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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2020 Linde Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Juan Pelaez. Thank you. Please go ahead, sir.
Chris, thank you. Good morning, everyone and thank you for attending our 2020 second quarter earnings call and webcast. I’m Juan Pelaez, Head of Investor Relations, and I'm joined this morning by Steve Angel, 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 slide and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are in the appendix of this presentation.
Steve and Matt will now give an update on Linde's business outlook and second quarter performance and we will then be available to answer questions.
Let me turn the call over to Steve now.
Thanks, Juan. Good morning everyone. Matt will cover the numbers which were obviously quite good. But just a few comments. We grew earnings per share versus Q1 and year-over-year despite currency headwinds and weaker volumes.
Cash flow was very strong, return on capital continues to improve, operating margins improved in every segment. In other words Q2 is like any other quarter except we had to deliver this one through a pandemic.
Safety Performance continued to improve while we battled COVID around the world. Plant reliability is at an all time high. We brought several large projects online. Our hospital and homecare businesses continue to play an important role around the world in the fight against this respiratory illness.
We provided a lot of support in our communities through donations and in times gifts. This type of performance doesn't happen because corporate ordains it, it happens because 80,000 committed and highly capable Linde employees do their jobs exceptionally well around the world.
Please turn to Page 3. We have talked about what makes Linde resilient in the past, you can see that in a few bursts on the left hand side of the page. The best performing markets in Q2 not surprisingly, were more defensive, like health care, food and electronics. And when combined with our commercial terms and conditions, that guarantees us a steady stream of cash flow irrespective of their respective or volumes.
You have what we demonstrated during Q2, a very resilient business. We are not directly part of any global supply chain. We source, produce and sell locally. Our businesses are local and they optimize their cost structure based on local market conditions.
Regarding our backlog, it remains firm. We have seen some delays which we are being compensated for, but the backlog has held together well. And it is all for high quality customers you know well.
We took additional cost actions in early March to ensure we could deliver the type of performance we could all be proud of. We eliminated discretionary costs. We made sure our productivity initiatives were delivering.
We took advantage of every efficiency opportunity, we could find. A good indication of how well the team executed in Q2 can be found in our SG&A results, which were down 14% year-over-year and reached our lowest level 11.9% of sales since our merger.
You don't deliver the kind of cash flow we did this quarter without doing a good job on working capital management and when you factor in CapEx efficiencies we generated approximately $1 billion in free cash flow. Pricing continues to hold up well with positive price attainment in every business.
So, where do we stand today since our merger closed on March 1st of last year. Operating margins have improved over 300 basis points and return on capital 200 basis points. Earnings per share grew 23% last year ex-currency translation and has grown 11% ex-FX through the first half of this year.
And based on our strong and stable cash flow, we raised the dividend another 10% this year which marks the 27th straight year we have increased the dividend and we have no intention of breaking that streak now.
If you can turn to Page 4. So what are we trying to accomplish over the coming months and years, what is our core strategy? I broke it down to three simple sections. First of all, we want to continue to optimize the base business.
We want to drive network density in our core geographies. We want to leverage digitalization initiatives to drive continuous improvement in every aspect of our business. We want to ensure we have best-in-class price management in every corner of the company. We want to streamline our business portfolio down to businesses, we are confident we can operate the way we want to operate them.
We are leveraged to any economic recovery. As I said prices have remained stable. So, all we need is more volume. The increased volume allows us to operate our plants and distribution networks more efficiently.
And that SG&A reduction I spoke about earlier those costs will not come back anytime soon needless to say, we will get leverage down the income statement with any improvement in economic activity.
We are capitalizing on growth opportunities now and coming out of COVID. I expect to see several opportunities in electronics come to fruition in the coming months. And health care which is 21% of total sales today will continue to grow at a nice say three 3% to 5% clip organically.
And though the backlog is coming down somewhat as we start up new projects, the project work between sale of gas and third-party remains healthy at 8.6 billion. The last element of growth I wanted to talk about is one that seems to be dominating always these days and that is clean energy.
There is a lot of hype, marketing, and companies that want to burnish their ESG credentials. Some companies are just looking for a way out of their current predicament. And then you have companies like Linde that are actually players in the hydrogen business today.
Please turn to Page 5. So, why do we believe clean hydrogen is real? Key countries and regions around the world are leading this leading the charge with regulations, targets, subsidies and funding. You can see a list of those regulations on Page 10.
Why are they doing this? It is about de-carbonizing their economies to address the challenges of climate change. Of course, but it is also about resuscitating their economies post COVID. They want GDP growth and they want jobs for their people. And they don't want to outsource their green economy to anyone else.
They want to build it all locally if at all possible. The EU does acknowledge, they will need to supplement their renewable power requirements from areas outside the EU, like North Africa, where they also have the ability to repurpose natural gas pipelines for renewable hydrogen.
On Page 10, you can see a map of the optimal renewable sources from around the world. Clearly, countries like the U.S. and China have the ability to develop their own sources of renewable hydrogen for their own needs.
In addition to renewable, there are quite a few countries advantaged in low carbon sources, such as natural gas that will continue to play an important role in the transition from gray to green hydrogen, as well as in the production of blue hydrogen, where the Co2 is captured in the hydrogen production process.
Back to Page 5. There are challenges. First of all, you have to determine how these funding mechanisms will actually work. But more importantly, over the next decade, the cost of clean hydrogen at the point of use needs to drop at least 50% to 60% from where it is today, to roughly $4 per kilogram.
To reach that target, renewable power costs need to come down along with the cost of the electrolysis itself. This can be achieved by scaling up capacity, improving efficiencies and developing greater standardization around the supporting infrastructure. This will not happen overnight, but it is certainly feasible within the next 10-years, and something we can directly impact.
Some form of carbon pricing will also need to be in place for clean hydrogen to compete against cheap fossil fuels in some sectors, and the market needs to develop. Especially fuel cell electric vehicles for heavy-haul trucking, which could become the largest target market for a mobility by an order of magnitude.
Our clean hydrogen strategy is not unlike our strategy for industrial gases. These markets are local and will evolve uniquely. For example, South Korea and Japan are focused on building their hydrogen economy first irrespective of the carbon content or color of the hydrogen molecule.
Green hydrogen will come later when it reaches scale and cost. China's focus on both gray and green hydrogen molecules. The EU wants green now, but privately admits gray or a transition through blue hydrogen will be necessary for a period of time.
The U.S. hasn't declared yet, except for California. But the rest of the country will likely pursue all colors of the rainbow, although several are already following California's elite. We want to leverage and build on our existing integrated supply capabilities in each of these regions.
In the appendix on Page 11, illustrates our capabilities across the entire hydrogen value chain. I think you could see, we are well-positioned to participate as these markets develop. Emerging technologies like PIM electrolysis technology needs to mature to bring clean hydrogen down the cost curve. We are partnered with leading technology companies like ITM Power to do just that and are already starting to see the benefits of such relationship.
So, I will end with the caption at the top of Slide 5. I say this can be a huge market by 2030, what needs to happen. It is a bit of chicken or the egg in the mobility market. You need fuel cell electric vehicle adoption to drive hydrogen growth, but you also need low cost hydrogen and scaled infrastructure to enable fuel cell electric vehicle adoption. If 1% of all energy consumed by heavy-haul trucking today was converted to fuel cell electric vehicles, that would be approximately a $20 billion per annum hydrogen market.
The other demands for hydrogen are as an energy carrier, which many consider to be a key enabler for wide scale use of renewable power and hydrogen as a feedstock for industrial use, as well as building and industrial heat. All-in-all, there have been 35 applications modeled for clean hydrogen, about half of which should be competitive by 2030.
As I mentioned earlier, there seems to be new entrants in clean energy by the day. Many of whom are non-traditional players in the hydrogen space. But with our expertise, capabilities, local presence, and global reach, I'm confident we will capture our fair share of this market as it develops. That is why I say this will be a multibillion dollar business for Linde.
And now I will turn it over to Matt to discuss our Q2 performance and outlook.
Thanks, Steve. And good morning everyone. Consolidated second quarter results can be found on Slide 6. Sales of $6.4 billion decreased 5% sequentially and 11% from 2019 versus prior year underlying sales declines 5% as 2% higher pricing was more than offset by a 7% reduction in volumes.
The price improvement was across all segments, and in line with globally weighted inflation. Volume trends include 2% growth in engineering, which were more than offset by a 9% decrease in the gases business.
Linde Engineering continues to execute on the high quality contractually secured $5 billion sale of equipment backlog. The gases volume decline is due to the negative economic climate more than offsetting positive contributions from the project backlog.
Overall, we estimate the second quarter sales headwind from COVID to be 8% to 10%. Although it is almost impossible to know for certain. Sequentially underlying sales declined 2% as a positive 3% contribution from engineering was more than offset by a 5% volume decline in gases.
The estimated sequential impact from COVID is approximately 6% to 8%. You can see that foreign currency continues to be a headwind to sales and earnings. Although the U.S. dollar has started to sell off at the end of the second quarter. If this trend were to persist, it could provide some upside to our foreign currency outlook.
Operating profit of $1.3 billion was flat with prior year and down 3% versus the first quarter. Excluding foreign currency translation, operating profit increased 4% versus 2019 and declined only 1% sequentially. The entire Linde team is fully engaged to prudently manage the things within our control and deliver high quality results in any environment.
We continue to find more opportunities for productivity and efficiency every day. So we expect to further improve upon these levels. In fact, operating margins expanded 230 basis points over 2019 and 60 basis points over the first quarter.
These are real and lasting improvements, well in excess of the temporary benefit from lower cost pass through. Furthermore, these actions enabled us to offset the lower volumes related to COVID which are estimated to impact profit by a few hundred basis points more than the sales effect.
Second quarter EPS was $1.90.Excluding foreign currency impact, this level is 8% higher than 2019 and 3% higher sequentially. In other words, we increased the earnings per share, despite an almost double-digit sales decline due to the pandemic.
More importantly, second quarter operating cash flow of $1.8 billion was 76% higher than last year, and 31% higher than the first quarter. I will speak more to this on the next slide. But this result is a clear validation of our business resilience and merger success.
CapEx is trending downward from a combination of foreign currency, merger synergies, and timing on the sale of gas project backlog, which currently stands at $3.6 billion. It is important to note that backlog definitions are not consistent within the industry.
As the Linde backlog represents contractually committed high quality customers with incremental growth. Therefore, we have full confidence the current backlog will continue to contribute to future sales and profit.
After tax return on capital of 12.3% represents the highest level we have achieved since the merger date. This is a direct result of our strong commitment to capital discipline and quality growth. In fact, our integrated and dense model across all three supply modes of on site, merchant and packaged gases enables us to enhance returns on each investment, allowing further improvements in our ROC without hindering growth prospects.
Slide 7 provides more details on our performance related to cash generation and capital management. The graphic on the left shows our quarterly operational cash flow trend since the merger date in Q1 2019. Recall that these figures represent GAAP operating cash flow.
2020 first half OCF of $3.1 billion is $1 billion or almost 50% higher than the prior year level. Approximately one-third of this improvement is due to lower merger related cash costs. The remaining two-thirds are from higher cash earnings and improved working capital.
In the second quarter alone, year-over-year working capital improved $430 million with approximately $110 million from the engineering business and the rest from improved management in gases.
These trends coupled with base tax reductions are evidence of merger synergies and efficiencies. You can also see that available operating cash flow is more than sufficient to cover the $500 million quarterly dividend and $300 million to $400 million of quarterly project CapEx spend.
The pie charts to the right shows how we deployed capital year-to-date through June. We paid $1 billion in dividends and are committed to growing it every year. Another $1.6 billion was invested back into the business. Quality growth is a key priority use of capital, but each opportunity must meet our investment criteria.
Finally, we repurchased $1.8 billion of Linde stock in the first quarter at an average price of $186 per share. You may recall that we paused the share repurchase program at the end of the first quarter to evaluate potential decafs and other higher priority uses of capital.
While certain opportunities did not fit our investment criteria, we are still pursuing others, but expect them to take longer to develop than originally anticipated. Furthermore, we continue to have access to very cost-effective capital.
As we have recently issued seven and 12-year euro bonds with coupons of 0.25% and 0.55% respectively. Both of these bonds represent the lowest coupons ever for any industrial gas company at these tenures. Given these developments and our continued significant excess cash generation, we are resuming the share repurchase program.
I would like to wrap up with 2020 guidance on Slide 8. To better frame the outlook, it may be helpful to describe the second quarter monthly trends. April represented the lowest month, although it was noticeably better than what we originally expected.
Subsequently may was better than April and June was better than May. For the entire second quarter, year-over-year volumes were estimated down 8% to 10% from COVID. Although the month of June recovered to about half of that range.
Looking forward to the third quarter, we still expect an FX headwind of 3% although current spot rates have improved from this initial estimate. The EPS range of a $1.90 to $1.95 assumes no economic improvement from Q2 at the bottom end and a gradual increase at the top end.
We are taking a more cautious approach since the pandemic is still evolving. However, if June conditions were to continue, I would expect to be at the upper end or above this guidance range. Rest assured, that if the economy performs better, we will capture that upside.
The full-year guidance range is $7.60 to $7.80 follows the same logic as the third quarter estimate. It assumes no improvement from Q2 at the bottom end and a gradual improvement at the top end.
Irrespective of economic conditions, we have a high degree of confidence in the business resilience and growth prospects across our integrated system. Beyond the merger benefits, we continue to find productivity and efficiency opportunities to enhance business quality.
In addition, we are pursuing attractive growth prospects through our resilient end markets, unrivaled hydrogen asset network and world-class engineering and technical capabilities. And when the markets do recover, we fully expect to participate and win our fair share.
The global Linde team has successfully navigated prior economic crises and each time has emerged even stronger. I fully expect the same for 2020.
Now, I would like turn the call over for Q&A.
Thank you. [Operator Instructions]. And our first question comes from the line of Nicola Tang with Exane. Your line is now open.
Hi, everyone. Thanks for taking my questions. And the first one was on decap. You have to about healthy pipeline of potential opportunities. And I knew that [Indiscernible] product showed something similar. So I was just wondering if you could update us a little bit more detail about your pipeline might look like and also help us to size the potential opportunity it has a capsule that could be deployed. And again, understanding that it could be sort of longer term view.
And then my second question would be on - you mentioned, Matt, the potential scope for additional efficiency measures that you are also delivering very well on that. Can you put that in the context of your original cost synergies target the $900 million. And I was wondering whether shorter term with COVID, that you have seen any temporary savings for travel cost savings which you would expect to reverse?
Okay, well, I will take the decap. And since you gave a second question to Matt, I will let him handle that one or we could give it to Juan or anybody gain, but I will let Matt take that one. So yes, on the decap there is we have a list of projects. The pipeline itself, you could describe as fairly healthy. But then again, the pace is very slow.
And that is not unusual. You have customers that are always evaluating their cash flow positions and their needs as you are going through these discussions with them. I expect we will get some to ground but it is not going to be a large number. I don't think and I don't think it is going to be a large number anytime soon.
We will do the projects that makes sense for us. You have heard me say this before that, the last thing I want to do is be a lender of last resort. So we will maintain our capital discipline and our return criteria as we work through this. But it is just going to take some time and that is just the way it is.
Hi, Nicole. And as far as your second question, yes, I will start with to your point the $900 million as you recall, on the cost side was the target we laid out there to be achieved over approximately a three year period post the merger dates.
As have we stated in the past, the more we integrate, the less frankly, we are able to differentiate between what was considered a true merger synergy and what is just simply being more efficient and productive on how we are running this combined business.
So frankly, on an internal basis, we really stopped spending significant effort trying to differentiate between the two. And we are much more focused on just trying find ways to be more efficient and productive operating as one combined company.
So to that degree where we really look is more how our operating margins progressing? How is our growth in profits progressing? And how is our growth in cash progressing? There are obviously a lot of other metrics around that, like Steve had mentioned, SG&A as a percentage of sales, what the headcount trends are power efficiency per headcount trends. So we look at those as well.
But in the end of the day, I want to see margin expansions. I want to see growth in cash, and I want to see growth in profits irrespective of what we are seeing on the volume side. I think this quarter, we have demonstrated that fairly well. I think last quarter, we have demonstrated that fairly well. And we continue to find even more opportunities every day, as I mentioned.
So we are looking in the end of the day to continue to find ways to improve the quality of his business, while leveraging every bit of sales dollar we can to add value. So that is how we will think about it going forward. And that is how we are going to continue to measure it.
Thanks. Maybe I could speak in just a quick follow-up on the customer side. And as you mentioned very strong operating cash conversion, and you have talked about resuming the buyback. Would you - are this going to be able to commit to give us a steer on how much you expect to buyback through the remainder of the year, assuming that you want a decap opportunity side, these are now a much longer term?
Yes, and sorry for just answering your last question, which I forgot to mention, on the temporary savings for COVID. As you would expect with everyone, we clearly saw a large reduction in travel. I think that is consistent universally.
But what I would say is that the vast majority of savings, as Steve mentioned that we saw this quarter, we expect to retain and maintain a lot of them. So, I'm not anticipating any significant shifts in that. So, that is something we expect going forward irrespective of the smaller temporary ones.
On the cash flow related to the buybacks. Yes, we will be back in the market, as we have been will be a participant. As you saw this quarter, we did reduce our net debt again. So we will continue to use it as per our capital allocation policy that any excess cash that we have, after our priorities of growing the dividend and growing the business, we will use in the opportunities to repurchase our stock.
And obviously, if there are market corrections, we will take opportunity in there as well, like we did in Q1. So, that is kind of how we are going to continue to manage it and measure it and as this is all underpinned by our target credit rating of a single A. So, we will work within those confines and be back in the market.
Thank you.
Thank you. Our next question comes from the line of Duffy Fischer with Barclays. Your line is now open.
Good morning. Thanks a lot for the views on the new hydrogen. So, maybe just kind of a three part follow-up to that. First over like the next five years, what you see is the premium for green hydrogen versus blue hydrogen versus grey hydrogen?
Second, as you guys run the most electrolysis units globally? What has your cost done in that space, let's say over the last three years as a baseline, and then what do you have line of sight for your cost doing over the next three?
And then the third one is, because it is such a big market, could you see yourself doing something aspirational? Maybe a couple billion dollars of build it no come investment that doesn't have the same surety, that the historic model has had.
Okay, Duffy, those three well prepared questions. So, I think the way you need to think about green hydrogen and keep in mind you have the renewable power cost, you have the production costs coming out of electrolysis, you have the distribution costs, you have the cost at the pump. If you are thinking about mobility, so there is a whole chain of cost here that needs to come down and I said 50% to 60%.
If you were to call green hydrogen today, coming off electrolysis $6. And so there has to be an assumption about renewable power costs to get to the six. But if you say six, you are making - with $2 to $3 natural gas, you are making great hydrogen for $1. So, there is a tremendous gap today that it would take hundreds of dollars of carbon tax or a carbon price if you wanted to wipe out that entire difference. So, it is a big premier today.
That is why I said the cost need to come down the production cost across the entire chain. At the same time there needs to be a carbon price to incent the scaling up of green hydrogen. It is the same thing that happened with solar power and wind power. If you go back and look at the early days, everybody said the costs are through the roof. We can't afford it.
But there were subsidies, there were incentives that were put in place that allowed it to scale up and come down the cost curve. So that is the same thing we need to have happened here, and it is going to take some years to do that. We and others are obviously working on that as we speak. I can see plans. I have reviewed plans that show how that can be done.
So, I think we just need to kind of wait and see how long it is ultimately going to take. But I think, in a few years the cost will come down quite a bit. But we need to get it down, like I said, 50% to 60% across the entire value chain.
As far as what we may or may not do? I mean, we are looking at projects today around the world. I could give you a number. It is like a hundred types of projects. Their slot are very small. Some of them are sale of equipment, a small sale of equipment.
Some of them are like projects that we announced in China, and also recently some are a little bigger. But we are very comfortable with the types of activities that we have, the locations that we have them in. It is like 16 countries that are involved in a hundred plus types of projects.
So, that really is our strategy. That has been our strategy. We are very comfortable with that approach. I'm not saying I would never do a much larger project, but I would have to be very confident in terms of that is just a good investment that will pass all the muster of it. We always put large project investments through.
Okay. Thank you. And then just one of Matt's comments where if June numbers kind of stayed through Q3, you would be at the upper end to beating the guidance for Q3. Is that imply that you guys see somewhat of a double-dip happening in Q3 and things could weaken or can you talk about July and what you are seeing?
Yes. So that is what Matt said. If I look at July's numbers today, I would say it is probably slightly better than June. But then again, you got to keep in mind, we don't really know what is going to happen. I read yesterday that COVID is back on the Continent of Europe. We all know what is happening in Latin America. You can read about what is happening in the South and West, back in Australia.
So, I don't really know what the consequences that is going to be. I don't know how governments are going to respond to that this time. Are we going to go back into something like what we saw in March and April and May. We don't know the answer to that. So, it is a possibility. It hasn't happened as of today, but it is certainly a possibility and we have to make sure that we say we are cautious in our guidance and that is what is behind the caution.
Terrific. Thanks guys.
Thank you. And our next question comes from the line of David Begleiter with Deutsche Bank. Your line is now open.
Thank you. Good morning. Steve and Matt just on FX, if you had mark-to-market today spot rates, what would that imply for Q3 and full-year guidance in terms of upside.
Hey, David. Yes. This is Matt. So as you saw, we have a 3% assumption now. Q3 would get better by a couple percent potentially based on spot. As you know that is a assumption based on spots, but it could get better by almost 2%. And the full-year number would be knocked probably in half as well on that. So, time will tell. We will see, that was based on really yesterday spots, but every day is a different day as you know.
Very good. And Steve again on hydrogen, are you indifferent to gray, blue or green hydrogen and if you look over that perhaps the next 10-years. How much your project CapEx could you foresee putting forward hydrogen opportunities?
Well you are asking me. So I want to be a provider of what the market wants. As I said, there are certain countries around the world today that are building their hydrogen economy first, their hydrogen mobility economy, for example using grade they will transition to green later on.
I think - look I mean at the right cost green is going to be preferable for everybody, but you have got to get there first. And that is why we think natural gas is going to still play a role. I mean, we have a $2 billion business today that is essentially all based on natural gas. So natural gas will continue to play a role.
Blue will make sense in locations where you have a low cost natural gas and you have the ability to capture the CO2 and do something with it, say make downstream chemical products with the CO2 or you have the right geological formation to sequester in the ground.
If those types of situations are present, then you could see what they call blue, which is basically capturing CO2 off of the gray hydrogen production process. But I think everyone would like to get to green, I just think it is going to take some years to get to that point.
Regarding CapEx, I mean, if I look at the list of hundred projects we have today, there is probably maybe a couple of billion dollars of CapEx that is kind of been assigned to these projects.
Some of them, we have to wait seeing whether they are going to move forward or not. But clearly, if I said hundred and some projects, and if I gave you a number, like a couple billion dollars of CapEx earmarked around those numbers that wouldn't be surprising. But we have to see how fast they move. And at what rate we end up spending against those projects.
Thank you very much.
Thank you. Our next question comes from a line of Peter Clark with SocGen. Your line is now open.
Thanks. good morning everyone. I have got two as well. The first one, obviously if I go back to the last recession, I know it is slightly different this time, but you had your earnings flat when you are perhaps Linde had an earnings hit because of engineering, but I guess, actually was flat on EBITDA.
And so I look at the difference this time obviously you are delivering on the gases. We expect that engineering is a standout. So I'm just wondering if you can give me your thoughts on the quality of this engineering business you have now probably against what you thought coming in. Because it has been outstanding, I think in the past two years.
And then effectively if I look at some of the more peripheral well, very important market for you. Certainly places like Brazil, Mexico and even Australia. How these businesses are performing. You have dominant shares, great businesses to begin with. I think you found a lot more to do in Australia, for example, but obviously Brazil still has the challenges with COVID, or bigger challenges. Just about these more peripheral markets those will get less - still on. Thank you.
Okay, so the first question on Linde Engineering. And anomaly speaking is a much smaller percent of Linde today than it was the old Linde AG. It is probably if I go back look about 5% of the EBITDA of our company is Linde Engineering.
So it can swing us too much one way or the other. But it is doing quite well, the team is executing very well. A lot of this is picking the right projects over the years. In addition to executing well. A lot of this is they have more gas projects to work on. So we are able to leverage their cost infrastructure much better by adding the practice, sale of gas to the equation.
If I look at their backlog today, they probably have close to two years of backlog in front of them to continue to execute. And that is a pretty good place to be. I don't have the order pipeline. I'm not looking at that right now. But the orders clearly are less than the sales for Q2.
So, but there are orders coming in. There are projects they are working on, I wouldn't say they are [mammoth] (Ph) projects today, because a lot of those customers are cautious, as you would imagine, but certainly electronics type projects they are working on those are working a lot of smaller projects around, say paper projects. As South America you mentioned that is very advantaged in paper, working on other types of projects.
So, there is work coming in there is a healthy backlog. I think they will continue to do pretty well, but if we are sitting here two years from now, and the backlog is a lot lower, then we will have, something to address. But we are very conscious too of our costs, and making sure that we are managing costs very carefully as we are looking at the order pipeline and we work out these big projects.
You mentioned Brazil and Mexico and Australia. If you look at South America, clearly they are dealing with COVID. But it seems like they are always dealing with something in South America. But, when I look at their operating margins coming out of Q2 they are at 20%. Probably not many companies operating in South America that are running at a 20% kind of operating margin rate.
Mexico has always been a good country for us. We have a very strong presence as we do in Brazil, and we are able to use that to our advantage. In Australia. I talked about an earlier calls Australia, has been on a nice slide path in terms of improving the quality of their business. I'm very pleased with the results that we have been seeing there. And I think, they continue to do a good job in Australia.
Thank you.
Thank you. And our next question comes from a line of Bob Koort with Goldman. Your line is open.
Thank you, Steve, I wanted to ask a hydrogen question. And I guess it is maybe broad, but how do you insert yourself into that ecosystem and how do you get paid. Is it a equipment model? Is it a fairly gas model and big driver for green to ever come about is a dramatic drop in energy prices. So, how do you get aligned with the energy providers, electricity providers, or do you not worried about that, it just seems like may be a much different business model than what you have traditionally done in large scale gas. So, how do you get paid. What is your secret sauce?
Well, I would say, we are going to be participating those ways. And for example, we sell hydrogen refueling stations today, we have been doing that but we are also providing as part of a package offering. If you look at the two announcements that we made in China, for example, One is partnering with the largest green power supplier in China.
And we are going to be providing hydrogen refueling stations, we are going to be providing a PIM electrolyzer, and we are going to be providing hydrogen via the molecules. So, that is what the nature of that venture is.
But here, we are kind of partnering with somebody different than we might have in the past. It is a renewable power supplier. And this is revive green hydrogen to buses that are going to be operating around Beijing go into the Great Wall and all of that.
And then you have got a project in the South, where we have had a JV actually with [Senuk] (Ph) on the industrial gases side for some time. They want to branch out and do hydrogen for mobility. So, we are taking the hydrogen off the refinery. We will clean it up. We will pipe it to some hydrogen fuelling stations. We are providing, and we will kind of build out that market. But that will be a typical sell a gas business model as well.
So, predominately to sell a gas that is currently going to be as certainly as what we are interested in, but there will be some SOE type of sales. And I think you correctly pointed out Bob that you know renewable power is a big part of providing green hydrogen. So, the scaling up of wind and solar is going to be key to getting green hydrogen costs down to a point where you close the gap versus conventional.
We can only assist in that so much. But certainly, that is a key part of that. And as I said earlier, hydrogen is seen as an enabler to renewable power because one of the issues with renewable power is as everyone knows, it is not as reliable. The windows always blow, the sun doesn't always shine.
But hydrogen can be a storage mechanism for energy. And so, that is why green hydrogen actually plays a role in helping enable the growth of renewable power. So, if some of that remains to be seen how that is going to play out, but that is where a lot of the focus is today.
And Bob, this is Matt. Just to maybe add to Steve’s points as part of your question also on aligning with power providers. As you know, we are one of the largest power purchasers in the world today. We purchase terawatts of power and we have actively been working for many years already to improve our renewable energy portfolio. In fact, we have recently got it from 35% up to 38% in this year-to-date. So this has been something that is not new for us.
It is something we have been doing for a long, long time. And given that experience, given our local relationships with all of these power producers around the world, it does give us an opportunity to leverage that and helping make this a more successful for green hydrogen. And we are able to connect our technologies and engineering and local presence with these purchase opportunities that we already have today in the relationships.
That is helpful. And got to say, it is a nice relief to talk about something that is not pandemic related lately. On that regard my second question just curious, maybe in the aerospace business or in the hospitality CO2 business, is there any risks that you might need to take an impairment on those businesses given the fundamental changes in how those businesses are doing or the customers of those businesses?
Yes. This is Matt. No concerns there whatsoever. I mean, the aerospace business book value is actually quite low. We still generate a good profits and as you could imagine that that PSP business is really three businesses in one, it is an aviation, it has an industrial, and then it has an energy that works on things like industrial gas turbines and other forms of more energy efficiency.
So, all three businesses continue to operate. This is actually an opportunity for us to consolidate some sites and they are taking appropriate actions in light of the new environment and that has always been a very, very well run business. So, there are no concerns there.
And similarly on the hospitality CO2 business, remember that as a high rent business. So, we still continue to get rents on the restaurants that continue to either operate, or will come back and operate again.
So while the volumes on Page 17, for food and beverage, were down 9%and that is the CO2 volumes to your point, primarily into the hospitality sector, the rents continues. So this business actually performing quite well in light of what is going on. And then a rebound obviously would be upside. So no concerns on either whatsoever.
Terrific. Thanks very much.
Thank you. And our next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is now open.
Thank you. And hi, everyone. I think you mentioned that there were some project delays in the backlog which I suppose to be expected in the current environment. And that you were chasing compensation for that. Can you just give us a sense of how substantial those projects were and the delays and how is that compensation accounted for in your financial results?
I mean, it can happen various ways, we get the compensation up front in terms of project delays with cash compensation, or it can be built into the final price. Usually you would find it built into the final price.
So, we end up with at least the same IRR, if not higher after we go through the negotiations around the delay. Our contractual language protects us very clearly in terms of we commit to a date, if that date gets delayed. And, there has to be compensation to compensate us for that.
So that is how it is addressed. And usually, you would see it in higher revenues, margins and cash flow because of the delay to compensate for any changes that we would see.
Okay. And just maybe just a follow-up on the repurchases and the guidance. I assume there is very little if any repurchases in the third quarter guidance and perhaps some in the full-year, but probably very little. Is that correct?
Yes. And Vince, this is Matt. We tend not to put too much of this in the forecast just because as you know, it is also a time weighted aspects of depending upon when they are done at what point throughout.
So as I mentioned earlier we will get back to the markets post this call. We will continue to be a participants. And then where we see opportunities we will take advantage of that. But right now, I wouldn't anticipate anything material affecting the share count at this stage.
Thanks very much.
Thank you. And our next question comes from a line of Mike Sison with Wells Fargo. Your line is now open.
Hey guys, nice quarter. In terms of the volume improvement in June and July. Was it pretty even through each of the segments or geographic regions?
Well, I would say, as you know this kind of all started in China first and then swept through the rest of Asia. That is why you had some effect from COVID certainly in Q2 as well as in Q1, Q1 China Q2 more of the southern part of Asia. It went to Europe first and then came to the Americas. And of course, we are still seeing some of that in the Americas.
But if you were to look at something like China, we saw improvement through the quarter in terms of merchant volume improvement. Our onsite business there has been very stable, quite strong, actually, all the way back to the beginning.
Certainly you can look at Europe, you can see the improvement from April to May to June. If I look at the U.S., similarly, you can see the improvement from April to May to June. So really, I guess they go back and answer your question pretty much across the Board. You saw improvement from April to May, June.
Got it. And then, it sounds like Lincare continues to do well. Can you talk about the returns has that improved markedly? And do you think that do you think that it could be sustainable, longer term?
Yes, it is sustainable, in terms of the level of improvement is probably on the order of 1000 basis points over a couple years. So, the business has been doing very well. We had put a lot of focus on improving the performance of that business, both in terms of improving the margins, lowering cost but also in terms of CapEx management, we change some of the compensation metrics around that.
And clearly Lincare is doing well in an environment like we have today where they are an important second line of defense for the hospitals. Months-ago they would not have treated one COVID patient, today they are probably over 12,000 COVID patients that they are handling.
The government Medicare has come to the realization that working with us is very important to making sure that patients are transitioned quickly, that the treatment can be provided, whether it is COVID, or other respiratory illnesses, and if they may have 1.6 million patients in total, in a well over a million of those would be would be respiratory type patients.
So, paperwork has been eliminated, we have been able to eliminate face-to-face requirements, because it is a very document intensive, paperwork intensive kind of business whenever you are working with a government that a lot of those more bureaucratic processes had been removed, streamline, so we are able to operate effectively and you know the business continues to perform quite well. And I expect that to continue.
Thank you.
Thank you. And our next question comes from the line of Jeff Zekauskas with JP Morgan. Your line is now open.
Thanks very much. I think I can put my two questions in one. Is the Singapore coal gasification -- Singapore gasification project for 2023, still on schedule, or has it been delayed? And secondly, you said that it is difficult to distinguish your cost reduction efforts from merger efforts. Do you have any margin targets of any kind, maybe your SG&A ratio or your EBIT margin or your EBITDA margin?
Well, you know Jeff regarding, I just doesn't come as a surprise, as we look at cost to me $1 cost is $1 cost. I do look at total cash fixed costs as a percentage of sales. That is something I always look at. I look at every RBU around the world, Regional Business Unit, there is 20, some and I always look at in terms of where do I think the appropriate cost where it should be given the type of business that they are in.
And then of course, we always demand efficiency, year-over-year. That is what a lot of our productivity projects are about this, but I will let Matthew come back and answer this question as far as other metrics, but that is what I look at very closely. And that is how we drive operating margins along with the normal productivity pipeline and pricing.
With respect to any specific project, I would rather not comment on that because you have to keep in mind, there are customers on the end of all of these things that I would rather- they lead with any commentary regarding delays.
Okay. And I can pick up to Steve's point a little more Jeff, on the margin. So I would answer it thinking about it this way. So first let's think about it on an external benchmarking basis. Clearly historically, there has been demonstration and I will talk to operating margins, which I think is an important metric to how we think about it.
EBITDA margins, I'm less interested in. The primary reason is because as you know, EBITDA includes the equity income of affiliates, and that is 100% margin every time, because it is not consolidated. There are no revenues. So, that is just a function of how structures and ownership structures, but it really doesn't speak to quality at all.
So operating margin is where I focus, that is my effort and that is what I think is the most important of the profitability ratios. So, within that, externally, clearly demonstrated mid-20s for an industrial gas company, even when you look at our segments externally, the Americas, obviously operating mid-20s. So at a minimum on a global basis, there is nothing preventing us from trying to achieve that on our gases businesses across all three segments.
Obviously, you will have timing of depreciation. You may have some portfolio differences of packaged gases versus onsite, but irrespective when you add it all together, those are numbers that we want to achieve and that we believe are absolutely feasible and has been demonstrated.
Internally, we obviously have a lot more benchmarks than what you have visibility to, and we look at every country and their operating margins, how they are structured, what they are able to deliver. So we have, I would say even more stringent internal expectations on what needs to happen around margin delivery.
And to Steve's point, when you look at price, when you look at inflation and when you look at productivity, the inter-relationship between all those three has to be accretive. If that is accretive, it creates a compound value creation and that is why we always are very intent on cash cost pricing and the relationship of those and then obviously inflation in the environments you operate.
So, this is something we expect every year to try and improve on our operating margins. And then to your point, other aspects like SG&A as a percentage of sales, sales or profit per head headcount, return on capital. These are things that should improve through this internal operating rhythm and effort. So, mid-20s is demonstrated and that is clearly a goal. And then we want to continue to work better than that on an operating margin basis.
Great. Thank you so much.
Thank you. And our next question comes from the line of Steve Byrne with Bank of America. Your line is open.
Yes. Thank you. You have laid out on the Slide 10 a lot of the lofty green hydrogen goals for many countries. And you mentioned you are in dialogue with 16 of them. I want to ask you, do you think these countries have a plan for how to implement these lofty goals? Do you see it more as a carbon tax that might have more impact on the industries that could incorporate green hydrogen or the power companies that could incorporate it as a feedstock versus funding infrastructure that could be more used in implementing fuel cell based transportation, which could be much smaller projects versus the former. It would be very large projects and maybe more capital efficient. Do you have a view as to how those two buckets might play out longer term?
Well, I think it is going to play out by country. It is going to play out by region. If I look at what is taking place in Asia, I would say that the Asian countries tend to move faster whether you are talking about China or South Korea, Australia, I would put in that in that category, they tend to move quickly. I think we are going to need to see a lot of details or some of these goals that have been, that have been gone public and see how they are going to work.
I think that there will need to be a carbon tax, I think there needs to be a significant carbon price. And earlier, I gave a comparison between say a gray hydrogen molecule and green hydrogen as nominally where it is today. So there is a significant difference.
I don't think you can charge hundreds of dollars of carbon tax and have a workable solution. I think the number needs to come down overtime. And that would be coincident with again, the cost of hydrogen coming down - from green hydrogen coming down as well.
So those two things are going to need to play out together. And we will see how all of this evolves, but we are going to have lots of opportunity to talk about this as we understand more and more about what each country is intending. All I'm trying to lay out here today is that, we are well positioned in a lot of countries around the world that are going to be active in this space.
I was curious about the level of involvement that your engineering arm in this initiative. For example, you mentioned IT Empowers your partner for an Electrolyzer, which they have a two megawatt unit which is certainly suitable for that Germany fuel cell train project that you announced the other day.
But, if the big shell refinery in Rhineland, were to convert all of its hydrogen over to green hydrogen the project would need to be a gigawatt of electrolysis. And if your partner has a two megawatt. Is your engineering business involved in designing much larger electrolyzers or involved and in trying to adopt this technology to get larger scale?
Well, two megawatts module today, we haven't said what the size of the megawatt module is going to be going forward. So part of this is larger modules. Part of this is scaling up the plants using our Linde Engineering capability so that they can bring all of their expertise to bear around the whole balance of plant, because it is not just an electrolysis module. There is a lot of other supporting balance of plant as part of that as well. And that is all part of how you bring these costs down.
So there are some larger projects being discussed. The projects that we are working on today, certainly 20 megawatt, I think they are good sized projects. I like those projects. Some larger projects being discussed. And I think what you will find is that with some of the capabilities that is out there today say around alkaline technology that is like 100 year old technology. They haven't really used it for water in several decades. But that certainly is the intent.
My expectation is that the Chinese are going to be very strong players in alkaline building alkaline electrolysis equipment. And I think there is certainly going to be players, particularly as we are looking at some of these much larger scale projects. But right now, most of that is just being discussed. The normal fare of projects is in sort of the 2, 5, 10, 20 megawatt size range and we are perfectly happy to focus on those.
Thank you.
Thank you. And our next our next question comes from a line of Geoff Haire with UBS. Your line is now open.
Just kind of size the scale of a hydrogen opportunity. Currently staffing hydrogens roughly 10% of the sales of the gases of the group. How long do you think it will take before green hydrogen the same size?
Before green hydrogen what?
The same size as hydrogen. Yes. Given the current landscape that you can see?
Well, I think we are, that is something that there is a lot of activity today. If I use some of the forecasts that are out there, not necessarily our internal forecasts, some of the forecasts that are out there it says that by 2030, this could be upwards of $200 billion size market.
I'm kind of cautious and that I want to see more, first I want to see the market develop. I want to see more projects move forward, but certainly if it becomes that size, we would have no trouble equaling the size of our current hydrogen business today by that timeframe.
Okay. Thank you.
Thank you. And our next question comes from the line of John McNulty with BMO Capital. Your line is open.
Yes. Thanks for taking my question, Steven, in some of your opening comments around the core strategy, you highlighted portfolio optimization, you have a handful of businesses that aren't necessarily kind of industrial gas aligned necessarily. Any chance that we see an ability for you guys to pair those off in the next say 12-months or so?
Well, we are certainly working through the portfolio. There is always a long list of activities. We divested a couple things this past quarter. One was a LNG trading business, another one was a small infusion business. So, we are always doing things, we are always making package gas acquisitions and certain kinds of healthcare acquisitions, we are always looking - we will continue to look at.
With respect to some of the larger pieces you might be referring to, with COVID, some of the discussions we were having just got put on the back burner, because, potential buyers just aren't in a position to move forward at this time. But those are things that we will continue to look at.
We have joint ventures around the world that, we have never been a big fan of joint ventures that we would look to find a better solution than what we have today. So, we can operate these things the way we want to. We are also in some small countries around the world that from my advantage point would have more risk than benefit in being in. So we are looking to prune those as well. But there is always activity, and a lot of times it is just a function of who is on the other end, whether they are ready to move forward or not.
Got it. That is helpful. And then I guess one more question, just there is a lot of talk on the hydrogen side at the same time. There is a lot of stimulus factors we have been hearing about, they are very heavily green related. Hydrogen also is obviously in that vein. Would you say, you are more excited at this point about the potential for carbon sequestration tied to whether it is the green initiatives or the push on the hydrogen mobility market or are you more excited right now about the hydrogen mobility opportunity? How should we be thinking about let’s say over the next five years?
I would say right now, the hydrogen mobility is something that is more active. And clearly, if you look at, if you go back to the number I mentioned that if we could convert 1% of all fuel today used in heavy-haul trucking to fuel cell electric vehicles, that is a $20 billion market itself. So, the size of that market is enormous.
There is a lot of interest in that, that is what most of the regulations you see today are targeting. China, one million fuel cell vehicles, 1000 hydrogen refueling stations. South Korea, three million fuel cell vehicles, California one million. So the target of these countries, the focus is really around fuel cell vehicles in hydrogen refueling stations.
So, I would say that is presents a bigger opportunity. The carbon capture and sequestration tends to be a little bit more one-offs. Again, it is going to be in countries where you have low cost natural gas to begin with like the United States. And as I said earlier, as a country, we are not really moving forward quickly at this point. So, that can change. We can see more of that in the future. But right now, that is the way this opportunity slate is shaping up.
Great. Thanks very much for the color.
Thank you. And our last question comes from the line of Lawrence Alexander with Jeffries. Your line is now open.
Good morning. I guess just one last one. Given the scope for project available for the onsite business. How do you think about return on capital hurdles or how do you think that the packaged gas and merchant businesses compete for capital going forward? And do you have any temptation to shift the merchant gas or is it more explicit pricing over volume strategy?
Well, we are always looking to balance price and volume. When you are looking at the merchant liquid market. I mean, generally speaking, it is pretty profitable across the Board. But that has to be done granularly.
And what I mean by that, you have to look at it customer-by-customer, if you have a low margin account pushing pricing hard, there is a lot of upside. If you have a high margin account, you want to be thoughtful in terms of how you manage the whole price and your expectation around that.
So, that is how I think about the merchant pricing in general. That is really how I think about package pricing, but any projects they want to bring forward, clearly it is got to stand on its own. It is got to make good strategic sense from a product and a location standpoint. It is got to meet our return criteria.
And the same thing is true back to the onsite. It has to meet our - we have not changed our return criteria. We are still looking for good spreads above our cost of capital and we look at each project opportunity through that lens.
And just to add to that, Lawrence. This is Matt, As you know, we make 15-year, 20-year investments and if you do it right, it could be 50-year or 60-year investments. So we have to think about our return criteria over the long haul. And as you know, often these on-site investments are not two tailed risks, they tend to be one tailed risk to the downside. Because you have liquid advantages, you have performance requirements.
So you have to be very thoughtful throughout all the cycles when you make these investments. So that is something that we are not going to change. And every cycle is different. As Steve mentioned today, electronics, mining, things like that are doing well. And with stimulus coming in the year or two that could change the balance of some other industries. So we have to think long range and we always want to maintain that long range view when we make these investments.
Thank you.
Thank you. And this does conclude today's question and answer session. I'm going to turn the call back to Juan Pelaez for closing remarks.
Chris, thanks again. And thank you everyone for participating in today's call. If you have any questions, feel free to reach out to me directly. Stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.