In its Q3 2016 conference call with shareholders, the Linde Group released a new three-year efficiency programme, Linde LIFT. But what exactly does this strategic business plan entail?
It has three main objectives; to LIFT operating profit margins, to LIFT return on capital employed and to LIFT shareholder value.
The Linde LIFT plan was initially introduced after the first round of merger talks with Praxair broke down, with Dr. Wolfgang Büchele, then CEO of Linde, indicating that the need for the company to manage costs was one of the main reasons that the Praxair/Linde merger was originally discussed.
With the LIFT programme in place, Linde expects to make savings of €370m ($390m) by the end of 2019, by restructuring and streamlining operations in various geographies alongside non-personnel cost reductions.
Planned restructuring costs are estimated to be around €400m ($425m), which will be accounted for as non-recurring items in 2016 and 2017 financial releases.
The LIFT programme demonstrates Linde’s renewed focus on quality growth. Büchele stated in October 2016 that focus on quality growth will ensure good profit growth margins and a healthier return on capital employed.
Linde stated that (through its LIFT programme) it will be targeting growth in the chemistry and energy sector in Eastern Europe and the Middle East.Linde highlighted that slower micro-economic development and strong global competition are the two key areas that have had a negative impact on quality growth in the past. Therefore, Linde sees a need to focus on leveraging the company’s competitive strengths such as its strong global presence and brand, as well as selecting attractive growth strategies that support impressive margins and returns.
The company also plans to be more selective in which countries it chooses to invest. Moving forward, Linde states that it will favour investments in core markets where the company already commands a strong position, with high customer density.
Linde, under the strategy, plan to continue its development in key power zones and markets in Asia, one of the most rapidly growing regions in the global industrial gases business.
Furthermore, the nature of the Asian market is unique in terms of its demand for tailored applications and for specific gases. The LIFT programme highlights Linde’s keen interest to tap into this demand for customer specific applications.
Linde will continue to develop in industrial clusters in North America and plans to target the homecare market, where Lincare is currently market leader. The recent (January 2017) acquisition of an Illinois-based medical oxygen and equipment supplier reinforces Linde’s drive in this sector.
The company has also highlighted strengths in its business outside of geographical targets that could be utilised to cultivate more growth opportunities.
Linde also plans to use its many strengths to leverage its position against global competitors. The programme outlines a clear focus on onsite opportunities, both in gaining attractive contracts and using bolt-on M&A and decapitivation projects as additional growth stimuli.
Linked to the company strategy in the Asia-Pacific, Linde is also looking to increase shares of merchant revenue driven by tailored applications and solutions.
As part of LIFT, Linde is aims to lower its capex to sales ratio from around 13% to between 11%-12% in the coming years as the company believes that the capital expenditure required to capture growth is lower than in previous years. This reduced capital expenditure will in turn increase the return on capital employed and support free cash generation.
And finally, in order to lift shareholder value, Linde plans to increase its dividend for 2016 reflecting on the expectation of continued solid operating profit and operational cash flow, as well as lower investment levels. Further commitment to either stable or ongoing increases in dividends YoY is also highlighted throughout the LIFT programme.
This is the first in a series of articles that gets behind some of the business plans and accounting measures of the major industrial gas companies, and the industry itself.
Next month’s article dissects Air Liquide’s NEOS 2016-2020 Programme.