Linde Targets A Modest Recovery

Linde, the world’s biggest industrial gases firm, is on course to recover this year from a disappointing 2014, aided by the depreciation of the euro. But it still has homework to do, even if it wants to reach its more modest goals for 2015.
Linde is looking for growth.


It was a small restructuring measure, but a telling one. Since Wolfgang Büchele, the chief executive of Linde, took over 12 months ago, he has got rid of the high stage from which his flamboyant predecessor Wolfgang Reitzle used to peer down at journalists during news conferences.

Mr Büchele prefers to face reporters eye-to-eye and has the same approach-ability in his dealings with employees. He doesn’t set much store by hierarchies. “He goes up to people and wants to hear their opinions,” said one Linde manager. And when people tell him about problems, he asks them to suggest fixes.

A look at Linde’s 2014 results shows that he’ll have to do a lot more than rearrange the furniture. The world’s biggest industrial gases company, which makes gases such as oxygen, nitrogen and hydrogen used by the engineering and auto industries, missed its targets last year and has pared back its medium-term forecasts.

Linde's gases division, which accounts for over four-fifths of group revenue, saw only minimal growth last year.

To be fair, Mr. Reitzle left the group in reasonable shape. Sales advanced 2.4 percent last year to reach a new record of €17.05 billion, or $19 billion. Linde also managed to stay ahead of former market leader Air Liquide, but the French rival outpaced Linde in terms of revenue growth, lifting sales by 4.5 percent to €15.4 billion.

Linde owed its sales growth last year to its engineering division which profited from a strong order book. By contrast, the gases division, which accounts for over four-fifths of group revenue, saw only minimal growth.

Linde’s growth was squeezed by the strength of the euro last year which had a negative impact totalling €346 million. But the first-quarter results already benefited from the sharp depreciation of the single currency this year. In the first three months, revenue grew nine percent, thanks entirely to the weakening euro, and adjusted earnings before interest, tax, depreciation and amortisation came to €1.01 billion.

Analysts at DZ Bank expect that trend to continue for the rest of the year and predict revenue growth of 6.5 percent growth in 2015 to €18.5 billion. Mr. Büchele went even further, saying up to €19 billion was possible.

Currency factors also hit operating profit, which edged down 1.2 percent to €3.92 billion last year. Before he stepped down as chief executive last May, Mr. Reitzle had promised a small increase. The operating margin narrowed slightly to 23 percent but that’s still respectable. Competitor Air Liquide reported an operating margin of 17.1 percent, an increase of 0.2 percent.


160 -WTB 2014


But Linde’s after-tax profit slumped by 18.7 percent to €1.2 billion due to the strong euro and restructuring measures undertaken by Mr. Büchele such as two write-downs of €100 million on a plant in China and on its struggling businesses in Brazil.

The operating free cash flow rose to €1.29 billion from €969 million partly because Linde scaled back its investments to €2.0 billion from 2.2 billion. This slightly lower level should enable the group to reduce its write-downs and thereby improve its returns in coming years.

Linde cuts its investment in its key gases division to just under €1.9 billion from €2.2 billion. As a result, its investment ratio for gases fell to 13.5 percent of revenue last year from 16.1 percent, and was still above the medium-term benchmark Linde had set itself of 13 percent.

But Linde must take care that it doesn’t save money in the wrong areas. It’s well positioned in fields like hydrogen filling stations and gas liquefaction, but Mr. Büchele also wants Linde to innovate in the huge growth area dubbed “Industrie 4.0” in Germany. The term refers to a so-called "fourth industrial revolution", in which the Internet will reach the factory floor, enabling machines and raw materials to communicate with each other, allowing gigantic efficiency gains and the mass production of customized goods. Linde plans to contribute by developing the smart gas canister capable of reporting when it’s empty and automatically ordering a replacement. The company is preparing a pilot project for it.

Linde’s ample cash flow allowed it to raise its dividend despite the profit decline. “In this environment of low interest rates the dividend is important for investors,” said Mr. Büchele. He and his chief financial officer, Georg Denoke, want to exude confidence in Linde’s business outlook. The payout has been increased to €3.15 from €3 and has risen continuously by 75 percent since 2009.

The group has taken on considerable debt in recent years. Its takeover of British competitor BOC Group in 2006 drove borrowing up to a hefty €12.8 billion. By selling forklift truck maker Kion and paying down debt from annual operating profits, Mr. Reitzle managed to reduce borrowing to below €5 billion.

Then in 2012 came the takeover of Lincare, a U.S. manufacturer of oxygen and respiratory services for homecare, and Linde’s net financial debt bounced back to €8.5 billion. That’s manageable for Linde but it could do with cutting it more than the meager €31 million reduction last year to just under €8.2 billion. The debt was partly inflated by currency factors as the strong dollar boosted the euro value of debt in the accounts. The ratio of financial debt to earnings before interest, tax, depreciation and amortization remained unchanged at 2.1 percent.

Mr. Büchele has pledged a “continuous improvement of the business model.” He evidently thinks Mr. Reitzle left him with unfinished business in this regard. Linde, said Mr. Büchele, must speed up the implementation of its plans and cut back on management red tape. He has already cut one management layer.

If he makes progress here, Linde’s targets are reachable. Mr Büchele is aiming for an operating profit of between €4.1 and €4.3 billion this year, rising to up to €4.7 billion in 2017. Mr. Reitzle had more ambitious benchmarks and originally set himself the target of €5 billion in 2016. But the modest Mr. Büchele evidently wants to allow himself space for positive surprises.


Axel Höpner heads Handelsblatt's Munich office, focusing in particular on the Allianz and Siemens corporations. To contact the author: [email protected]