Yahoo Finance Linde plc (NASDAQ:LIN) Q4 2023 Earnings Call Transcript
Linde plc (NASDAQ:LIN) Q4 2023 Earnings Call Transcript February 6, 2024
Linde plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, good day, and thank you for standing by. Welcome to the Linde Full Year and Fourth Quarter 2023 Earnings Teleconference 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. And I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.
Juan Pelaez: Thank you, Abbie. Good morning, everyone, and thank you for attending our 2023 fourth 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 fourth quarter financial performance and outlook, after which we will wrap up with Q&A. Let me now turn over the call to Sanjiv.
Sanjiv Lamba: Thanks, Juan, and good morning, everyone. By all measures 2023 was another successful year. Thanks to the hard work and dedication from Linde employees around the world. And despite the economic and geopolitical challenges, Linde once again delivered on its commitments with industry-leading results. As I’ve said before, this doesn’t happen by accident. It’s daily grind across the entire organization underpinned by our disciplined operating rhythm, an important tenet of this rhythm is to maintain a results-driven culture by having consistently focus on performance metrics that drives shareholder value. Slide 3 provides an overview of build areas I view as critical to running a leading industrial gas company.
It starts with people. We have a top notch team who run the safe, reliable and efficient industrial gas company. During 2023, we made meaningful progress towards our goal of highly engaged diverse workforce and further supported community as we operate in, all while maintaining world-class safety results. I would like to thank our employees around the world for delivering these results. Supporting the environment is more than just lip service at Linde. We’ve been working on it for decades. Last year we reduced absolute greenhouse gas emissions while increasing our active renewable energy purchases by 1 terrawatt hour. It’s a good start towards our long-term goals and I am pleased to see acknowledgement of this progress in or external recognition.
We also positioned the business with high-quality future growth. The OCI project with CapEx of approximately $2 billion will produce 300 million cubic feet per day of blue hydrogen which will be sold under standard industrial gas supply contracts while partnering with Exxon Mobile for CO2 sequestration. And I continue to be confident about winning new backlog projects in the US, Europe, Middle East and Asia Pacific worth around $8 billion to $10 billion in the next three years. Recently there have been some updates and indeed some confusion regarding the IRA regulations. We’ve included a slide in the backup to help explain our views. I am happy to respond to any questions on it, but let me reiterate the key message. We expect future US onsite clean hydrogen projects to primarily leverage 45 Q credits since we have not yet identified any large onsite green hydrogen projects that meets our investment criteria.
I expect to see small to mid-size green hydrogen projects, primarily to serve merchant type demand, that these will likely not meet our backlog definition. Aside from clean energy projects we continue to position the base business routes as evidenced by our traditional onsite merchant small onsite investments. Indeed why you’ll see we have one of the new records. Finally, we delivered on the numbers. After all, management’s primary purpose is to be a steward of shareholder capital. We’ve listed a few key accomplishments. But I believe the four most important financial metrics to create shareholder value can be found on the next slide. It’s easy for management to get distracted by a myriad of financial metrics through which performance can be measured.
However, one cannot lose sight of the ultimate objective to increase shareholder value which can best be represented by total shareholder return or TSR. From my perspective, the best way to deliver superior TSR is to have industry-leading results and EPS growth, operating cash flow growth, operating profit margins and return on capital. ROC and operating margin demonstrate the quality and health of the business. And while both have theoretical limits, sustaining them at leading levels while growing EPS and OCS is the best combination for compound value creations. Each chart shows the five year trend against two members in the industry. Linde has led all of them, in some cases by a wide margin. We maintained leadership despite volatile economic and geopolitical conditions including unprecedented global events.
Linde is an investment for all seasons and I think these charts demonstrates that. But what about the shareholders? How about metrics that impacted TSR, all you can find them on the next slide. This chart shows the five year TSR for Linde through members of our industry and the S&P 500 index. The first observation is that Linde has far exceeded all three, it almost doubled the shareholder return. But equally important, Linde is one of only 12 companies in the entire S&P 500 to deliver positive outflow for five successive years and the only company in our sector to do so. During good years and bad, Linde consistently outperformed the benchmarks to reward our owners. The performance culture and the corresponding compensation programs at Linde are designed to optimize these four metrics at all levels of the organization.
Year after year, we’ve proven how we positively correlate to superior TSR and positive outcomes, two important ways to gauge shareholder value creation. Because of this, I remain confident in our ability to continue to creating long-term shareholder value regardless of the economy. I’ll now turn the call over to Matt to walk you through our financial results.
Matt White: Thanks, Sanjiv. Slide 6 provides a summary of fourth quarter results. Sales of $8.3 billion grew 5% over prior year and 2% sequentially. Versus prior year, the sales declined 3% from contractual cost pass through due to lower energy prices in EMEA and Americas, which has no effect on profit. Foreign currency translation was a 2% tailwind from a weaker US dollar. Acquisitions improved 1% from the nexAir natural gas purchase. And Engineering increased 1% from project backlog execution. Excluding these items, underlying sales increased 4% from higher prices, which continue to track with globally weighted inflation. Year-over-year volumes were flat as contribution from the project backlog was offset by softer base volumes, primarily in EMEA.
Versus the third quarter, sales grew 2% from engineering project timing. Underlying sales were sequentially flat as higher prices offset seasonally lower volumes. Overall, economic conditions have been stagnant as the estimated industrial production growth for our weighted countries was close to 0% for the fourth quarter. Operating profit of $2.3 billion was 14% above last year and resulted in a 27.4% operating margin. Excluding cost pass-through, operating margins expanded 130 basis points from last year, but declined 80 basis points sequentially driven by EMEA and engineering. The EMEA trend mostly relates to seasonality, but engineering margins are returning to the normal runrate of low to mid teens percent as we begin to lap the impact from sanctioned projects.
However, I still expect global operating margins to expand in the future including 2024. I also like to point a one-time unfavorable impact embedded in this quarter’s results related to the Argentinean peso which devalued over 50%. As a hyper inflationary country, we recorded a charge of $10 million to the Americas operating profit and another $20 million to the interest line or about $0.05 of total EPS. This impact is not reflected in the sales FX translation summary as it only impacts other operating income and net interest. We fully expect to recover this over time as our pricing aligns with the subsequent local inflation. EPS at $3.59 was 14% above last year as pricing net of cost inflation, backlog contribution and a lower share count more than offset lower base volumes.
The 1% sequential decline was primarily driven by seasonal factors and the devaluation of the Argentinean peso. Disciplined capital management is a hallmark of Linde’s stewardship and 2023 was no exception. Return on capital finished over 25% against the backdrop of healthy operating cash flow. Slide 7 provides further details on full year capital allocation performance. Operating cash flow of $9.3 billion grew 5% over prior year despite the significant working capital outflows related to wind down of engineering projects. Most of this is passed which have enabled a future OCF to EBITDA ratio in the low to mid 80% range. On the right, you can see uses of cash, which is consistent with our longstanding capital allocation policy of an underlying mandate to maintain a single A rating, while growing the dividend, a priority to invest in projects which meet our criteria, and the opportunity to sweep all remaining capital toward share repurchases.
With that approach, we returned $6.4 billion to shareholders in the form of dividends and share repurchases while investing $4.7 billion back into the business. But investing in the business is much more than just a dollar number. One of the most important responsibilities of management is to ensure capital is invested for an appropriate risk weighted return. Across Linde, we understand this concept and have integrated it into the culture, so our owners can sleep well that night. I’ll wrap up with guidance on Slide 8. We are initiating 2024 full year EPS guidance at $15.25 to $15.65 or 8% to 11% growth when excluding an assumed 1% FX headwind. Consistent with prior approach, this assumes no economic improvement at the midpoint. Therefore, if the economy grows there would be upside and if there is a recession, we’ll take actions to maintain this range.
For the first quarter, this translates to a range of $3.58 to $3.68 or a 6% to 9% EPS growth excluding FX. While the economic assumption is similar to the full year, the first quarter is traditionally our lightest due to seasonal factors. Heroes aren’t made in February. So we believe it’s appropriate to remain cautious that’s early in the year. However, regardless of what 2024 brings, investors can rest assured that we will manage what matters most to create shareholder value. I’ll now turn the call over to Q&A.
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