it's Asia or your refinery customer base, is tied into either your existing pipelines or an expansion of your pipeline network that represents really an investment longer-term for you to enable subsequent projects at a more modest capital cost?

Steve Angel, CEO

I would say a significant percentage is tied to existing complexes, enclaves we are in, where we are able to either extend a pipeline or add to a plant; serving not only a baseline of customers but others in that park. I didn't add up the percent, but I can look at the large projects, and it's certainly a major percentage of that $3.7 billion.

Matt White, CFO

Yes. And Steve, this is Matt. Even that, to your point, that helped us win the projects, right? Having our existing asset base and reliability with that dense network also played a significant role in securing those contracts.

Cory Murphy, Analyst

Hi. Good morning. This is Cory, on for Kevin. To an earlier question about hydrogen investment, you had said that you described it as rifle shots. Given the increasing support for green hydrogen, for instance, Chile's government this week put out a plan—geographically, where do you see green hydrogen opportunity that might fit the rifle shot description? Or something like what you did with your plant in California where you upgraded?

Operator, Operator

This is the operator. I am sorry about that. I want to ask Mr. Murphy to call back in. There was a lot of static on his line.

Steve Angel, CEO

Okay. Let's move to the next call.

P.J. Juvekar, Analyst

Yes. Hi. Good morning. Can you hear me?

Steve Angel, CEO

Yes.

P.J. Juvekar, Analyst

Great. First of all, Sanjiv, congratulations.

Sanjiv Lamba, COO

Thank you.

P.J. Juvekar, Analyst

Steve, I have a question for you. You talked about your hydrogen strategy as being local and in-market. Then I look at some of the projects, including some recent ones by fertilizer companies, where they want to ship green hydrogen or I should say green ammonia globally. Your strategy seems deliberate in-market. Could you just talk about your strategy and what the risks are of shipping it globally as how you see it today?

Steve Angel, CEO

It's not that I am opposed to any kind of global strategy in terms of delivering product. Every country wants to develop their natural resources with a competitive advantage. If you look at all the countries we are in today, every one of those countries is looking to develop their renewable power and clean hydrogen infrastructure. Why? It’s stimulus for their economy, employment for their people, and energy security. So that’s why we prefer looking at this more granularly, finding projects we can clearly understand, and being confident in our investments. You’ll hear about projects in places like Australia, Saudi Arabia, Northern Africa, and Chile, as they believe they have advantages on renewable power and want to exploit that. However, we also have to consider countries with abundant natural gas resources—such as the U.S., Russia, Northern Africa, Canada, and Australia—that are looking to monetize those resources and produce what many refer to as blue hydrogen, which can be very cost-competitive compared to green hydrogen. Therefore, you will see all of these scenarios play out. It’s potentially a large market and additive to our opportunities as we aim to find the right places to play worldwide.

P.J. Juvekar, Analyst

Okay. Thank you. That's clear. And a quick question on Latin America, specifically Brazil, given the COVID impact in the country and the volatility of the Brazilian real. Can you just talk about the price and volume trends of what you are seeing there? Thank you.

Steve Angel, CEO

What you are seeing in Brazil, as in the rest of Latin America, is a high demand for healthcare, particularly for medical oxygen. We are the industry leader there and have been for quite some time. Thus, we are in a solid position to serve. With respect to pricing, we are in decent shape. They have done a good job historically, and they continue that trend. Hence, I look at the overall performance—if you were to ask, what COVID? Naturally, the dynamics show healthcare is much stronger, while metals and manufacturing are weaker. Regarding the FX question, the real has depreciated significantly, but it doesn't seem to show in your numbers.

Matt White, CFO

You will see, as I mentioned, the real, the Mexican peso, the Argentinean peso—all took a dive. The euro and Chinese RMB helped offset that on a global level. In addition to those devaluations, you get more inflation than you would see in developed nations. And that higher inflation, the team has done a tremendous job to recover through pricing actions ensuring we can stay aligned with what's happening on inflation on the ground and work efficiently to maintain the costs. Thus, by obtaining that positive spread, it helps insulate the business from some of these significant devaluations and the effects they bring.

Markus Mayer, Analyst

Yes. Thank you. Good morning, gentlemen, or good afternoon from my side. I have too many questions, but basically, add-on questions to what have been asked before. Again, on the helium market, could you provide an update? How do you see potential additional capacity and how will that affect the market from your viewpoint? That would be my first question.

Steve Angel, CEO

Helium demand is weak due to the general use of helium being down, especially in fiber optics; it's down a bit. MRI volume is holding up, but not as strongly because of COVID. Furthermore, electronics markets show some positive performance with helium usage. However, demand has dropped more significantly, with balloon sales which typically drive profitability down sharply due to COVID, as people aren’t planning events. Right now, until things improve post-COVID, demand has dropped, and I don't expect much to change until about the end of next year. Supply from things like Siberia might be coming toward the end of next year as well. However, I don't expect to see substantial supply coming up until then.

Markus Mayer, Analyst

Okay. Perfect. Thank you.

Juan Pelaez, Head of Investor Relations

Thank you, Chris, and thanks everyone for participating in today's call. If you have any further questions, please feel free to reach out to me directly. Stay safe. Bye.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.