Executive Summary / Key Takeaways

• Linde plc (LIN) operates a highly resilient industrial gases and engineering business, underpinned by a defensive model where nearly two-thirds of sales come from stable end markets, fixed facility fees, and asset rentals, providing significant stability even in challenging economic periods.
• Despite a stagnant global industrial environment and macroeconomic headwinds, Linde continues to deliver industry-leading financial performance, demonstrated by expanding operating margins (30.1% adjusted in Q1 2025) driven by disciplined pricing and rigorous productivity initiatives, including leveraging digital solutions and AI.
• The company holds a record total project backlog exceeding $10 billion, including over $7 billion in high-quality, contractually secured sale of gas projects with protected returns, providing a clear runway for future growth independent of near-term economic fluctuations.

• Linde maintains a fortress balance sheet and a disciplined capital allocation policy, prioritizing investments in high-return projects, consistent dividend growth (32 consecutive years), and flexible share repurchases, enabling robust shareholder value creation.

• While management remains prudent, guiding for flat to recessionary volumes at the midpoint for 2025 due to ongoing uncertainty and FX headwinds, the core investment thesis is supported by the strength of its operating model, technological advantages, and executable growth drivers that are expected to deliver double-digit EPS growth from controllable actions.

The Resilient Core of Global Industry

Linde plc stands as a titan in the global industrial gases and engineering sector, a position forged over a history stretching back to 1879 and significantly solidified by the 2018 merger of equals with Praxair. This combination created a powerhouse with unparalleled scale, a vast global network, and a diversified portfolio serving essential industries from healthcare and food & beverage to chemicals, electronics, and manufacturing. At its heart, Linde's investment thesis is built upon the fundamental, non-discretionary nature of its products – gases essential to countless industrial processes and human well-being – and a business model designed for resilience across economic cycles.

Linde's operating model is notably defensive. Management highlights that approximately two-thirds of global gas sales stem from sources largely insulated from typical industrial volatility: resilient end markets like healthcare, electronics, and food & beverage; on-site contracts that include fixed facility fees independent of customer volumes; and rental payments on owned assets like tanks and cylinders. This inherent stability, consistent across its geographic segments (Americas, EMEA, APAC), provides a crucial buffer during periods of economic uncertainty, a characteristic vividly demonstrated by the company's ability to grow EPS even during the challenging environment of 2020.

The company's competitive positioning is formidable, built upon its scale, dense supply networks, and operational excellence. While competing with global players like Air Products and Chemicals (APD), Air Liquide (AI), and regional specialists such as Taiyo Nippon Sanso (4088.T), Linde distinguishes itself through its integrated model and efficiency. Its extensive pipeline networks, particularly the significant infrastructure developed over decades in the U.S. Gulf Coast, represent a key competitive advantage, enabling efficient and reliable supply to large industrial clusters. Linde consistently reports industry-leading profitability metrics, including operating margins (30.1% adjusted in Q1 2025) and return on capital (25.9% in Q4 2024), often exceeding peers by a wide margin. This leadership is not accidental but a direct outcome of its strategic focus on disciplined execution, cost management, and leveraging its operational scale.

Technological Leadership and Innovation as a Moat

Linde's competitive moat is significantly reinforced by its technological capabilities and commitment to innovation. The company's core differentiated technology lies in the design, construction, and operation of highly efficient industrial gas production plants, such as advanced Air Separation Units (ASUs) and hydrogen/syngas (HyCO) plants.

Linde's proprietary ASU technology offers tangible benefits, including superior energy efficiency compared to older or less advanced systems. While specific quantitative comparisons to all competitor technologies are not detailed, management emphasizes that optimizing power consumption in energy-intensive ASU operations is a key focus, with AI-driven models now used to enhance efficiency based on demand, tank levels, and predictive power pricing. This focus on operational efficiency directly translates into lower production costs, strengthening Linde's competitive position, particularly in cost-sensitive bulk and on-site markets.

In the realm of hydrogen production, Linde's expertise spans various technologies, including Steam Methane Reformers (SMRs), Autothermal Reformers (ATRs), and Pressure Swing Adsorption (PSA) units. The company is actively engaged in R&D and deployment of technologies crucial for the clean energy transition. For instance, its ATR technology is highlighted for providing high concentration, high purity CO2 onstream, making carbon capture significantly easier and more efficient. This is critical for the development of low carbon (blue) hydrogen. Linde is operating one such ATR and building another at the OCI (OCI) project, demonstrating practical application of this technology. Furthermore, the company utilizes PSA units to purify hydrogen from various sources, including cracker off-gas, a capability already deployed in the U.S. Gulf Coast and integrated into projects like the large Dow Chemical (DOW) facility in Alberta.

Beyond core production technologies, Linde is heavily investing in digital solutions and AI to drive productivity. Management reports having 105 use cases for AI models currently being deployed. Examples include using AI for power optimization in ASUs and deploying telemetry and machine learning for optimized distribution scheduling. In China, the company is rolling out "Smart Plants" using drones and robots for automated readings, potentially reducing on-site manning. These digital initiatives are stated to contribute significantly (around 30-32%) to Linde's overall productivity efforts.

The "so what" for investors is clear: Linde's technological edge in efficient production, integrated plant design, and increasingly, digital operations, enhances its cost structure, improves reliability, and supports its ability to serve complex customer needs, particularly in high-growth areas like electronics and the emerging clean energy sector. This technological foundation acts as a significant barrier to entry and helps maintain the company's premium market position and profitability.

Disciplined Execution Driving Performance

Linde's recent financial performance underscores the effectiveness of its operating model and management actions, even amidst a challenging macroeconomic backdrop. For the first quarter of 2025, Linde reported sales of $8,112 million, flat year-over-year. While volumes saw a slight 1% decrease and currency translation was a 3% headwind, these were largely offset by a 2% contribution from higher pricing, 1% from cost pass-through, and 1% from acquisitions.

Reported operating profit for Q1 2025 increased 4% to $2,184 million, resulting in a robust operating margin of 26.9%. On an adjusted basis, operating profit reached $2,438 million, expanding the adjusted operating margin to an impressive 30.1%. This margin expansion, a consistent theme across all segments in Q1 2025, was primarily driven by disciplined pricing strategies and ongoing productivity initiatives, which more than compensated for cost inflation and lower base volumes. Selling, general, and administrative (SGA) expenses decreased by a notable 9% year-over-year in Q1 2025, reflecting lower costs, the impact of restructuring programs initiated in Q3 2024 (targeting a 2% workforce reduction), productivity gains, and favorable currency translation.

Segment performance in Q1 2025 reflected the varied global economic conditions. The Americas segment saw a 3% sales increase to $3,666 million and a 5% operating profit increase to $1,137 million, driven by higher pricing and productivity, partially offset by currency. Management noted mixed trends, with weakness in packaged gases but growth in bulk and North Latin America, and expects flattish volumes for the year in the region. EMEA sales decreased 3% to $2,031 million due to lower volumes (particularly in metals/mining and chemicals/energy) and currency, but operating profit increased 5% to $722 million, showcasing strong margin expansion (35.5%) driven by pricing and productivity offsetting volume and currency headwinds. APAC sales also decreased 3% to $1,539 million due to currency and base volume declines, but operating profit grew 1% to $451 million, supported by productivity initiatives. Management highlighted mixed trends in China (strength in electronics/batteries, weakness in metals/chemicals) and continued growth in India. The Engineering segment saw a 5% sales increase to $565 million and a 14% operating profit increase to $114 million, driven by project timing.

Linde's cash flow generation remains strong. Net cash provided by operating activities increased 11% year-over-year in Q1 2025 to $2,161 million, driven by higher net income (adjusted for non-cash items) and lower working capital requirements. Capital expenditures were elevated at $1,270 million in Q1 2025, primarily funding new plant and production equipment for backlog growth. The company's capital allocation policy is clear: maintain a strong single A credit rating, consistently increase dividends (the quarterly dividend was raised 8% to $1.50 per share), invest in high-return projects, and return excess cash through share repurchases ($1,100 million in Q1 2025). This disciplined approach ensures that capital is deployed effectively to drive both growth and shareholder returns.

Growth Drivers and Forward Outlook

Despite the cautious macroeconomic outlook, Linde's future growth is underpinned by several powerful drivers, most notably its substantial project backlog. The company ended 2024 with a record total backlog exceeding $10 billion, including a record sale of gas backlog of over $7 billion. This backlog represents contracted growth, largely independent of near-term industrial production fluctuations, with projects expected to contribute 1-3% to EPS growth annually as they come online. Key projects within this backlog include significant clean energy initiatives like the Dow Chemical project in Alberta (Linde's largest sale of gas project historically) and the OCI project, as well as numerous electronics projects for major semiconductor manufacturers like TSMC (TSM) and Samsung (005930.KS).

The clean energy transition presents a significant long-term opportunity, with Linde identifying an $8 billion to $10 billion pipeline of potential investments over the next few years. The company's strategy in this space is primarily focused on low carbon (blue) hydrogen, leveraging its mature and cost-competitive technologies (ATRs, PSA, CO2 capture) and supported by incentives like the U.S. 45Q tax credit. While acknowledging the potential of renewable (green) hydrogen, management views it as 5-7 years away from achieving the necessary scale and cost competitiveness for broad industrial adoption. Projects like the Dow facility not only provide contracted revenue but also build out strategic hydrogen networks in key industrial regions, positioning Linde for future expansions and customer wins.

Growth is also expected from secular trends in specific end markets and high-growth geographies. The electronics sector, driven by demand for AI and data centers, continues to require significant investment in new fab capacity, where Linde's ultra-high-purity gases and on-site supply expertise are critical. Markets like India and Mexico are benefiting from near-shoring and reshoring trends, offering attractive growth opportunities where Linde has a strong established presence.

Management's guidance for 2025 reflects a prudent stance on the macro environment. For the second quarter of 2025, the company guided for adjusted EPS between $3.95 and $4.05, representing 3-5% growth (5-7% excluding FX). The full year 2025 adjusted EPS guidance is set at $16.20 to $16.50. This guidance incorporates an estimated 4% currency headwind and assumes flat to recessionary base volumes at the midpoint, translating to roughly a 2% EPS headwind from lower volumes. Despite these external pressures, the guidance implies continued EPS growth driven by the controllable elements of the growth algorithm: capital allocation (backlog conversion, buybacks) and management actions (pricing, productivity). Management emphasizes that this cautious outlook is a placeholder based on current trends and that they are prepared to mitigate further weakness or capture upside if conditions improve.

Risks and Challenges

While Linde's business model offers significant resilience, it is not immune to risks. The macroeconomic environment remains a key concern, with ongoing industrial weakness, geopolitical tensions, and regulatory uncertainty potentially impacting demand and project timelines. Currency fluctuations pose a persistent translation risk, as a significant portion of earnings is denominated in foreign currencies. Cost inflation, particularly for energy and raw materials, remains a challenge, although Linde has demonstrated an ability to offset this through pricing and productivity.

Specific legal proceedings, such as the unresolved Brazilian tax disputes, the German appraisal proceedings related to the Linde AG merger, and the complex disputes in Russia with RCA and Gazprom (GAZP) related to terminated engineering projects, represent contingent liabilities and potential operational disruptions. As of March 31, 2025, the company reported contingent liabilities of $1.1 billion related to RCA and $0.7 billion for Amur GPP matters. While Linde intends to vigorously defend its interests, adverse outcomes in these matters could impact financial results.

Execution risk exists in bringing large, complex projects online on time and within budget, although Linde's stringent backlog definition and track record mitigate this to some extent. The ability to attract and retain skilled personnel is also crucial for both operations and project execution.

However, Linde's strong balance sheet, characterized by ample liquidity ($5,294 million cash in Q1 2025) and access to capital markets (undrawn credit facilities, recent bond issuances), provides a buffer against financial shocks and supports continued investment and shareholder returns. The company's proactive management culture, focused on identifying and implementing cost and productivity improvements, further enhances its ability to navigate challenging conditions.

Conclusion

Linde plc presents a compelling investment thesis grounded in the essential nature of its products, the inherent resilience of its operating model, and a proven track record of disciplined execution. Despite facing macroeconomic headwinds, including stagnant industrial activity and unfavorable currency movements, the company continues to demonstrate its ability to expand margins through rigorous pricing and productivity initiatives, leveraging its technological advantages and operational scale.

The record project backlog, particularly in high-quality sale of gas projects and clean energy initiatives, provides a clear and contractually secured path for future growth. Combined with a disciplined capital allocation strategy that prioritizes high-return investments, consistent dividend increases, and flexible share repurchases, Linde is well-positioned to continue delivering robust shareholder value creation. While management prudently acknowledges the near-term uncertainty in its guidance, the core drivers of Linde's long-term success – its defensive business model, technological leadership, operational excellence, and strategic growth initiatives – remain firmly intact, making it a resilient leader in the global industrial gases market.