Linde plc (LIN) Earnings Call Transcript & Summary

Okay, and thank you for standing by. Welcome to the Linde Third Quarter 2026 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.

Good morning, everyone, and thanks for attending our 20,263rd 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 the 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 the teleconference. The reconciliations of the adjusted numbers are in the appendix of this presentation. Sanjiv will provide some opening remarks and then Matt will give an update on Linde's third quarter financial performance and outlook, after which, we will wrap up with Q&A. Let me now turn the call over to Sanjiv.

Thanks, Juan, and good morning, everyone. Three months ago, we delivered financial results that were not up to the expectation of our owners. That message was received loud and clear by the Linde organization. And so we have and will continue to take actions that increase shareholder value. During the third quarter, we recorded a $425 million restructuring charge to better align our cost base and portfolio with market conditions. Roughly half relates to severance, particularly in lower-growth regions. The balance relates primarily to portfolio and asset actions, mostly in the U.S. home care business or [ Linde Care ]. Effective this quarter, I've realigned this business to report directly to Matt, which, among other reasons, has prompted us to modify the segment reporting by moving it into the global Other segment. This will provide investors with greater insight into the underlying performance of our regional [ gases ] businesses while we continue to restructure [ Lincare ] and evaluate strategic alternatives. Turning to the quarter, while performance has improved, there is still more work to be done. Sales of $9.4 billion, operating profit of $2.8 billion and EPS of $4.59 were all quarterly records. However, operating margin, excluding cost pass-through was essentially flat, reflecting continued headwinds from non-gas segments. Aside from the restructuring actions, we also have a series of price and productivity initiatives underway to stay ahead of the inflationary momentum building across the regions. While the overall financial performance is heading in the right direction, sales trends remain varied by geography and end markets, which can be found on Slide 3. Starting with consumer-related markets. Electronics leads with 15% growth, primarily driven by the organic growth across APAC and the U.S. These figures exclude our 50% Taiwanese joint venture, which is growing at similar rates. We also have approximately $2 billion of electronics projects under construction in the U.S., Korea and China, providing a strong foundation for continued double-digit growth. Food and beverage grew 3%, led by the Americas and EMEA. Structural consumer trends, including greater consumption of carbonated beverages, higher-quality prepared ready-to-eat meals and food delivery services; all continue to drive demand for our gases, equipment and services. Health care grew 2%. However, excluding [ Lincare ], the growth is mid-single digit, which is aligned with demographic trends. As we continue to trim the [ Lincare ] portfolio, I expect the sales trends to lag market average. But I fully expect to see improvements in both the quality and profitability of the remaining businesses. Turning to Industrial markets. Chemicals and Energy grew 12%, reflecting stronger volumes in the U.S. and China as well as pricing actions to recover prior cost inflation especially in the Americas. Customers along the U.S. Gulf Coast and in China are benefiting from the relative raw material advantages amid the Middle East conflict supporting stronger demand. This has been particularly evident among more complex refiners requiring more hydrogen to process heavier and higher sulfur crude. Metals and Mining was up 3%, driven primarily by the Americas, with stronger construction and industrial activity in North America. This was partially offset by slight contractions in EMEA and APAC. Importantly, pricing improvements are broad-based across all major geographies as we continue to manage inflation. The manufacturing end market grew 7%, reflecting broad-based price increases and stronger volumes in the U.S., China and India, including continued aerospace growth. U.S. packaged gas growth remains elevated at low teens from construction and data center activity. Rare gas sales for satellite propulsion have softened as customer payloads continue to await launch. Merchant and on-site volumes remained strongest in the U.S., including higher activity in the U.S. Gulf Coast energy and chemicals, stronger metals production and increased space propellant. China and India growth rates remain healthy with our portfolio of Tier 1 customers. In summary, volume growth remains concentrated in key geographies and specific end markets, while price increases are more broad-based and tracking with inflation. In addition, the $8 billion sale of gas project backlog will provide future growth and increase supply density across 4 geographies. That being said, we still have opportunities for improvement. The third quarter restructuring program and the ongoing productivity initiatives will expedite our efforts to better align each local cost structure with market conditions. Furthermore, we are accelerating pricing efforts to stay ahead of rising inflation. And at [ Linde ], which has weighed on the overall results, we're taking decisive actions to improve performance while evaluating strategic options. Linde's operating model is built on a siphon accountability and continuous improvement. When performance falls short, we act. When conditions change, we adapt when attractive opportunities emerge, we invest with discipline. I remain confident that the Linde organization will continue to deliver industry-leading results that our owners expect from us. 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 $9.4 billion increased 9% over prior year. Currency impact of 1% continues to abate and is not expected to have a meaningful impact for the remainder of the year. Conversely, 1% of cost pass-through, which represents contractual billing of energy cost variances, has steadily increased from energy inflation. Acquisitions and engineering each contributed 1% sales growth from tuck-in M&A and higher third-party plant sales, respectively. Excluding these items, underlying sales grew 5%. Volume of 2% is [Audio Gap] roughly split between project backlog contribution and organic growth. although most of the organic growth relates to equipment sales in APAC and EMEA. As Sanjiv mentioned, organic growth is concentrated in a few key end markets and geographies, although prior year comps are becoming easier in certain regions, such as EMEA. Prices increased 3% in the quarter. While the majority came from ongoing price actions, a portion relates to prior and current period inflation cost recovery in the Americas. An acceleration of energy and distribution cost pressures in North America warranted incremental recovery. While we don't anticipate these costs to sustain into the fourth quarter, the team is prepared for additional measures if necessary. Operating profit grew 8% to $2.8 billion. Operating margin of 29.4% and fell 30 basis points from prior year, but was flat excluding cost pass-through, which is highlighted in the table to the right. Margin increases of the combined gas segments were offset by declines in engineering and global leather. As stated earlier, actions are well underway to address the underperformance. EPS of $4.59 grew 9% over prior year or 8% excluding the impact of currency. Year-to-date, we're losing about 2% EPS growth from [ Lincare ]. So negating that headwind will support the return to double-digit EPS growth for the global organization. Slide 5 provides a summary of capital management. Operating cash flow of $3.2 billion increased 8% over prior year, in line with EBITDA growth. As mentioned in prior calls, the second half OCF is higher due to seasonal cash timing of taxes, interest and incentives. Base CapEx, which includes growth investments as well as maintenance and repair, is flat versus prior year or down when excluding currency impacts. The excess available operating cash flow affords Linde a steady capital allocation process, which can be seen in the pie chart. We've deployed over $9 billion of capital year-to-date with roughly half invested into the business and the remainder distributed back to shareholders. We've maintained this approach through good times and bad. And the rising interest rate environment reinforces something we have known for a long time. Balance sheet and cash flow matter. Health and stability of both provides us significant optionality regardless of the future macro. I'll wrap up with guidance on Slide 6. For the fourth quarter, we're guiding an EPS range of $4.40 to $4.50 or 5% to 7% growth. While no prior-year currency impact is assumed, we do expect a 1% headwind sequentially. Consistent with prior guides, no economic improvement is assumed. This also applies to [ Lincare ]. Despite the recent actions, we are not yet embedding any meaningful change to Q4 profit. While I fully expect future improvement, we're taking a more cautious view for the near term. A full year guide of $17.82 to $17.92 simply rolls the fourth quarter into the year-to-date actual. However, one change you may notice is that the full year FX benefit increased from a strong 1% last quarter to a weak 2% this quarter. That's more rounding than anything else. So time will tell where the final number lands. Overall, the core gas business is healthy. but there are clear opportunities to improve, most notably around management actions in price and productivity against the backdrop of higher inflation. And while Lincare is a headwind to results today, we're taking significant actions to improve going forward, while simultaneously increasing transparency and executive oversight as we evaluate strategic options. I'll now turn the call over to Q&A.

[Operator Instructions] Your first question comes from the line of David [ Balata ] from Deutsche Bank.

Sanjiv and Matt, just on the backlog, you still expect to end the year on a sale of gas basis around the $8 billion level. [ sell ] a plan, how should that progress over the next few quarters? And what does that mean for engineering sales growth in 2027?

David, the sale of backlog sits close to $8 billion today. My expectation remains. We will continue to start up for the rest of this quarter, a number of projects that might lead up to around $1 billion, as we previously mentioned. And depending on customer timings, we expect still to be able to get pretty close to that $8 billion number. So the target internally remains at 8 angle. Sometimes that's dependent on customers' final decision, but feel pretty confident we're going to be in that vicinity. As far as sale of plant backlog is concerned, that's just under $3 billion at the moment. It has sitting within that, some space component today. We expect to see that to continue to grow as well. So I expect the trend line for sale of plant backlog will remain along the lines we have at this point in time, growing over the course of next year. In February next year, we'll provide you with a more pronounced guidance on what we see for the business overall. And within that, we can address that question specifically.

Your next question comes from the line of [ Duffy Fisher ] from Goldman Sachs.

Just a question on cost. If you look at your COGS line in Q3, year-over-year, you're up 13% and your acquisitions and volume are up 3. So if you just subtract that kind of a cheap metric would say that your per unit COGS is up about 10% per unit. Can you just walk through what that is? That seems like a fairly high number. Maybe I'm missing something around currency. But just if you kind of got to a per unit, how much is your COGS really up year-over-year?

Duffy, it's Matt. So yes, I think there's a couple of moving parts there. So for the quarter, you got to start with FX, right? So that's up 1%. You can take that out, that will apply across all the lines. Cost pass-through is another 1%, as you imagine. That's also in there, given some of the energy that just grosses up as you know, both sales and variable costs. . In addition, as you saw, the energy market did quite strong, and a lot of that's on the back of [ HEICO ], our hydrogen business, which tends to have, as you know, a higher variable cost, just given the inputs for that business. That also is driving part of it. To your point, the acquisitions will come in in that regard. And so a lot of that plays into that. But I would add that when we talked about some of this recovery we had to do, that partly plays into that as well. And maybe I can kind of take this point to talk a little bit about the pricing recovery. So this is something we mentioned last quarter that we were seeing these costs and we needed to go out and recover. That is a normal part of the business. That's something we do all the time. I would say it's a little more prominent this quarter for two primary reasons. The first is just we saw a more accelerated cost, both with distribution and power in the last few quarters. as you read about some of the power situations, the weather and what we saw, especially in North America that we needed to get out and recover. I would say secondly, which is just more optics, is as we move [ Lincare ] out of the Americas segment, while this recovery has always happened, it's going to look a little more pronounced now because you're taking [ Lincare ] out the denominator of that calculation. So by default, you will see more elevated pricing and more prominent recovery in Americas, just given that function of the change. So I would say all of those played into that. We do expect that to kind of come back down here into the fourth quarter. But that's the reason we also needed to go out and recover some of that.

Your next question comes from the line of John McNulty from BMO Capital Markets.

Regarding the charge that you took in terms of the severance side or the non-Lincare portion of the restructuring and efficiency work that you're doing, I guess, can you help us to think about how that will play out going into 2027 in terms of the savings and the improved efficiency versus your kind of normal cadence that you call out most of the time in terms of efficiency improvements that we kind of know as a steady state?

John, it's Matt. I can handle that. So I would start with the severance portion is very, very consistent with all of our prior actions we've taken. So as you may recall, the paybacks on a cash basis, undiscounted, tend to be in the 1- to 2-year range. And that range is really a function of where in the world, more of the severance occurred just based on contracts or sort of what the requiring severance would be. So I would say, for this particular charge, it's closer to the higher 2 year end, but that will start taking effect here in the fourth quarter. But really, we'd expect to see the full benefits in the second half of next year on a full run rate basis. So that's pretty consistent with our other charges that we've had 1.5 to 2-year payback, and you start to see full benefits within 3 to 4 quarters of the action itself.

Your next question comes from the line of Vincent Andrews from Morgan Stanley..

Matt, I wanted to ask you versus where we were at 2Q when you look into the fourth quarter, where natural gas and electricity costs have gone in Europe, how much of an incremental headwind is that to you? And how much of it do you think you'll be able to price for in the fourth quarter versus having to wait to recover in the first quarter?

Yes. So Vincent, I'll break it down between on-site and then the merchant and package. So on-site, it's recovered in the current month, and that cost faster. So that would essentially be cost pass-through. . When you think about merchant and package, which this North American impact is more related to, it generally can be anywhere from a 3- to 6-month sort of lag on recovery is what we tended to see. And I would say, in Europe, what we've seen in the past, and it really depends how it plays out this year is either it's a very cyclical up and down power, which means it's just a constant 3-, 4- or 5-month recovery lag that we continue to do until it stabilizes or you can have a continued power spike to the point it works into the entire inflation of the economy, which then it becomes essentially permanent price. We'll see how this one plays out. I would say when we saw this inflation spike in 2021, 2022; it was more sustained and became price. If you remember from our results then. This particular one has vacillated a little more, but we'll see how it plays out as we get into the winter months going ahead.

Your next question comes from the line of Josh from UBS .

I wanted to ask kind of simply here just in terms of your EPS guidance versus what you just delivered, 9% growth versus 7% growth, what are the factors that drive the deceleration in the fourth quarter versus 3Q? And what should we be inferring from fourth quarter as we look forward into 2027? .

Josh, it's Matt. So for 2027, we'll give that in February. So we'll stick with Q4 right now. And I think the best way to probably talk about it is sequentially to hopefully address your question. So if you take the midpoint -- and obviously, time will tell where we deliver, but I'll just use the midpoint for simplicity's sake of the guidance range. It's about a 3% decline. 1% is FX as we mentioned. Obviously, we're seeing the dollar strengthen across most currencies right now. So that's part of that. And time will tell, it will be what it will be when it ends up. Another percent, if you noticed, we had a little bit of elevated equity income this quarter and third quarter, and a lot of that was a customer true-up on a contract we were paid for that was resolved. And so that caused a bit of a spike in the equity income this quarter. That will go back to run rates Q4. So that's roughly a percent. And the last percent we'll see -- I mean we do have a little bit of seasonality in Q4. As I mentioned, we're taking a pretty guarded view on the impact of some of the actions we're taking with both the non-gas business as well as our view on the economy right now. We're not going to take any view on continued sustained growth. But our goal is to do better than this range, and our goal is to work to get above it. But that's where we are right now. and we'll have to see. Obviously, we -- for most intensive purposes, we left the full year guide somewhat intact, and that was part of the thought process as well as laying out this Q4 guide to just leave that intact at this point because we didn't see a reason to to take any bullish signals yet until we can kind of see how the rest of the economy plays out.

Your next question comes from the line of James Hooper from Bernstein.

On everyone. Can I get an update, please, on the [ Woodside ] project and when the component parts might start up and how the customer facing it on the strategic review might affect your business? .

Thanks, James. So the [ Woodside ] project continues to make progress. When we last spoke to you, we were about to start up the air separation unit and start the nitrogen supplies that is now underway already in Q3, and it will continue to progress for the rest of the year and into next year. We are also supplying the customer currently temporarily with hydrogen from our pipeline network, ensuring that they have an opportunity to continue to manufacture ammonia as they would want to. Now the ATRs, which is our on-site supply for hydrogen will get started up. There are 2 trains for the ATR. So there is always a staggered start up. I expect that to be completed in the first half. And at the end of that a 6-month period, we would then be at a point where all the facilities would be ready. And the only component left to be completed then would be the carbon capture and [ secustration ] element, which is being worked on by ExxonMobil. So our timeline that we have communicated in the last call, I think, hold for now, and the teams are working to see what we can do and maybe even slightly improve that. So you'd only see that impact start come through in the second half of next year. A quick reminder on those of you who looked at large projects like this, there is a ramp profile that always exists with projects like this on the ammonia side as well. So once we start up, then we would start going into that ramp process, which would mean that we staggered capacity utilization of our plants until we get to that 100%, which I expect probably to be sometime in 2028. The conversations around the strategic review that the customer is doing. I think will -- is something that they will have to complete. We are actively engaged with them. The only point I'd make to you is we always, in projects like this, assess the quality of the asset into which we supply, and we recognize that we have a really high-quality asset that's being supplied over here, which originally was owned by [ OCI ], transferred to Woodside. And irrespect of who the ultimate owner is, we believe this ammonia complex will have a very attractive and opportunity for them to continue to make some money from the complex. So feel good about our positioning with that asset as well.

Your next question comes from the line of Matthew DeYoe from Bank of America.

I wanted to ask a little bit on volumes, both kind of structurally and then maybe in the quarter. Starting with Europe, Sanjiv, I have a feeling what your answer will be [indiscernible] but are you getting any more optimistic that the Europeans are taking a bit more defensive view on industry there now with like steel antidumping and the auto import cap. towards the quarter, it looks like volumes maybe got a little bit better in Europe in 3Q, but I don't know if that's just noise and comps on kind of like what's still pretty much a tough market. And if I could tack on Europe, saw a bit better performance than I would have expected on volumes. I feel like last time we caught up, there was some expectation of a deceleration in China, but maybe that doesn't feel as visible here in the print. So I want to give you an opportunity to kind of sound off on that stuff.

Thanks, Matt. You kind of almost predicted what my answer was going to be. So I'm not going to disappoint you sadly Europe, unfortunately continues to be in that range that we talked about the last time we spoke. There is, at this point in time, no catalyst. Now I'm sure you've seen the positive volume on Europe rounded up to 1, but the reality is that unfortunately comes -- well, I shouldn't say unfortunately, but that comes largely on the back of sale of equipment, which has embellished that number, if you will, strip that out and the underlying number is flat. Now look, the comps have gotten better, to your point, and that helps. But a flat number today for Europe actually is looking better than the minus 2, minus 3 that we've seen, if you go back 12, 18 months ago. So there seems to be a degree of stability, but there is absolutely no catalyst, and I have absolutely no reason for any confidence that the European market will pick up and give us any growth in the near term. There is zero capital. And I do not see the pragmatism that is needed across that whole European Union and the European community to take decisions that could get back industrial activity to a level where actually we start seeing some positive movement. So sadly, that disappointment will remain for some time until such decisions are taken. And I read the press as much as you do. And as I said before, nothing there suggests that, that trends likely to change anytime soon. On China, you were right. In the last call, I said my expectation was a moderation in the second half. That played out for steel, as an example. So steel production was down 2.5%. There is a curtailment -- production curtailment order from the government that's playing into steel. So steel is down. Chemicals flat. The star of the show really has been electronics in China. And really, electronics industrial production has grown about 17% in the quarter, if I'm not wrong, and essentially driving a lot of the growth within that space. Beyond that, manufacturing also has been -- other than the green shoots that we previously referred to on EV and batteries. Everything else has been rather down. Now the other point I want to make on China is the expectation was that exports would moderate, but it has been a fantastic export market in Q3. So that obviously has helped the economy a little bit. Domestic demand continues to not manifest itself at all. That remains my concern, to be honest. Sustained improvements in China require the domestic consumption to pick up alongside some level of export growth. We are just not seeing the domestic consumption pick up. I'll give you one number that surprised me. Domestic EV consumption or purchasing is down about 11%, 12% despite the fact that you're still seeing significant exports outside. At some stage, that export machine will face resistance at the other end, mostly Europe. And I think we'll see that moderate as well. So you know what, I'm not seeing any structural changes in China that are giving me confidence that we will see a significant rebound other than whatever forecast you might have on exports outside China into the rest of the world.

Your next question comes from the line of Eric Boyes from Evercore ISI,

Does the Lincare restructuring savings take away from the usual productivity gain that's typically embedded in your normal earnings algorithm for 2027. Or will that typical productivity benefit come on top of Lincare for next year?

Eric, it's Matt. It will be on top, right? The way we always view it is the productivity is an ongoing embedded in the culture. That is an expectation, and that is every day. These restructurings are more episodic onetime and they're more top-down approaches that are incremental. So it's consistent with how we do the gas view as well that it will be incremental. .

Your next question comes from the line of Jeff Zekauskas from JPMorgan.

Thanks very much. It looked like helium prices moved up in Asia sequentially. Did they move up in the other geographic jurisdictions? And then for Matt, at least by my calculation, the decrease in [ Lincare ] EBIT in the first half was $66 million. And I know you said that it would -- the [ Lincare ] would lower EPS growth by 2%, which would be about $200 million pretax. So are you rounding up? Is the number a little less than that?