Earnings Call Transcript - LIN Q3 2024

Juan Pelaez, Head of Investor Relations

Abby, thank you. Good morning everyone and thank you for attending our 2024 third 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 supplement, 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 third quarter financial performance and outlook. After which we will wrap up the Q&A. Let me now turn the call over to Sanjiv.

Sanjiv Lamba, CEO

Thanks Juan and good morning everyone. Third quarter results once again demonstrated the resilience and resolve of Linde employees across the globe. EPS, ROC and operating margin reached new highs despite challenging economic conditions in most countries. But frankly, none of this came as a surprise. Some of you may recall that we anticipated sluggish industrial activity this quarter and it played out as expected. Looking ahead, I have concerns regarding continued economic weakness. So, we've taken a series of proactive actions, including targeted cost reductions. Matt will provide more details on this charge, and it affects approximately 2% of the workforce globally and is expected to be mostly completed in the next few months. In light of these actions, it may be helpful to provide you additional color on the end market trends, which you can find on Slide 3. Industrial-related end markets have declined 1% to 2% sequentially from the second quarter. This trend is consistent with our prior comments as well as the industrial-related macroeconomic statistics. However, we did experience some positive growth over prior year, including in North America, which at almost 40% of global sales continues to be a bright spot. On-site and merchant volumes are slightly up in the U.S. In addition, North American project activity continues to progress. This said, these positive trends contrast with most of EMEA and parts of APAC, primarily China. The combination of geopolitical tension and economic uncertainty has suppressed large ticket purchases, which tend to correlate with industrial markets such as steel, glass and chemicals. Currently, we don't see any meaningful catalyst to reverse this trend for the remainder of this year and thus have embedded this view in our guidance. We believe this is the most prudent position to take at this time. Conversely, consumer-related end markets are slightly positive versus second quarter with continued growth in food and beverage and stability in health care. Electronics was up high single-digit over the previous year. As expected, recovery in electronics continues to move forward, but at a lower clip. While recovery is slow, we fully expect electronics to provide sequential growth in the next quarter, including project backlog ramp-ups. Taken together, these trends point to a stagnant or slightly declining economic backdrop. However, a combination of actions on pricing, productivity and costs, combined with contractually secured project backlog and robust stock repurchases continue to support our ability to deliver shareholder value regardless of the challenges. In fact, our backlog in the third quarter hit $10 billion as we signed our largest sale of gas project in the company’s history. This contract with Dow Chemical is a testament to our disciplined investment approach to pursue and win projects in our core competence of reliable and cost-effective industrial gas supply. Slide 4 provides more details on this $2 billion plus investment as Dow embarks on an ambitious project to achieve net zero Scope 1 and 2 carbon emissions in their Alberta, Canada complex through a series of initiatives, including fuel transitioning from natural gas to low carbon, or otherwise known as blue hydrogen. We're proud to be selected as the industrial gas partner to provide atmospheric acids, low carbon hydrogen and services for both CO2 capture and off-gas cleanup. For Phase 1, Linde's total investment is expected to be over $2 billion, underpinned by a traditional over-the-fence gas supply contract that aligns with our investment criteria. We expect this project to start up in late 2028. I think it's important to note the size and scope we are undertaking. It's more than just low carbon hydrogen production. The clean energy transition will draw upon several different Linde capabilities, expertise and product offerings since integrated gas management solutions are in greater demand. In addition to supplying Dow, this investment will enhance our existing footprint and provide substantial density for future extensions. In fact, we’re already in conversations with future potential customers. All in all, this project aligns well with our core strategy to pursue traditional industrial gas contracts with high-quality customers in key geographic regions of industrial density. Overall, we see a challenging economic future, but are well prepared. Linde is heading into this uncertainty with the largest sale of gas backlog in company history, an incredibly strong balance sheet and a lean and well-focused workforce with a proven track record in successfully navigating typical conditions time after time. And while I may not be bullish on the global economy, I've never been more confident in Linde's ability to sustain industry-leading results while rewarding our owners. I'll now turn the call over to Matt to walk through our financial results.

Matt White, CFO

Thanks Sanjiv. Third quarter results can be found on Slide 5. Sales of $8.4 billion are up 2% from last year and 1% sequentially. Versus prior year, engineering increased sales 2% from higher project activity and higher demand for LNG infrastructure. While both cost pass-through and currency translation are down 1%. As a reminder, cost pass-through represents the contractual building of energy changes to on-site customers and has no impact on operating profit dollars. Excluding these items, organic sales are up 2%, driven by price increases. Volumes are flat as growth from the project backlog is mostly offset by weaker base volumes. As mentioned earlier, the global industrial environment remains stagnant as many economies continue to report flat to negative industrial production levels. Despite these trends, operating profit of $2.5 billion increased 7% from last year, resulting in an operating margin of 29.6% or 130 basis points higher. Project contribution, price and cost productivity drove profit growth. EPS of $3.94 is up 9% from 2023 or 10% when excluding the impact of currency translation. These figures exclude a $150 million net restructuring charge, which represents severance costs for a 2% workforce reduction in the regions most affected by weaker volumes. We anticipate full run rate savings to be recognized in the second half of next year. Slide 6 provides an update on our capital management. Operating cash for the quarter was $2.7 billion, 8% above last year and 42% higher than the second quarter. As anticipated, we saw a significant sequential improvement driven by interest, tax and incentive timing. I expect to maintain this OCF level for the fourth quarter. Our capital allocation policy remains stable with $3.4 billion invested into the business and $5.1 billion returned to shareholders. In the third quarter, total CapEx spending is up 12% versus prior year, with project CapEx up 40% from executing the $7 billion sale of gas backlog, but base CapEx is down 4%. As a reminder, the Linde project backlog only contains growth projects underpinned by a customer contract, with fixed fee returns that are protected with termination provisions. Our definition is unique and the most stringent across the industry. The base CapEx decline is from productivity initiatives as well as better aligning non-backlog spend with local market conditions. I'll wrap up with guidance on Slide 7. For the fourth quarter, we're initiating an EPS guidance range of $3.86 to $3.96, or 8% to 10% growth from prior year. This range assumes an economic contraction at the midpoint since we have not seen sufficient indicators of near-term improvement. In addition, this range assumes no currency impact, although the U.S. dollar has strengthened noticeably in the last few weeks as we approach the U.S. presidential election. The full year range merely incorporates the Q4 guide and thus becomes $15.40 to $15.50 or 9% to 10% growth, excluding a 1% FX headwind. The top end was reduced by $0.10 from prior quarter since we updated our sequential economic assumption from neutral to a contraction. While no one knows for sure what will happen, we believe this approach is prudent for this environment. In summary, global industrial activity has been weak, and we do not anticipate near-term improvement. In fact, geopolitical tensions and regulatory uncertainty only appear to add volatility and potential downside events. However, as Sanjiv mentioned, we're prepared for this uncertainty. We have the strongest balance sheet in the industry with the most disciplined project backlog at $10 billion, ensuring high quality growth for years to come. We have a well-honed operating rhythm, enabling our employees to take decisive and timely actions for their respective markets. And we have the densest network across all three supply modes to capitalize on every growth opportunity. No matter what the future brings, I have confidence we will continue to deliver industry-leading performance. I'll now turn the call over to Q&A.

Mike Leithead, Analyst

Great. Thank you. Good morning to you. I wanted to ask about your guidance for economic contraction in the fourth quarter. It seems like some of the cost actions you're taking this quarter indicate some incremental macro caution as you position for heading into next year. So, can you speak to where in your business either regionally or on an end market basis you are seeing the most macro pressures today?

Sanjiv Lamba, CEO

Mike, I think as I said in my prepared remarks, you would have heard that I think describing the world, there aren't many bright spots. So, really, in essence, we are seeing the European market, EMEA may have more broadly, clearly seeing pressure, and that's reflected in the volume developments we see in that market. We've seen China where there was a short-lived euphoria around the stimulus. We know that the underlying industrial progression there is not reflecting that and is unlikely to see a catalyst for change in the near-term. So, bright spots, as I defined, were really North America, primarily in the U.S., which has proven to be very resilient thus far and is at a high watermark. We are hoping to see that slight sluggishness or softness that we've observed hopefully transition back into a more stable and steady growth rate. We have other smaller countries. India would be a good example where we are seeing consistent growth. We continue to be a market leader there, therefore we continue to benefit from that. Similarly, Mexico also is benefiting like India from the near-shoring and reshoring strategies that people are deploying. So, across the world, we see broadly an industrial recession or industrial weaknesses that we've been talking about for many quarters now, as you would recall. This is not new. And I think the actions we've taken now really reflect our view of the challenges going forward, but also the fact that there has been this long weakness in the industrial space.

Vincent Andrews, Analyst

Thank you very much and good morning. You announced a de-captivation of two ASUs in India, I believe earlier in the week or last week. Are you seeing more activity or interest there, just given the weakness in economic activity? Are customers looking to potentially offload some assets from their balance sheets? Or was that just something you've been eyeing for a while until they came to fruition?

Sanjiv Lamba, CEO

I will talk about that specific opportunity first, and then I'll give you a slightly broader view of what I see around de-captivation globally. Let's start with the de-captivation that we did. The plants were being constructed by the customer who had sourced the plants from a competitor. They were very keen that Linde take over those assets, particularly because we were able to integrate them into our extensive network in Kalinga Nagar, Orissa, which is one of India's large steel enclaves. We were able to provide a very innovative solution, both from sourcing energy and providing safe and reliable supply from our asset network, again, leveraging that network density that we often speak about. It's a great project. We have a long-standing relationship with our customer. The project meets our investment criteria and enhances network density. I couldn't have asked for a better combination of factors to come together when I considered that. That is what we look for in de-captivation. You might recall a few quarters ago that we did a re-captivation for assets in Fujian in China. All of the exact metrics of these conditions were satisfied for us to take that onboard as well. Broadly on de-captivation, I'd say we assess anywhere between eight to ten opportunities for deactivation every year. We are selective about the ones we pursue because we see the ability to integrate them into our network and leverage that benefit by creating great supply options for the customer, but more importantly, creating value for ourselves as well. When network density is at play, we will certainly find these opportunities very attractive for us to pursue.

Duffy Fischer, Analyst

Yes, good morning. A question around the health care business. Earlier this year, you were pruning some parts of that. Can you just walk us through what's been pruned and when does that anniversary end? Is there more to come? Additionally, what do you think the structural growth rate is for healthcare in 2025 and beyond?

Sanjiv Lamba, CEO

Thanks Duffy. So, let's go back to the healthcare piece. The headline is that healthcare grew year-on-year, albeit by a small percentage, but it still grew. I think the home care part of our business, as you recall, we have two elements in the healthcare business: hospital care, which is a very stable business that we serve across the world, and home care business that we participate in specific markets, obviously a large market here in the U.S. for home care. Much of our pruning of the portfolio and cleaning it up was focused on the home care business primarily in the U.S. That effort is largely completed. In fact, you might recall in the last call, I said by the end of the year, I expected all of that cleanup to be completed. We are on track structurally to see growth rates between low single-digit to mid-single-digit in the healthcare space. That's kind of our expectation, and I fully expect the healthcare business to be there as we look ahead.

David Begleiter, Analyst

Thank you. Good morning. Sanjiv, Matt, with the economic contraction in Q4, does that reflect seasonal slowdowns as well as perhaps longer-than-normal planned shutdowns? Or is this over and above what you would normally see seasonally and even extended year-end planned shutdowns?

Matt White, CFO

Hey David, it's Matt. The way we think about it is sequential. So, to your point, we view it as a sequential contraction. It would be across the base organic volumes and it would not be seasonal. As you know, we have a normal seasonal pattern that we view as consistent. But if there are extended outages, we would view that as a weakness, right? Because you tend to have an average outage for certain periods, you could call it holiday periods. When you see those extend on the front and back end, that usually signifies the customer may not have the order intake or the workload to work at a harder pace, leading them to extend around outages. So, it does not include seasonality. It is only based volumes. To that extent, we might see people extending outages given that. But I want to emphasize that we don't know if this is right or wrong. This is merely a perspective that influences our guidance. We're taking actions around it. We're getting ahead of it. If this does happen, we feel prepared. If our assessment is incorrect and things are better, then that would present potential upside for us.

Peter Clark, Analyst

Yes, good morning everyone. Are there targets for the $8 billion to $10 billion investment? Well done on finally getting down to the zero side into the backlog. I understand that some of your close relationships are increasingly positive in the space and are looking closely at Signature. Have you got some financing in place or some incentives in Europe with Equinor? Can you comment on that scenario and whether you believe you'll meet that target?

Sanjiv Lamba, CEO

Thanks Peter. Let's start with where we stand against that $8 billion to $10 billion. I feel pretty confident about where we are. We've signed up about half of that between OCI and, obviously, Dow Phase I. You'll remember that Dow has a Phase II which we haven't committed to yet, but that will develop in its own course. Alongside that, we are actively working on a number of projects. You referenced a couple of those already. I feel pretty confident that that $8 billion to $10 billion number over the next few years looks intact and is something I feel good about. I will, however, just give you a broader overview of what I'm seeing around hydrogen. We have been talking about hydrogen developments and indicating that there is a high degree of euphoria. What we see today is indeed what we had expected. I would segment the hydrogen development and see that you are hearing about several project cancellations recently. Most of these tend to be around something called renewable hydrogen or otherwise known as green hydrogen, which is driven by several factors: key among them being unclear incentives, a regulatory framework that is still being defined, elevated capital costs, and insufficient analysis when announcing projects early on, leading them to not account for rising capital costs. Lastly, ROI isn't as promising as initially believed. So, this reality check is beneficial for the long-term growth and development of hydrogen. Importantly, we are selective with the projects we work on and feel good about the projects in our development pipeline, as most of these are in the low carbon hydrogen space or what is known as blue hydrogen. The technology is mature, available and scalable today, and the end product is very cost competitive. All these factors play a vital role in the decision-making process around managing decarbonization projects, which naturally come with economic challenges.

Jeff Zekauskas, Analyst

Thanks very much. Your sequential prices were flat. Now, we're in something of a deflationary environment. If you exclude the negative pricing if it was negative pricing in your on-site business, was it the case that price/mix would have sequentially grown? Or maybe in another way of saying it, did price/mix sequentially grow in your packaged and merchant business during the quarter, or was it flat?

Matt White, CFO

Hey Jeff, it's Matt. A couple of things here. I wouldn't use on-site as the focus of this; I would describe it more as disinflationary based on a global view. Maybe China might be deflationary. We're still seeing positive pricing across all of our base gases. When we mention 2% globally, the way to translate that is for merchant and package, it's about double that. To your point, we continue to see both positive sequential and positive year-over-year pricing there. Clearly, something like helium, I think we all understand the pricing there is a little more volatile based on supply and demand. Hence, one might see a slight decline or flatlining there. Furthermore, looking within quarters, there is going to be some timing impacts. I don’t tend to be overly concerned about that. Certain contracts might have anniversary dates where the increases happen, so you might see some timing and lumpiness. We still feel quite good about the fourth quarter where we stand and where we'll be. So, I'm not overly worried. I believe our pricing still tracks positively with the globally weighted CPI that we observe in our regions. I think this disinflation will yield a lower number at the global level for now, but it will still be positive and contribute positively.

Steve Byrne, Analyst

Yes, thank you. You are going to build this ATR for Dow, and you are going to reform C3 and C4 not hydrogen then methane. Have you designed an ATR like this before? If you need or want more hydrogen than required by Dow to heat their crackers, will you have the ability to reform natural gas in this ATR if you develop your own network of hydrogen customers in the area? Lastly, is this whole approach of reforming cracker byproducts something you could foresee potentially employed down in the U.S. Gulf?

Sanjiv Lamba, CEO

Thanks Steve, great question. This is where Linde brings a huge amount of value, our ability to provide a technical solution that integrates various technology packages and provides whatever is required by the end customer. You've clearly spotted that. To address your question, we're putting in place two large assets, as you noted. There is an ATR of 300 million per day, which is going to process natural gas and, as you would expect, provide hydrogen as a consequence. From an ATR technology perspective, the autothermal reformer provides very high concentration and high purity CO2 on stream. So, capturing that CO2 is an integral part of our process, which we can implement easily coming out of the ATR. To your question about having designed this before: Yes, we are operating on one today and have been doing that for about four to five years. If anything, it’s how the top is designed. We have provided this technology package and have established a strong customer base because of it. I'm confident about the ATR technology overall. Adding on, we are also implementing a PSA unit that will process the off gas. We will clean it up and provide that clean hydrogen back to Dow, and we will utilize the residuals, either as fuel or capture any CO2 for Dow as well. Integrating that PSA unit plus the ATR makes for a very sound technical solution. As for the Gulf Coast of Texas, we are already executing similar work there. We have established operations with these PSA units processing off gas from crackers, cleaning it up and supplying it back to customers, allowing us to apply what we've learned and create strong solutions for Dow.

Stephen Richardson, Analyst

Hi, good morning. Sanjiv, it seems like we've had a bit of an acceleration of late on restructuring and potential exit announcements, particularly from the European industries, chemicals, and the like. Can you talk about any conversations you're having with customers or how you view that as either risk or opportunity from your assets in the continent, particularly with any customers wanting to shut down or restructure?

Sanjiv Lamba, CEO

You're absolutely right that you read a lot about some of these proposed actions that large companies are taking in the press. I can only tell you that currently, we haven't heard from any of our major customers in Europe discussing major closures. That’s not to say that we don't keep a close eye on it. We are obviously tracking that very closely considering the news. But as things stand, we haven’t had any of those conversations just yet. I'll also mention that, when customers decide to undertake significant shutdowns, we run solid contracts that ensure the protection of our investments. That's part of our business model and contracting discipline that we maintain across every project.

Mike Sison, Analyst

Hey, good morning guys. A lot of companies have talked about 2025. I know it's a bit early to give specific guidance, but many have hinted that they felt the first half of 2025 would be similar to the second half of 2024, which you depicted as not great. Is that kind of your view initially? And when you think about 2025 in general, do you see this growth algorithm as fairly similar, considering you have pricing potential, backlog, and stock buybacks for now?

Sanjiv Lamba, CEO

I'm sure you're interested in hearing about our outlook for 2025, but you'll have to hold off on that for a while. We will reconvene in February and provide a comprehensive view on 2025. As you might anticipate, we're internally putting significant energy into our planning for the next year, and those planned meetings are happening in the next three weeks. We will spend a lot of time thinking and discussing this, and we'll return in February to provide a much clearer perspective with more granularity on our view of 2025.

John McNulty, Analyst

Yes, good morning. Thanks for taking my question. So, a question on the sale of gas backlog. You more than doubled it; it's up almost $4 billion just from the last quarter. It looks like Dow is about half of that. Can you help us think about the other half and how to approach the mix of projects coming in? Also, the Dow project is relatively far out compared to your usual sale of gas backlog in terms of when it materializes. Can you speak to the timing or duration on the rest of the projects you just added and whether that's more traditional, coming in over the next, say, one and a half to two years?

Matt White, CFO

Hey John, it's Matt. Yes. To start with, our traditional projects upon a signing announcement typically take about three years to go from signing to completion and startup. Sometimes it can be accelerated if you have what’s called an extensive reimbursable front-end engineering design (FEED) where pre-ordering occurs prior to announcement with reimbursement. But generally, it averages about three years for a traditional project. Clearly, some of the large clean energy projects, like Dow, take longer given the scope, usually four years plus because of the larger scope of work involved. To answer your question, I would suggest that the remainder of the backlog would likely align with traditional projections, averaging around three years for contributions. Larger clean energy projects, like Dow, could extend to four plus years due to the magnitude of scope. Ultimately, it will depend on how far advanced we are on FEED prior to signing a contract.

Sanjiv Lamba, CEO

John, I'll add that these projects and you know my regard for backlog, right? A shrinking backlog is a good thing, and that's what’s happening. This year, we're starting up about 29 to 30 projects and we'll see about $1 billion of backlog come through. We have brought in Dow at the moment, along with a few other projects, leading to an increase in backlog. That's exactly how we should think about it.

Patrick Cunningham, Analyst

Hi, good morning. Do you expect your capital allocation split to change in 2025 or 2026? I'm curious about the path for repurchases over the next few years, given you've taken on some larger projects in the backlog?

Matt White, CFO

Hey Patrick, it's Matt. I'll start by saying absolutely no change to our capital allocation process. We view this as a long-term commitment regarding how we allocate our capital. No change. Just as a reminder for those listening, our capital allocation policy emphasizes maintaining a single-A credit rating and increasing dividends annually. After meeting that mandate, our priority is to invest in the business that meets our investment criteria. After that, whatever is left over goes for buybacks. We will apply that structured approach consistently. Clearly, as we generate more excess free cash flow, buybacks will naturally increase. We're seeing our sale of gas backlog rise. Hence, there will be more CapEx as we deploy capital to build these projects. We consider this a beneficial trend because we view growth that meets our investment criteria positively. However, the buybacks will likely remain steady next year, consistent with this year, given our generation of excess free cash flow and opportunities available today.

Josh Spector, Analyst

Yes, hi, good morning. Could you talk about the moving parts in electronics? We saw a strong performance year-on-year but sequentially down slightly. You talked about improvement in the fourth quarter, but I'm not clear on your macro view and whether that’s factored in your guidance. Can you discuss what transpired in the quarter and what is baked into your guidance?

Sanjiv Lamba, CEO

The electronic sales, as you pointed out, are up 9% year-on-year. We noted that the electronics recovery has unfolded as expected, though it’s a bit slower than initially anticipated. From a macro perspective, we align our expectations with the investment commitments made by the large OEMs. Observing the company's dynamics sequentially, gas sales were up. The distinction was that our advanced material business, AMT or LAMT, serving aerospace and electronics components, experienced some destocking during the quarter, which we expect to normalize in Q4. Therefore, we have confidence in securing solid growth in electronics sequentially due to gases recovering and the inventory normalization occurring for the components we provide out of the LAMT part of business.

Kevin McCarthy, Analyst

Yes, thank you and good morning. At the start of the conversation, there was substantial discussion about the potential for macroeconomic contraction. Can you share company-specific or idiosyncratic sources of volume growth from your project pipeline? As we assess projected project contributions over the next four to five quarters, do you anticipate them being similar to the previous year, higher, or lower? Additionally, could you elaborate on the most significant startups anticipated over the next few quarters?

Sanjiv Lamba, CEO

From a high-level perspective, I would say that the backlog includes several secular growth trends. Electronics is one example I just discussed with Josh. We anticipate that the backlog will continue to contribute to growth, with startups occurring as expected. To translate that into our EPS algorithm, I'd say about 1% to 3% of EPS growth will arise from that backlog, continuing to be consistent with prior trends. I have also highlighted that we expect the backlog to keep growing. You can see evidence of that this quarter with the $10 billion valuation at $7 billion sale of gas backlog. This backlog is tied to contracted growth that will yield revenues and earnings. We've initiated the startup of approximately 30 projects this year alone, translating to over $1 billion of backlog transforming into revenues and earnings, affecting that 1% to 3% EPS growth I mentioned. There are also high-growth geographies in our backlog converting to revenues. Notably, there are projects in India and more traditional markets contributing to this progression in earnings.

John Roberts, Analyst

Thank you. When you create a new ASU, I generally think of the base load customer typically taking about half the demand after you build out the area. When building an SMR, the on-site customer represents more than 90% after everything is complete. In these new projects, can you sell out all the excess oxygen, all the nitrogen, and the argon, and what would the original on-site customer be in one of these projects after you finalize everything?

Sanjiv Lamba, CEO

That's a great question. The network density is at the heart of our conversations. On ASUs, we normally expect our anchor customer to take about 70% of capacity, as that allows us to operationally optimize the separation plant typically. We subsequently try to keep the remaining balance to create the density required for downstream markets, looking at merchant and potential package businesses while ensuring network density is leveraged. The example of Dow is where our ATR plus the oxygen feeding into the ATR will take a substantial part of the product slate, but we expect there to be some surplus oxygen and nitrogen. We will provide some atmospheric gases back to Dow for their use within their complex. Essentially, we aim for the anchor customer to absorb a large part of the product slate. We also anticipate some surplus hydrogen, which pushes us to build a hydrogen network for Alberta as we mentioned.

Dan Rizzo, Analyst

Hi, good morning. Thank you. This is actually Dan Rizzo on behalf of Lawrence. You mentioned a potential second phase with Dow, which you have not committed to yet. In a broad sense, would that project be a magnitude larger if it were to happen after the completion of the first phase?

Sanjiv Lamba, CEO

There is an established timeline over which that decision will be made. We've done quite a bit of preliminary planning on how that phase will unfold. We would expect that investment to be slightly lower than in the first phase, so, if and when that decision arises over the next few years, we will see a substantial investment stemming from the foundation laid in Phase 1.

Tony Jones, Analyst

Hey, good morning everyone, and thank you for taking my question. Just a quick one to wrap up at the end. Could I check my math that the new cost reduction might lift EPS by around 1% to 2% if it all gains traction in 2025? Is that incremental growth or would it blend into the normal 4% to 5% EPS growth from price versus management actions?

Matt White, CFO

Tony, it's Matt. We expect this to achieve a roughly one-year return, so feel free to do that math. We anticipate that the full run rate will take effect in the second half of next year. Hence, you won't see the complete benefit in 2025, but we would expect a majority of that benefit to appear in 2025. We regard this action as clearly incremental. This is a bottoms-up approach where each market aligns with what they're observing in their specific regions and adjusts their costs accordingly. We believe this is beneficial and incremental for next year, and this aligns with our effort to prepare for adverse environments through management actions.

Mike Harrison, Analyst

Hi, good morning. You mentioned that large ticket purchases have been sluggish due to economic uncertainty. Could you comment on what you've observed in hard goods and equipment and automation demand in North America or other regions? Have you seen changes in customer behavior in response to lower interest rates?

Sanjiv Lamba, CEO

Let’s discuss the hard goods business first and we’ll touch on interest rates. The largest hard goods market for us is the U.S., and this is a trend we actively monitor. I've mentioned that I view this as a leading indicator. We are right in the midst of the industrial weakness that we've described numerous times because the hard goods indicators reflect that. Currently, we see mid-single-digit declines in hard goods sales. This data shows some variability, with large automation purchases shifting from one quarter to another; however, there’s underlying weakness in the hard goods segment reflective of broader industrial weaknesses across the manufacturing sector. This trend aligns with what we see in hard goods globally, though predominantly, our largest market remains the U.S. Regarding consumer sentiment, it has been strong, and that has benefitted the economy. While we are witnessing some signals of concern, such as increasing delinquencies in auto loans, we have yet to see anything to indicate that sentiment is becoming overly bullish, if anything, it looks like there's tightening happening. However, I’m open to being proved wrong, so we will see how this quarter unfolds.

Juan Pelaez, Head of Investor Relations

Abby, thanks again for a great job today. Everyone else, thank you for participating in today's call. If you have any further questions, feel free to reach out. Have a very productive day. Thank you.

Sanjiv Lamba, CEO

Thank you.

Operator, Operator

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