Linde (LIN) Q2 2025 Earnings Call Transcript

Image source: The Motley Fool. DATEFriday, Aug. 1, 2025, at 9 a.m. ETCALL PARTICIPANTSChief Executive Officer — Sanjiv LambaChief Financial Officer — Matt WhiteOperatorHead of Investor Relations — Juan PelaezNeed a quote from a Motley Fool analyst? Email [email protected]RISKSLamba stated, "Europe expected to continue to soften in demand ... Any growth in the resilient end markets will be more than offset by decline in the industrial sector ... I currently don't see any catalyst for economic improvement this year. Volumes, therefore, likely to be negative in the second half."White said, "The current negative volume headwinds are a function of contractual customers taking less gas due to the economic uncertainty."Lamba noted, "China, which sits in APAC, which has got some challenges, particularly around helium pricing, but we are seeing high single-digit kind of price declines."TAKEAWAYSEPS— $4.09, up 6% year-over-year and marking an all-time quarterly high for fiscal Q2 2025 (period ended June 30, 2025).Operating margin— 30.1%, an all-time high, up 80 basis points—or 100 basis points excluding cost pass-through effects—in fiscal Q2 2025.Revenue— $8.5 billion, up 3% year over year and 5% sequentially.Operating profit— $2.6 billion, up 6% year over year.Return on capital employed (ROCE)— 25.1% in fiscal Q2 2025.Operating cash flow— Up 15% year over year.Sales growth drivers— 1% lift from bolt-on acquisitions in the U.S. and APAC; underlying sales rose 1% year over year and 3% sequentially in fiscal Q2 2025.Volumes— Down 1% year over year in fiscal Q2 2025, primarily due to lower base volumes in EMEA; however, up 2% sequentially on seasonal effects.Project backlog— Sale of gas backlog reached $7.1 billion with 70 projects as of fiscal Q2 2025; nearly three-quarters are in the Americas, mostly the US, focusing on electronics and clean energy markets.Base growth CapEx— Over $1 billion annually, supporting packaged and merchant supply, plus "small on-site" projects. This annual base growth CapEx is not included in the project backlog and typically supports network density and merchant/packaged supply modes, with "small on-site" defined as individual plant CapEx under $5 million.Sale of plant backlog— $3.2 billion as of fiscal Q2 2025, typically converting to sales within a three-year cycle.Guidance—fiscal Q3 2025 EPS— $4.10 to $4.20, representing 4%-7% growth, with a 1% FX tailwind.Capital allocation— $6.5 billion deployed year to date; $2.8 billion invested in projects meeting risk-reward criteria, up 20% year-over-year.Bond issuance— Raised 0.5 billion Swiss francs at a yield below 1% in fiscal Q2 2025.Price increases— Broad-based pricing in line with globally weighted inflation, except for China helium and rare gases.Space launch segment— Revenue nearly quadrupled over the past three years; the company supplies more than four out of five launches in the U.S. and expects to invest just under $1 billion in supporting infrastructure over the next couple of years.Helium— Volumes flat year-to-date, with prices down by high single digits, reflecting oversupply in Asia year-to-date.SUMMARYLinde(LIN 0.17%) confirmed strong margin and EPS performance despite macroeconomic headwinds in fiscal Q2 2025, supported by disciplined backlog management and increased capital deployment to growth projects. Management reiterated continued positive global pricing except for certain rare gases in China, while noting that demand in EMEA remains weak without near-term catalysts for recovery. Guidance for full-year and fiscal Q3 2025 EPS includes the first FX tailwind since 2021, but incorporates economic contraction assumptions at the high end. Ranges are $4.10 to $4.20 for fiscal Q3 2025 and $16.30 to $16.50 for full-year 2025, each including a 1% currency tailwind. Management highlighted resilient performance in the U.S. -- including robust growth in space and electronics -- and emphasized the company's ability to maintain high ROCE, project execution, and disciplined risk-return standards throughout the portfolio.The project backlog turnover rate exceeded 150% over roughly four and a half years, demonstrating rapid execution and monetization of new awards.Lamba said, "My expectation remains that we will end the year with a backlog with a seven handle on it," signaling high confidence in sustaining the current backlog value despite project startups.Ongoing room for improvement and no structural concerns for margin expansion.Enhanced U.S. tax law and incentives, including bonus depreciation and 45Q, are expected to improve IRRs by about 100 basis points for future capital projects in the U.S., according to management commentary on the fiscal Q2 2025 earnings call.Long-term industrial recovery in Europe is contingent on structural investments—such as Germany’s €1 trillion stimulus and potential Ukraine rebuilding—while short-term volume outlook remains negative.INDUSTRY GLOSSARYSale of gas project backlog: The total value of committed industrial gas supply projects under contract but not yet operational, with strict inclusion criteria based on incremental growth and fixed-fee agreements.Packaged and merchant supply: Delivery modes for industrial gases involving smaller quantities (packaged) or trucked deliveries to customer sites (merchant), as opposed to on-site generation facilities.Base volume: Recurring gas volumes supplied under existing contracts, excluding new project additions.FID (Final Investment Decision): A firm commitment by customers to proceed with major capital projects, moving past preliminary agreements (such as LOIs).45Q: A US federal tax credit program incentivizing carbon capture and storage, supporting energy transition projects.Full Conference Call TranscriptSanjiv Lamba: Thanks, Juan, and good morning, everyone. I'd like to thank our Linde plc 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 ROCE 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 some more further details. But before that, I'd like to review one of my top priorities. Which is to ensure future growth for Linde plc.Slide three 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 the definition of what is included. And unlike others in the industry, Linde plc's definition has been clear, and consistent with the most disciplined criteria. Inclusion in Linde plc's project backlog requires incremental growth, secured by contractual fixed fees with high-quality customers. Contract renewals, plans 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.And while many like to tout the overall size of the backlog, it's the turnover of the backlog, which is one of the most important metrics which actually can be seen in the center graphic represented by wins and startups. 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 four and a half years.So 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 US. Of future plans 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 ad is the BluePoint project. Which is a JV between CF Industries, JERA, and Mitsui. That'll produce low-carbon ammonia in Louisiana. We're proud to have been selected as their industrial gas partner due to the capability and track record of our US Gulf Coast team.The addition of this facility will help further build out supply density in a fast-growing region in The US. 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. It's 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 of less than $5 million. One recent base growth addition includes a Southeastern US 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 fee precludes eligibility in the backlog. Finally, I'd be remiss not to mention the role of small tuck-in acquisitions can play a sustained high-quality growth. While I don't expect this number to be an overly large driver, it can consistently deliver an annual percent of two 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 the Linde plc 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 making our world more productive. And I'm certain Linde plc will remain the undisputed leader in this effort. I'll now turn the call over to Matt to walk through our financial results.Matt White: Thanks, Sanjiv. Slide four provides a summary of second quarter results. Sales of $8.5 billion increased 3% over the prior year, and 5% sequentially. Year over year FX headwinds abated, as we saw a 3% sequential improvement from broad-based weakening of the US dollar. Cost pass-through trends were driven by energy fluctuations but have no impact on profit. And as Sanjiv mentioned, acquisitions lifted sales 1% over the prior year from synergistic deals in The US and APAC. Excluding these items, underlying sales grew 1% over the 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 contribution 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. And while volumes did increase 2% sequentially from seasonal effects, the core trend remained somewhat stagnant. Operating profit at $2.6 billion increased 6% over the 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 the prior year as a lower share count was mostly offset by a higher effective tax rate.Despite the base volume headwinds, 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 in capital management can be found on slide five. 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. And an increase of 20% over last year. Equally important is our ability to consistently act low-cost capital. This quarter, we issued bonds of a half a billion Swiss francs with an average yield less than 1%. 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 six. 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 plc 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. And when that happens, coupled with the self-help growth initiatives, that Sanjiv laid out, I'm confident Linde plc will return to the double-digit EPS growth that our owners have become accustomed to. I'll now turn the call over to 1 on your telephone keypad to raise your hand and join the queue.Operator: If you would like to withdraw your question, simply press 1 a second time. If you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question. Again, it is 1 if you would like to join the queue. And our first question comes from the line of Duffy Fischer with Goldman Sachs. Line is open.Duffy Fischer: Yes. Good morning, guys. Congrats on a really good quarter. We're hearing a lot of different things from the companies in this space over the last week about just where businesses globally, whether it's the tariffs and stuff like that. Could you take some time and just go geographically in by end market kind of what you're seeing and what you expect to see in the back half of the year?Sanjiv Lamba: Thanks, Duffy. That's a good place to start. So why don't I do just that walk you around the world and share some insights? I'll start off here in The Americas. And I'm expecting volumes to be flat, maybe very slightly up, led essentially by growth in the resilient market. But being partly offset by the softer industrial sector. I have to say I remain positive on The US 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.I'll say again, manufacturing, is our commercial space market, which continues to be a very attractive growth opportunity. And Linde plc, of course, is well positioned in that space. The opportunity to supply fuels for rocket launches, propulsion systems for placing satellites into orbit, It's fueling double-digit growth, Linde plc, in that particular market or end market. And not only do we supply 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 investments in Texas and Florida is likely the first of many that you'll see.And, again, we're 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 Americas for you with a lot of confidence in The US market, if you will. From that excitement of space, have to bring you down to some ground realities. When I talk about Europe. So Europe expected to continue to soften in see softening in demand. Led primarily by Western Europe. Any growth in the resilient end markets will be more than offset by decline in the industrial sector. Across metals, manufacturing, chemicals, energy, all with volumes lower than last year.So in the short term, Europe has several challenges to get their economy back on their feet. And I currently don't see any catalyst for economic improvement this year. Volumes, therefore, likely to be negative in the second half. I think it's gonna be driven almost entirely by the industrial sector. Now 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, cost actions, And, of course, 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 gonna see improvement. If anything, you're gonna see a likely decline continue there. If I move on to Asia, I'll start with China maybe and just tell you 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 is you know, EVs and batteries and electronics end markets that will continue to grow. But that'll be more than offset by much weaker metals and chemicals for the remainder of the year.Industrial activity in Australia is seeing declines which are similar to Europe. Almost across all industrial sectors. Really a reflection of the level of industrial activity in the country. Again, the Linde plc team there is busy executing their self-help actions. Will show results at 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 investment. Investments. This is unfortunately offset by declines in the ASEAN countries. South Korea, the other main market in APAC, mainly driven by electronics. End market is also expected to see some growth.So all in, I'd say when you wrap it all up for APAC, it's probably gonna be just balanced or flat. Volumes for the year. That essentially is how we are seeing the market. Think the summary is resilient end markets continue to have low to mid-single-digit growth. But more than offset by the industrial sector largely across the board. Particular negativity coming out of EMEA.Operator: And our next question comes from the line of David Begleiter with Deutsche Bank. Your line is open.David Begleiter: 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? Thank you.Sanjiv Lamba: So, David, I've often quoted that over the last twenty-five years, Praxair Linde plc has always achieved positive pricing. Being know, being through economic cycles, which are up or down. And I think I'd say to you, that remains the expectation going forward as well. A great proxy for our pricing is globally weighted CPI. You should see us track to that as we do at the moment. And I guess when I look at pricing today, and you can see the numbers as we provided in the deck, 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 got some challenges, particularly around helium pricing, but we are seeing high single-digit kind 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. I've said this many times in the past, David, that the way we create value for the customer and the fact that we are a small sliver of that cost stack I think that balance always works in our favor when we have a conversation on pricing.David Begleiter: Thank you.Operator: And our next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open.Vincent Andrews: Thank you. I wanted to ask on margins, particularly in The Americas where margins were flat year over year you did have positive pricing 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 a function of the business mix in the quarter in The Americas, or is there something else going on?Sanjiv Lamba: I'll let Matt respond to that, and then I'll add a couple of comments at the end.Matt White: Hey, Vince. I'll start with anytime you look at quarters, you can always have some noise and some bumpiness. I mean, we always tend to see that with the quarters. For me, the most important thing is how you're tracking full year. And year to date. That being said, yeah, you're gonna have some mix in there. Primarily with some of the home care, I'd say. Know, 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 and I don't think there's anything really of concern on a go forward in my basis. But I don't if it sounds to you.Sanjiv Lamba: Thanks. But I think you've actually covered it all. All I'd say is the expectation of margin expansion is something that we have laid out. That 30 to 50 basis points of margin expansion is we you should be thinking about the margins across all the segments.Operator: And our next question comes from the line of Laurent Favre with BNP. Your line is open.Laurent Favre: Yes. Good morning, guys. I was wondering if you could talk about the appetite on your projects from customers given the macro backdrop that you are indicating. Is there any risk of the, I guess, slowdown or slippage on intakes so that your backlog may finish the year below $7 billion? Thank you.Sanjiv Lamba: 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 seven handle on it. Now this despite the fact that we will start up another billion of the investments that are currently sitting in our backlog in the second half of this year. And most of that will start ramping up towards the back end.So, you know, our view my view remains that our business is currently know, supporting it 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 a billion to get that backlog to $7 billion plus.Laurent Favre: Thank you.Operator: And our next question comes from the line of Jeff Zekauskas with JPMorgan. Your line is open.Jeff Zekauskas: 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? And secondly, your competitors in Allentown also said that the helium penalty to them was 55 or 60 per 60¢ a share as they estimated for 2025. When you heard that number, did you say, oh, that makes sense? You know, that's a comparable sort of comparable to what we're experiencing. Or do you have a different experience? If you are quantifying it?Sanjiv Lamba: Jeff, I'll let Matt talk about the EBIT growth. And then I'll give you a comment on Helios.Matt White: Yeah, Jeff. So, I mean, just using our table in the back with EMEA, clearly, FX is part of it. Right? You got a 4% component of our 11% growth. Obviously, the euro has strengthened. The sterling has strengthened. So that's definitely helping. But on top of that, you know, we continue to have pricing opportunities. We continue to have productivity opportunities. So while the volume is negative, a large portion of that are with the on-site contracts. Which are heavy volume effect, but they tend not to be overly impactful the operating profit given the fixed fee structure. And so 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. And the combination of all that is giving us the double-digit OP growth despite some of the underlying macro challenges that you see. You know, clearly, when we lap that and that stabilizes, that gives us some opportunity. But at this stage, we're not banking on that, and we're not guiding that. We're just kinda expecting a continuation of the same.Sanjiv Lamba: And on helium, Jeff, know, I'd say to you, as you're aware, of course, that our exposure on helium is very different and much smaller than you know, our friends, you referred to earlier. So what I'd say to you, the trends I see in helium year to date are helium volumes are flat. We have not seen a decline. And, yes, pricing is down high single digit. 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. So know, 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, you know, cost issues associated with that and creates productivity out of that benefit. You know? A productivity benefit. Out of that sourcing. So, you know, I think, Stan, I think we don't really see a concern. And, as I've said before, not you know, it isn't a significant exposure for us.Jeff Zekauskas: Thank you so much.Operator: And our next question comes from the line of Matthew DeYoe with Bank of America. Your line is open.Matthew DeYoe: Thank you. So I just wanted to dig in on Europe a bit. So I guess first, if we decelerate again next year, would you still feel the volumes hit your on-site, or are customers kind of largely at the low end of their commitments? And then just longer term. Right? 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. And I know you've got contracts here. Right? But there's merchant. There's package. So let's can we just hash out what this looks like across the top line for you as you look out you know, two years, three years.Is Europe just gonna be a minus two, minus 5% for you? Or you know, how do you manage what might be loss of density on closures.Sanjiv Lamba: But, good question on Europe. And clearly, as you can see, we remain bearish on Europe, and it's reflected in our guidance as well. But so that is a view for the short term. I'd 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. Now for the quarter, as you saw, the impact did come through.So the general macro environment that affects the merchant and packet side of the business, from various end markets, but in particular, manufacturing and a little bit of chemicals and metals, you know, led to that negative volume decline that we showed. Exacerbated, of course, by the on-site volume decline that you just mentioned. So, you know, that's what kinda came through. As you know well, on the on-site, the contracts do protect us well, And, really, the question I ask every month is, for customers who are below m top, on those contracts for on-site, are they paying up? And that is a critical assessment that we make. And you know what? Every customer is paying us.So those signals look good. But the longer term is a question that you're also referring to, and I have been bearish on the long term, but I'm gonna give you a couple of perspectives which are you know, kind of suggesting that you would see some potential change happen. I'm gonna start off by a conversation on Germany. You're aware, Germany has made this extraordinary commitment to investing a trillion euros over the next ten years in defense and build out of infrastructure. That's, you know, that's a very significant industrial stimulus to the German economy.And while you debate the reasons the reality is it'll have an impact and will uplift both Germany but also more broadly because supply chains are integrated across a slightly broader Western European region, you will feel that impact come through somewhere else as well. So while in the short term, we are seeing some of these challenges reflect in you know, the chemical industry in particular, But the longer term view which I think is expected to start showing some initial signals over the next couple of years both from know, an increased level of infrastructure spend and defense spend, I think, will be an important part in how we look at the long term view on Europe.There's one other thing which I wanna just cover off briefly, which is on Eastern Europe. And this relates to conversations around Ukraine rebuild. Now 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. But the reality is at some stage, there will be a resolution of sorts and that will result in potentially moving the Ukraine rebuild forward. Large numbers being thrown around. I take them with, again, a fairly large pinch of salt. But we have operated in Ukraine over the last three years. We continue to supply steel mills. Medical facilities, etcetera, with product even today.And we are pretty strongly positioned for any recovery that happens in Ukraine not just for the Ukrainian business, which might all standards is on the smaller end, But by the infrastructure and footprint we hold in Eastern Europe broadly, which is a very strong footprint supporting whatever happens in Ukraine. So those two developments, I would say, Matt, are gonna dictate how the longer term development in Europe is gonna look like. And, again, we'll have to wait and watch how that plays out. I obviously can say with a high degree of confidence that Germany will go through that recovery. In the foreseeable future. Ukraine, we'll have to see when that happens. Thank you.Operator: And our next question comes from the line of Mike Sison with Wells Fargo. Your line is open.Mike Sison: Hey, good morning. Nice quarter. Just wanted to dig in a little space a little bit. The recent agreement, the merchant contract, as I recall. So when do you think these will convert into a non-site and maybe frame up the growth potential since we're sort of in an early phase of the development for that industry.Sanjiv Lamba: Sure, Mike. Great questions. You know, I said in my commentary earlier on describing my walk around the wall that I do see space as a very attractive opportunity for growth. And the fact that Linde plc has been so well positioned, it's particularly in The US, with a history of more than five decades of supporting you know, space development and more recently, significant rocket launches. Our two new investments are gonna significantly spur that growth momentum. Now having said that, let me give you a couple of data points just to help you kind frame the growth potential that you were asking about.So the last three years or so, we've seen our supplies in this space and our revenue generated from that commercial space segment almost quadruple. We today's supply, I would say, more than four out of five launches that happen in The US. And the investments we're making in the infrastructure through the air separation plants, the distribution equipment because much of this liquid is carried and out using tankers, hydrogen production, related infrastructure, you know, all of those, you know, by the end of the next couple, three years, we would have invested just under a billion in building this eco infrastructure to support the space ecosystem going forward.I also mentioned that I see not just one, probably the most prominent launch company, I may not name them, but I know you'll know who they are. We'll have a prolific number of launches. But, actually, we are seeing that spread and many other companies in that space now scaling up and looking at future programs as well. So again, I see that opportunity pipeline for growth being very, very attractive. Great. We have strong customer commitments, Mike. So just to make the point on-site versus merchant, the critical factor here is you have a strong customer commitment. And we have strong long-term customer commitment. It's just a commercial structure that doesn't allow us to classify that.And as you know, we have a very disciplined and rigorous definition of backlog that I spoke to earlier. So 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.Mike Sison: Got it. Thank you.Operator: And our next question comes from the line of John McNulty with BMO Capital Markets. Your line is open.John McNulty: Yes, good morning. Thanks for taking my question. Nice results in a tough environment. Just wanted to dig a little bit 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, you know, 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. But I guess, is that a fair way to think about it? Or maybe you can add some color to it? Sure.Sanjiv Lamba: The sale of gas backlog and every individual project that sits in there, you know, all 70 of them, John, have gone through the rigorous process of being assessed at our investment committees. Against that investment criteria that we set out. And 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. So the return profile hasn't moved significantly because the risk-return equation has to play out based on the investment criteria that we have. So I feel pretty good about the return profile that we have. But an equally important portion of that return profile is how well do you execute.The point I made earlier on in my prepared remarks around the turnover of the backlog is absolutely critical. An industrial gas company, it is very important to be able to execute them in a timely manner to have a strong contractual position to ensure that you're monetizing that project and creating the return that were promised know, when they were presented at the investment committee. And I feel really good about the capabilities that we have within Linde plc, both on the insuring 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. Come back and reflect in the EPS growth that we commit out of these decisions that we make. So I feel good about that. I'll give you one of the data points since you asked about, you know, how that competitive kind of environment looks. Juan actually did a really nice study a couple of years ago which looked back and said, if you think about the competitive dynamics when you're bidding out these projects, about half the time, the decision is a make or buy decision. As you know, our customers are sophisticated. They will make a make or buy decision.And, of course, there are projects where we have an interest, we are usually able to get that converted into a sale of gas project because we can show the benefits and you know, the benefits of the reliability, save delivery of product coming with the benefit of network density. I think that's a very compelling case for the customers. But about half those projects are made for buy. About a third of the projects are where you see one of the competitors in the freight. And the rest, you know, you see multiple competitors. We tend to be very selective about projects. In what's left over. So, you know, from our perspective, that hasn't changed.That analysis is still relevant. And I think we, you know, obviously have to be have to have a compelling proposition for our customers, when they look at it, for them to move over.John McNulty: Got it. Thanks very much for the color.Operator: And our next question comes from the line of Patrick Cunningham with Citigroup. Your line is open.Patrick Cunningham: Hi, good morning. Thanks for taking my question. I'm curious on the electronics outlook from here. It seems year-on-year and sequential growth is down slightly. How much of this is helium pricing or maybe there was some modest pull forward and positioning in 1Q?Sanjiv Lamba: Thanks, Patrick. So let me just 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 that you see in the end market slide that we have in the tech is all driven by our advanced materials business that sits in the global other segment, which provides electronics targets to some of these electronic customers, instance over here was destocking happening with one of the larger customers that's gonna correct itself in the second half. So really no concerns there. Just to clarify what the advanced materials group is doing over here.So essentially, the advanced material group develops and builds, manufactures, precious metal targets, which are used in the chip-making process to deposit a thin film of materials onto the semiconductor. So the process called sputtering, what happens is we provide high-energy particles bombarding the target that's been set up. And what it does is it checks these atoms to then provide a coating, a very thin level coating on the wafer forming layers of components like transistors, interconnect, etcetera. All of this is about putting very precise material deposition on the integrated circuitry. And that's what sits in that advanced materials business. Is the reason why you see that slightly negative.Now as far as electronics outlook is concerned, my expectation remains that we have a very healthy not expectation. The fact remains that we have a healthy pipeline of projects that are gonna come up in the next twelve months or so. And we will obviously be participating. And as you would expect from Linde plc, we're winning more than our fair share of those projects. The outlook for both new projects as well as start-ups remains on track with the backlog that we've just shown you.Patrick Cunningham: Thank you.Operator: And our next question comes from the line of John Roberts with Mizuho. Your line is open.John Roberts: Thank you. The Economist magazine this week has a story on what's called green rushing. So your backlog, you said, is gonna grow. The point of the story was that companies are still going forward with their energy transition in investments. They just don't talk about it. As much. It's not making the headlines. So two or three years from now, do you think energy transition will be still as big a percentage of your backlog? 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 talking about their energy transition programs anymore.Sanjiv Lamba: John, I know, 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 the euphoria has gone away, and reality is sunk in, and 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 look you know, at the risk of saying I told you so, None of this should come as a surprise to you or anyone else who's been on these earnings calls because we've said, look.You know, it's unrealistic to expect this green hydrogen to get up to a point where it's at scale. It's cost-competitive, and it actually adds and creates value. We've always said that's probably a five to seven-year window for the technology to mature. And then you'll see the commercials play out. So I'm not surprised by this article. The reality is you know, low-carbon alternatives, is low-carbon hydrogen otherwise known as blue hydrogen, a low-carbon ammonia, or, you know, products in of that ill.Will still have a demand in the marketplace, and we see solid projects with good economic cases supported further by incentives such as a 45 q remain around and we are developing a number of those even today. While we execute know, a number of those around the world as well. So my view is I think you know, this trend is not gonna stop. There is you know, increasingly an economic case for it. So good projects which create that economic value will still see, you know, see progress and move to FID and get contract.John Roberts: Thank you.Operator: And our next question comes from the line of Josh Spector with UBS. Your line is open.Josh Spector: Yes. Hi. Good morning. I wanted to ask just coming back to the guidance assumptions around things. Linde plc's approach has been we're seeing the market like x, and we're forecasting x. It seems like in this case, we're seeing the volumes down 1% and now your forecast is maybe at the midpoint down 2%, something like that. So I'd just be curious. Obviously, it's a weak market. No one's expecting anything incredibly exciting here. But are you seeing anything either in June, July trends that would say you that there is weakening and that's more of a correct way to think about it. Or is this just added conservatism for everything we don't know about FX included?Matt White: Hey, Josh. It's Matt. So I think we'll start with, you know, the volumes to your point, they're down 1% on the quarter. But the base volumes are down 2%. So when we think about sort of our economic projection, we're really talking to the base volumes because the backlog is pretty much on autopilot. Right? That's contractual. So that is independent of any macro view. So starting with the minus 2% on the base volumes that occurred this quarter, to your point, the current guide on the top end is assuming that 2% year over year continues out for the back half.Now while the year on year assumption in the top half is being held consistent, Last year, the comps got a little easier. So it does imply a little worsening on a sequential basis. We'll see if that happens. When I think about it, in combination, you know, clearly, FX rates improved. Meaning the dollar weakened. Given the uncertainty, given some of the flight to different currencies. It is interrelated. And so I think from this perspective, you know, maybe you see currency know, maybe you see the dollar strengthen a bit, things stabilize, maybe you see the opposite. But at this point, I think about them in combination. We'll have to see how it plays out.But the top end pretty much has about a 2% base volume, For the remainder of the year. And we're gonna do what we can to do better than that. But that's what we laid out.Operator: And our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Your line is open.Kevin McCarthy: You, and good morning. Matt, what impact, if any, does the passage of the one big beautiful bill act have, maybe internally for Linde plc or know, appreciate any thoughts you may have on any early feedback from your customer base as to potential stimulus in The Americas. And just wondering if it has any meaningful impact at all on, on your 25 guide or how you're thinking conceptually about the 26 outlook?Matt White: Sure. So I think when we start thinking about the bill, and I'll mostly to the taxes right now, what it mainly did was make permanent a lot of the existing tax policy that we were operating under. Since the 2017 act. And that in of itself, I think, is positive and that it gives more confidence looking ahead. When you think about The US, tax policy, it had a lot of temporary items. and long-term investments in the country because of the uncertainty whether those temporary items will continue or not. And with the passage of this bill, it made many of these things permanent. And I think that in and of itself is good.When you look at kind of breaking it down for us on an ETR basis, not expecting much impact. Again, our current run rate had in it primarily the 2017 effect, and this just extends and makes that permanent. So if anything, if this didn't pass, I would have expected a worse ETR. But given it is not, I expect no change. On the cash tax front, this will be net beneficial. And the primary driver is the reinstatement of the bonus depreciation. You may recall that was something that was part of the 2017 act. However, it phased out. And essentially has been gone for probably a little over a year.With both the reinstatement of that and the retroactive nature back to January, we'll give cash tax benefits to companies that make large capital investments into the country, of which we will benefit from the especially given the vast majority of our backlog right now. Has US exposure. And what that also will do is make IRRs on projects better. We saw the same effect in 2017, how much the IRR improves It's a function of a couple different things, but I'd say on average, you probably see almost a 100 basis point improvement. Anyone making long-term investments in the country now will get a tailwind. From the accelerated depreciation.They'll get more confidence from making permanent a lot of the tax policy. And I think all in all, that'll be a positive development. Now aside from income taxes, clearly, 45 q was enhanced a bit. We view that as positive. That's something that, as Sanjay mentioned, is the I'd say, the primary, incentive that was being looked at for a lot of the blue projects. And by making that even more attractive, I think that will further help any views to use that. So for us, we view it as net positive. I would say for anyone constructing in the country would view it as positive for capital intensity.And any type of low-carbon products, especially with a hydrocarbon base, would view it as positive. So that's kinda how I would summarize it.Kevin McCarthy: Thanks very much.Operator: And our next question comes from the line of James Hooper with Bernstein. Your line is open.James Hooper: Hi. Thank you very much for taking my question. I wanted to go back to Europe and a little bit about the transition there. Clearly, your backlog is a very small percentage European. And we've seen some of your competitors winning low-carbon hydrogen projects. We've seen since you last reported, we've seen the action plan and then just start of a plan to make a plan, if you will. Do you see this being more of an opportunity for your backlog going forward? And if this made you any more positive on energy transition in the region?Sanjiv Lamba: James, I will say that there is a measured level of pragmatism in Europe today around the energy transition and the goals, Remember, however, you know, the people that we are speaking to, and primarily in this instance, the German government, the new government that's come in and giving them a sense of you know, how we think about this regulatory framework that's in place, There is, of course, all of Brussels to still contend with. But there is a higher degree of pragmatism. There is clearly a move towards getting a bit more practical around of this target setting, etcetera.So, yes, I do see that as potentially having a beneficial impact on energy transition projects which would have an economic basis and which would support a cost-effective decarbonization program for Europe. But there is all in Europe, most things will take time, and this will be no exception to that. So, know, while I appreciate the pragmatism I'm seeing, I still expect that it's gonna take as long as it takes. To for them to actually enact whatever bills are needed to get to a point where you get cost-competitive hydrogen in those countries to support the decarbonization effort?James Hooper: Thanks.Operator: And our final question comes from the line of Chris Parkinson with Wolfe Research. Your line is open.Chris Parkinson: Hi. Thank you so much for taking my question. Sanjeev, you actually just hit on this a little bit, you know, behind, you know, everything else that's going in Europe on, you know, kind of the clean energy side, there's also been a lot of debate amongst The EU 27 states regarding just improving efficiencies. Know, protecting the chemical industry. Obviously, a lot of your core customers have been involved in discussions. Could you potentially and there's been a lot of news from even the last you know, three weeks or so. Could you just give us a little insight on how integral you are to those conversations?How, you know, Linde plc could the Linde plc platform could perhaps you know, help along in terms of basically, you know, setting some guardrails. And then also in terms of just the, you know, potential for greater infrastructure growth spend towards the end of the decade. I mean, is it wrong to think about Europe slightly differently these days, or is it still essentially the status quo over the longer term? Thank you.Sanjiv Lamba: So, Chris, I kinda tried to describe this earlier. I'll say to you, let me deal with the infrastructure project first because that really is somewhat fundamental to any industrial recovery that's gonna happen in Europe. And I think I talk about infrastructure, I'm including defense as part of that. Germany's commitment to a trillion euros, I think, is clearly you know, a very significant milestone for Germany as a country. For the balance sheet and the ability to, you know, kind of finance that kind of spend. So in many ways, that spending is certainly gonna change our perspective and has changed our perspective on how we think about the recovery, industrial recovery, and Europe longer term.That's a ten-year program. I manage people's expectations by telling them that, look. For any procurement process to come in place to handle that kind of spend, and for infrastructure projects as the need for permitting, etcetera. Which across Europe generally and Germany specifically all take time. So don't expect any exciting, announcements in the next couple of years maybe the back end of next year, you'll start seeing some of those early projects announced. But, really, most of that allocation you should expect in the following year beyond that. So it's gonna take some time, but the longer-term view around the European economy and industrial activity is benefiting from these commitments that have been made.Obviously, Germany has made that very significant and specific commitment. Other countries have now signed up to this 5% spend for NATO. You know, some of that is infrastructure one and a half and three and a half is defense. All of that's gonna drive some level of industrial activity. So absolutely right in saying that the perspective on Europe has changed a little bit. I am still cautious when I look at that, and, you know, we have to see this play out and get enacted. And then transacted before, I will tell you with confidence, you know, in the next year, I would see this kind of growth.But for now, I think the directionally, it's headed in the right direction. And your earlier comment, you know, Linde plc's position in most of the serious conversations that happen in Europe particularly given our position in Germany. We are both consulted and part of many groups that are working to ensure that the real challenges that industry in Europe broadly faces because most of them being customers of ours you know, is being adequately communicated to those who are making these decisions.Chris Parkinson: Thank you for the color.Operator: And that concludes our question and answer session. I would now like to turn the call back to Juan Pelaez for any additional or closing remarks.Juan Pelaez: Thank you, Abby, and thank you, everyone, for participating in today's call. Have a safe day.Operator: And ladies and gentlemen, once again, this concludes today's call, and we thank you for your participation. You may now disconnect.