Linde 2026 Q2 Earnings Call

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 investor section. Please read the forward-looking statement disclosure on page two on 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. 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. Good morning, everyone. During the second quarter, we achieved record sales and EPS levels, with both growing at near double-digit % while increasing the backlog by $1 billion to a record $8.1 billion after securing a new electronics win in the U.S. In addition, the backlog project pipeline remains healthy, with several new project opportunities under development. For the remainder of the year, we're expecting to start up more than 20 projects that add up to approximately $1.3 billion in investments. Even after accounting for these startups, based on the opportunities I see today, I expect our sale of gas backlog to finish the year with an eight handle, underscoring the continued strength of our long-term growth outlook. While these results demonstrate the strength of our 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 hard good sales in our packaged business, which actually I view as a good sign of U.S. manufacturing recovery. 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. 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. I'd like to touch on some growth trends, which can be found on slide three. Consumer-related markets grew versus prior year and sequentially. Healthcare and food and beverage grew along 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 AI. As I mentioned earlier, we added $1 billion of new electronics wins to the backlog to support the expansion of advanced node fabs invest in U.S. Consistent with other backlog projects, we've 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 a third 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 remain 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. Furthermore, 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 four 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 of the volume increase relates to project startups 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. Regardless, actions are underway to improve. Separately, U.S. hard goods sales are up double-digit % from prior year. 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 five 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. 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 can 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 six. Third quarter guidance range is $4.45-$4.55, or 6%-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-$17.90, or 8%-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 guides. 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. The organization is committed to delivering on those expectations. I'll now turn the call over to Q&A.