Earnings Call Transcript - LIN Q2 2025

Juan Pelaez, Head of Investor Relations

I appreciate it, Abby. Good morning, everyone, and thank you for attending our 2025 second quarter earnings call and webcast. I am Juan Pelaez, Head of Investor Relations, and I'm joined this morning by Sanjiv Lamba, Chief Executive Officer; and Matt White, Chief Financial Officer. Today's presentation materials are available on our website at linde.com in the Investors section. Please read the forward-looking statement disclosure on Page 2 of the slides and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are in the appendix to this presentation. Sanjiv will provide some opening remarks, and then Matt will give an update on Linde's second quarter financial performance and outlook, after which, we will wrap up with Q&A. So now let me turn the call over to Sanjiv.

Sanjiv Lamba, CEO

Thanks, Juan, and good morning, everyone. I'd like to thank our Linde employees for once again delivering solid results. EPS of $4.09 and operating margin of 30.1%, both represent all-time quarterly highs, against the backdrop of a challenging macro environment. Operating cash flows grew 15%, and ROC of 25.1% continues to comfortably lead the industry. And these results are underpinned by a healthy balance sheet that ensures access to low-cost capital. Overall, Q2 was a successful quarter, which Matt will provide further details on. But before that, I'd like to review one of my top priorities, which is to ensure future growth for Linde. Slide 3 highlights the sale of gas project backlog, which is one key element of that future growth. One cannot discuss project backlog without first aligning on a definition of what is included. Unlike others in the industry, Linde's definition has been clear and consistent with the most disciplined criteria. Inclusion in Linde's project backlog requires incremental growth, secured by contractual fixed fees with high-quality customers. Contract renewals, plants without customer commitments or LOIs are not included in our backlog. It's important to make this distinction because backlogs are simply not comparable within the industry. While many like to tout the overall size of the backlog, it's the turnover of the backlog that is one of the most important metrics, which can actually be seen in the center graphic represented by wins and start-ups. In a little over four years, the sale of gas backlog has approximately doubled from $3.6 billion to $7.1 billion. The same is true for the number of projects, moving from 33 projects to 70 projects. During this time, we added $9.2 billion of new projects and more importantly, started up $5.7 billion of these wins. This represents more than 150% backlog turnover in 4.5 years. While I'm pleased to see the sale of gas current backlog at record levels, I'm equally encouraged by the accelerated turnover from timely execution and strong contracts. Of this $7.1 billion backlog, almost three-quarters are in the Americas, mainly the U.S., for future plants serving the electronics end market and clean energy. To the right, you will see some of the high-quality customers that make up the majority of this backlog. One recent addition is the Blue Point project, which is a joint venture between CF Industries, JERA, and Mitsui that will produce low-carbon ammonia in Louisiana. We are proud to have been selected as their industrial gas partner due to the capability and track record of our U.S. Gulf Coast team. The addition of this facility will help further build out supply density in a fast-growing region in the U.S. Furthermore, this win represents a third large clean energy contract signed, bringing the total to approximately $5 billion, which validates that the right low-carbon projects will continue to reach FID and execute contracts. Also not included in the slide is a sale of plant backlog, which today stands at $3.2 billion and typically converts one-to-one sales over a three-year cycle. Now it's important to note that while we've made nice strides with the backlog, it does not represent all investments for future growth. We actually spend over $1 billion in CapEx annually for what we call base volume growth. Decisions for making these investments follow the same process as the backlog and require a consistent risk versus return criteria. They're just missing one or two key requirements to be classified as backlog. Most base growth CapEx supports packaged and merchant supply modes and is critical to further developing network density. Now small on-site, an important supply bridge from merchant to on-site, can also be included as base CapEx when individual plant CapEx is less than $5 million. One recent base growth addition includes a Southeastern U.S. merchant investment in support of space launches, a sector that continues to offer attractive growth opportunities. While these wins are contractual commitments by customers, the lack of guaranteed fixed fees precludes eligibility in the backlog. Finally, I'd be remiss not to mention the role that small tuck-in acquisitions can play for sustained high-quality growth. While I don't expect this number to be an overly large driver, it can consistently deliver an annual 1% or 2% bottom line improvement, from both acquired profits and self-help synergies. For the second quarter, you can see the 1% top line increase from U.S. and APAC bolt-on acquisitions, mostly in packaged gases. Overall, despite the unfavorable economic backdrop, we are forging an independent path to growth. This comes not only from a high-quality disciplined project backlog but also incremental base CapEx investments and roll-up acquisitions. I'm highly confident in the Linde team's ability to not only win more than our fair share of high-quality opportunities but also to execute them as promised to deliver value for both customers and shareholders. Simply stated, I continue to be bullish on industrial gases as a critical foundation in making our world more productive. And I'm certain Linde will remain the undisputed leader in this effort. I'll now turn the call over to Matt to walk through our financial results.

Matthew J. White, CFO

Thanks, Sanjiv. Slide 4 provides a summary of second quarter results. Sales of $8.5 billion increased 3% over prior year and 5% sequentially. Year-over-year FX headwinds abated as we saw a 3% sequential improvement from broad-based weakening of the U.S. dollar. Cost pass-through trends were driven by energy fluctuations but have no impact on profit. As Sanjiv mentioned, acquisitions lifted sales 1% over prior year from synergistic deals in the U.S. and APAC. Excluding these items, underlying sales grew 1% over prior year and 3% sequentially. Broad-based price increases continue to track with globally weighted inflation, except for helium and China. Volumes are down 1% from last year as weaker base volumes, primarily in EMEA, more than offset contributions from the project backlog. As mentioned in prior calls, much of this decline stems from existing contractual customers using less gas in their operations. So any recovery would be immediately beneficial. While volumes did increase 2% sequentially from seasonal effects, the core trend remained somewhat stagnant. Operating profit of $2.6 billion increased 6% over prior year. The operating margin of 30.1% increased 80 basis points or 100 basis points when excluding the effect of cost pass-through. EPS of $4.09 also increased 6% from prior year as a lower share count was mostly offset by a higher effective tax rate. Despite the base volume headwind, business quality continues to improve from self-help actions. Further support of this quality can be seen in operating cash flow growth of 15% as well as a healthy ROC exceeding 25%. More details on capital management can be found on Slide 5. The operating cash flow trend shows sequential stability in the first half of this year, consistent with our commentary from last quarter. Recall that the first half of the year is seasonally weaker due to timing of certain cash impacts like taxes, interest and incentive compensation. I expect a step-up for the back half, like what we experienced last year. Base CapEx is stable, which has enabled healthy levels of cash flow available for shareholder returns, M&A and project investments. The pie chart represents a steady and disciplined capital allocation policy, which deployed almost $6.5 billion year-to-date. Of this, $2.8 billion comprises investments that met our risk-reward criteria, an increase of 20% over last year. Equally important is our ability to consistently access low-cost capital. This quarter, we issued bonds of CHF 0.5 billion with an average yield less than 1%. The ability to raise cost-effective capital will continue to be a key component of shareholder value creation, especially as we see greater discrepancy across interest rate policies. I'll wrap up with guidance on Slide 6. For the third quarter, we're providing a guidance range of $4.10 to $4.20, or 4% to 7% above last year. This includes an assumed 1% currency tailwind, which would be the first quarterly FX benefit since late 2023. While the FX assumption improved from our prior guidance level, we mostly offset that with a more negative assumption of the economy as the top end now assumes economic contraction. During the second quarter, we were able to capture the full FX upside on top of meeting the original expectation. However, the currency volatility and general economic uncertainty don't give us enough confidence to raise the outlook at this time. Rest assured, we'll strive to outperform this projection, but time will tell if we're being too conservative or not. For the full year, we simply approached it the same way as the third quarter, updated the improved FX but offset with an assumption of a contracting economy at the top end of the range. This resulted in a new range of $16.30 to $16.50, or 5% to 6% growth, including a 1% currency tailwind. The last time we saw a full year currency tailwind was 2021, so I believe it's appropriate to remain guarded. In summary, the EPS algorithm remains intact. Linde employees continue to manage what's within their control to deliver value, but we know there's always room to improve. The current negative volume headwinds are a function of contractual customers taking less gas due to the economic uncertainty. Between internal initiatives and industrial recovery, I expect this level to improve like it always has. When that happens, coupled with the self-help growth initiatives that Sanjiv laid out, I'm confident Linde will return to the double-digit EPS growth that our owners have come to expect. I'll now turn the call over to Q&A.

Patrick Duffy Fischer, Analyst

Congrats on a really good quarter. We're hearing a lot of different things from the companies in the space over the last week about just where business is globally, whether it's the tariffs and stuff like that. So could you take some time and just go geographically and by end markets, kind of what you're seeing and what you expect to see in the back half of the year?

Sanjiv Lamba, CEO

Thanks, Duffy. That's a good place to start. So why don't I walk you around the world and share some insights? I'll start off here in the Americas. I'm expecting volumes to be flat, maybe very slightly up, led essentially by growth in the resilient end market, but being partly offset by a softer industrial sector. I have to say I remain positive on the U.S. market. In Q2, we saw volume move in line with slightly positive IP numbers that were published earlier this week. Year-on-year volumes were up for metals and mining, chemicals, energy, food and beverage, electronics, while manufacturing showed a slight decline. Now sitting in manufacturing is our commercial space market, which continues to be a very attractive growth opportunity. And Linde, of course, is well-positioned in that space. The opportunity to supply fuels for rocket launches, propulsion systems for placing satellites into orbit, is fueling double-digit growth for Linde in that particular market or end market. And not only do we supply the leading and probably the most well-known company for space launches, but also working with many others who are looking to scale up, and we expect to see that growth continue. So our recent announcement regarding the new investment in Texas and Florida is likely the first of many that you'll see. And again, we are trying to see how we take this business globally and in doing that are finding opportunities in Europe that are starting to look attractive as well. So that's really the Americas for you with a lot of confidence in the U.S. market, if you will. From that excitement of space, I have to bring you down to some ground realities when I talk about Europe. So, Europe is expected to continue seeing softening in demand, led primarily by Western Europe. Any growth in the resilient end markets will be more than offset by a decline in the industrial sector across metals, manufacturing, chemicals, energy, all with volumes lower than last year. In the short term, Europe has several challenges to get their economy back on its feet, and I currently don't see any catalyst for economic improvement this year. Volumes, therefore, are likely to be negative in the second half. I think it's going to be driven almost entirely by the industrial sector. Our team in Europe is doing all they can to manage through this economic environment, working on levers that they know and are in control of such as price, productivity, and cost actions. You can see that reflected in the double-digit EBIT growth that they were able to provide in the quarter. But looking ahead into the rest of the year, I'm not feeling any level of confidence that you're going to see improvement. If anything, you're likely to see a decline continue there. If I move on to Asia, I'll start with China, and just tell you that China remains a mixed bag. You've heard me say this in previous calls, I expect China to remain flat for the year, and that continues to be our expectation. There are EVs and batteries and electronics end markets that will continue to grow, but that will be more than offset by much weaker metals and chemicals for the remainder of the year. Industrial activity in Australia is seeing declines similar to Europe, almost across all industrial sectors, really a reflection of the level of industrial activity in the country. Again, the Linde team there is busy executing their self-help actions, which will show results in the back end of the year and beyond. Now, the bright spot in APAC remains India with merchant volumes growing in the teens, and a healthy opportunity pipeline for new investments. This is unfortunately offset by declines in the ASEAN countries. South Korea, the other main market in APAC, mainly driven by electronics, is also expected to see some growth. All in, I'd say when you wrap it all up for APAC, it's probably just going to be balanced or flat volumes for the year. That essentially is how we are seeing the market. The summary is resilient end markets continue to have low to mid-single-digit growth, but are more than offset by the industrial sector largely across the board, with particular negativity coming out of EMEA.

David L. Begleiter, Analyst

Sanjiv, your price/mix has been very stable over a number of years. Do you see any risk to not getting future price increases given the weak macro we're now in?

Sanjiv Lamba, CEO

So David, I've often quoted that over the last 25 years, Praxair-Linde has always achieved positive pricing, be it through economic cycles that are up or down. I think I'd say to you, that remains the expectation going forward as well. A great proxy for our pricing is the globally weighted CPI. You should see us track to that as we do at the moment. When I look at pricing today, you'll see that pricing across all countries is actually pursuing that and in line with that globally weighted CPI. There is an exception, China, which sits in APAC, which has some challenges, particularly around helium pricing, where we are seeing high single-digit kinds of price declines and some rare gases as well, and a little bit more pressure on China pricing generally. But beyond that, every other country is tracking in line with our expectations. So I do not see any reason why we would not see positive pricing going forward. As I've said many times in the past, David, the way we create value for the customer, and the fact that we are a small sliver of their cost stack, I think that balance always works in our favor when we have a conversation on pricing.

Vincent Stephen Andrews, Analyst

I wanted to ask on margins, particularly in the Americas, where margins were flat year-over-year, but you did have positive price and volume. But in some of the other segments, you had margin expansion year-over-year with maybe not as robust volume and price. So is that a function of the business mix in the quarter in the Americas? Or is there something else going on?

Matthew J. White, CFO

I'll start with, any time you look at quarters, you can always have some noise and some bumpiness. I mean we always tend to see that within the quarters. For me, the most important thing is how you're tracking full year and year-to-date. That being said, yes, you're going to have some mix in there, primarily with some of the home care, I'd say, that might be a little bit of an impact. But we feel quite good at almost 32% margins we're tracking. We clearly see more room to improve. We expect to improve that further. So I wouldn't look very far into a single quarter at this point. I don't think there's anything really of concern on a go-forward basis.

Laurent Guy Favre, Analyst

I was wondering if you could talk about the appetite for new projects from customers given the macro backdrop that you are indicating. Is there any risk of, I guess, a slowdown or slippage on intake so that your backlog may finish the year below $7 billion?

Sanjiv Lamba, CEO

So Laurent, I said this in the last call, as I recall, my expectation remains that we will end the year with a backlog with a 7 handle on it. This is despite the fact that we will start up another $1 billion of the investments that are currently sitting in our backlog in the second half of this year. Most of that will start ramping up towards the back end. My view remains and our business is currently supporting and giving me confidence that there is enough opportunity pipeline on projects that we're currently working on, that we will be able to bring home $1 billion to get that backlog to $7 billion plus.

Jeffrey John Zekauskas, Analyst

Both you and Air Products had very strong EBIT growth in Europe. I think for both of you, it was double digits, which was a step-up. Did something happen in Europe to the industry in general? Was it a function of currency? Was it a function of other factors? Additionally, your competitors in Allentown also said that the helium penalty to them was $0.55 or $0.60 a share as they estimated for 2025. When you heard that number, did you say, 'Oh, that makes sense.' That's comparable to what we're experiencing? Or do you have a different experience if you are quantifying it?

Matthew J. White, CFO

Yes, Jeff. Using our table in the back with EMEA, clearly, FX is part of that. You've got a 4% component of our 11% growth. Obviously, the euro has strengthened, and the sterling has strengthened. That's definitely helping. But on top of that, we continue to have pricing opportunities and we continue to have productivity opportunities. While the volume is negative, a large portion of that is with the on-site contracts, which are heavy volume effects, but they tend not to be overly impactful to the operating profit given the fixed fee structure. That's kind of the makeup that we have strong contracts. We continue to price to inflation. We have a lot of productivity initiatives, and we're getting a fairly nice tailwind on the FX. The combination of all that is giving us the double-digit OP growth despite some of the underlying macro challenges that you see. Clearly, when we lap that and that stabilizes, that should give us some opportunity. But at this stage, we're not banking on that and we're not guiding that. We're just expecting a continuation of the same.

Sanjiv Lamba, CEO

On helium, I'd say to you, as you're aware, our exposure to helium is very different and much smaller than our friends you referred to earlier. The trends I see in helium, year-to-date, our helium volumes are flat. We have not seen a decline. Yes, pricing is down high single digits, and that's really just a function of the oversupply in the market, particularly around Asia and maybe a little bit of cooling off in demand on the electronics side of things. Our expectation remains that helium supply will be long. You would have seen our recent announcement that we are putting a 3 billion cubic feet helium cavern in, and that really is around making sure that we are optimizing the sourcing end of things, giving ourselves more flexibility with the cavern to ensure that we have a plan in place that addresses the sourcing cost issues associated with that and creates productivity benefits out of that sourcing. So as things stand, I think we don't really see a concern. And again, as I've said before, it's not a significant exposure for us.

Matthew DeYoe, Analyst

I just wanted to dig into Europe a bit. If we decelerate again next year, would you still feel the volumes hit your on-site? Or are customers largely at the low end of their commitments? And then just longer term, we have this deindustrialization of Europe. We're probably in the early innings of just chemical plant closures. I would expect other industrial plant closures. I know you've got contracts here, but there's merchant, there's package. Can we just hash out what this looks like across the top line for you as you look out 2 years, 3 years? Is Europe just going to be a minus 2%, minus 5% for you? Or how do you manage what might be loss of density on closures?

Sanjiv Lamba, CEO

Matt, good question on Europe. Clearly, as you can see, we remain bearish on Europe, and that's reflected in our guidance as well. But that is a view for the short term. I would say to you, we are both cautious and conservative around our expectations from Europe. I said before in my commentary that I do not see a catalyst for that fundamentally changing in the near term. For the quarter, as you saw, the impact did come through. So the general macro environment affects the merchant and package side of the business from various end markets, but particularly manufacturing and a little bit of chemicals and metals led to that negative volume decline we showed exacerbated, of course, by the on-site volume decline that you just mentioned. As you know well, on the on-site, the contracts do protect us well. The question I ask every month is for customers who are below MTOP on those contracts for on-site, are they paying up? That is a critical assessment we make, and you know what, every customer is paying up. Those signals look good. But the longer-term is the question you are also referring to. I have been bearish on the long term, but I will give you a couple of perspectives suggesting that you would see some potential change happen. I'm going to start off by a conversation on Germany. Germany has made this extraordinary commitment to investing EUR 1 trillion over the next 10 years in defense and the build-out of infrastructure. That is a very significant industrial stimulus to the German economy. While you debate the reasons, the reality is it will have an impact and uplift both Germany, but also more broadly, because supply chains are integrated across a slightly broader Western European region, you will feel that impact. So while in the short term we are seeing some of these challenges reflect in the chemical industry, the longer-term view, which I think is expected to show some initial signals over the next couple of years, both from an increased level of infrastructure spending and defense spending, will be an important part of how we look at the long-term view on Europe. There's one other thing I want to briefly cover, which is Eastern Europe. This relates to conversations around the Ukraine rebuild. I recognize we need to take that with a pinch of salt just given everything that we're reading in the newspapers at the moment. At some stage, there will be a resolution of sorts, and that will result in potentially moving the Ukraine rebuild forward. Large numbers are being thrown around, but we have operated in Ukraine over the last three years. We continue to supply steel mills, medical facilities, etc., with product even today. We are pretty strongly positioned for any recovery that happens in Ukraine, not just for the Ukrainian business, but by the infrastructure and footprint we hold in Eastern Europe, supporting whatever happens in Ukraine. Those two developments will dictate how the longer-term development in Europe looks like. We'll have to wait and watch how that plays out. I can say with a high degree of confidence that Germany will go through that recovery in the foreseeable future. For Ukraine, we'll have to see when that happens.

Michael Joseph Sison, Analyst

Nice quarter. I just wanted to dig into a little space a little bit. The recent agreement, it's a merchant contract, as I recall. When do you think these will convert into an on-site? Frame up the growth potential since we're sort of in an early phase of the development for that industry.

Sanjiv Lamba, CEO

Sure, Mike. Great question. I said in my commentary earlier on about my walk around the world that I see space as a very attractive opportunity for growth. The fact that Linde has been so well-positioned, particularly in the U.S. with a history of more than five decades of supporting space development and more recently, significant rocket launches, our two new investments are going to significantly spur that growth momentum. Let me give you a couple of data points to help you frame the growth potential you were asking about. Over the last three years or so, we've seen our supplies into space and our revenue generated from that commercial space segment almost quadruple. We supply more than four out of five launches that happen in the U.S. The investments we are making in infrastructure through the air separation plants, the distribution equipment—much of this liquid is carried in and out using tankers, hydrogen production, related infrastructure—all of those by the end of the next couple, three years, will see us invest just under $1 billion to support the space ecosystem going forward. I also mentioned that we see not just one of the most prominent launch companies, who have a prolific number of launches, but actually, we are seeing that spread across many other companies in that space now scaling up and looking at future programs as well. I see that opportunity pipeline for growth being very attractive. We have strong customer commitments, Mike. To clarify on on-site versus merchant, the critical factor here is you have a strong customer commitment. We have strong long-term customer commitments. It's just a commercial structure that doesn't allow us to classify that. As you know, we have a very disciplined and rigorous definition of backlog that I spoke to earlier. We just don’t put them in the backlog for that reason. But the customer commitments are there, and they are over the long term.

John Patrick McNulty, Analyst

Nice results in a tough environment. I wanted to dig a little more into the sale of gas project backlog. And in particular, just get some color as to whether you see the return profile of those projects having improved over the last few years as that backlog has built up. It seems like with one of your competitors maybe focused in other areas, the opportunity set might be higher for you just given there's maybe less competition for that. Is that a fair way to think about it? Or maybe you can add some color to it.

Sanjiv Lamba, CEO

Sure. The sale of gas backlog and every individual project that sits in there, all 70 of them, have gone through the rigorous process of being assessed at our Investment Committees against that investment criteria that we set out. Not only do we go through that process with some rigor, and if they've met the investment criteria, they obviously get approved and go into the backlog. The return profile hasn't moved significantly because the risk-return equation has to play out based on the investment criteria that we have. I feel pretty good about the return profile that we have. But an equally important portion of that return profile is how well we execute. The point I made earlier on in my prepared remarks around the turnover of the backlog is absolutely critical. For an industrial gas company, it is important to be able to execute them timely to have a strong contractual position to ensure that you're monetizing that project and creating the returns that were promised when they were presented to the Investment Committee. I feel really good about the capabilities we have within Linde, both on the engineering side, our team does a phenomenal job over there, and on the gas side, where we do some great contracting and work closely with customers. That's really what's reflected in that return profile, which you then see as we start these projects up, leading back to EPS growth that we commit out of these decisions. I feel good about that.

Patrick David Cunningham, Analyst

I'm curious about the electronics outlook from here. It seems year-on-year, sequential growth is down slightly. How much of this is helium pricing? Or maybe there was some modest pull forward in positioning in Q1? How would you characterize the shape of volume and new project starts for the balance of the year?

Sanjiv Lamba, CEO

Thanks, Patrick. Let me start off by making sure that this is understood well. The industrial gases sales to the electronics end market grew both year-on-year and sequentially. The drop you see in the end market slide that we have in the deck is all driven by our advanced materials business that sits in the global other segment, which provides electronics targets to some of these electronics customers. The instance here is destocking happening with one of the larger customers, and that's going to correct itself in the second half. Just to clarify, the advanced materials group develops, builds, and manufactures precious metal targets, which are used in the chipmaking process to deposit a thin film of materials onto the semiconductor wafer. The process called sputtering involves high energy particles bombarding the target that's been set up, checking these atoms to provide a coating, a very thin level of coating on the wafer, forming layers for components like transistors, interconnects, etc. All of this is about precise material deposition on the integrated circuitry. The outlook for electronics remains strong, with a healthy pipeline of projects that are coming up over the next 12 months. We will obviously be participating, and as you would expect from Linde, we're winning more than our fair share of those projects.

John Ezekiel E. Roberts, Analyst

The Economist magazine this week has a story on what's called greenhushing. Your backlog, you said it's going to grow. The point of the story was that companies are still going forward with their energy transition investments. They just don't talk about it as much. Do you think energy transition will remain a significant percentage of your backlog in 2 or 3 years? Or based on what you're currently talking to customers about, are they actually pulling away? Because we don't hear a lot of companies discussing their energy transition programs anymore.

Sanjiv Lamba, CEO

John, we recognize that customers will continue to need to decarbonize their operations. I expect the demand for low-carbon products to continue to grow over time. It's just the hype and euphoria have gone away, and reality has sunk in. That reality is a more stable, economically viable set of projects, which will go to FID and get contracted. Those are the kinds of projects that we mentioned. At the risk of saying I told you so, we have said this for the last three years: none of this should come as a surprise to anyone on these earnings calls. We've said it's unrealistic to expect green hydrogen to get up to a point where it's at scale, cost competitive, and actually adds and creates value. We've always said that this is probably a 5- to 7-year window for the technology to mature, and then you will see the commercials play out. I'm not surprised by this article. The reality is low-carbon alternatives, which are low-carbon hydrogen or low-carbon ammonia or products that build will still have demand in the marketplace. We see solid projects with good economic cases supported further by incentives like the 45Q tax credit. We are developing a number of those even today while we execute several around the world. My view remains that this trend is not going to stop; there is an increasing economic case for it. Good projects that create economic value will still see progress and move to FID and get contracted.

Joshua David Spector, Analyst

I wanted to ask about the guidance assumptions. Linde's approach has been we're seeing the market like X and forecasting X. It seems like volumes are down 1%, and now your forecast is maybe at the midpoint down 2%. Obviously, it's a weak market, and no one is expecting anything incredibly exciting here. But are you seeing anything, either in June or July trends, that indicate worsening or is this added conservatism considering everything we don't know about, including FX?

Matthew J. White, CFO

Josh, it's Matt. Volumes are down 1% in the quarter, but the base volumes are down 2%. When we think about our economic projection, we are talking primarily to the base volumes because the backlog is pretty much on autopilot—that's contractual. Starting with the minus 2% on the base volumes that occurred this quarter, the current guide on the top end assumes that 2% year-over-year continues into the back half. The year-on-year assumption in the top half is consistent, but last year's comps got a little easier. It does imply a little worsening on a sequential basis. We'll see if that happens. When I think about it in combination, clearly, FX rates improved, meaning the dollar weakened given the uncertainty and some flight to different currencies. I think from this perspective, you may see the dollar strengthen a bit, things stabilize, or see the opposite. But at this point, I think of them in combination, and we'll have to see how it plays out. The top end has about a 2% base volume negative assumption, which is probably double the effect on EPS for the remainder of the year. We're going to do our best to do better than that, but that's what we laid out, and we'll see how it plays out.

Kevin William McCarthy, Analyst

Matt, what impact, if any, does the passage of the One Big Beautiful Bill Act have maybe internally for Linde? I appreciate any thoughts you may have on early feedback from your customer base regarding potential stimulus in the Americas. Does it have any meaningful impact at all on your '25 guidance or how you're thinking about the '26 outlook?

Matthew J. White, CFO

Sure. When we start thinking about the bill, I'll stick mostly to the taxes. What it mainly did was make permanent a lot of the existing tax policy we've been operating under since the 2017 Act. That in itself is positive and gives more confidence looking ahead. When you consider U.S. tax policy, it contained many temporary items, and those temporary items can complicate long-term planning for investments in the country. The passage of this bill made many of these things permanent, which is good. Looking at it on an ETR basis, I don't expect much impact. Our current run rate had primarily the 2017 effects, and this extends and makes that permanent. If anything, if this had not passed, I would have expected a worse ETR. On the cash tax front, this will be beneficial. The primary driver is the reinstatement of bonus depreciation, which will offer cash tax benefits to companies making large capital investments. Given the vast majority of our backlog has U.S. exposure, this will help to improve IRRs on projects. On average, you can see almost a 100 basis point improvement for long-term investments in the country. The legislation overall will be positive for capital intensity and for any low-carbon products. So we view this as a net positive.

James Hooper, Analyst

I wanted to go back to Europe and discuss the energy transition there. Your backlog is a very small percentage European, and we've seen some of your competitors winning low-carbon hydrogen projects. Since you last reported, we've seen the EU action plan and the start of a plan to make a plan. Do you see this being more of an opportunity for your backlog going forward? Has this made you more positive on energy transition in the region?

Sanjiv Lamba, CEO

James, I will say that there is a measured level of pragmatism in Europe today around the energy transition and the goals. However, we are speaking to the German government, which provides a sense of how we think about this regulatory framework. There is clearly a move towards getting more practical around target setting, etc. I do see that as potentially having a beneficial impact on energy transition projects with an economic basis and which would support a cost-effective decarbonization program for Europe. In Europe, most things will take time, and this will be no exception. While I appreciate the pragmatism I'm seeing, I still expect it to take a while for them to enact whatever bills are needed to get to a point where they achieve cost-competitive hydrogen in those countries to support decarbonization efforts.

Christopher S. Parkinson, Analyst

Sanjiv, you touched on this a little, but behind everything else going on the European clean energy side, there's been a lot of debate among the EU-27 states about improving efficiencies and protecting the chemical industry. Many of your core customers have been actively involved in these discussions. How integral are you to these conversations? How could the Linde platform help provide guardrails? Also, in terms of the potential for greater infrastructure growth spending towards the end of the decade, is it wrong to think about Europe slightly differently these days, or is it still essentially the status quo?

Sanjiv Lamba, CEO

Chris, let me deal with the infrastructure project first because that is fundamental to any industrial recovery in Europe. When I talk about infrastructure, I'm including defense. Germany's commitment to EUR 1 trillion is clearly a significant milestone for the country for the balance sheet and the ability to finance that kind of spending. That spending will change our perspective and has changed how we think about the recovery and industrial activity in Europe longer term. That's a 10-year program. I manage people's expectations by telling them that for any procurement process to manage that kind of spending and for infrastructure projects, there is a need for permitting, which takes time across Europe, particularly Germany. Don't expect exciting announcements in the next couple of years. Maybe early next year, you'll see some projects announced, but most of that allocation you should expect in the following year. It will take time, but the long-term view around European economy and industrial activity is benefiting from these commitments made. You are right to say that the perspective on Europe has changed slightly. I remain cautious, and we need to wait to see this play out.

Juan Pelaez, Head of Investor Relations

Thank you, Abby, and thank you, everyone, for participating in today's call. Have a safe day.

Operator, Operator

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