Linde plc (LIN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and thank you for standing by. Welcome to the Linde Second Quarter 2026 Earnings Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] And I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.

Abby, thank you. Good morning, everyone, and thanks for attending our 2026 second quarter earnings call and webcast. I'm Juan Pelaez, Head of Investor Relations, and I'm joined this morning by Sanjiv Lamba, Chief Executive Officer; and Matt White, Chief Financial Officer. Today's presentation materials are available on our website at linde.com in the Investors section. Please read the forward-looking statement disclosure on Page 2 of the slides and note that it applies to all statements made during this teleconference. Reconciliations of the adjusted numbers are in the appendix of this presentation. Sanjiv will provide some opening remarks, and then Matt will give an update on Linde's second quarter financial performance and outlook, after which, we will wrap up with Q&A. Let me turn the call over to Sanjiv.

Thanks, Juan, and good morning, everyone. During the second quarter, we achieved record sales and EPS levels with both growing at near double-digit percent, while increasing the backlog by $1 billion to a record $8.1 billion, after securing a new electronic spin in the U.S. In addition, the backlog project pipeline remains healthy, but still new project opportunities under development. For the remainder of the year, we are expecting to start up more than 20 projects that add up to approximately $1.3 billion in investments. Even after accounting for these start-ups and based on the opportunities we see to date, I expect our sale of gas backlog to finish the year with an 8 handle, underscoring the continued strength of our long-term growth outlook. . While these results demonstrate the strength of core business and the future growth prospects, we are not satisfied with our margin performance for this quarter. Operating margins, excluding cost pass-through, declined approximately 30 basis points year-over-year, primarily driven by the Americas segment. Some of this is due to higher equipment and had good sales in our package business. which actually, I view as a good sign of U.S. manufacturing recovery, but the majority is driven by the U.S. home care business. Even though we have been actively pruning this portfolio, it simply has not been enough to overcome the continued headwinds led by higher cost inflation and policy changes. We have a series of actions underway, and I fully expect sequential improvement into the third quarter. At the same time, we continue to evaluate the strategic fit of this U.S. home care business within Linde, both in part and as a whole, while remaining focused on improving its performance and ensuring it earns its place in the portfolio. Matt will speak more to the numbers, but I remain confident in our long-term margin expansion story. Now I'd like to touch on some growth trends, which can be found on Slide 3. Consumer-related markets grew versus prior year and sequentially. Health care and food and beverage grew with demographic trends and consumption with stronger sequential growth related to beverage seasonality. As expected, Electronics is the fastest-growing end market with the combination of project startups and higher demand tied to hardware associated with AR. As I mentioned earlier, we added $1 billion of new Electronics wins to the backlog and to support the expansion of advanced node fabs in West and U.S. Consistent with other backlog projects, we have already begun constructing the plants under reimbursable LOIs while the supply contracts were finalized. I'm pleased to see this addition to our existing network of plants in Arizona and look forward to winning a few more large opportunities that we're currently pursuing. Not included in the backlog are a couple of electronics wins by our Taiwan JV, which will invest approximately $800 million to build, own and operate ASUs and hydrogen production units to supply to new semiconductor fab and advanced packaging facilities there. Overall, I expect Electronics to remain our largest backlog contributor and one of the fastest-growing markets for the foreseeable future. Moving to industrial-related markets. Manufacturing remains the fastest-growing market. We experienced volume growth across APAC and the Americas although the U.S. is still the primary driver with both aerospace and construction activity related to data centers. In fact, aerospace accounted for more than 1/3 of the manufacturing growth during the quarter. Both Metals and Mining and Chemicals Energy markets grew low single digits. Metals and mining activity was solid in the U.S. and Brazil, and most of the chemicals growth relates to project backlog contributions in APAC. Aside from these regions, both end markets remained flattish across other geographies. In summary, we've lapped the more difficult comps and are starting to see green shoots of growth across certain geographies and end markets. For the ball, the project backlog reached a new record from the large-scale electronics wins, and we anticipate some further base CapEx investments to support our commercial space customers. Regardless of the current challenges, you can be assured that the entire Linde team is focused on being the best-performing industrial gas business globally. I'll now turn the call over to Matt to walk through our financial results.

Thanks, Sanjiv. Please turn to Slide 4 for the consolidated results. Sales of $9.3 billion rose 9% from prior year and 6% sequentially. Versus prior year, FX was a 2% tailwind while acquisitions and engineering each contributed 1%. Cost pass-through rose 1% on higher power in all segments but was partially offset by lower natural gas for U.S. hydrogen. Excluding these items, underlying sales rose 4%, split between higher volume and price. Almost half volume increase relates to project start-ups in APAC and Americas. The remaining is driven by organic growth in the U.S., China, Korea, India, and the Advanced Materials business. While aerospace and electronics continue to lead, industrial end markets are improving in select geographies, especially the U.S. The price increase of 2% was broad-based across all geographies and generally tracked with local inflation. Sequentially, underlying sales increased 4% from 3% volume and 1% pricing. More than half of the volume increase relates to seasonal factors with the remainder being organic. Operating margins of 29.5% decreased 60 basis points from prior year or 30 basis points when excluding the impact of cost pass-through. As Sanjiv mentioned, the U.S. home care business negatively impacted the Americas. Excluding this, margins would have increased. But regardless, actions are underway to improve. Separately, U.S. hardgoods sales are up double-digit percent from prior year. And while this mix is dilutive to margins, it could bode well for U.S. manufacturing recovery. Finally, the APAC erosion is mostly due to lower margin equipment sales for electronic customers. Overall, we expect many of these margin headwinds to be temporary and thus recover in the coming quarters. Operating profit rolled down to an EPS of $4.50 or 10% over prior year from a combination of net income and lower share count. Slide 5 provides an overview of capital management. The operating cash flow trend shows moderate year-over-year growth as higher earnings are partially offset by unfavorable timing in the Engineering business. Recall that the first half results are seasonally lower. So we expect the second half to step up like prior years. Available cash flow, which we define as operating cash flow less base CapEx remains at healthy levels, enabling significant excess cash for secured growth and shareholder distributions, which could be seen in the pie chart. Year-to-date, we've deployed $6 billion of capital, split evenly between business investments, and shareholder returns. $1.9 billion of secured growth represents capital deployed for acquisitions and the project backlog. When considering the record $8.1 billion sale of gas backlog continued roll-up acquisition targets and project pipeline opportunities, we expect this number to remain a significant use of capital for the foreseeable future. I'll wrap up with guidance on Slide 6. Third quarter guidance range is $4.45 to $4.55 or 6% to 8% growth. This assumes no currency impact from prior year but does assume a 1% FX headwind sequentially. Consistent with prior approach, the range assumes no economic improvement at the midpoint. The updated full year range is $17.70 to $17.90 or 8% to 9% growth, excluding a 1% FX tailwind assumption. This range raises the prior bottom end by $0.10 but leaves the top unchanged. While base volumes showed some recovery in the second quarter, we'd like a few more quarters under our belt before incorporating this trend into future guidance. Therefore, we're leaving the back half guidance assumption the same as before. The Q2 to Q3 sequential EPS trend is projected to increase $0.05 at the midpoint when excluding FX, which reflects some of the actions being undertaken. Of course, this is merely a guide. How we perform is what matters most. We know our owners expect more, and the organization is committed to delivering on those expectations. I'll now turn the call over to Q&A.

[Operator Instructions] And our first question comes from the line of Laurent Favre with BNP Paribas.

Sanjiv, I think you said it all within the first 5 minutes. But can I dig a little bit deeper in that health care comments. Can you give us a sense of how much of a headwind it has been over the last year is the business in the U.S. currently profitable at all? Or how much of the margin drag it has been on the business, please?

Thanks, Laurent. So I think we -- in the slide itself, we've laid out the fact that the Americas business ex the U.S. home care or Lincare business would be up 20 basis points on margin, ex pass through as we normally do. So that is a reflection of the gases business is doing well. As we said in the remarks as well that there is a bit of a mix effect, which actually, to be honest, I see the gases business doing well. I will take the hardgoods -- double-digit hardgoods sales that we're seeing in the business. It's a good signal of manufacturing recovery in the U.S. Yes, it has a small dilutive impact on margin, which is temporary. And then of course, we talked briefly about sale of equipment elsewhere, particularly APAC, where there was that impact as well. But from our perspective, not happy with where the margins are. Actions are aggressively underway to essentially attack the issues that we've identified in the Lincare business. And I expect that we will continue to see sequential improvement as we move forward.

And just as a follow-up on the Electronics side, I think the contract that you announced have been, I guess, in the pipeline for a while. I was wondering in terms of geographies or maybe some of the key customers, where do you see the biggest opportunities on the Electronic side? Is it still in the U.S. or elsewhere in Asia, maybe in Korea and Taiwan, et cetera?

Absolutely, the Electronics pipeline, as I said in my remarks as well, is looking healthy at this point in time. And you certainly heard from me say that I expect that we'll end this year on the backlog with the 8 handle despite bringing on investments of up to $1.3 billion. So we will -- the backlog will go down from the current sale of gas backlog of 8.1%, by about 1.3%, and we will add back into that backlog. So it has to be supported by a robust pipeline. Those projects stand a wall, to your point, I see bulk of those projects out of the U.S. but see strong pipelines in Taiwan and Korea as well and some in China.

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

I guess just talking about some of the manufacturing growth assumptions, particularly in North America, it doesn't seem like you have some of this base volume assumption trend sort of baked into the outlook. But is the bulk of that inflection that you see in coming from commercial space. I was hoping maybe you could dig into the health of some of the other end markets and what you're sort of anticipating for the second half.

Sure. So why don't I start off with a quick view. I think I provided a broad overview in my prepared remarks, Patrick there. Let me just kind of give you a sense of what we think the outlook for the second half looks like. So traditionally, our resilient markets, health care and food and beverage have been consistent, and we continue to expect the same outlook for the rest of the year there. Nothing significant to change. Electronics, as you saw year-on-year had 18% growth in the second quarter, we expect Electronics momentum to carry on for the rest of the year as well. So again, pretty positive in terms of that. And of course, adding to the backlog helps us get the future growth prospects locked in as well. A point on Electronics worth noting, and I think in APAC, in particular, sale of equipment that we provide to many of our electronics customers is very important for us because while from a margin point of view, not that exciting, the reality is the pull-through on gas sales that happened in the future, I think this kind of ensures that. So feel good about that as well as we look at the second half. On the industrial markets, and I'd say to you, manufacturing, which you kind of specifically mentioned, looks robust. Signals from the U.S. market, in particular, where the recovery is most prominent looks good. The feedback from the customers suggest that they see that outlook for the rest of the year as things stand today. Now within that, the indicators that we look for, and I referenced this again in my remarks briefly, the sale in the U.S. package business is a good leading indicator. Here, the gases side has been growing mid- to high single digit with the hardgoods themselves growing double digit. And I think that's where the confidence that the manufacturing recovery that we're expecting, not just recovery, I think the momentum that we're expecting in manufacturing in the U.S. is likely to continue. We see that -- also elsewhere, Asia Pacific saw manufacturing momentum pick up as well, despite the fact that there are some Middle East related challenges in Asia, in particular, but the manufacturing underlying seem to continue to perform well. So again, the outlook for that continues to be reasonably robust. Aerospace did provide for more than 1/3 of that growth for manufacturing. So to your point, I expect that momentum to carry on into the second half as well. Chemicals Energy has been a little bit spot here. I think low single-digit growth. We obviously have the benefit of some good backlog contributions coming in, in Asia. So I think that's looked good. But I do not see a fundamental shift in the chemicals energy piece. Obviously, there's a lot of volatility in the market at the moment. There are lots of geopolitical events that could impact one way or the other. And in part, you would see from our guidance that we have taken a neutral stand in terms of what's going to happen to the economy, we are happy for our investors to take a view on that because at this point, it's a speculation. Metals and Mining, again, pretty robust in the U.S. and in Brazil. I expect that trend to be about steady. Obviously, in the U.S. with all the build-out that's happening with data centers, et cetera, metals are getting a little bit of a fill-up. So that's good. Listening to some of our customers' calls over the last few weeks have seen slightly more -- slightly higher degree of optimism as well on steel. So it will be good to see that flow through into the next half as well. So I think that kind of broadly gives you a sense of where we are seeing momentum and what the outlook for second half looks like at this point.

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

Question just around the impact that you've seen on your business and on your customers from what's happening with the Strait of Hormuz and kind of the greater Persian Gulf area obviously, particularly with helium, but then just with the general business. And then if that issue resolves itself this year, what do you think the impact will be a year out as that starts to normalize?

So that will be the Middle East impact, as you know, and I'll start with Helium, just to begin with because I think that's a good place to kind of give a sense of how we've managed and navigated that fairly complex set of issues. But -- and then talk a little bit about what happens elsewhere. So starting with helium. I think as far as helium is concerned, I'm really pleased with how our team has navigated this whole set of developments over the last many months, largely because we've done what we need to do in ensuring that reliable and safe supplies until our existing contracted customers, and we've had a lot of positive feedback coming from them because that's what they would expect from Linde. But more importantly, our teams have also gone out and they've signed up new customers with long-term contracts as well, leveraging the fact that we have the confidence in our supply chain due to the diverse sources that we have supplying into the helium supply chain, the cabin that we maintain, and of course, quite importantly, the capability around supply chain logistics, in terms of tanks, et cetera, all of that's played well into positioning this for new business growth that we've seen. We have had the pricing move along as well, which has been a good thing. Obviously, [indiscernible] costs related to helium, the overall recovery probably doesn't quite show through in the margins just yet, but I fully expect that as well over the next couple of quarters. I think equally important to just underscore on the helium is the fact that looking ahead, we continue to be confident in our ability to maintain that supply chain despite the more recent developments in the Strait of Hormuz. Any change in the Strait of Hormuz and the fact that we restart helium production back in Qatar and get the alignment of all the supply chain elements that each come together between tanks and shipping and so on and so forth, I think will have a lasting impact for the rest of the year. I don't think you will see normalization. This year, it will -- once those issues are resolved, which, of course, itself remains a little bit of a question mark today, once the issues are resolved, we will see normalization progress at a slower pace than most of us would like and will kind of probably take us into the early part of next year. As things normalize, yes, next year, we should see a more normalized year market. But at this point in time, seeing the resolution of what happens in the Strait of Hormuz is probably more important than speculating what next year is going to look like. Let me talk about some of the other markets. So where we have seen an impact on the Middle East crisis is the fact that in Asia country is highly dependent on hydrocarbons coming out of the Middle East have had to scale back industrial activity. And I think markets like India, [indiscernible], Australia and, to a lesser extent, China have seen that. And I think that's where the impact over this second quarter, as we've kind of mentioned to you, it's probably a little bit more visible. Everybody is hoping for resolution. Once that happens, you will see that normalization happen fairly quickly. But each of those countries has been looking at different strategies to manage these issues that they currently continue.

And our next question comes from the line of Vincent Andrews with Morgan Stanley.

Maybe just a 2-part one. First on Helium, just to clarify, did you all change anything in your guidance assumptions relative to what you had assumed back at the start of the year? And then secondly, in Americas, the kind of year-on-year price step down, I think it was flat sequentially. Was that the hardgoods mix issue? Or is underlying sequential price leveling off?

Vincent, it's Matt. I could probably answer those. So I think first on helium, yes, so we left the guidance intact. So by default, that kind of means no material change and helium would also be part of that. So to your first point, we didn't change it. and just kind of building off what Sanjiv said. When you think about the helium business right now, what we're seeing, we are seeing strong price improvement, but we're also seeing higher costs for dislocation, as Sanjiv mentioned. So the contribution on a dollar basis, it is positive. It's not as large as we'd like it, but it's positive. But on a margin basis, that grossing-up effect right now is a little bit dilutive. That should stay [indiscernible] as it normally does. But as you can imagine, right now, meeting our customers and getting new contracts signed is the priority. And doing it a positive dollar contribution is happening. It's just the margin gross-up effect right now is a little bit dilutive on that front. On the Americas, just to make sure I understand, I mean, price is up 2% year-over-year. Sequentially, were flat. As you know, when we talk about sequential, I tend not to send a lot of time on sequential just given the different timings of some of the escalations that are done and the pricing actions. Year-over-year always is a more important metric for me. So when I think about that, it is, I'd say, for Americas delivering on our expectations, Obviously, you're going to have -- again, we talked about Lincare, there's not pricing in that business right now, a significant amount. It is probably not keeping up with what it needs to be. So that will be a little bit of a drag. That's been the case, though, for many years now. So I would say pricing in Americas on the year-over-year is tracking where we'd expect and what we want to see. I hope that answers your question, but just to make sure -- I don't know if you have a follow-up on that.

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

Sanjiv, I know it's early, but if you look at next year 2027, given project start-ups, helium maybe being [ Helen ] next year, Helium, growth in space, pricing productivity. Do you need much of any macro improvement to get to double-digit 10% EPS growth next year?

Thanks, David. As you know, our EPS algorithm lays out the fact that between manufactions and capital allocation combined, we should be delivering 8% to 12%. We're not looking for macro as long as macro is not taking away from that, you should expect us to look at that 8% to 12% range. And I think we will be consistent on that as we look out to next year as well. Obviously, any tailwind that we get will be factored straight in and you will see that improvement come through at the EPS line. Now as you know, this is very early. We've talked about 2027. So later in the year, we'll have -- and early next year is when our guidance will be more clear on that. The late in the year, we'll obviously be doing a lot of work planning for next year to make sure that we have a good handle on how the business is going to play out.

And to be clear, Helium should be a tailwind next year. Is that fair?

Helium will be normalized next year. I think we'll have to wait and see what that means. The complexity of volume and price mix, I think, will play a role in what Helium does next year. .

And our next question comes from the line of Josh Spector with UBS.

I wanted to ask on the CapEx rate for this year. I think you addressed it in the prepared remarks briefly, but did you indicate that a lot of that increase was linked with commercial space? And I guess if you can give maybe any other breakdown of that $500 million increase, that would be helpful. And I'm just curious with that, if you are building more for that market through your merchant pipeline, what does that mean for space customers approach in your view to make versus buy in terms of oxygen, nitrogen and the gases for that market?

Josh, it's Matt. I can probably handle those. So starting on the CapEx. Yes, you are correct. The CapEx number on the estimate was bumped up. Clearly, with the backlog wins that will drive that. So by adding the new project that Sanjiv mentioned in the prepared remarks, that is contributing to that. And yes, there are going to be more commercial space activities and the base CapEx that also are contributing to that as well. So the combination of those 2, both the project backlog and some of the base CapEx will drive that. As far as the make versus buy, that -- when you think about our traditional on-site customers, that always is something that has been something we manage for many, many decades, right? The traditional on-site customer would look to buy a plant versus outsourcing the sale of gas model. And that's something we had always managed through actually a hybrid approach because we have the capability to do both. I would say with commercial space, given the quantities of propellant they acquire. You're seeing a similar dynamic at least with certain players that have comfort and the access of capital to have a desire to vertically integrate. Now this right now is primarily only with certain players and atmospheric. We are not seeing it in the hydrogen side, which is a very, very different dynamic for any Hydrolock-based engines. So it's a normal occurrence, I'd say, when you start seeing these kind of quantities. It's something that's very akin to how we have navigated the on-site business for many days, and we're very comfortable with it. So absolutely, I expect you'll see a blend of sale of gas and some sale of plant. Generally, those sale of plants can come with what's called an operated maintain. So you tend to run it all as a system. You may run customer-owned plants with your own plants on sale of gas. And that gives the customer kind of the best of both and it also helps manage our both capital and management of products. So I would anticipate that for certain customers, not all customers, and it also would probably only be on certain atmospheric I don't anticipate it at this stage at hydrogen. So that's how I see that develop.

The only thing I'd reiterate there, Matt, would be the fact that we will play for both sale of gas as well sale of block. So we do participate in the opportunity, even if it is a sale of plant in case people want to vertically integrate them.

And our next question comes from the line of Matthew DeYoe with Bank of America.

Congratulations for getting the [indiscernible], the large electronics customers over the line. What -- and can you share maybe some revenue intensity of the CapEx or give some guidance? Your European competitors kind of flagged like a 25% CapEx to revenue conversion on some of these projects. Is that a reasonable ballpark for you?