Linde's (LNAGF) CEO Wolfgang Büchele on Q2 2016 Results - Earnings Call Transcript

| About: Linde AG (LNAGF)

Linde AG (OTCPK:LNAGF) Q2 2016 Earnings Conference Call July 28, 2016 8:00 AM ET

Executives

Dominik Heger - Head of Investor Relations

Georg Denoke - Chief Financial Officer

Wolfgang Büchele - Chief Executive Officer

Analysts

Neil Tyler - Redburn Partners

Peter Clark - Société Générale

Jeremy Redenius - The Bernstein Companies

Thomas Wrigglesworth - Citigroup

Markus Mayer - Baader Bank AG

Martin Roediger - Kepler Cheuvreux

Jean-Francois Meymandi - Morgan Stanley

Peter Mackey - Exane BNP Paribas

Laurent Favre - Bank of America Merrill Lynch

Operator

Welcome to the H1 2016 results conference call of the Linde Group. At our customer’s request, this conference will be recorded and published afterwards. As a reminder all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. [Operator Instructions]

This presentation contains forward-looking statements about Linde AG and their respective subsidiaries and businesses. These include, without limitation, those concerning the strategy of an integrated group, future growth potential of markets and products, profitability in specific areas, the future product portfolio, development of, and competition in economies and markets of the Group. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, many of which are outside of Linde’s control, are difficult to predict and may cause actual results to differ significantly from any future results expressed or implied in the forward-looking statements on this presentation.

While Linde believes that the assumption made and the expectation reflected on this presentation are reasonable, no assurance can be given that such assumptions or expectations will prove to have been correct, and no guarantee of whatsoever nature is assumed in this respect. The uncertainties include, inter alia, the risk of change in general economic conditions and government and regulatory actions. These known, unknown, and uncertain factors are not exhaustive, and other factors, whether known, unknown, or unpredictable, could cause the Group’s actual results or ratings to differ materially from those assumed hereinafter. Linde undertakes no obligation to update or revise the forward-looking statements on this presentation, whether as a result of new information, future events, or otherwise.

May I now hand you over to Mr. Heger, who will lead you through this conference? Please go ahead, sir.

Dominik Heger

Good afternoon, ladies and gentlemen. This is Dominik Heger from Investor Relations. Thank you for joining the presentation of the results for the first-half of 2016. With the current reporting season this seems to be the industrial gases’ day as our two U.S. peers also published their results today.

With me today are Dr. Wolfgang Büchele, CEO; and Georg Denoke, Member of the Executive Board and CFO. Today’s presentation of the result will be given by Georg Denoke. Afterwards both Wolfgang Büchele and Georg Denoke will be available for your questions.

Let me now hand you over to Georg Denoke.

Georg Denoke

Yes, thank you, Dominik; and good afternoon, ladies and gentlemen, and a warm welcome also from my side. Let me begin with highlights of our performance in the first-half of 2016 on Slide #3.

Reported revenue declined by 5.3% to €8.6 billion due to currency headwinds and the expected lower contributions from Engineering. On the currency adjusted basis, the decline in revenue was 1.6%. Reported operating profit declined by 4.1% to €2 billion, adjusted for currencies operating profit declined slightly by 0.5%.

The revenue and operating profit figures yielded a group margin of 23.6%, up by 30 basis points compared to last year. This was supported by positive effects from restructuring measure that are starting to come through and helped to improve the margin in the Gases division in the first-half of this year to 28%. In the second quarter the margin was 28.3%.

We recorded a solid operating cash flow of €1.6 billion in the first-half representing an improvement of 3.2% over the last year’s level. Reported EPS came in at €3.40, 9% above the level of last year.

I would like to move on to the development of revenue and operating profit by division on Slide #4. In the Gases division, currency headwinds and the effects from lower prices for natural gas as well as other pass-through items, such as electrical energy restrained revenue development. Reported revenue declined by 3%.

Revenue in the Engineering division proceeded in line with expectations totaling €1.1 billion. Despite negative currency headwinds, operating profit in the Gases division remained relatively stable at slightly above €2.05 billion, with the margin of 28%. In the Engineering division, margin came in at 8.2% and in line with our guidance.

I will now move on to a more detailed review of the performance in the Gases division on Slide #5. Headwinds from natural gas prices continued in the second quarter and amounted to minus 0.9% in the first-half of the year. Currency headwinds became progressively stronger through the year so far, coming in at minus 4.1% versus the first-half of 2015.

During the reporting period, we recorded comparable growth of 2.1%. As you know we adjust for currency and natural gas, but not for electrical energy and other pass-throughs like intermediate and LPG.

On Slide 6, you see the comparable growth by product area. The 8.5% growth in healthcare was driven by the American HomePatient acquisition that has been consolidated since February 1. Excluding the acquisition healthcare growth would have been 1.8%. Growth in the on-site came in at minus 0.8% versus the prior year.

The development was affected by two events from 2015, namely the end of the contract in Australia and the insolvency of a customer in UK. Adjusted for these effects on-site growth would have been 1.1%.

Additional pass-throughs such as lower prices for electrical energy and other intermediates also affected growth in on-site, in particular in Q2. Further adjusting these effects the results would have been that on-site grew +3.1%. Bulk revenues increased by 0.5% on a comparable basis with Asia providing the highest growth contribution. In the cylinder gases business, reported revenues was €1.9 billion, which was 0.5% above the comparable figure for the first six months of 2015.

The development in South Pacific remains significantly negative, without the headwind from merchant industry gases in Australia, in cylinder the mix effect for cylinder globally would have been 2.2% growth in comparison to the 0.5%.

Let me summarize for the entire Gases division. Adjusting the additional pass-through effects like electrical energy and intermediates, as well as the plant closures of last year, the underlying H1 figures would be 3.3% growth, instead of the 2.1% comparable growth in the Gases division.

I move on to Slide #7. Revenue in EMEA declined by 0.2% on a comparable basis. Growth was impacted by headwinds from weakness in the U.S. steel sector, including the insolvency of the customer as previously mentioned, and the challenging macroeconomic environment in South Africa.

The region Middle-East and Eastern Europe provided the highest growth contribution in EMEA. The development was supported by the startup of two gas separation units in Russia for our on-site customer SIBUR. From a product area perspective, the strongest growth in EMEA came from healthcare.

In Asia Pac growth was 1.5% on a comparable basis. Despite the moderation in the second quarter, comparable growth in Asia remains solid at 5.1% in the first-half of this year with China growing by 7.2%. In contrast, the development in South Pac remained significantly negative, due to the weak economic conditions and the end of the contract in 2015.

Therefore, we continue to expand further efficiency measure within this year. In terms of product areas, within Asia Pac on-site and bulk showed the best development, supported by the LPG business. Comparable growth in the Americas was 5.3% in the reporting period. As already mentioned, this result includes the American HomePatient acquisition, furthermore pricing in South America contributed to growth.

Proceeding now to operating profit by operating segment, on the next slide, which is Slide #8. In EMEA, operating profit declined by 2.8% to €889 million. Operating margin expanded to 31.1% aided by lower natural gas prices and cost savings from our efficiency measures. Positive effects from restructuring measures supported the margin development in Asia Pac and the Americas.

Operating profit in APAC came in at €513 million with a margin of 26%. For the Americas, operating profit amounted to €652 million with an improved operating margin of 25.3%.

Let’s now take a look at the Engineering division, which is Slide #9.

Engineering revenues developed in line with project progress totaling to €1.1 billion. The realized margin of 8.2% is in line with our 2016 outlook of around 8%. At €718 million order intake was on par with the level of last year. During the reporting period, we recognized additional €180 million of a more sizeable order intake with respect to a petrochemical project for Shell in Pennsylvania. This scope of the project involves procurement and supply services, as well as providing equipment.

At €4.1 billion, order backlog remains on a solid level. This concludes the division performance review. Next on the agenda is a short update on our efficiency measures on Slide #10.

Efficiency and cost management are important elements of our strategic focus. From 2013 to 2015, our High Performance Organization program, HPO, realized gross cost savings of about €620 million. So far this year, we have generated gross cost savings of around €100 million.

And you know, besides HPO, we have implemented additional improvement measures regarding changes in our organization structure, as well as in the southern hemisphere. During our previous communication, we also underlined that we will continue to implement additional rigid cost management measures. For this reason, further efficiency initiatives are underway, particularly in UK, Northern Europe and Australia. The expansion of the program increases our expected cost savings by €50 million to €230 million by the end of 2015.

Costs associated with these additional measures are not recognized as non-recurring items as you know. So far we have realized savings of around €50 million in the first-half of 2016. Related to the cash out for the restructuring initiated last year, of course, cash flow is impacted as you know in the first-half year with these cash outflows.

Now, on the next slide we see the financial performance. Supported by the solid operating cash flow of over €1.6 billion in the first-half of 2016, net debt remained on the same level compared to the end of 2015 despite the higher dividend payout in May and redundancy payment for last year’s efficiency program. The net debt to EBITDA ratio was 1.9 times.

In May we exercised our right to call two subordinated hybrid bonds. Due to our strong credit ratings, we no longer consider hybrid capital as a necessary part of our financial structure. The redemption of the two bonds on July 14, 2016 will lower interest expenses in the second-half of the year. The ratings of, Standard & Poor’s and Moody’s, remained unchanged with stable outlooks.

I’m now on Slide 12 and we hereby confirm our outlook for 2016, it remains unchanged. We also reconfirm our medium term targets of group operating profits of €4.2 billion to €4.5 billion, and the return on capital employed of 9% to 10% in 2017. This concludes today’s presentation. Thank you for your attention and interest in Linde and we are happy to take your questions now.

Pierre, you may now poll for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. Dear, ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] The first question comes from Neil Tyler, Redburn. Your line is now open. Please go ahead.

Neil Tyler

Good afternoon. Thank you. Three for me, please. Firstly, could you just, Georg, perhaps go back and re-quantify, that you mentioned 3.3% organic growth excluding a number of factors. Could you just remind me what is and isn’t in there?

Secondly, the cash flow, the CapEx at the half-year stage is running sort of some way below the level that I would have anticipated. Should I use the first-half run-rate as a proxy for the second-half? And I wonder if you could also help me think about how you’re looking forward to 2017 in terms of CapEx and other capital allocation priorities?

And then thirdly, just a small one on the healthcare disposals that you’re talking about, can you put those into context of the strategy for the U.S. healthcare business? Why are you - what’s wrong with those particular businesses, are they particularly impacted by the price cuts and how we should think about your strategy for sort of M&A in U.S. healthcare including potential further disposals? Thank you.

Georg Denoke

Yes, thank you, Neil, for your questions. I think the first question if I understand that right, you want me to repeat when I was talking about the 3.3% growth rate adjusting for additional effects…

Neil Tyler

Yes, if you don’t mind, yes.

Georg Denoke

…for the Gases business. And the additional effects are the well-known shutdown of plants last year which is Babel Island in Australia, And your shutdown of SSI, the bankruptcy as you know. And then the others are electrical energy, which we do not adjust, and certain intermediates in our schemes which are implemented in on-site contracts, as well as the LPG part in mostly in our Australian business. These are the components.

Neil Tyler

Thank you.

Operator

Thank you. The next question…

Georg Denoke

No, no, no. We are not done yet. We have two more. Yes, sorry.

Operator

Oh, sorry.

Georg Denoke

So, on the CapEx, I think we have to guidance as you know from 11% to 12%. It’s first within, let’s say, net sales number which has the trends through the currency trending down. So it’s not easy to see recognition on balance sheet rates to say this 11% to 12% ratio impacted also by the reductions through currency. But, overall, I think, we would recommend at that stage, because we are also looking after certain projects. We would recommend that you keep that range in mind and don’t flatten it to the level of $1.6 billion. I think, that would be too much from today’s perspective, because of certain initiatives we are undertaking from a growth perspective.

Neil Tyler

Okay. Thank you.

Georg Denoke

The last question was the question which we communicated in the first-half here, the disposal of the spec pharma business in the Lincare activity in North America. The reason for that is we don’t consider this really core for our product mix and it comes with a relatively low-end margin, because it’s a kind of trading business, right.

Neil Tyler

Okay. And that’s clear. So there is nothing further to sort of read around that. This is a relatively standalone asset within the Lincare business.

Georg Denoke

Exactly. The standalone asset, it was once acquired. We sell it off. We think that it’s not necessary from a product offering perspective. That is not a difference for us, okay.

Neil Tyler

Perfect. Thank you. But just going back to the CapEx question, even if the first-half run rate isn’t perhaps the right level to use, could you perhaps just list again the priorities for capital allocation?

Georg Denoke

I think - let’s say that way. When we look into projects of course, one of the execution of the - we are talking here net additions only to be very clear. Your question is a net addition, right?

Neil Tyler

Yes.

Georg Denoke

So from this perspective, we are executing the projects which are underway in on-site, in merchant. And of course, the well-known gas distribution equipment, which is mainly cylinders, bulk tanks, helium containers, as well as trucks, right? So from that perspective that is what we entertain. Additionally, as you know with the synergies in Engineering we look for projects like decaptivations which are growing of course hand in hand with customers. And you need two to tango. And that is something which is more difficult to forecast.

So from that perspective, if you include these or not, then this run rate can be too low from today’s perspective, which would be then the €1.6 billion. And therefore, that is a range when you do the calculation of the 11% to 12% you would be definitely be pulled below the €2 billion of last year. I think that is very obvious. And you would be around €1.8 billion, if you do these adjustments I was mentioning.

Neil Tyler

Very helpful, thank you.

Georg Denoke

Yes. Thank you.

Operator

Thank you. The next question comes from Peter Clark, SocGen. Your line is now open. Please go ahead.

Peter Clark

Yes, thank you. Good afternoon, everyone. Again, coming back on the question, I asked on Q1 actually on the Americas margin, which is holding up very nicely at 25.5%, obviously, pointed to the specialty gases again an element in let’s say the electronics market particular. We see the three effects probably I don’t know, double the impact in the first-half for the pricing. And you make clear that. You can’t rely on that specialty gases number remaining so strong. Are you expecting this margin to pull back in the second-half? That’s the first question.

And then secondly, just to clarify. What you are saying on the restructuring you’re doing in Northern Europe, UK etcetera. You say, you’ve taken some charges already, which is in the number. Can you just clarify, if you put a number on that. I would call €50 million, but I know that’s the benefit, extra benefit you’re getting out I’m just wondering what you put in the profit in terms of your charges that are additionally restructuring? Thank you.

Georg Denoke

Yes. Thank you for your questions, Peter. So let’s start with the last one to make it easy, I said, this will be - this €50 million contributions of this mentioned initiatives, which is mainly Europe at the current stage, but for the second-half. I think, we really further expand activities in South Pacific as mentioned. So from that perspective that number, which we adjusted was for this year - or for the next two years around €50 million additional savings compared to what we communicated at the last point in time. That has bring the number up from €180 million to €230 million.

On the charges, I think through the P&L that’s the number, which is around at this stage €40 million. So that’s the number, which we didn’t adjust through non-recurring items. I think that’s important to understand.

On the first question, which is the Americas margin development, as you know, you have to have in mind that there will be an continued effect in the second-half by the already communicated price cuts and further price cuts out of competitive bidding three, as well as they’re recompete of competitive bidding tool. As we pointed out also in our last call. Therefore that effect is more pronounced. Of course, if the disposal of these spec-pharma business, specialty pharma business go through then that has the counterbalancing effect on margin development. I think to give you a number for the Lincare will be effect at that point in time, which is let’s say, pre-synergies of American HomePatient’s and pre-additional mitigation efforts, which are underway this number is around €18 million is the OP number, the EBITDA number, which we have lost in the first-half through the competitive bid three cut.

Peter Clark

Okay, thank you.

Operator

Thank you. The next question comes from Jeremy Redenius, Bernstein. Your line is now open. Please go ahead.

Jeremy Redenius

Hi, Jeremy Redenius from Bernstein. Thanks for taking. Three questions, please. Firstly, just going back to the comment on the underlying volumes for the quarter. I heard 3.3%. I just wanted to clarify does that include the acquisition of American HomePatient, which I think, total of - contributed about 1.6% to that but if you double check?

Second, from lower energy prices in your particularly lower power prices and lower natural gas prices. Have you been able to keep any of those benefits in absolute year or terms in the first-half of this year, particularly in the merchant business. And then, secondly - thirdly, do you mention 1.1% underlying growth for the on-site business that seems a bit soft. I’m curious to hear what was the contribution from the start-ups that you have in the report. And then what part of that was - what part was particularly soft even in an underlying number? Thanks.

Georg Denoke

Okay. So I think, I can clarify and give you a little bit more color. So on the on-site, if you adjust the comparable reported number, which we presented to you on Slide number, I think it’s six or so. Yes, Slide number 6. This is minus 0.8%. So from this perspective, when you adjust for the shutdowns of the plants, which is Babel Island and SSI, so Babel Island, Australia. This was a refinery of BP and SSI is the giver [ph] which went into insolvency in UK, right. Adjustments - if these adjustments is bringing up the onsite business to 1.1%, okay.

Jeremy Redenius

Understood.

Georg Denoke

The additional effect of pass-throughs which I said, which is electrical energy and intermediates is bringing up the effect to 3.1% in onsite. Therefore, the number is not that soft, as you where pointing out when you look into the reported let’s say, the comparable number in the normal way and if you exclude these two effect shutdowns of plants plus the intermediates and the electrical energy you are on 3.1%. I think, that’s important, therefore that has more visibility. Again in…

Jeremy Redenius

Of that 3.1% is how much of that is starting up new facilities?

Georg Denoke

I think, we have to look up, but we do have certain facilities coming in also in the second-half as you know, and then also some more sizeable in 2017, right. But let’s add one thing, overall, still oxygen quantities are rather globally on the soft end of that number. I think, when you see the additional negative effect from an trading perspective I think, that is to be pointed out in overall consumption, which is more on a take or pay level, then on an significant variable takeout. I think, that is important for on-site. So now, you have to help me with your second question again.

Jeremy Redenius

The second question then was about the benefits if any from lower energy prices in euro terms, rather than margin or percent terms.

Georg Denoke

Yes. I think, you know that of course, the obligation in on-site is a pass-through and therefore that’s the customer. Sometimes, the customer is asking us also for implementing hedging strategies on these pass-through’s then it would be a little bit different. But then we do have certain hedging cost against that and therefore, we would be compensated for that instead of pure market pricing.

And on the merchant side I think, that comes through with a slight time difference overall of course. When you do have a certain advantage on electrical energy then that is not coming through immediately, because here you work against price agreements over the three to five years period. And sometimes you do have of course sort of charges in inflationary times which we don’t have at that moment in time. Therefore, it’s a limited effect and I think, it is not to be mentioned as sizeable at that phase.

Jeremy Redenius

Okay. And then just a last point on the underlying growth 3.2% including American HomePatient?

Georg Denoke

Yes.

Jeremy Redenius

Great. And 1.6% was the right figure from American HomePatient?

Georg Denoke

Yes. This is included in the number and the American HomePatient number is around 0.5% for the half year effect. So if you adjust the American HomePatients without the American HomePatient that number would be 0.5%.

Jeremy Redenius

And the three - sorry, the 3.3% was for the Q2 or for H1?

Georg Denoke

No, the 3.3% was for the H1 and that includes American HomePatient.

Jeremy Redenius

0.5%, okay. Perfect. Thank you very much.

Georg Denoke

Against the 2.1% American HomePatient this year included and that number would be then 0.5%.

Jeremy Redenius

Okay. Understood. Thank you very much.

Georg Denoke

As you see, I think, the American HomePatient has to be very clear. On the top line, we are mitigation - we are mitigating the sales effect more or less with the American HomePatient acquisition against the price cuts, right. The price cuts were around 80, the contribution is a little bit more than 100. So from that perspective on the top side, we do not address the acquisition, because it’s seen as an compensation of the price cuts on the bottom line that looks different, because the time effect of the synergies of the American HomePatient comes in through the optimization after the acquisition, whereas the price cuts kick in immediately.

Jeremy Redenius

Okay. Thank you.

Georg Denoke

Okay. Thank you.

Operator

Thank you. The next question comes from Thomas Wrigglesworth, Citi. Your line now is open. Please go ahead.

Thomas Wrigglesworth

Hi, good afternoon. Thank you very much for taking my questions. Two, if I may. You sighted in Asia for growth was being driven by on-site and bulk. I was wondering, if you could provide a little bit more colors to, which areas in on-site strong, and specifically in bulk, where we have seen excess liquid oxygen and liquid nitrogen, what the market developments have been?

And then secondly, just coming back to this kind of adjusted 3.3%, kind of growth for the business. Do you think that’s commensurate with the market level of growth. Are you guessing your kind of pro rata share of market growth and how sustainable is that 3%. In the context of your medium term target, is that kind of underlying number, we should be looking for over the next couple of years? Thank you.

Georg Denoke

I think, it is our costs in comparison to the mix effects, as I pointed out. I think, we are hit by the negative mix effect, especially through South Pacific, where we have seen and decline in economic or industrial activity, since the longer period of time. Here we do have a more sizable market share as you know, therefore we are effective stronger. And that is across mixing the top line number. From this perspective, I think, I definitely assume that we have strong positions, where we do have our activity.

So on that perspective, I consider this 3.3% and really okay number, and for us, it was more important to talk about that, because when you look at Q2 isolated the effect and that is in a way a little bit surprise the effect of electrical energies and other intermediates for on-site, but also for other activities or more negative been last year, I think some people could say, because of the oil price all of that would have been come through already, but that’s not the case, it was for now.

Additionally, the shutdowns of the contracts, I think, therefore that’s an activity level, which is, I would consider with the explanation, which I gave to you about the steel end market. The steel end market is at that stage rather soft. And I do not want to know, let’s say give you a midterm guidance based on that activity level in the first half year, because it’s a rather soft market with certain over capacities as we know, and therefore with certain weaknesses. And as more important our mitigation strategy also on the cost side is, I think there. The additional point, when we talk about 3.3% of course. The organic growth of our Lincare activity is relatively strong when you see the additional contribution. So I think additional roughly €80 million are coming through pure organically, additionally to the acquisition effect of the American Home. So from that perspective, here I would consider that we can gain here more, when we look into the midterm future.

Thomas Wrigglesworth

Okay, thank you. Thank you. And on the Asian developments with regards to bulk, what’s been the - could you provide some more color there as to what’s been going on in the market?

Georg Denoke

I think the strongest growth came from, I think a loading of an on-site facility for the electronics market in Mainland China, I think that’s pretty obvious, this is a strong load. You can say it came in now within year delay, but now it’s regarding to the plan. I think that was a strong development. And therefore electronics in APAC is around 11% growth, which is a leading number here. Bulk loading, as we talk already last time, I think, we are loading volumes and we still have a negative price effect in China. And overall structure on-site, when you talk about steel other activities. We are around 3% level in Asia-Pac. So from that perspective, the negative as I pointed out, all the RSP [ph] industrial gas cylinder market, which is negative minus 6% still.

Thomas Wrigglesworth

Okay. And any view as to when that negative price effect in bulk may end?

Georg Denoke

Look, it is already coming. It’s narrowing down definitely this year. I think very important is that we do have the volume visibility. We pointed out, how this is developed in these markets. You know that there are certain steel customers also which kept this merchant capacity or on-site capacity, which they sell into the merchants market. And that is, let’s say, weakening spot market. But it is improving. I think in the first-half of this year, therefore the number this year is smaller than last year.

Thomas Wrigglesworth

Okay. Thank you very much to you. Thank you.

Operator

Thank you. The next question comes from Markus Mayer, Baader Helvea. Your line is now open. Please go ahead.

Markus Mayer

Hey, good afternoon, gentlemen. Three questions as well. Firstly, do you already see impact of the Brexit, and with this regard to Gist, Gist investment now off the table? Secondly, for the North American healthcare business, excluding the American HomePatient, just including the price cuts from competitive bidding part three, has disclosed to be positive as it was also in Q1.

And then lastly on the specialty gases in North America. Can you in general give you as a split of your specialty gases on neon, helium, krypton and xenon for your business globally? Thank you very much.

Georg Denoke

Yes. Thank you for your questions. I think on the Brexit, I think the strongest impact is a devaluation of the pound currency as you know, that is a translational impact for us, only this is visible on balance sheet in OCI. As you know, in the numbers from an P&L perspective. We have seen in deterioration down to 0.83, as you know from an euro, pound ratio. So that has the visibility, on the business itself, I think, that is too early to say honestly. I think, when you have seen IT forecasts and GDP forecast after the referendum, we have seen that IT forecast is slightly better for six week was surprised and more negative in 2017 and 2018 compared three referendum.

On GDP, you see a negative trend overall. So is this impacting our business in an indirect way it can, but we don’t know really also the negotiation with the European Union, that’s too early.

Markus Mayer

And on the Gist?

Georg Denoke

The pension effect of course you know that we run in pension scheme, rates are coming down, which is for the obligation side, of course, a negative development. But overall, I would say that, we do not run in crisis scenario because of the Brexit, if this business as usually and we have to continue and what the outcome is will be the outcome. And we have a strong market position. And I think, it can also foster a little bit the inland demand from a Great Britain perspective.

So the second one is on the Gist question, which you were mentioning, I think, see, I don’t give you an update, I think that’s very clear. We have to wait and we have to see and it’s still a non-core activity and there is - at that moment in time, nothing to communicate. Then on the question of North America, I think, if I understand your question, right, I have given the answer already. The organic underlying number for Lincare was plus €80 million.

Markus Mayer

Okay. Perfect.

Georg Denoke

First-half, yes. And when the question for the specialty gases activity, I think we have seen as you know in the second-half of last year, especially on the neon side, very positive effect overall. We still have certain positive effects, but less pronounced within this year. And we do assume that this will fade out at that stage in the second-half, but definitely more true for the especially the neon electronics part.

Markus Mayer

And would you say that the split of the specialty gases is typical for the market, for large neon split than far lower…

Georg Denoke

So I think, we do have a very strong position as you know from our antitrust obligations out of 2006, when we had to execute the antitrust obligations. We have a very strong position in helium, and we do have from an electronics perspective. I think, an over proportionate good position for certain xenon, neon columns when we look from a global perspective. So I think that were - that was it, right?

Markus Mayer

Thank you very much.

Georg Denoke

Thanks.

Operator

Thank you. The next question comes from Martin Roediger, Kepler Cheuvreux. Your line is now open. Please go ahead.

Martin Roediger

Yes. First, clarification question. Again to the $50 million additional savings for the 2016, 2017, we’ll come together with $40 million restructuring charges. Is that the figure, which you have booked in Q2 already or is that the figure which is related with the $50 million additional savings? That’s the first one.

The second is when we talk about these restructuring measures in UK, in Northern Europe, Australia for the $50 million additional savings, are these plant closures and workforce reductions are anything else?

And finally, on the outlook, in the press release it sounds a bit more cautious. Did the headwinds increase since the end of last year, because you are now seeing to be forced to do more actions, drive efficiency measures to improve your profitability? Is that the right understanding?

Georg Denoke

So I think, Martin, it is as you pointed out and as I said. So the $40 million are currently booked in the H1 figures as restructuring charges and not showing as nonrecurring items. I think, that is what I can repeat. The $50 million is what we see today from these initiatives and as we pointed out especially, I would argue in South Pacific we have seen a continuous negative trend in the cylinder activity and the industrial merchant activity.

And I think, this is the point where we have to expand further as an reduction. So from an perspective of the other initiatives in Nordic and in UK, I think, this is our continuous optimization on the one hand, but it is also of course the - it’s balancing out certain negative effects we have seen, I mean, the shutdown of SSI for example. When we see this effective something where, our CEO always healthy organization that we do have to work on the fixed costs on the continuous basis, and that is a result of that. So these are initiatives which are coming from the geography.

So these are coming from the regions, rather than this is an overarching global program. These are from the perspective, where an organization says if top line is not coming through as expected, then you have to do something with the bottom line and then you have to work on cost and you have to do work on pricing. And the effect on the cost is something which is then more certain then all the other effects. And therefore, these are the initiatives. And it is of course, mainly the fixed costs you’re mentioning. Thank you.

Martin Roediger

Thanks.

Operator

Thank you. The next question comes from Jean-Francois Meymandi, Morgan Stanley. Your line is now open. Please go ahead.

Jean-Francois Meymandi

Good afternoon. Just one in conscious of time, in Australia, if we back a bit on your regional growth, it looks like you’re close to potentially even more double digit decline in percent on year. Can you confirm that and how is the trend on the year-on-year basis from the Q3 that we could see and is most of the $50 million of the additional restructuring just over there or it’s really spread or it’s really the problematic kit within your results today? Thank you.

Georg Denoke

No, I think, I only can repeat again. So what I had at the $50 million additional savings potentially now, is coming out of Europe.

Jean-Francois Meymandi

Okay.

Georg Denoke

The number for Australia is not here included at that stage, because here we are investigating. And this, what I said, the industrial merchant trend is minus - around minus 6%, that is the number, it’s not a double digit number.

Jean-Francois Meymandi

Okay. So you’re on minus 6% and versus…

Georg Denoke

In industrial merchant - in industrial merchant particularly, that’s important.

Jean-Francois Meymandi

Yes. And in Australia altogether, if I look at the Q3 last year versus your Q2, well all your projection in Q3. Do the decline is getting to lower, i.e., are we getting close to a bottom or are you very much still in trouble zone on there?

Georg Denoke

No. I think, when you look overall, you have seen - now with the winter coming into Australia, we’re seeing a ramp-up of LPG activity as this is normal. So from a seasonal perspective, I think I would say the trend depending on, honestly, temperature in Australia, because we do have a very sizable business. It’s narrowing a little bit at that stage.

Jean-Francois Meymandi

Okay. Thank you very much.

Operator

Thank you. The next question comes from Peter Mackey, Exane BNP Paribas. Your line is now open. Please go ahead. One moment, we cannot hear you at the moment, just a second, please. Mr. Mackey, your line is now open. Please go ahead.

Peter Mackey

Thank you; London calling, London calling, et cetera. Just two or three questions, if I can. We talked about the €40 million restructuring costs that are booked in the operating number. The statements suggest that was off, entirely offset by non-recurring gains as well. Can you split that, it looks as if perhaps the Americas were flatted by on a net basis. And EMEA margin, which perhaps hindered on that same basis. I wondered if you could just sort of quantify that a little bit.

Secondly, if I very simplistically strip out the AHP acquisition from healthcare growth in Q1 and Q2, it looks like basically there was no growth in the second quarter on a comparable basis in healthcare. Are there any other phasing issues, we should be aware of on CB3? Are you seeing any pressure on prices in non-Medicare, Medicaid parts of the portfolio as a result of CB3?

And then, I want to just to push a little bit on the sudden [ph] commentary. I misheard something you said in your introductory comments, Georg. I think you said without the South Pacific mix effect, I got the impression that we were in 2.2% drop rather than 0.5% growth. I don’t know, if I misheard that. But I wonder, if you could just clarify that. And Air Products sounded a little bit more optimistic about the Chinese merger market at the moment. I wonder, if you’re seeing those same sorts of trends. Thanks very much.

Georg Denoke

Plentiful of details, Peter, thank you. I think, I can, I taught with the last one, I think, we would have seen growth of 2.2% in cylinder globally, when we adjust for Australia weakness in merchant industry, that was the number. It was not a drop. It was a growth of 2.2%. The mix effect of Australia on the cylinder basis is negative. And therefore, if you would exclude that effect, you would have seen in 2.2% growth compared to 1.5% growth, which is presented on Slide #6.

Peter Mackey

Very clear. Thank you.

Georg Denoke

Okay. When we look into the volume development from Asia on the bulk side, and I am doing your questions backwards and I am focusing on China as your question is, volumes are more pronounced. That is true in the year-to-date number. But I think, it is something where you still have to work on the price side. So really talk about the spot market development, which I was mentioning, and the strategy to repeat that for us. The strategy is that we come with application solutions for our bulk customers, because with applications and technology there.

We hope them into longer term contracts, normally five year contracts. And that means that’s a supply certainty, because of the enhancement of the consumption of industry gases. The supply guarantee is more important for them, because normally the work on energy efficiency, the applications as you know are output and quality product segmentation. So from that perspective, I think this is our effort and as you know from an application technology perspective globally. We have a lot to bring to these markets in the emerging world. I think that is very obvious.

Overall, we have entries in the last year’s from 30% to 40% share through applications in the Babel [ph] area. And in merchant, I think this number is 6%. So there is in the emerging market this number is 6%, excuse me. Therefore, I wouldn’t see this - I see it positive. But I think overall, it’s a long-term strategy, which we’ll workout definitely, because with the quality of application technology.

So, again, you have had the question on the organic growth development of healthcare I think. And there is one effect normally, which is a normal effect in the year that the Q1 still has a positive effect out of the previous year when people the administration and effort about the reimbursement. Then something in Q1is coming out of, let’s say, the last year. Therefore that is not a un-normal trend. And therefore, Q2, this is what you evaluated. This was a little bit softer from that perspective.

Peter Mackey

Okay, okay. And then on those restructuring versus one-off income, is there anything you can add on that in Americas.

Georg Denoke

Again, a little bit. I think you have seen that we have work, especially in U.S. and then UK on the pension plans. And we have readjusted, restructured certain components of our pension plans, which do have the positive effect, which is part on an operational perspective of our overall cost mitigation strategy also. Therefore, you can consider that as an operational effect definitely. But when we were saying we were compensating the cost charges for the efficiency work in EMEA we were including here the positive effect from the pension work. Therefore, here we were a little bit more conservative.

If you pass that out, you would say, we have €20 million more charges than we have savings through the pensions. That is roughly the number.

Peter Mackey

Thank you. And are those pension plan savings part of the cost reduction plan or is that in addition to that, please?

Georg Denoke

No, that isn’t addition to that.

Peter Mackey

Perfect. Thank you.

Operator

Thank you. The next question comes from Nicola Tang, Bank of America Merrill Lynch. Your line is now open. Please go ahead.

Laurent Favre

Hi, good afternoon. It’s actually Laurent Favre. I’ve got a question for Dr. Büchele, if that’s possible at all. And, Wolfgang, you have been for about two years at Linde, being cautious from the start and focusing on cash flow. And, I guess, when we look at Slide Page 11 on gearing, we can see that coming down and if you extrapolate that with lower CapEx, a bit of OP growth, we can see that coming down to maybe 1.5 times. And so my question is, simplistically what do you think is the right level of gearing for an investment in gas business?

And how do you plan to get there assuming that indeed it has come down and that indeed the right level is a bit higher than 1.5? Thank you.

Wolfgang Büchele

Of course, it’s possible to ask questions to me. So that’s why I’m here. And from that point of view I am not so much looking at this point. For the gearing I feel very comfortable with the current gearing level. I said many, many times that I can imagine that we are at a net debt to EBITDA level, which is slightly below 2. And from that point of view I think that we are where I could imagine from the very beginning where we could be.

And also said that a strong cash flow is one reason why we have constantly increased our dividend and even over proportionally increased the dividend in order have the shareholders participate in this high cash generation. And without prejudice we have not excluded other measures to have shareholders participate without the Board having made any decision at this point in time.

Laurent Favre

Thank you.

Operator

Thank you. The next question comes from Neil Tyler, Redburn. Your line is now open. Please go ahead.

Neil Tyler

Yes, hi, sorry. Just one follow-up question, Georg, just to put the context - put some context around the comments you made about the underlying growth in the on-site business, stripping away the one-off effects. It sounds to me, that I can’t remember the specific equivalent number from the first quarter. It sounds to me as if actually the second quarter was slightly better in terms of underlying on-site activities, stripping away the contract losses and the depressing with deflation via electricity effects. Is that the right interpretation?

And then, following on from that or as part of that, in the presentation you made some comments about pressure in UK steel, is that specifically referring to the SSI contract or is there other further operational pressures in the UK steel industry that you’re experiencing? Thanks.

Georg Denoke

So to the on-site development, when you look, as you describe it, it is exactly right that Q2 was better. Therefore I was pointing out, especially these very pronounced effects in Q2. So from this perspective underlying we have seen more contributions in on-site. That is true. My point was not only UK steel. My point was more from a general perspective; steel globally is from a demand perspective.

When we talk about oxygen on a rather lower level, then on a variable take out level when we look into the schemes, that was the point. It was not referring to UK. UK, of course, we do have a long tradition as you know in steel. But we do not have seen at that moment in time things we experience with SSI.

Neil Tyler

Thank you very much. That’s helpful. Thank you.

Operator

Thank you. There are no further questions for today. This concludes the Q&A session. And I hand over for the closing remarks.

Georg Denoke

Yeah, thank you, Pierre. Thank you, ladies and gentlemen, for this lively participation in our Q&A. We wish you all a nice summer holiday. If possible, see you next time in Q3. Thank you. Bye-bye.

Operator

Ladies and gentlemen, thank you for your attendance. This call is being concluded. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!