The Linde Group has revealed a mixed bag of results for the nine months to 30th September 2014, though the overall takeaway was an increase in revenue and a performance described by CEO Dr. Wolfgang Büchele as having ‘held our own pretty well’.
While a slight increase in group revenue was achieved despite unfavourable exchange rate effects, group operating profit, on the other hand, was not as high as the figure achieved in the first nine months of 2013.
The first nine months of 2014 saw Linde achieve a slight increase of 0.9% in group revenue to €12.584bn (2013: €12.468bn). Exchange rate effects are understood to have had a significant adverse impact on revenue, especially in first half 2014. In the third quarter, the exchange rate effects became less unfavourable to Linde and after adjusting for these, the increase in revenue in the first nine months of 2014 was 4.8%.
Adjustments for exchange rate effects equated to revenue of €462m during the nine-month reporting period.
Group operating profit of €2.898bn was not as high as the figure achieved by Linde in the first nine months of 2013, of €2.996bn. Adverse exchange rate effects also need to be considered here; the effect of these distortions was to reduce earnings by €109m. Without these distortions, the group would have achieved a 0.4% increase in group operating profit.
Group operating margin for the first nine months of 2014 was 23.0% (2013: 24%). When considering this fall in margin, it should be noted that the Engineering Division (as expected) contributed more to group revenue in the reporting period than the same period of 2013 – the engineering business has a lower margin than its gases operations.
“Although global economic growth slowed down in the course of the year, we held our own pretty well. At the same time, we have recognised some impairment losses…”
Dr. Wolfgang Buchele, CEO of Linde AG
“Although global economic growth slowed down in the course of the year, we held our own pretty well,” said Dr Wolfgang Büchele, CEO of Linde AG. “At the same time, we have recognised some impairment losses, which were required due to changed conditions in some regions in the Gases Division.”
Given these impairment losses, Linde will no longer be able to achieve the target it had set itself for the 2014 financial year of around 10% for return on capital employed (reported ROCE). The group now expects to achieve a similar level of operating profit (EBIT before non-recurring items adjusted for the amortisation of intangible assets and the depreciation of tangible assets) in the 2014 financial year as in 2013, after adjusting for exchange rate effects.
Until now, Linde had anticipated that it would achieve a moderate improvement in group operating profit. It continues to expect to achieve solid growth in revenue in 2014 after adjusting for exchange rate effects.
Discussing the group’s medium-term targets, Büchele added, “We will continue to implement our strategy which is geared towards profitability and sustainability. However, we have to take account of the fact that economic growth has been much weaker than we all expected. In addition, future prospects for global economic trends have recently dulled.”
Linde therefore assumes that it will not be able to achieve the earnings target it originally set itself for 2016, until 2017. Depending on economic trends, Linde expects to achieve group operating profit of €4.5bn to €4.7bn and a reported ROCE of 11% to 12% in 2017, based on current exchange rates.
The group generated earnings before interest and taxes (EBIT) in the nine months to 30th September 2014 of €1.400bn, which was below the figure for the prior-year period of €1.644bn. This significant fall was the result of non-recurring items. Non-recurring items comprised impairment losses of €229m recognised in the Gases Division.
As a result of unfavourable exchange rate fluctuations, Linde’s revenue in the Gases Division in the first nine months of 2014 of €10.398bn, somewhat lower than the figure of €10.510bn achieved in the prior-year period. If an adjustment were to be made for these exchange rate effects, Linde would have achieved a 3.3% increase in revenue.
On a comparable basis (after adjusting in addition for fluctuations in the price of natural gas), Linde would have achieved a 3.1% increase in revenue in its gases business.
In terms of what it did achieve, however, the first nine months of 2014 saw operating profit in the Gases Division fall 2.6% to €2.837bn (2013: €2.913bn). Exchange rate fluctuations also had a significant influence here. The operating margin in the gases business in the nine months to 30th September 2014 was 27.3% (2013: 27.7%).
Business trends in the individual segments of the Gases Division varied in each case, depending on prevailing economic conditions.
“Against the prevailing background of modest economic growth in the eurozone, revenue in the liquefied gases and cylinder gas business in the EMEA region was only slightly above the figure achieved in the first nine months of 2013”
In the EMEA segment, (Europe, Middle East, Africa), revenue in the first nine months of 2014 was €4.497bn, just below the figure for the prior-year period of €4.569bn. On a comparable basis, revenue rose slightly, by 0.8%. Within the EMEA region, Linde achieved double-digit growth rates in its onsite business in the UK and in the Middle East. In Continental Europe, on the other hand, business performance in this product area in the first nine months of 2014 was temporarily affected by the stoppage for repairs of a hydrogen plant in Italy.
Against the prevailing background of modest economic growth in the eurozone, revenue in the liquefied gases and cylinder gas business in the EMEA region was only slightly above the figure achieved in the first nine months of 2013. In the Healthcare product area, a number of supply contracts relating to homecare operations acquired by Linde from Air Products in April 2012 were put out again to tender. As expected, due to the reorganisation of supply areas associated with this process, revenue in the Healthcare business in the EMEA segment in the first nine months of 2014 was slightly below the figure for the prior-year period.
Business trends in the Asia/Pacific segment were hampered mainly by unfavourable exchange rate effects. In the South Pacific region, the economic environment in manufacturing industry remained weak and investment in the mining industry declined. Both these factors had an adverse impact on growth. In third quarter 2014, Linde had to recognise an impairment loss of €100 m in China relating to parts of a plant complex in the Chongqing Chemical Park. It was necessary to recognise this impairment loss due to a change in the structural organisation at this site, which had an impact on both the raw gas available as feedstock and the purchase volumes of the plant complex. As a result of changed conditions in a sub-region of the South & East Asia region and in Australia, Linde also recognised an impairment loss during the reporting period of €29m.
The group generated revenue in the nine months to 30th September 2014 in the Asia/Pacific segment of €2.822bn, almost the same as the figure for the prior-year period of €2.843bn. On a comparable basis, Linde achieved an increase in revenue here of 5.4%. Within the segment, the most positive trends were to be seen in business operations in the Greater China region. Boosted by volume increases in all product areas, Linde was able to achieve double-digit revenue growth here.
In the Americas segment, Linde generated revenue of €3.172bn in the first nine months of 2014, around the same level as that achieved in the first nine months of 2013 (€3.190 bn). On a comparable basis, revenue increased by 4.3%. Whereas growth in North America was stable, the economic climate in some countries in South America, especially Brazil, continued to worsen as the year progressed. Higher natural gas prices in North America and inflation in some of the countries in South America also had an adverse impact on earnings and on the margin. When comparing the figures for the Americas with those for the prior-year period, a number of other factors should also be considered, including Government tenders introduced in the healthcare business in North America in the second half of 2013, which resulted in reductions in prices.
Recent economic forecasts indicate that the global gases market will grow at a slightly faster pace in 2014 than was the case in 2013, although the rate of growth will not be as dynamic as was expected at the beginning of the year.
Linde therefore remains committed to its original target in the gases business of outperforming the market and continuing to increase productivity. The group is still expecting a moderate improvement in revenue in the Gases Division in the 2014 financial year when compared with 2013, after adjusting for exchange rate effects.