Operator:

Good day and thank you for standing by and welcome to the Linde Second Quarter 2024 Earnings Teleconference and Webcast. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. And after the speakers presentation there will be a question-and-answer session. I'd now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.

Sanjiv Lamba:

Thanks, Juan and a very good morning, everyone. Linde employees once again delivered high-quality growth despite the stagnant trends of global industrial activity. Second quarter EPS of $3.85, operating margins of 29.3% and return on capital of 25.7% all reached new highs, driven by the unwavering efforts of our 66,000 employees who actively manage what we can control. Turning to volume trends; you'll notice we were flat year-on-year. Last quarter, we described potential challenges in the industrial macro. And for the most part, it has played out as expected. This is why we initiated the self-help actions which enable us to create shareholder value in any environment. That being said, the current quarter experienced a 3% sequential volume growth. And while some of this relates to seasonality, certain regions had organic volume improvements. While this is a positive sign, we are still not assuming any meaningful economic recovery in the guidance. Some may view this as overly cautious. But given the uncertain environment, I believe it's prudent to take this approach. As you know, when industrial activity recovers, our network density will enable us to supply that additional volume to our existing and new customers. Until then, we will continue with disciplined pricing and proactive actions to ensure earnings growth in this environment. Slide 3 provides more color on end market growth trends. Starting with consumer-related end markets, food and beverage continues the strong resilient growth trend at 8% over prior year, in part attributed to Linde's total systems approach. This includes growing demand for higher quality and more innovative frozen foods, food packaging safety and dry ice for meal delivery services as consumers opt for convenience meals. In addition, beverage carbonation and associated services continue to grow as consumers dine out. Our electronics sales represent 9% of our consolidated sales. But there's a substantial portion of our 50% nonconsolidated JVs that supply this end market and are not included in this number, primarily in Taiwan. The 7% growth sequentially and year-over-year was driven by a combination of project backlog start-ups and base growth in the U.S. and Asia. In the U.S., we started up our Phase 1 supply system in Phoenix, Arizona for TSMC. Due to this, more than half of this project CapEx has now been removed from the backlog, driving the slight net decline versus prior quarter. I've always said that a healthy project backlog is one that turns over frequently with projects starting on time, contributing to earnings as per contract. In addition, base volumes improved moderately in the U.S., China and Korea. As you know from the last quarter, we signaled this was possible. So I'm encouraged to see volumes -- volume levels starting to recover now. Healthcare is down 1% from prior year and flat sequentially. Consistent with last quarter, this is primarily due to our efforts to continue rationalizing home care products and service offerings that don't meet the business criteria, especially in the United States. We still anticipate the underlying demographic trends to drive mid-single-digit percent growth but some of the ongoing portfolio pruning will partially offset that. Turning now to the industrial end markets; chemicals and energy grew 5% from North American activity, primarily in the U.S. Gulf Coast, hydrogen as well as Mexican energy services. We supply some of the most cost-competitive customers in the world and their higher production rates reflect their share of the global market. Looking forward, this end market will likely be the largest beneficiary of the project backlog, especially around clean energy projects. While OCI represents just one example, there are several more that comprise the $8 billion to $10 billion of near-term pipeline opportunities which we are pursuing and making good progress. Metals and mining is slightly down year-over-year, mainly from North American steel volumes which have decreased, primarily serving the automotive and construction markets. This is a normal cycle we've seen over the years, not unexpected, although there could be some future growth opportunities as more infrastructure and energy projects break ground. Finally, the manufacturing end market is trending up 4%, primarily on pricing actions as volumes are fairly steady across most geographies. Aside from some specific manufacturing sectors like aerospace or battery production, this end market mostly coincides with global industrial production which remains flat. Overall, Linde employees continue to do what they do best, manage an industrial gas business with leading results that create value for our shareholders regardless of the economic climate. Despite the challenging conditions, Linde delivered high-quality growth, executed on $8 billion project backlog and further positioned the company for future growth. I remain confident in Linde's ability to successfully navigate the near-term uncertainty while ensuring longer-term leading performance that our owners expect. I'll now turn the call over to Matt to walk through our financial results.

Operator:

[Operator Instructions] Our first question comes from the line of Michael Leithead of Barclays.

Sanjiv Lamba:

Thanks, Mike. You're right. I think the macro isn't really very supportive at this point in time. What I'd like to suggest is you go back maybe 4 or 5 quarters now, we've seen the macro environment reflect that. In fact, over that period, we've seen what I call industrial recession. While people debate around what the GDP does or doesn't, we are very focused on what the industrial production index is doing. And we've seen industrial recession over that period and we've managed right through that to not only deliver that EPS growth that you just referenced but also consistently ensure that our organization is ready to take the actions ahead of the curve in most cases, as we see these indices. One of the good things we have is our ability to see across different end markets and geographies and to take action quickly. So I think that in part is the reason we are where we are today, delivering on that EPS growth consistently over an extended period of time. My view is that is exactly the MO that you will expect from us going forward as well. It's something that we have understood well. We have a good -- it's a muscle that we know how to flex well and I think you'll see that play out. I'll take you right to the EPS algorithm that we've spoken about a lot in the past, Mike and I think that's what gives us confidence that we will be able to continue to provide that 10-plus percent EPS growth through most economic environments, if not all. So I'll recap that for you. There are 4 contributors to how we get to that 10-plus percent EPS growth. The first, backlog. That backlog and the start-ups that are happening and you know we've been consistent in starting up the backlog. Those start-ups contribute anywhere between 1% to 2% of our EPS growth. Backlog is trending up and I expect to see that 1% to 2% contribution to trend up alongside that. The next factor is what we are -- what we practice every day. This is pricing and productivity. We've explained this in a lot of detail to you guys. I won't kind of recap all of it. But to say that we expect about more than half of that EPS growth to come from proactive management actions related to pricing and productivity. So about 4% to 6% of that EPS growth comes and contributed from pricing and productivity. Next, volume. And obviously, at this point in time, you've heard us say that our guidance has 0 volume assumed at the midpoint. So if there is a volume uptick, even a little bit of a tailwind on industrial activity, obviously, we will pick that up and there's a multiplier effect that you've seen. We've demonstrated that in 2021. We constantly remind people that even with a little bit of a rebound on the industrial side, we were able to deliver 30% EPS growth in that year. But in the absence of that, our algorithms still suggests with 0 contribution, we will continue to deliver that 10-plus percent EPS growth. And last but not least, we have a lot of cash that we generate. Surplus cash after investing in the business is swept into share buybacks and they contribute about 2% of that EPS growth. Put that together, that 10-plus percent EPS growth, I can say with a high degree of confidence is where we stand in terms of our business for this year and going forward.

David Begleiter:

Sanjiv and Matt, the sequential volume growth of 3% in the quarter was positive. The volume comparison in Q3 is not hard, maybe even easy, at minus 2%. So why wouldn't we see volume growth for Linde in Q3 year-over-year?

David Begleiter:

And just one more question. The order intake was the lowest, I think, since Q2 2020 at $300 million. I know it's lumpy but is bidding activity lower or less than it was 6 or 12 months ago?

Operator:

Our next question is from Duffy Fischer with Goldman Sachs.

Sanjiv Lamba:

All right, Duffy. So let me first explain what's happening with the pruning, then we'll talk a little bit about how the growth around healthcare happens. So as far as pruning is concerned, we have been looking at that portfolio. We've been acting on it. You've heard us speak about it in the last quarter. Those actions continue. My expectation is by the end of the year, you will see some of those actions getting lapped out. So that's what you should be thinking about. Long term -- mid- to long term, I'd say demographics will support that mid-single-digit expectation of healthcare growth. We see that currently on par and that demographics obviously drive both the hospital care which is obviously a large part of our business as well as the home care business which is in some selected geographies where we operate. As far as inflation is concerned, this is a business that relies enormously on productivity actions and therefore, we always find that inflation and productivity will have to go hand in hand for us to get the pricing that we need and keep that business at an attractive margin level.

Peter Clark:

Two questions but was sort of one related but it's -- on the ExxonMobil contract that Air Liquide announced. Obviously, one of the things that getting to the return hurdle is the big ramp in argon merchant where they're claiming 50% increasing their merchant availability. I know it's not [indiscernible]. I know it could be 4 years-plus away. But what sort of impact could that have just in the market, I know argon has been tight but it's quite a slug of capacity that would come pretty quickly. And related to that, obviously, part of that deal they're allowing access to the pipelines. They've probably got capability to do that. I think you probably sold out a bit more than them on your Gulf Coast pipelines. But is that something you would consider in some regions, access to pipeline for the right sort of contracts? Those are the 2 questions.

Peter Clark:

You didn't surprise me with your answers.

Operator:

Our next question comes from Vincent Andrews with Morgan Stanley.

Sanjiv Lamba:

Vince, I'm going to let Matt talk to you about this, it's a topic he's very passionate about and then I'll maybe add to that. Go ahead, Matt.

Operator:

Our next question comes from the line of Laurent Favre with BNP Paribas.

Sanjiv Lamba:

Thanks, Laurent. So -- both of those questions are excellent and something that we kind of referenced in the last call just saying that, look, we were seeing a build-up of some early signals around the recovery in electronics, I'd say to you that we have seen that in the course of the quarter. But these are early signals. There is still more to happen in the course of the balance of this year. Let's talk a little bit about projects now. So we started our Phase 1 of TSMC in Phoenix. We are very advanced in our build on the Samsung project in Taylor, Texas. And we're building a number of other plants, some for Intel, around the world as well. We also see growth going back in terms of the Asian demand, we're also seeing growth in the Asian demand starting to pick up and new projects getting announced there as well. So over time, as these projects get signed up and contracted, as you know, we have a very high level of discipline around what we will announce but you will see announcements reflecting a number of these investments that we would make as those contracts get signed up. I expect electronics will continue to see momentum in terms of new investments, new fab capacity. And to your point, this will be driven in part by large data requirements also driven by AI requirements. I know AI had the hype, the shine is off a little bit at the moment. But the reality is AI will prove to be a tool that will be significantly and, in some cases, transformative for industries and markets and you will see investment underpinning that coming through data centers, helped and supported then by chip production that happens out of the fabs. So I still expect that that momentum will be there. I still expect the large majors -- large major semiconductor manufacturers to continue to make that investment. Obviously, there are some that are kind of seeing some short-term challenges, including some news today that you would have seen. But the long-term outlook remains very robust and we continue to be very well positioned to win more than our fair share in that space.

Steve Byrne:

Yes. Matt, you mentioned in your remarks about the challenges in helium in your Asia Pac business. Just curious whether that is stabilizing? Or do you see further erosion in either pricing or volumes there? And perhaps it would more broadly, can you talk about your helium fundamentals in the other regions? Are they quite different from the impact from this Russian supply? And what exactly is the portion that is in your corporate segment? I assume that's some kind of export volume. Perhaps you can highlight what exactly is the driver there?

Operator:

Our next question comes from Mike Sison with Wells Fargo.

Sanjiv Lamba:

All right, Mike. So maybe I'll break that up into a couple of different conversations. Let's talk about the business itself. And I think you'll recall, Mike, we had a conversation a few quarters ago when we described the profile of our business as being defensive. And I think in that -- in doing that, we had explained that a combination of factors ensures that we have the robustness and the resilience that sits in the business portfolio that we have. So part of that we said was obviously our contracted on-site business, as we've seen through some difficult -- the period of energy crisis in Europe, as an example, that, that's held really well. Contracts have been honored. And I think that defensiveness of that and the resilience has shown through in many ways. So that's one part of the defensive nature of our business. The other is the resilient end markets that we supply which are not prone to manufacturing PMIs and so on and so forth, being food and beverage. Again, you saw that 8% year-on-year growth in food and beverage and I expect to see continued growth in that segment as well. In addition to that healthcare which we are now kind of sorting out some of the portfolio issues but underlying healthcare, mid-single-digit growth expectations going forward, that resilience will continue to be there. Again, secular in many ways, of what happens to manufacturing and industrial activity. So that portion of supplies to the resilient business. Add to that, we have contracted rental streams that come in, in respect again, of activity levels. You form all of that together, you've got a business where nearly 3/4 of our business is contracted in or locked in through these various mechanisms, keeping that defensive nature. In respect of what happens to the industrial activity and manufacturing PMI that everyone is referencing at the moment, the reality is that defensive nature will continue to be very resilient as we move forward. The other part of your question was what happens to backlog, right? And again, I just want to say, backlog is $7.9 billion. We're working our way through that. We're starting up this year, between $1.5 billion to $2 billion worth of projects in the first half itself, more than -- about half of that has already been done. So that backlog is contracted growth. Usually, it's date certain. So irrespective of what is happening with the customers' project, we get a stream of revenues through that project coming through and we see that as a very robust part of our future growth plans which are locked in and contracted and we feel really good about the quality of that backlog that we're currently executing. And as I said before, backlog is -- as an example, this quarter itself, we started off the TSMC Phase 1 project and that's going to start contributing to earnings based on the contracts that we have. So again, a very resilient part of that. So I think, you look at that, I think that kind of gives you a flavor of what we're looking ahead to in terms of how we think about resilience underpinning the business.

Josh Spector:

I was wondering if you could talk about pricing specifically in the Americas. I think it's been a source of strength for you guys and some of your competitors that have reported. So just curious, one, if that's more of a U.S. phenomenon or if that's more South or Central America where you're getting more pricing? And two, I guess, with energy prices semi-stable, demand kind of semi-stable what's driving some of that sequential acceleration in pricing within the region?

Josh Spector:

Okay. I mean that's helpful. I guess maybe one more follow-up around that is just so when I think about CPI and that being something to look towards, again, I guess, focusing on the Americas, I mean with your mix, your pricing is up, call it, mid-single digit year-over-year in Americas and maybe it's up, I don't know, 3% to 4% on a merchant level sequentially, I guess what CPI indicator is going up at that rate on a quarter-over-quarter basis?

Operator:

Our next question comes from Jeff Zekauskas with JPMorgan.

Sanjiv Lamba:

Thank you, Jeff. So yes, we had laid out our decarbonization strategy and road map, if you will. And as part of that, we said there were 3 levers. The first lever was -- and this is out of a $50 billion investment over 10 years. We've said in the past. First lever was decarbonizing our own operations with that $3 billion estimate at that point in time. We said a bulk of our deployment would be enabling our customers to decarbonize which is the second pillar. And the third pillar was just some new opportunities for hydrogen to act as an energy vector and for export purposes, etcetera. The first pillar which is what -- which you are referring to at the moment, is where a lot of our work at the moment is happening. As you know, we have a large fleet of steam methane reformers or SMRs in the U.S. Gulf Coast. They are part of that network that connects that 500 miles of pipeline that we have and serves between 60 to 80 very large customers for their hydrogen requirements. And we are currently in various stages of FEED studies for those SMRs to understand the best opportunity for us to do decarbonization. On the SMRs, technically speaking, there are different ways to do that. We can do post-combustion capture. We can do syngas capture. The FEED studies are ongoing at this point in time. My view is that we will actually progress with those probably over the next few years. They are in line and on track with our 2035 targets that we set for ourselves. And I expect to see those business cases be developed as we get to a more technical conclusion as far as our FEED study is concerned. Whether that's $3 billion or more, I think the FEED will tell us that. So I think we'll wait for the FEEDs to come through. But order of magnitude, I'd say to you, that's in about the right ballpark.

Sanjiv Lamba:

So Jeff, why don't I just talk a little bit about what we're seeing in Americas. I think this is a good lead into that because I think it will give you a flavor of where the volumes are. I think hopefully answer your question as well. So I'll start off by just saying that the U.S. market has been incredibly resilient, right? I mean it surprised most people. But we are now seeing industrial activity being more sluggish, it is reflecting the softer demand growth that is there in the marketplace. And obviously, everyone's quoting the PMI, etcetera. In the last quarter itself, we referenced that we were starting to see that sluggishness in the market. So an exception to that -- a notable exception to that is hydrogen demand. Hydrogen volumes are at very high levels and I expect them to remain strong for the rest of the year. So again, that is a reflection of what's happening in the chemicals and energy space. And again, the on-site piece which I think you were querying is -- one of the key elements of that comes out of those HyCO volumes that we've seen. The other indicator that I watch carefully is the hard goods out of the U.S. packaged business. You heard me say before, I consider hard goods a leading indicator of what is happening in manufacturing and industrial activity. Again, during this quarter, we saw hard good sales decline year-over-year in the low single digits, a clear indicator that you're seeing softer manufacturing environment, I expect that to continue for the next couple of quarters at least. Now, hard goods were sequentially flat, though. So I think it wasn't that you were seeing sequential worsening but you were seeing softer year-on-year movements as far as hard goods were concerned. Again, that gives you an indication what's happening around our packaged business. I would say that between those 2, I mean, that's a fair view of where we are seeing that volumes play out in terms of what we see between on-site merchant and packaged.

Eric Zhang:

This is Eric Zhang on for Patrick. Deflationary conditions in China continue to be an issue. Can you talk about the cost actions you're taking in the region? And how has pricing trended?

Operator:

Our next question comes from Kevin McCarthy with Vertical Research Partners.

Matt White:

Sure, Kevin. I think obviously, I stated our capital allocation policy which you know well in the prepared remarks and that's been consistent going back many, many years and we expect it to remain consistent. And within that, repurchases are absolutely an integral part of that. And it's something that we expect to be every day in the market. To your point, we have a significant amount of room on the single A rating. That's obvious given our metrics where they stand right now. And I do expect, as I mentioned, to see a fairly nice pick-up in operating cash flow in the back half of this year, just given some of the timing of things that are going to be better in the back half than they were in the first half. But that all being said, our repurchase plan will look out generally for four quarters forward. We will determine a number that we want to deploy in cash based on the capital allocation policy. And then we'll execute inside the quarter and sometimes we'll accelerate when we see opportunities in the stock. And we definitely saw that this last quarter. So we did accelerate and we repurchased $1.4 billion recently and we got good execution and we felt good pricing. So the overall plan will continue to be part of the equation and our cash and our capital allocation. But day to day, we will accelerate or change our patterns based on what we see in the market. And as you know, we did that back during the COVID times, we did that back during the great financial crisis, where we saw some significant opportunities to come in. And if we see anything like that, again, we absolutely will take advantage of it going forward.

Matt White:

For M&A, I mean that's something we're always going to be evaluating for tuck-ins. You could see here in our recent cash flow statement that we had out here that we did do -- continued more M&A activity. It will mostly be probably North America, maybe some in our APAC packaged gas business. These are great tuck-ins. They are justified on synergies. So they have a very low risk threshold. And I think that's something between that and decaps, we are seeing more decap opportunities but our investment criteria for them remains the same. So we'll see if opportunities present themselves with our Tier 1 customers but that's a consistent aspect of our capital allocation policy to invest back in the business with our investment criteria and M&A is absolutely part of that.

John Roberts:

Matt, I think you've talked before about return on invested capital plateauing here. Does it stay high or maybe even drift a little higher as long as earnings are driven by productivity in the consumer-based markets? And then when the cyclical markets start to recover and the energy transition investments come in, it starts to come down? Or do you think it plateaus high here, even when cyclicals do start to come back and the energy transition investments come in?

Operator:

I would now like to turn the call back over to Juan Pelaez for any additional closing remarks.

Operator:

Ladies and gentlemen, that concludes today's call. You may now disconnect. Thank you.

Operator:

Ladies and gentlemen, good day, and thank you for standing by. Welcome to the Linde's First Quarter 2024 Earnings Call and Webcast. [Operator Instructions] And please be advised that today's conference is being recorded. [Operator Instructions]

Juan Pelaez:

Abby, thank you, and good morning, everyone. Thanks for attending our 2024 first quarter earnings call and webcast. I am Juan Pelaez, Head of Investor Relations. And I'm joined this morning by Sanjiv Lamba, Chief Executive Officer; and Matt White, Chief Financial Officer. Today's presentation materials are available on our website at linde.com in the Investors section.

Patrick Fischer:

First question is just around electronics. A lot of incoming calls on electronics, investors seem to be getting more and more bullish. How much leverage do you have to electronics in that we know what the revenue is, but I believe it carries a higher margin than average? So if electronics picks up, how much leverage could that give to the whole of Linde? And are you seeing signs that the electronics market is picking up for you guys going forward?

Patrick Fischer:

Great. And then maybe just jump to low-carbon hydrogen, blue hydrogen for you guys. You put out a couple of slides over the last 1.5 years or so, sizing that market over the last decade. Just kind of an update, how are those conversations going? What should investors expect as far as announcements again, primarily with sizable projects? And then the one you've announced with OCI, how is that progressing as far as finding partners for the CO2 sequestration and just general progress on that?

Operator:

We will take our next question from Mike Leithead with Barclays.

Sanjiv Lamba:

So I'm going to let Matt talk a little bit about the guidance itself. Mike, what I might do is just maybe walk you guys around the world because really I think it's important to just share with you what we are seeing around the world, and I think it sets the tone for how we think about the guidance. So I'll start just very quickly and give you a brief on Americas.

Matthew White:

Sure. So I think, Mike, I'll start with how we approach the guide is really no different than how we've been approaching it for the last 4 to 5 years. And to clarify, when we say no improvement in the economy, it really means from now -- from what we're seeing now. And so when you go back in the last couple of months, I'd say, as we mentioned in the prepared remarks, it's been stagnant to even declining in some regions. So we've updated for that and held that for the remainder of the year. So even though, like Sanjiv just mentioned, the year-over-year comps in the second half get easier, so from the 2023 baseline. So even though that may demonstrate positive numbers just given a softer baseline, that's not how we're thinking about it. We're thinking about it from the current status and how it moves forward more sequentially. So that's how we applied it.

Operator:

We will take our next question from Peter Clark with Bernstein.

Sanjiv Lamba:

I know you've said in the past that EMEA margins should be the highest. So we've finally gotten there as you can see. Now as Matt stated in his prepared remarks, EMEA margins are a combination of a number of factors that we've taken into account price, cost management, managing the spread, right? And I have to say a credit to the team, they do a good job of managing that pricing to inflation, identifying opportunities to manage both fixed and variable costs on an ongoing basis. We do a lot of work, including using AI around our power management, in particular, which is a big number, as you know.

Jeffrey Zekauskas:

Your volumes year-on-year were down 1%. And I think one of the things that Linde says is that new projects add about 2% growth. So should we think of the volume growth or the base volume growth is really negative 3%? Or is the amount that you expect from new projects smaller? And then secondly, your average gross margin -- your average EBITDA margin is around 37%. When you look at your helium business, is your helium business meaningfully above that margin or below or at that level?

David Begleiter:

Question on CapEx. Given the lack of volume growth the last few quarters, why are you not increasing CapEx as opposed to now lowering it here?

Steven Haynes:

This is Steve Haynes on for Vincent. Just wanted to maybe come back to the Americas performance in the quarter and two of the bigger pieces of your pie there, manufacturing and health care were down. It sounds like maybe you walked away from some volume and also had some -- maybe some onetime issues into aerospace. So I would be interested if you kind of quantify the collective impact of those 2 items and what you're assuming for the balance of the year or just generally how we should be thinking about that.

Operator:

We will take our next question from John Roberts with Mizuho.

Sanjiv Lamba:

John, we look at every project on merit, and we will make -- as you know, we've said before, we are unique in the fact that we have that optionality between pursuing sale of gas versus sale of plants. So we look at fundamental economics around the project and then -- and look at the risk profile before we determine which way we go. Really, the project cost movement or capital cost inflation, that's broadly there in the marketplace isn't really a factor that gets considered over there. I think what we consider is the risk return profile. If it meets our investment criteria, we are happy to have that as the sale of gas backlog and you see that we are currently executing just under $5 billion of those. So it feels that we have that optionality as a really strong competitive advantage when we go to market for such projects.

Joshua Spector:

I had a question on two of your kind of recent announcements here. So when you talked about decaptivating some assets from a metals customer in Asia, is that hitting the books now? Or is that something that's to benefit more a quarter or two from now? And then also with your electrolyzer investments in Latin America, just curious if you could frame around the environment down there. I think we're talking more about investments in North America and Europe and particularly around support or subsidy schemes, so how does that differ from those regions versus Latin America and why invest there?

Operator:

We will take our next question from Patrick Cunningham with Citi.

Sanjiv Lamba:

We've said this in the past, I'm going to now just reiterate the point that there is no silver bullet around productivity. We run about 13,000 to 14,000 projects a year. A significant portion of those projects happen both in Americas and in EMEA. So there is a track record of taking those productivity projects and driving them hard to make sure that those benefits come through. The EMEA margins are reflecting that, right? There has been a lot of action both around managing total cash fixed cost with a lot of rigor around that and ensuring that productivity actions are happening and projects are being developed. The Americas across the board from U.S., Canada to Latin America have got a great organizational rigor around productivity projects, and we are seeing them ramp up, given the economic conditions.

Operator:

And we will take our next question from John McNulty with BMO Capital Markets.

Matthew White:

Yes, John, sure. This is Matt. So you're absolutely right. We always think about it in terms of a spread, right, because there's different inflationary environments everywhere in the world. And our model is very, very local. So managing the spread is very important. And when you think about APAC, clearly, China does make up a large portion of that segment. And as I mentioned, in China, you are seeing some deflationary conditions. And this is the primary reason why we talked about taking cost actions out several quarters ago, which we've been undertaking. So the dynamic we're seeing in China, while volumes are flattish, like Sanjiv said, pricing is also flattish, and so costs are actually coming down. And that spread is still positive in that regard.

Operator:

We will take our next question from Steve Byrne with Bank of America.

Sanjiv Lamba:

See, we are very committed to tuck-in acquisitions anywhere in the world. And to your point, network density is what guides that decision for us to be able to bring a tuck-in acquisition, enhance our network density and actually move that business forward is how we see a good growth opportunity. As you know, in the U.S., we have a track record of doing many of these. The last one that we did, which was which is large enough, I would argue, is nexAir, it's proven to be tremendously successful, looking really good as we integrate that business into Southeast U.S., and that's a very attractive market in which to do that.

Operator:

And we will take our next question from Michael Sison with Wells Fargo.

Sanjiv Lamba:

I'll just go back and tell you that when we think about our backlog today and then we look at order intake, the backlog we've got is about $8.3 billion. It's currently under execution. We have a healthy order intake pipeline. I think engineering does just under $0.5 billion of order intake a quarter. That looks pretty much on track at the moment. Yes, we do take high-quality projects. There's no question on that. But we have a unique position in the fact that Linde's engineering business is one of the leading engineering entities and gas processing in our space, we are the leader and therefore, well sought after today by customers who would like to continue to build on relationships that we've maintained with them over the past. So I feel good about where we stand with the project intake as things stand. And if you look at the sale of gas backlog, I'll just do the math for you over here because I'll kind of underpin that for you as well in terms of order intake.

Unknown Analyst:

Okay. So you're anticipating a higher order intake later on in the year is what I'm hearing versus earlier in the year?

Unknown Analyst:

Yes, that's helpful.

Laurent Favre:

I just have one question left. On the H2 green steel side, I noticed it was just the ASU contract. I was wondering if there was any reason why you haven't been involved on the hydrogen supply in the first place? Is it by choice or I guess, by accident? And when we think about further green steel announcements in particular in Europe, should we be assuming that you may have bigger exposure to those means than [ 150 million ] unit?

Laurent Favre:

And a follow-up for Matt. On the cut-off date for Q1 cash flow and working capital, can you maybe size impact for us? Is it most of the $0.5 billion outflow you had in Q1?

Laurent Favre:

Yes. On the cutoff date, on Good Friday, I was just wondering if we should assume that most of the working capital outflow year-on-year is related to that timing and we should see that $0.5 billion come back in the second quarter?

Operator:

And we will take our final question from Laurence Alexander with Jefferies.

Sanjiv Lamba:

Let's start -- let's start with the project pipeline and it's a reflection on the backlog, Laurence. So I'll distinguish this between traditional projects and clean energy projects. On the traditional projects, we see a lot of project activity continue. I would say that elections aren't having a dramatic impact on timing. I think people are just being very intentional about the projects that they wish to pursue. I have said that in India, we saw a little bit of a slowdown in the business just given the ongoing elections, but that's just around logistics and day-to-day business as opposed to decisions being made from a long-term perspective.

Operator:

And I would now like to turn the conference back over to Mr. Juan Pelaez for any additional or closing remarks.

Operator:

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.

Operator:

Ladies and gentlemen, good day, and thank you for standing by. Welcome to the Linde Full Year and Fourth Quarter 2023 Earnings Teleconference and Webcast. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. And I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.

Sanjiv Lamba:

Thanks, Juan, and good morning, everyone. By all measures 2023 was another successful year. Thanks to the hard work and dedication from Linde employees around the world. And despite the economic and geopolitical challenges, Linde once again delivered on its commitments with industry-leading results. As I’ve said before, this doesn’t happen by accident. It’s daily grind across the entire organization underpinned by our disciplined operating rhythm, an important tenet of this rhythm is to maintain a results-driven culture by having consistently focus on performance metrics that drives shareholder value. Slide 3 provides an overview of build areas I view as critical to running a leading industrial gas company. It starts with people. We have a top notch team who run the safe, reliable and efficient industrial gas company. During 2023, we made meaningful progress towards our goal of highly engaged diverse workforce and further supported community as we operate in, all while maintaining world-class safety results. I would like to thank our employees around the world for delivering these results. Supporting the environment is more than just lip service at Linde. We’ve been working on it for decades. Last year we reduced absolute greenhouse gas emissions while increasing our active renewable energy purchases by 1 terrawatt hour. It’s a good start towards our long-term goals and I am pleased to see acknowledgement of this progress in or external recognition. We also positioned the business with high-quality future growth. The OCI project with CapEx of approximately $2 billion will produce 300 million cubic feet per day of blue hydrogen which will be sold under standard industrial gas supply contracts while partnering with Exxon Mobile for CO2 sequestration. And I continue to be confident about winning new backlog projects in the US, Europe, Middle East and Asia Pacific worth around $8 billion to $10 billion in the next three years. Recently there have been some updates and indeed some confusion regarding the IRA regulations. We’ve included a slide in the backup to help explain our views. I am happy to respond to any questions on it, but let me reiterate the key message. We expect future US onsite clean hydrogen projects to primarily leverage 45 Q credits since we have not yet identified any large onsite green hydrogen projects that meets our investment criteria. I expect to see small to mid-size green hydrogen projects, primarily to serve merchant type demand, that these will likely not meet our backlog definition. Aside from clean energy projects we continue to position the base business routes as evidenced by our traditional onsite merchant small onsite investments. Indeed why you’ll see we have one of the new records. Finally, we delivered on the numbers. After all, management’s primary purpose is to be a steward of shareholder capital. We’ve listed a few key accomplishments. But I believe the four most important financial metrics to create shareholder value can be found on the next slide. It’s easy for management to get distracted by a myriad of financial metrics through which performance can be measured. However, one cannot lose sight of the ultimate objective to increase shareholder value which can best be represented by total shareholder return or TSR. From my perspective, the best way to deliver superior TSR is to have industry-leading results and EPS growth, operating cash flow growth, operating profit margins and return on capital. ROC and operating margin demonstrate the quality and health of the business. And while both have theoretical limits, sustaining them at leading levels while growing EPS and OCS is the best combination for compound value creations. Each chart shows the five year trend against two members in the industry. Linde has led all of them, in some cases by a wide margin. We maintained leadership despite volatile economic and geopolitical conditions including unprecedented global events. Linde is an investment for all seasons and I think these charts demonstrates that. But what about the shareholders? How about metrics that impacted TSR, all you can find them on the next slide. This chart shows the five year TSR for Linde through members of our industry and the S&P 500 index. The first observation is that Linde has far exceeded all three, it almost doubled the shareholder return. But equally important, Linde is one of only 12 companies in the entire S&P 500 to deliver positive outflow for five successive years and the only company in our sector to do so. During good years and bad, Linde consistently outperformed the benchmarks to reward our owners. The performance culture and the corresponding compensation programs at Linde are designed to optimize these four metrics at all levels of the organization. Year after year, we’ve proven how we positively correlate to superior TSR and positive outcomes, two important ways to gauge shareholder value creation. Because of this, I remain confident in our ability to continue to creating long-term shareholder value regardless of the economy. I’ll now turn the call over to Matt to walk you through our financial results.

Operator:

[Operator Instructions] We will take our first question from Duffy Fischer with Goldman Sachs. Your line is open.

Sanjiv Lamba:

Sure, Duffy. Let me just start off by a quick reminder that China is about 7% of our total sales and profits just as a baseline and that of course is spread across various customers in every possible end-market that we have. So, you would recall we spoken about China in weakness and slow recovery over there, I think all of last year in fact. And now that this should really come as a surprise. We’ve been seeing China being a little bit softer and we’ve kind of tracked that for at least 6 to 9 months for now. We’ve also as a result of that taken some actions in the country already as you would expect us to. So all of that’s already in place. Now let’s talk about the outlook for 2024. As far as industrials go, as we’ve said, we’ve seen a lack of momentum. We talked about it last year. We see the same carry through into 2024 for most parts. I’ll walk you through some end-markets just to give you a sense of what’s going on. Some are little bit stronger than others, but broadly I think we don’t quite see China recovering at a pace at which we would have expected it to. In end-markets let me just kind of mention chemicals to start over. They did have a solid Q4. It is of course weighed down by the fact that construction is a little bit slower. But all in, the market was in a reasonable shape and we expect maybe a mild recovery towards the first half of this year and then maybe a pick up towards second half. Steel, which is the other major market that we’ve been talking about has been shrinking for a while. In fact crude, steel in Q4 shrank about 4%. Some of that was administrative control because it wanted to hold on their annual capacities if you will. Don’t expect anything to happen on steel. It is really driven around the property market and the property market recovery is not foreseen in 2024. So we expect steel to just muddy along for most part of this year. Manufacturing generally has been a bit lackluster, but there are some bright spots within that. Automobile for instance have shown some good growth in Q4, up about 17%. EV a large part of that. Batteries up a little bit as well. Solar cells up a little bit as well. Other than this I’d say, again manufacturing has been largely flattish beyond that. As far as electronics is concerned, electronics saw a little bit of a recovery in Q4. Again remember, the thing to watch out in electronics is less about what is happening on capacities and more about the kind of escalation in geopolitical risk that comes with electronics in China, in particular at this point in time. And again, our view is you will see continued mild recovery probably through the first half of the year and then the second half we’ll have to just watch and see what happens.

Operator:

And we’ll take our next question from – [Audio Disconnect]

Unidentified Analyst:

Thank you.

Jeff Zekauskas :

Thanks very much. In terms of your outlook for 2024, is global industrial production is roughly flat? And you have new projects coming on stream? Should your base case volume be up 2% or 3%? And then if you can comment on whether Russia is now producing more helium that was before?

Jeff Zekauskas :

Great. Thank you so much.

Tony Jones:

Hi guys. Thanks for taking my question. In your prepared remarks, you sort of highlighted that large green hydrogen projects and not where you are likely to be at least for the foreseeable future. Could you just explain why is it sort of price, you focused on price and long-term take or pay contracts, the criteria is not quite as tight? That will be very helpful. Thank you.

Tony Jones:

Great. That’s really helpful.

David Begleiter :

Good morning and thank you. Thank you for Matt. Your return on capital are very, very strong, mid 20s. And in contrast – flat to less I think five quarters. Is there an option to expect some low return but so value creating opportunities to drive top-line growth going forward?

Matt White :

Yeah. Thanks, Sanjiv. And exactly, to start off, IRR is the primary criteria for incremental investment decisions and ROC, as you know is the – basically the accounting metric on the back end. And when you think about where ROC has been and as Sanjiv mentioned in the prepared remarks, we believe that maintaining an industry-leading and healthy ROC and operating margin while growing EPS, while growing OCF is the best combination for shareholder value creation and ultimately, relative TSR outperformance. So, while they are of course at theoretical limits, 25% we think is a healthy number. Obviously, the pricing has helped the non-capital intensity of our growth has helped. We are embarking on a more capital-intensive growth as we look out on some of the energy transformation and we see that as good growth. It meets our investment criteria. So therefore, I would see the ROC number, yes, plateauing now as it is, maybe even declining a little bit. But we view that okay as long as we continue to make the right decisions on IRR which we feel very confident about. So for us, it’s more about maintaining healthy levels and maintaining leading levels while growing the organization. But we are not going to let those metrics as either operating margin or ROC inhibit our decisions for good growth projects, they never will.

Operator:

And we will take our next question from Vincent Andrews with Morgan Stanley. Your line is open.

Sanjiv Lamba:

Sure, Vince. So, consumer gas backlog is today driven by a couple of factors, right? We kind of split that into a traditional onsite which is what you are referencing as an example for manufacturing metals, chemicals, energy, et cetera and then the decarbonization portion of our backlog, which is growing and my expectation is that that will continue to grow as we move forward. What we are seeing some overlap in that. So there are chemical companies obviously who are looking at decarbonization. We are developing a number of projects alongside with them and we will see that play into the backlog and of course that will kind of boost the chemical side of things. What I’d say, we are winning a – more than our fair share of projects at the moment in countries like India, which are more traditional end of the market. That’s where you are seeing the manufacturing, metals, chemicals growth and refining growth actually pick up a little bit more. We are obviously seeing the decarbonization projects around both chemicals as I referenced earlier, but also some developments around metals which might follow in due course, as well. So, that’s kind of what you should expect to see in terms of momentum and that momentum will translate into projects that are currently in the pipeline, getting signed up in the next few years as I’ve mentioned. About $8 billion to $10 billion of that and then translating into the backlogs.

Operator:

And we will take our next question from [Indiscernible] Your line is open.

Sanjiv Lamba:

Matt, do you want to talk to?

Operator:

And we will take our next question from Josh Spector with UBS. Your line is open.

Sanjiv Lamba:

Josh, as you know, EMEA hasn’t seen a lot of growth. So one of the things they’ve done tremendously well and I give the team credit, we are having been really one of the profit growth stories over the last three to four years despite having negative volume trends in that same period. So, they’ve actually done a tremendous job of just managing that. So, let’s go to the fourth quarter which is what your question is and I think basically the point I think that I want to make over there is, there are some one-time costs alongside the volume decline that we’ve seen over that actually impact that volume for the fourth quarter. My expectation is in terms of outlook, my expectation is in the first quarter we will be back with the three handle on that volume and I think my – the momentum that the EMEA team has built around managing the profit growth, my expectation would be that we’ll continue to see margin improvement in 2024 as well.

Stephen Richardson :

Thanks. Good morning. Sanjiv and Matt, just one of you could talk – dig in a little bit on the drivers of TSR that you talked about in the script. Clearly, the business is showing a huge amount of stability and I appreciate that the dividend has been growing at a healthy cliff year-over-year for the last couple of years. Can you just talk about, is you – if you think about the two levers there, is the buyback is it agnostic to the value of the stock? Is it – do you think about that in terms of the buyback amount like us when getting at is your dividend coverage ratio is very healthy and has continued to improve? And so, is there not a place where you could consider kind of rebasing the dividend higher just considering the stability of the business? Thanks.

Matt White :

Sure. Yeah, and obviously both the buybacks and dividends are important. We have shareholders that value both. On the dividend, we commit to growing it every year and to your point we have very healthy ratios that enable us to continue to grow that. But one thing I will never promise is the dividend yield. Absolutely not, that makes no sense. If we do our job well every year, we grow the dividend with a healthy cliff. But we also grow the capital base of the stock. Therefore, we will never commit to a dividend yield. On the buyback side, this is because we have such excess cash in the organization and we see a very attractive opportunity to continue buying our stock back. I can tell you I’ve been asked many times $180, $280, $380 on intrinsic valuation and questions like that. That’s not exactly how we think about it. We look at the long term prospects just like we do any other use of capital. It’s very important to understand that. We treat our capital the same whether it’s for buybacks, projects because it’s one homogeneous pool of capital and we have to find the best use of it for our owners. So when we look at the long term repurchases of stock, that has been a good continued use of excess capital and it also instills discipline in the organization and that if we don’t meet our investment criteria on projects, we have an alternate use of capital. Because the one thing about this industry is if you invest poorly in a project, it can create problems for you for two decades. So for us, it’s an important element of our overall capital allocation process and this is something we are going to continue to do. But dividend growth and buybacks are both important for our capital allocation and will continue to be.

Operator:

We will take our next question from Patrick Cunningham with Citi. Your line is open.

Matt White :

Patrick, as I mentioned earlier on, EMEA hasn’t quite been the industrial growth story other than maybe a couple of countries, broadly our growth capital is largely been deployed in Americas and APAC, which is where we saw most of the growth come through. Now having said that, EMEA has as I mentioned earlier on been a very strong profit growth story for us, we manage that whole process right through the negative volume trend.

Patrick Cunningham :

Okay. Thank you so much.

John McNulty:

Yeah, good morning. Thanks for taking my question. Sanjiv, on the – you spoke on the IRA bill and kind of your views on the green hydrogen opportunity. Can you help us to think about the types of customers that you are seeing for the liquid green hydrogen? And also the types of premiums that they are willing to pay?

John McNulty:

Got it. Thanks very much for the color.

Steven Byrne:

Yes, thank you. So in the last two years, your sale of plant and your sale of gas backlog have both roughly increased 50%. Do you expect the latter, the sale of gas to increase at maybe a faster cliff either by your preference and that you do have benefits in the rest of your business from that or from the clean energy opportunities presumably would be more in sale of gas? And then just one more – for that $8 billion to $10 billion that you highlighted as your pipeline for clean energy, how much of that would be associated with existing customers where you could either retrofit or expand the existing facilities which could generate an even higher IRR?

Steven Byrne:

Thank you.

Mike Sison :

Hey, cheers. Nice quarter and outlook. I am just curious when you mentioned that at the midpoint looking for a much economic growth in 2024. I get to look at your global end-market trends you have sort of for greens and yellow, so, you are sort of runrating above that midpoint and I mean, are you seeing more growth now than maybe the midpoint in terms of economic growth?

Mike Sison :

Got it. Thank you.

Unidentified Analyst:

Good morning. It’s [Indiscernible] on for Laurence. Thank you for taking my question. I am just wondering, you mentioned that China is relatively small part of your business but you didn’t mention opportunities in India. I was wondering if you could just talk with India has more of a growth opportunity than what people usually look at which is obviously China?

Unidentified Analyst:

Thank you very much.

John Roberts:

Thank you. Slide 16 shows food and beverage up 9% year-over-year. Almost all processed food companies are showing down volume. But could you parse the volume and price in the food and beverage market? And in CO2 seeing any price impact from the 45Q?

Operator:

And I would now like to turn the call back to Mr. Juan Pelaez for any additional or closing remarks.

Operator:

And ladies and gentlemen, that will conclude today's conference call. We thank you for your participation and you may now disconnect.

Operator:

Ladies and gentlemen, good day, and thank you for standing by. Welcome to Linde's Third Quarter 2023 Earnings Teleconference and Webcast. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. And after the speaker's presentation, there will be a question-and-answer session. I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.

Sanjiv Lamba:

Thank you, Juan, and a very good morning, everyone. Linde employees delivered another solid quarter despite the economic headwinds. Earnings per share grew 17%. Return on capital closed at 25.6%. Operating cash flow was 2.5 billion and operating margins expanded 550 basis points, finishing at 28.3%. And we delivered these results, while continuing to responsibly deploy capital to high-quality growth opportunities and consistent shareholder returns. This is what our owners expect. It's not new, and not a surprise. Time and again through recessions and global economic shocks, Linde has consistently delivered industry leading results through a relentless productivity culture while increasing network density. And I see no reason why that won't continue going forward. In fact, rather than waste time trying to predict what will happen we are constantly striving to perfect a model for all seasons. Here at Linde, we acknowledge the world is a volatile place and as stewards of shareholder capital, we are focused on running an organization which can sustainably deliver on owner expectations. Quality earnings growth, leading return on capital, and strong cash generation are hallmarks of our history and will be integral to our future performance. I think it's important to remind investors of these key tenets at Linde especially during uncertain times, like today. The combination of inflation, rising interest rates and geopolitical tension is curtailing risk appetite, and hence overall economic activity. However, I remain confident in Linde's ability to weather any economic downturn based on the strength of our diverse portfolio, and long-term contracts, which is further demonstrated on Slide three. When you read the news or government statistics, I know it's hard to be bullish on the global economy. However, when looking at underlying trends by end market, we see a mixed picture with some increasing, while others are flat or slightly down. Overall, underlying sales were up 3% with base volumes, down low single digit percent, which was more than offset by pricing and contribution from project backlog. In other words, the Linde operating model allows us to quickly adapt to maintain steady and compounding value creation, regardless of the macro environment. The resilient consumer related end markets, which represent about 1/3rd of sales of solid growth in food and healthcare, but a mid-single digit percent decrease in electronics. Now, onsite electronic volumes remained stable, with reductions in merchant and package gases, primarily from rare gas sales in Asia. Based on customer feedback, I believe we will begin seeing signs of recovery in the first half of 2024, due to growing AI demand, and inventory levels stabilizing. Industrial-related markets make up the remaining 2/3rds of sales. And similar to the other sectors, we're seeing mixed trends here. Manufacturing and chemicals and energy are bolt-up primarily led by the United States. We continue to see U.S. packaged gas volumes stable at a high watermark including met fab as well as the recovery in Gulf Coast hydrogen pipeline volumes, which have carried into the fourth quarter as well. Conversely, metals end market volumes are down slightly from weaker economic conditions. Overall, higher prices and growth from contractual project backlog more than offset weaker base volumes. This is because our long-term customer contracts, stabilized results through inflation adjustment and fixed payment clauses and differently, we have the right business model and operating rhythm to weather any storm. Looking ahead into the fourth quarter, the U.S. economy continues to navigate at higher levels, with pretty much every end market expected to grow year-on-year and remain stable sequentially. China volumes are expected to remain flattish even as manufacturing, chemicals and energy end markets may show a mild recovery, while still an electronic volumes continue to remain flat. Regarding Europe, we have not yet seen an inflection point. So the expectation is that volumes will hold around the third quarter levels x some normal seasonal impact. Despite the softer macro environment and higher interest rates, proposal activity continues to be robust, and our backlog has increased by 300 million to 8.1 billion of which 4.5 billion are sale of gas projects. In addition, our clean energy projects continue to progress well as our customers remain committed to decarbonizing their assets. Finally, our priorities remain intact, be best-in-class in safety, compliance, sustainability and talent development while maintaining a high-performance culture, which remains focused on delivering on our commitments. So although the global economy seems tepid, I can only tell you that Linde will continue to deliver on its commitments. I will now turn the call over to Matt to walk you through the financial results.

Operator:

Thank you. [Operator Instructions] We will take our first question from Mike Leithead with Barclays. Your line is open.

Sanjiv Lamba:

Thanks, Mike. And you're right, there is a bit of a risk off in the market. I have to say that you know our approach to clean energy projects, and at the risk of repeating myself from some previous conversations we've had on these calls, we've always maintained that technology and scale up resulting in projects that have a competitive position are the ones that are going to move forward. And I want to reiterate today that we are seeing many of those projects that we are currently developing on track for exactly those reasons. We work with Tier 1 customers who have a commitment to decarbonizing but are also looking at cost competitive solutions to do that. So in terms of proposal activity, we've gone in the past and had conversations about investment decisions of about $50 billion over a 10-year period. I'll say to you that I feel reasonably confident about those numbers. About 60% of that, I see likely happening in the U.S., again, a very strong market where developments continue to be fairly robust. In terms of more near term, in the past, Mike, I've said decisions of above anywhere between $9 billion to $10 billion over the next few years. I feel pretty good about that number as well. The projects that we are currently working on and tracking all appear to be on that path. And most recently, you would have heard in Dow's earnings call a couple of days ago, Jim outlining the fact that their project in Alberta is moving to FID towards the end of the year. Again, that's just a validation of the outlook that I've given you. One last comment. You heard me be skeptical around developments in green. And I've said in the past a number of times, there are a few factors that impact us. One, investment renewable energy to make sure there is enough renewable energy available for electrolyzers to produce green hydrogen. In this environment, that continues to be a challenge. Obviously, technology and scale up on green is also lacking today. I've said in the past and I maintained that's probably 5 to 7 years away, and I expect those developments to feed out as we see that point of inflection, maybe a decade from now when green energy projects really are available at scale at a cost-competitive level and meaningfully to be deployed in the energy transition.

Laurent Favre:

Yes. Good morning, all. I got a question on China. Sanjiv, you talked about flattish volumes. I was wondering if this is a comment about the near term? Or also if that's how you feel about the medium term and are you adjusting resources and productivity at all?

Laurent Favre:

So are you adjusting at all the way you're running the business in terms of management structures and resourcing?

Operator:

We will take our next question from Stephen Richardson with Evercore ISI. Your line is open.

Sanjiv Lamba:

Sure, Stephen. So both of those wins recently announced. So our entities in India obviously did a really good job in winning a large hydrogen supply scheme to Indian Oil at Panipat. That's a premier refinery in India. As you know, the Indian market is growing and most of the infrastructure projects as well as large refineries are kind of running hard to keep pace. So good to see that full holistic package. We're providing the atmospheric gases as well as hydrogen to that refinery as they go into their expansion plans. And again, given our strong relationship with IOCL or Indian Oil, we are seeing continued kind of momentum from the technology that we're providing to them and their appreciation of the package of technology and operating capabilities that we bring to bear. We also supply them at [indiscernible] already for a number of years now. As far as South Australia is concerned, it was an interesting project. We work very closely with the government of South Australia. I have to give them some credit for kind of doing some past-breaking work over here. What they're trying to do is to build a hydrogen-fired peaking power plants, essentially moving hydrogen into the power sector. And really, as a result of that, we are now doing a FEED study for them. It is a paid FEED study to provide 250 megawatts of electrolysis and a lot of hydrogen storage to support that peaking plant. Now as you know, a peaking plant really is a bit more discretionary in the hydrogen that's provided. We're doing a FEED study to assess what is required for a successful project to happen. We're working with a reputed power player in developing that project jointly. And once the FEED is completed, we will work together with the partners to ensure that we can take that to a final investment decision.

Duffy Fischer:

Yes. Good morning, guys. Two quick questions. First, when you look forward into next year, how additive should new projects be to next year? And then, the second is the $15 billion buyback is very large relative to history, and you already had 2 remaining. So what should we read into that as far as pace of buybacks and maybe cash flow generation? Just anything, why such a large size, I guess?

Matt White:

Sure. So first, as you know, Duffy, we'll give next year guidance next year, when we give that. But I will say that and we've said this in the past, when you kind of look at the backlog, we've always felt and stated that with $3.5 billion to $4 billion backlog should be giving us close to 2% of EPS growth. We're now at $4.5 billion, so we're a little above that, so I see no reason why that would continue. And we always want to focus on EPS growth of the backlog because the revenue impact can vary based on whether it's tolling or pass-through, right, on the energy. Sometimes it will pass through the energy which makes higher revenue, as you know. Sometimes we take it totally, and it will be lower revenue. But the returns are consistent in how we look at it, the terms and conditions are consistent. And so from an EPS perspective, we fully expect the 2% or so on top with that backlog. As far as the buyback, we've also grown. We have to remember that and how I think about the $15 buyback is the pace at what it should be consistent with how our use of the prior programs have been. So as you know, we've been $1 billion-ish per quarter already. We are growing. Our cash flow continues to be quite strong. And so while we did not give any explicit date on this, I would expect that the timing for us to go through this will be consistent with what we've seen in our prior program, for example, the $10 billion that we announced in the beginning of last year. But again, our priority will always be growth and investing in the business. It just has to meet our criteria. So we view that we have ample capital to not only pursue every project that meets our criteria, but obviously a significant amount of excess capital that we can deploy towards this program.

Jeff Zekauskas:

Thanks very much. When you look at your cost of goods sold line, you went from 50 to 85 to 43.14, you went down 19% and your revenues fell 7. I was hoping you could analyze the decrease in cost of goods sold? Now I know that there's cost to pass through which is there, and I know that your engineering business was much more profitable on a revenue basis. But can you talk about the real underlying cost inflation and why the gross profit increase was whatever it was, $330 million in the quarter?

Operator:

And we will take our next question from David Begleiter with Deutsche Bank. Your line is open.

Sanjiv Lamba:

Thanks, David. So let's just talk about pricing. I'll start off with the Americas because you heard in the introductory remarks that we made that in the Americas, we did see a spike in power costs, which we expect to see recovered over the next couple of quarters. That's a typical lag that we've talked about in the past, and we'll see that come through. So that's just to make sure that that's put aside. Now as you look at pricing across the board, again, very often, we reminded you and our investors broadly of when you think about pricing for us, you should be thinking about its correlation to globally weighted CPI on a long-term basis. And I'm taking the long-term view over here because that is what plays into the sequential movement as well. This quarter, our globally weighted CPI ended up at about 5%, and you can see our pricing year-on-year ended up at about 5% as well. So again, that's kind of a reflection of that long-term trend, and that's what's playing out. And sequentially, we expect to continue to see that movement. Wherever we see increased cost levels, we are more than out there to ensure that that recovery is taking place. In the Americas, as I said, sequentially, you'll see that happen over the next couple of quarters as well. Matt, anything to add?

Operator:

And we will take our next question from Peter Clark with Société Générale. Your line is open.

Sanjiv Lamba:

Thanks, Peter. Let's start off with the DOE hubs that were announced. And we are actually involved in them, and we've been awarded as one of the participants of the ARCHES hub, which is in California, where we have a market that we believe on mobility will be meaningful, and therefore, we are participating in that. We did participate in a few others. But remember, for us, Peter, the core of how we think about our business and also the development of that business going forward is all built around network density. And that's the asset test that we apply to the development around the hydrogen hubs as well. The DOE has done a remarkable job and really kind of put this whole proposal forward, but of course, there's still a long way to go to get to that funding and ensuring that you have a reasonably complex structure with multiple stakeholders involved in putting and positioning one of those projects. So we'll be watching out for those developments, but where we thought there was most impact for us in our business in California, we are participating in our part of the hub that's been selected. So just that much in hubs. Let's talk about EMEA, and you're right. I mean, EMEA margins at about 30% is a major milestone. I do recall, Peter in the past, your comments around EMEA being the most profitable region, or at least it should be. We are demonstrating now that it can be. You'll recall, if you go back to 2018, Peter, that the EMEA margins were 19.2% in the baseline. So they've come almost 1,100 basis points up from that, and it's been consistent. It's not been choppy. It's been a consistent and it's a hard process, as you know, and we talk about this all the time, the grind of making sure you do pricing and productivity everyday while we watch out for all growth opportunities that come by. I think that's the model that's been applied. And really, at the heart of this is making sure we're extracting full value from the high net worth density that we enjoy in the EMEA businesses where we are. So I feel pretty good about that. Now looking ahead, I'd expect Linde overall to continue down the path of giving you between 20 to 50 basis points of margin expansion every year as the task we hold ourselves to, and I think EMEA just because it gets to that 30% doesn't mean we 'll be -- waive that. I think they will work -- all the actions necessary to ensure that they actually deliver as part of that 30 to 50 basis points improvement that we look for every year.

Geoff Haire:

Good afternoon. Perhaps, good morning, I should say. Thank you for the presentation. Matt, I had a quick question for you. I think at the end of your prepared remarks, you mentioned that you were taking actions to potentially lift the top end of the EPS guidance range for this year. I was wondering if you'd like to give some details on what those actions are, if I understood it right?

Operator:

And we'll take our next question from Vincent Andrews with Morgan Stanley. Your line is open.

Matt White:

We did not give a specific number. But consistent with what we've had in prior power spike situations, of which you probably know you had in the United States, we tend to take an unfavorable impact to merchant and package margins in the quarter it occurs, and then we recover in the following 1 to 2 quarters. And we fully expect the same situation will happen again here as we saw a pretty severe power spike, especially in the southern part of the United States.

Matt White:

They would have had a free handle.

Kevin McCarthy:

Yes. Good morning. Sanjiv, would you provide your latest thoughts on the helium market, both fundamentally in terms of operations or lack thereof at your competitor in Russia? As well as the upcoming U.S. helium auction of reserves and related assets, would you expect that to have any material impact on that market moving forward?

Operator:

And we will take our next question from Patrick Cunningham with Citi. Your line is open.

Sanjiv Lamba:

So my expectation is that on Electronics, you should think about that, Patrick, in kind of 2 separate pieces. The on-site Electronic volumes, as I mentioned earlier on, remains stable, and I expect that stability to continue sequentially through into this quarter and beyond. The volatility is largely coming around the inventory that is held around electronic special gases, which includes some high-value rare gases, and I think that's where most of that volatility has been. Again, my expectation going into Q4 is, you should expect sequential movements to largely be flat, but the recovery is some way away, potentially middle of next year when you'll see that move. Now DRAM, you're seeing a little bit of a recovery at the moment around pricing. I don't think that's enough to kind of move the needle on that market by itself. Logic has obviously been a lot more stable, but notwithstanding that, my expectation based on feedback that we've had from different customers, mid next year is when that recovery will result in significant or reasonable volume growth.

Steve Byrne:

Yes. Thank you. Both of you have mentioned network density a couple of times in the call, and it leads me to want to ask you about the nexAir acquisition you made earlier in the year. Presumably, that was a competitor of yours in U.S. packaged gases. Has that acquisition enabled you to get even more aggressive on price and margins? Are those stores now more back integrated into your liquid plants? And has this allowed you to change the footprint any -- of where your stores are located?

Operator:

And we will take our next question from Laurence Alexander, Jefferies. Your line is open.

Sanjiv Lamba:

So I said before and I just mentioned it again, most of these large hydrogen projects and again, I'd emphasize that at this point in time, while I want to consider I want to define these projects as low carbon intensity projects. But for easier definition, blue hydrogen projects, I find are the ones that continue to make good progress. And we are finding that despite the high interest rates and some capital cost inflation in the marketplace as well that there is an economic case to pursue those, particularly given the incentives that come out of the IRA. So there is a lot of policy support for these. At this point in time, we're not seeing any of the larger projects that we are currently developing for or with our customers and partners, kind of scale backwards in any shape of form. They're all on track and progressing well. The challenge, I think, for hydrogen development tends to be around the green projects where all of these factors that you mentioned are obviously taking a toll, given that the technology isn't quite at scale and there isn't fundamental competitiveness in the product that comes out of those projects. I said before, my expectation, 5 to 7 years until a point of inflection where you see green hydrogen technical technology solutions and available to renewable energy provide momentum in a lot more larger development on that front.

Mike Sison:

Hey, good morning, guys. Just curious, and if you would have told me you have negative volume growth in a given year, it seems like it's tough to grow EPS but you're growing now mid-teens. Can you maybe run through the growth algorithm, make sure I understand how you're doing that? And if the environment stays the same in '24, '25, is this sort of a new range of EPS growth you guys can do given there's not a lot of demand and volumes?

Operator:

And I would now like to turn the call back to Juan Pelaez for any additional or closing remarks.

Operator:

And ladies and gentlemen, that will conclude today's conference call. We thank you for your participation and you may now disconnect.

Operator:

Ladies and gentlemen, good day, and thank you for standing by. Welcome to the Linde Second Quarter 2023 Earnings Teleconference and Webcast. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. And I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.

Sanjiv Lamba:

Thank you, Juan, and a very good morning, everyone. The Linde team once again delivered strong results despite the challenging environment. For the second quarter, we grew EPS, ex-FX by 16%, expanded margins 440 basis points and increased return on capital to 24.9%. These results don't just happen on their own. They require a strong execution culture and operating rhythm, which ensures that all 66,000 employees are aligned towards creating shareholder value. I'm proud of how we've demonstrated this resilience quarter after quarter, regardless of the economy. To this end, we are seeing some economies stag nato [ph] start to soften as evidenced by recent data. Now I'm not going to try and predict what the future is going to do because no one really knows. But I can tell you with some confidence that Linde will continue to manage what we can control and deliver on our commitments, which is reflected in our guidance for the year. For example, we are managing inflation by contractually passing through energy cost variances while securing price increases which are aligned with local market trends. This is a key part of our contractual structure and operating discipline that we've consistently demonstrated for decades. On top of this, we continuously optimize costs through robust productivity initiatives. Ultimately, it's the spread between price and cost, which adds compound value. Add to that, our backlog that fuels growth. We're currently executing our $7.8 billion project backlog on time and on budget. For me, a healthy backlog contains quality customers with secured returns and is constantly turning over. In the last 12 months alone, we started up 22 projects valued at $2.1 billion, while winning 38 new projects valued close to $3 billion. Looking ahead, investors can rest assured we'll win projects that add value commensurate with risk. With this in mind, we continue to make good progress on the $50 billion of clean energy opportunities, of which I expect $9 billion to $10 billion to be decided in the next few years. We're also adhering to the long-standing and proven capital allocation policy, which has consistently demonstrated industry-leading financial performance and shareholder returns. We continue to see ample quality growth opportunities within our traditional industrial gases business. This year, we made the largest acquisition in Linde's history with nexAir, significantly enhancing our packaged gas presence in the fast-growing Southeastern United States. I'm happy to say it's performing well ahead of expectations and further validates our tuck-in acquisition strategy. In addition, we consistently returned capital through stock repurchases and increasing dividends, both to reward orders and also ensure investment discipline. Let me now wrap up with a quick overview of end markets, which you can find on Slide 3. Starting with consumer-related markets. We have positive year-on-year organic growth primarily driven by price increases. Note, sequential trends are subject to seasonality. So you'll see less respiratory health care but more beverage carbonation during warmer months. Health care itself is growing mid-single digit as expected, and food and beverage continues to expand as we see more applications for food freezing and aquaculture. While electronics is up versus prior year, we see some sequential softness from lower packaged and merchant sales into fabs, although the onsite volumes appear to be stable. For the industrial markets, both manufacturing and metals and mining are growing 9%, led by price improvements as well as strength in battery production, commercial space and carbon steel. You can see that chemicals and energy is growing the least at only 1%, and this is primarily driven by customer turnarounds in the United States, as well as lower demand in Europe. I expect the U.S. to improve for the second half since a number of customers already back up, but it's difficult to project how European demand will develop. You will recall that these contracts are underpinned by fixed payments, so our profit impact is mitigated. Overall, the business continues to perform well as we adapt to local market conditions. In fact, since our merger, we've grown EPS an average of 19% per year from 2019 to today. This was achieved against a backdrop of a global pandemic, supply chain constraints, energy crisis, military conflict and the largest inflation increase in decades. It's because of this track record and the daily execution of our dedicated employees, and I continue to have confidence Linde will grow EPS double-digit percent on average, regardless of the economic environment. I'll now turn the call over to Matt to walk you through the financial numbers.

Operator:

Thank you. [Operator Instructions] And we will take our first question from Duffy Fischer with Goldman Sachs. Your line is open.

Matt White:

Sure, Duffy. This is Matt. I think first, to start with, as I mentioned, and as you well know, our pricing, we always view as a function of inflation, and this will be the globally weighted average inflation. So I think starting with that, I won't tell you what our pricing will be. It's more a function of where you think inflation will be. And when we look at least 10, if not 15-year trend, arguably inflation right now is clearly higher than what it's been before, especially when you think post 2008, we definitely saw significant disinflation and even deflation back in those years. So from that perspective, while we continue to expect the price to inflation, and we are seeing disinflation in developed markets, I still would expect our overall pricing to remain in line with overall inflation, which I expect will continue to be higher than what we've seen at least in the last 10 years. Aside from that, we, as you know, have a lot of other factors, including our backlog startup. We have - we'll see what happens with volume. But right now, if we do see inflation abate in theory, you could probably see some volumes start to come back. And we'll continue to have a lot of strong free cash flow that we'll deploy in everything from stock repurchases to things like acquisitions for a roll-up strategy, like Sanjiv mentioned. So overall, as the economy moves with pricing and inflation, you may have also industrial production trends that could go the other way, and that's what we've seen over the last several decades, and we'll see what happens going forward.

Sanjiv Lamba:

Sure. So there are two parts to the backlog. I'll quickly cover the clean energy piece, which you are referring to on the IRA and other incentives we see around the world Duffy and then we'll briefly just talk about the traditional end market, which tends to get forgotten a little bit, but where we are also seeing interesting project pipeline and growth as well. But let's start with the clean energy piece. And really, the way I look at that backlog today is just looking at what is feeding into that potential backlog for the future and what are we currently developing that's likely to result in that backlog. The answer to your question, I think, in brief, is over the next 5 to 7 years, we'll continue to see this backlog grow. We'd like to see it grow at a relative pace increasing year-on-year, and I think that's on the basis of the amount of activity we see. I'd say to you, we are still pursuing about 200 projects that I've referenced before. We went out and told you in the U.S., we think the IRA is driving a potential project pipeline for us, where we make decisions on about $30 billion over the next 10 years. And I certainly see that backlog reflect as those decisions get made as we move forward. I'm also happy to say that we are actually seeing most of those projects progressing extremely well in the U.S., in Canada and even outside in the Middle East and Europe as well. These project development cycles kind of tend to take a little bit longer. I explained that in the last earnings call, there's a lead time anywhere between 12 to 24 months between our prefeasibility or feasibility to a feed then to get down to the final investment decision. So the timing tends to be a little bit lumpy, but you'll see that happen as we move forward. I'll also reiterate that I expect over the next few years, decisions around $9 billion to $10 billion, which are more tangible in terms of projects that are currently getting developed. All of that then translates once those decisions happen into the backlog. Duffy, I'll just go on and add a little bit on flavor on the traditional markets as well. Our traditional end markets are seeing a fair amount of strong proposal activity. And this includes all the decarbonization that we just referred to. The opportunity pipeline is spread across many end markets here, starting with electronics, metals, energy, chemicals and includes a few decaptivation opportunities for us as well. As you know, our current sale of gas backlog is about $4.4 billion. That's after we adjusted for the $1.4 billion for the Singapore project. So we took that out as we are starting to ramp up on that already. About 50% of that backlog today is around our traditional end markets, and we see potential for continued growth in there. I expect the backlog probably towards the end of the year to be closer to about a $5 billion number.

Operator:

And we'll take our next question from Mike Leithead with Barclays. Your line is open.

Sanjiv Lamba:

Sure, Mike. So let's go back a little bit in time. A couple of years ago, the EMEA business went through a reasonably large restructure essentially intended to reset their cost base. At that stage, we obviously couldn't look at the war in Russia or the energy crisis or any of that. But we just felt that it was about time that we've got to reset on that cost base. And that's really what's holding us in good step today. Obviously, a lot of productivity actions, productively deeply embraced across that entire business today is paying out good dividends. And obviously, they've managed very disciplined pricing over this period as well, which was absolutely essential given what happened to energy costs, et cetera. I see EMEA performance, and the team has done a fantastic job. I see EMEA performance holding and continuing to move forward. I see them managing their business in order to make sure that margins continue to hold or hopefully go up slightly as you would expect from our business.

Sanjiv Lamba:

My expectation is we will start the TSMC first plant second half of this year, even before the fab actually starts a lot of product is needed to make sure the tools are in place and tested out. So that process has started. All fabs go through a ramp process. I suspect TSMC's announcements were probably related to other negotiations they were having rather than the actual start-up of the fab and how it progresses in terms of its ramp.

Operator:

We'll take our next question from Jeff Zekauskas with JPMorgan. Your line is open.

Sanjiv Lamba:

So Jeff, I'd say to you that the dynamic from our perspective looks a little bit different. And I'm going to kind of drill down a little bit into the hypothesis you've laid out. So let's look at it from our perspective, a Linde perspective. And I'd say to you, we see the following as it plays out related to hydrogen. Now you went back in time and said, look, in the past data outsourced, and that's absolutely right. And the reason they're outsourced are from the economics was the fact that Linde handles those hydrogen plants extremely well. It's the core of our - it's a bread-and-butter part of our business. We know it well. We manage those processes well, whereas in a large refinery or a chemical complex, those assets sit by themselves and really do not get optimized. So there is a value that gets unlocked by bringing a very competent operator like Linde into the mix. But that's how decaptivation happened in the past, and I suspect it will happen in the future as well. And let's talk about the actual hypothesis that you put forward. And I'd say to you three things happened from a Linde perspective. One, the fuel market, which thus far was managed - and if hydrogen is a part of the portfolio, Linde now has access to a much larger piece of cake. The buy has grown, if you will, and our ability to tap into that because hydrogen now plays a role in that creates a huge advantage. The expectation is hydrogen market will grow to maybe about $150 billion over the next 10 to 15 years. Again, the fuel market itself, if you look at the entire number is anywhere between $6 billion to $7 trillion. So even a small slice of that buy makes it very interesting from a Linde perspective. So we have a new market opening that's now available to us in some ways. The other place I'd say to you is that to leverage hydrogen production for merchant requirements. Let's describe that from an IOC NOC perspective, if that's what you're referring to. I'd say what is necessary is the installed base of assets. It's a network of pipelines and it's the contracted customers hooked on to those pipelines, which obviously create that advantage. The reason I mentioned all of that is because Linde has the ability to scale that up and provide hydrogen to refiners in addition to ensuring that surplus hydrogen has taken and put into that pipeline network, providing a significant advantage and obviously getting us economic returns that would not be available on a stand-alone asset basis. The third point really is around risk debt. And I'd say, again, the benefit that Linde has in the U.S. Gulf Coast, which you saw, Jeff, a couple of weeks ago, the network that we have over there provides a high degree of redundancy using the cavelon [ph], using the multiple assets hooked onto the network, reducing the operational risk with single large either sites or plants. And again, that advantage that Linde carries will be enormously valuable for all customers in the U.S. Gulf Coast, and I think they will -- they value that today. And as we continue to expand that network, they will value that even more as we move forward. All of those provide the competitive advantage we're looking at. However, I'll accept the point that I think as far as IRAs there for a period of about 10 to 12 years, there will be some financial benefits that will accrue from either owning those assets, but in many of those cases, people might own the assets and ask Linde to either incorporate that into our network and/or operate and manage it as well, again, providing greater opportunity for us. You put that together, I think that's essentially what the hydrogen kind of the future is going to look like from a U.S. Gulf Coast perspective, replicated in many other parts of the world.

Sanjiv Lamba:

I'll let Matt walk you through the math just to say that I'm not happy with where the other line is, and it should be bigger than it is today.

Jeff Zekauskas:

Okay. Thank you.

Nicola Tang:

Hi, everyone. Just one for me on margins. I understand you kind of see further margin upside into next year at a group level, but I was wondering if you could talk a bit more about how that would play out from a regional perspective. So I'm thinking if there's pricing normalization in Europe, is there a situation where European margins trend down from here, but then actually another region takes over to drive group margins?

Nicola Tang:

All right. Thank you. Its impressive.

David Begleiter:

Thank you, good morning, Sanjiv, productivity has been a key driver of earnings growth this year. Can you remind us what that number quantified that number this year? And should it be similar next year as well?

David Begleiter:

Very good. And just on the clean energy opportunity, is there a market share you're thinking about that Linde should attain over a longer period of time?

David Begleiter:

Thank you.

Peter Clark:

Yes. Thank you. Hopefully, you can hear me. I've got two questions. The first one, I've listened to the discussion on the pricing, the inflation thing, but it feels like you've still got momentum at least into the third quarter. So I'm just wondering about sequential price into the third quarter than we'll see from Q4. So I'm assuming you've got something. And then on the EMEA [ph] margin discussion, I'm rightly thinking obviously on-site was hit harder. So that presumably helped the margin a little bit on mix. Just wondering how you see the second half in EMEA on both in cylinders and on on-site because one of your competitors is a bit more confident about the second half year-on-year comp in the on-site given the very soft comp. And obviously, energy costs are a lot lower in Europe now a bit more confidence with the customer. So how you see those things? Thank you.

Peter Clark:

Thank you. Do you think the on site will be a bit better in the second half yourself in EMEA?

Peter Clark:

Okay. Thank you.

Michael Sison:

Good morning, guys. Historically, volume sort of drove some of -- a good portion of our adjusted EBIT growth and your volumes are down 1%, yes, you're still able to generate pretty impressive operating profit growth and EPS growth. So if volumes aren't positive, whenever they do, does your leverage get better from here? Or do you have to add cost to sort of support some of that volume growth?

Michael Sison:

Understood. And then for the second half, are your volumes -- I apologize if I missed this. Are they going to stay similar to the second quarter? Are they going to improve a little bit on a year-over-year basis? I know sequential, I think you mentioned it was going to be better. And then how much volume growth will you get from new projects in '24?

Michael Sison:

Thank you.

Vincent Andrews:

Thank you and good morning, everyone. Matt, I might be overthinking this a little bit, but could you just maybe help me better understand historically, your guidance midpoint had assumed no economic growth and now the high end assumes no economic growth. So what caused you to sort of change that framework?

Vincent Andrews:

Okay. Fair enough. If I could just ask on the pricing equation. Is there a way we can think about the price you achieved in the second quarter and maybe what you're expecting to achieve in the third quarter? How much of that is lapping of prior price initiatives versus how much of that is sort of the implementation of new initiatives? Is there a way you can help us think through that?

Vincent Andrews:

Okay. Very helpful. As usual, I really appreciate it.

Patrick Cunningham:

Good morning. Thanks for taking my question. Thank you,. Thanks for taking my question. In June, you announced the contracts with Wanhua for decaptivating ASUs in terms of future opportunities to decaptivate ASUs in Asia, can you size the potential there for Linde, both in terms of backlog and the addressable market? And would future investments need to include additional investment in decarbonization or are you agnostic from that standpoint?

Patrick Cunningham:

Yes. Yes, got it. And that's just on the second part of my question, I know the Wanhua agreement included investments in decarbonization. And I know you mentioned that network density is – hard there, but would you look for additional investment in decarbonization if there are future opportunities? Thanks, again.

Patrick Cunningham:

Very helpful. Thank you.

Kevin McCarthy:

Yes, good morning. On slide 13, you provide some helpful pie charts that speak to your backlog composition and so just wonder if you could speak to how you would expect those pies to evolve over the next year or two. For example, EMEA has been quite small, historically, recent history anyway for understandable reasons. But would you expect that to grow materially as clean energy projects gain traction? And curious within Asia Pacific, what is the mix of clean energy versus more traditional projects that you're seeing there in your discussions and how you would expect that to evolve as well?

Kevin McCarthy:

Okay. Thank you very much.

Laurence Alexander:

Just a housekeeping question on packaged gases. How is pricing for rental fees evolving in Europe and in the U.S. compared to inflation? Is it just sort of moving at a low single-digit rate regardless of the background inflation environment? Or have you been moving it up ahead of inflation?

Laurence Alexander:

Okay. Thank you.

Steve Byrne:

Yes. Just continuing on that packaged gases question. Post the nexAir acquisition, what would you estimate your share of U.S. packaged gases business? And how would you compare your pricing power in that business now versus liquid bulk? And any indications on trends for hard goods and so forth that would give you an outlook for the U.S. economy?

Steve Byrne:

Thank you. And a question on clean energy. Can you just roughly estimate the sizes of these buckets for you with respect to the opportunity for you? Obviously, you got a blue energy - blue hydrogen production and sales. You got green hydrogen. But you also have oxyfuel opportunities for big energy consumers. You have a mean based decarbonization projects. How would you size those relative to each other?

Steve Byrne:

Thank you.

John McNulty:

Thanks for taking my question. Sanjiv, a question just as a follow-up to one of your earlier answers, you had mentioned that you were seeing some clean hydrogen or clean energy opportunities in the Middle East. I guess how would you characterize these? Are these for domestic use? Or are they for export? And if it's the latter, do you see subsidies in place, whether it's from Europe or Asian demand or what have you, that would facilitate the economics to make sense for projects like that. I guess can you help us to think about that?

John McNulty:

Got it. Thanks very much for the color.

Juan Pelaez:

Thank you again for participating in today's call. If you have any further questions, please feel free to reach out. Have a safe day. Take care.

Operator:

Good day, and thank you for standing by. Welcome to the Linde plc First Quarter 2023 Earnings Teleconference and Webcast. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. And after the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.

Sanjiv Lamba:

Thanks Juan and a very good morning everyone. We had a strong start to the year as Linde employees once again delivered on their commitments, irrespective of the geopolitical and economic headwinds. Earnings per share, operating margin, and return on capital all reached new record highs. Robust pricing, coupled with dependable return on capital have more than compensated for a weaker economy. Just like the last four years. Linde's ability to consistently deliver earnings growth in any environment is a testament to the resilient portfolio, operating excellence, and capital discipline. And when global economies recover, which they always do, there's an opportunity to further leverage the base volume growth just as we've demonstrated in 2021. However, during uncertain times like today, we continue to execute our strategy of optimizing our base business every day, capitalizing on growth projects, including high-quality clean energy projects. All of this while maintaining our industrial gases model, coupled with a disciplined approach to capital allocation. Slide three provides a brief update on clean energy, including key projects that are both under construction and an example of a project being developed. Let me begin by reiterating our strategy with respect to clean energy and you'll notice it hasn't changed over the last three years, which it shouldn't. Let's start with the first principle. We will stick to the core of industrial gases model. This has been a cornerstone of our strategy for decades. We are experts at designing, building, operating, and distributing industrial gases and equipment. We serve many markets where our customers are experts at what they do, making our customers more productive and competitive through our core strengths is what makes Linde successful. This has been true for the last 100 years and I expect it will continue to be true for the next 100. Another certainty within our industry is how customers demand the same three requirements for the gas supply, which are safety, reliability, and lowest total cost of ownership. This holds irrespective of the molecule, the end market or supply mode. This is why a key element of our strategy is to leverage our world-class engineering capabilities and existing asset network of our $3 billion hydrogen business to deliver the most reliable and lowest-cost supply systems for our customers. Following these principles, we've successfully won and advanced many clean energy projects, of which I'd like to highlight just a few. The left side represents projects currently under construction. These are projects with executed contracts, fixed payments and incremental growth with predictable returns. With project CapEx of just under $2 billion, including the new OCI project in Texas, where Linde will supply nitrogen and clean hydrogen by capturing CO2 for underground sequestration through our partner, ExxonMobil. Currently, this project makes up the majority of clean energy projects in our backlog since most electrolyzer investments are designated for the merchant market and therefore, considered base CapEx. There are a few projects like the recently announced Evonik agreement that meet backlog criteria. But even here, we support local network and supply high-purity clean hydrogen to electronics and other industrial customers as well. Currently, we view these electrolysis -- electrolyzer projects as modules in our local supply network for supply of merchant hydrogen. They're often integrated into our existing hydrogen network, sometimes side by side leveraging the same storage and transportation infrastructure, helping optimize distribution costs. Furthermore, these projects leverage various electrolyzer technologies, including PEM and outline to provide the best fit to customer needs. Sale of Plug is another avenue for Linde to participate in growth opportunities, which may have different customer demands or which may not benefit from integration with our existing supply network. Now in addition to these projects being constructed, we have over 200 different projects under development. Of course, the profitability of these projects being approved or won by us varies from project to project. On the right side of the slide, I'd like to highlight one such opportunity which was recently made public by our customer. Dow recently announced that it has selected Linde as an industrial gas partner for supply of clean hydrogen and nitrogen for its proposed net 0 carbon emissions integrated ethylene cracker site in Alberta, Canada. Under the framework agreement, Linde will complete the design and engineering for a Linde owned and operated world-scale air separation, autothermal reformer and carbon capture complex. This complex will potentially be integrated with Linde's existing operations in Alberta. Engineering work is underway, and both companies are working to obtain their respective board approvals and regulatory approvals. Final investment decision is anticipated by end of the year. So I don't really have many additional details until then. We continue to work on a number of other projects aligned with our strategy to decarbonize our own operations, help customers decarbonize their operations, such as the Dow project above and address new market needs such as the OCI project. Overall, the total opportunities are likely to exceed $50 billion over the next decade representing one of the best long-term growth environment I've seen in a long time. Of course, time will tell how many we ultimately sign and announce, but you can see we are making meaningful progress. And despite the many differences across these projects, our full suite of offerings, coupled with a strong balance sheet, will enable us to win more than our fair share. But rest assured, our participation will consistently follow our strategy and proven investment criteria. I'll now turn the call over to Matt to walk you through the financial numbers.

Operator:

Operator

Sanjiv Lamba:

Sure, Mike. Let me start off by just kind of going back and telling you how the EMEA business have been looking at actions they need to take, management actions. So the underlying impact that we're seeing come through is driven by two levers

Operator:

The next question is from Nicola Tang with BNP Paribas. Your line is open.

Matt White:

Thanks Nicola. So again, just to remind you, we -- I talked about earlier in my remarks, 200 -- more than 200 projects that we are currently developing. The whole segment that for you is by application that should help. So there are three key buckets in which we see these projects being developed. There is a mobility bucket. Then there is industrial application and the ones in our wheelhouse, the ones where we are currently working with existing industrial customers to help them decarbonize and then the last piece is really around energy and power, where hydrogen or its carrier, ammonia or methanol will play a role. So let's split them down when I think about a $50 billion, let's flip them down and say, well, mobility is around 10% of that. We see industrial applications, really the dominant part of that opportunity set at about under the balance is large, but fewer projects around energy and power. So that's one way to think about it. As you know, and as you mentioned, Nicolas, we've already reached out and said previously $30 billion plus in the U.S. driven, of course, with momentum coming out of the IRA driving a lot of that development. So you see the balance $20-odd billion that we're talking about outside of the U.S. We're seeing growth opportunities in our pipeline out of the Middle East. We're seeing growth opportunities come out of Mainland Europe, some in the U.K. And then, we are seeing a little bit of a buildup happen out of Australia and Asia, and it does look like they will be behind the curve relative to what the U.S. and Europe is likely to see.

Jeff Zekauskas:

Hi. Thanks very much. In late January, ExxonMobil indicated that it wanted to build a hydrogen facility or hydrogen complex in the United States. That would generate about 1 billion standard cubic feet per day of hydrogen, which is Kryotechnik. Can you talk about how you see the hydrogen market evolving in North America now that it seems that ExxonMobil wants to enter it, do you see other integrated oil companies as entering the hydrogen market as well? Do you see them in hydrogen in a way that's different from the way you sell it? Can you give us an idea of what that market looks like over the next few years competitively?

Matt White:

And Jeff, this is Matt. Maybe just one other thing I'd add. I think another way to think about it is -- when you look at the hydrocarbon market today for transportation and energy, it's somewhere in the order of a $6 trillion market. My number may not be exact, but it's something in that order. And when you look at the industrial gas industry, our participation in that market is a fraction of a percent. So in my view, a lot of that $6 trillion market is what is being addressed and potentially converted to things like hydrogen, and so if that happens, I think that actually creates opportunities in areas that we had a very, very small participation in, in the past. But time will ultimately tell.

Operator:

The next question is from Duffy Fischer with Goldman Sachs. Your line is open.

Matt White:

Duffy, I'll start off by just talking about the clean energy projects. And I think the important thing to remember there is that these projects have a life cycle that they need to go through before they get announced, there is no way to predict what types of announcements and frequency of announcements you will see on these projects. I think important to maybe remind you of just the project development stages that go through. So typically, a project of this size will go through a feasibility study followed by a pre-FEED, followed by a fee, which is where you actually get to a point where you've got the quantities and the investment requirements in place based on the detailed engineering and design, which results in the FID. That all of those stages put together, would take anywhere between 18 to 24 months, in some cases, if it's a complex projects stretching up to two and a half years. Beyond that, you will then see another two and a half to three years in execution before final start-up happens. So that's the way I think about the frequency that you would expect to see projects. These projects have been under development for a while, and you kind of continue to see those announcements reflecting the different stages these projects are at.

Duffy Fischer:

Great. Thank you, guys.

David Begleiter:

Thank. Good morning. Sanjiv or Matt, just on EMEA pricing, with energy prices now falling, how should that flow through the energy price or the pricing realization in Q2 and the rest of the year?

David Begleiter:

Very good. And just on EMEA volumes, do you expect EMEA volumes to be down for the rest of the year in all three quarters?

David Begleiter:

Thank you, very much.

Peter Clark:

Yes. Good morning, everyone. Thank you. Yes. Two questions. First, on -- back on the pricing and the sequential price you're still getting in America, is the question. One of your competitors was mentioning a big kick-up in medical gas pricing, and I think that was led by the Americas for them as well. So I'm just wondering if your medical gas price has seen a kick or you're already ahead of the pack on that. And then the second question around Europe and the cylinder business. You've alluded to the fact it's been doing pretty well, certainly on the pricing and the margin side. I'm just wondering if it's leading that, because, again, we're hearing it's still very robust on pricing. The volumes for your competitors also were pretty good in Europe on the cylinder side. So just wondering, if that is a real driver between that margin kick you're seeing underlying in Europe? Thank you.

Peter Clark:

Okay. Thank you.

Steve Byrne:

Yes. Thank you. I would like to better understand the mechanisms by the pass-through cost. Is there a month or multiple months delay in how that is passed through, given natural gas costs in the US and Europe have plunged and yet your cost pass-through was fairly neutral. Is that another lag effect similar to the comment you made on European pricing. You have this lag effect. These two things combined did they represent some operating profit in those regions in the first quarter that really was just driven by lag?

Steve Byrne:

Okay. Thank you.

Michael Sison:

Hi, guys. Nice start to the year. Just a follow-up on the clean energy opportunities. How much of your sale of gas backlog is Clean Energy now? And then if you're successful in winning your fair share, how big do you think that backlog will be for clean energy down the road? And is there a limit on how much you can put in your backlog?

Michael Sison :

Okay. Thank you.

Vincent Andrews :

Thank you. Good morning everyone. I just wanted to ask on the buyback. I would have guessed given the delisting from Frankfurt that -- and the big cash balance at the end of the year that you might have put more money to work in the first quarter in the buyback, but it didn't look like you had to -- so given that you're still sitting with a pretty large cash balance, I guess you did the packaged gas acquisition, but how are you thinking about using that cash balance and the incremental capital you generate in free cash flow this year in terms of return of capital to shareholders?

Vincent Andrews :

Great. Thanks for the update. Operator

Matt White:

Sure. This is Matt. I can handle that. As I mentioned in the prepared remarks, and first of all, our approach is very consistent in how we've been approaching this for the last couple of years, frankly. And we believe our view of the economy is not going to be any more accurate than anyone else's. So we'll just put a baseline there and no improvement and let you put your house view in whatever that may be. So in the case of if the macro deteriorates, we will take actions to mitigate. Clearly, we saw that in 2020 and we took actions. And you may recall, our full year EPS growth rate in 2020, it was close to 12% growth rate. So those actions did help mitigate what was a pretty unexpected macro decline from the pandemic. Similarly, last year, in 2022, we saw some macro softness related to the energy crisis and obviously, the invasion. And so given those, we have a track record of being able to act in case those disruptions happen, and as I mentioned to Duffy, that's how we build our operating rhythm is to be able to quickly respond when things are different in the macro than what was expected. So, I view this the same, time will tell. But given our base is very local, we can react locally to what happens locally because, as you know, the macro and every country may be different. And that's how we need to approach it.

Operator:

The next question is from Kevin McCarthy with Vertical Research Partners. Your line is open.

Sanjiv Lamba:

Thanks, Kevin. So the last time we spoke about this, I mentioned that there are two ways in which we look at the storage, the capture and storage of CO2, particularly for blue hydrogen projects in the US. And really, that's driven around the IRA benefits that come out of 45Q providing that $85 per tonne of CO2 to be captured and sequester. And the two models I mentioned was a tipping fee, i.e., where Linde would on the capture and would create a pipeline that would then provide that CO2 to a partner who would take a tipping fee and sequester and manage that storage on the ground. The other option was for us to sell the CO2 that we have and allow the partners to take the benefit of whatever tax credits that come as part of 45Q through their ownership of the carbon capture and sequestration process and the assets that they build in order to achieve that. We've mentioned that we were in conversations with a number of players. And as you read from the announcement, we selected and worked with ExxonMobil to continue down that path. That's where the OCI -- the CO2 coming out of the OCI assets and the production of blue hydrogen would be passed on or offtaken by ExxonMobil and sequested to buy them and manage long term. As we think about new projects and that we are currently developing, we have an opportunity to work with partners, including ExxonMobil and others to look at it on a case-by-case basis, given that we have a well-established model with ExxonMobil, we will pursue that with them, but it does depend, in some extent, to some extent, on the geology and the infrastructure available for us to be able to sequester this in dorms on the ground and therefore, we will work with other partners as well in the US to kind of progress and move forward on that basis. As far as cost recovery is concerned, the 45Q credits are reasonably well understood. The fact that for the first five years, we have a direct pay mechanism that for the balance period of seven years to make up that, we have a tax credit that goes below the line, I mean, recognizing that we're trying to build as much flexibility into the operating models that we want to pursue in those conversations we're having. One of those has been decided with ExxonMobil, the others will just follow and we've kind of worked that on a case-by-case basis.

Operator:

The next question is from Geoff Haire with UBS. Your line is open.

Sanjiv Lamba:

Thanks, Geoff. So I'll take the Asia piece, and I'll let Matt respond to you on the cash flow. So -- just as a quick reminder, Geoff, the first quarter in Asia is usually impacted by seasonality. The Lunar New Year has a big impact across that region. So you'll see that. And when you see sequential movements that's something to keep in mind. Now however, let me just give you kind of a snapshot of what we're seeing in Asia anyway. Year-on-year sales are growing. They are pretty strong across food and beverage, health care, chemicals and energy, manufacturing, Electronics also was strong growth in the first quarter, but that was primarily new startups. As far as electronics is concerned, we are seeing some marginal weakness. So you can see that in the sequential movement in the end market slide that we provided. We think most of that is coming out of memory feedback from customers suggest that we're likely to see that kind of a normalization of activity in the second half, probably towards the back end. I've also mentioned previously, and I think we see that trend continue, Geoff, in terms of China, feel volumes being soft. We continue to see that in Q1 as well. And of course, One of the things to keep in mind when you think about the year-on-year movements is that we had some SOE sale of equipment sales that happened last year, which kind of doesn't help with the comps when you look at it year-on-year. But sequentially, primarily Chinese New Year impact or the Lunar New Year impact across the region and then the movement that I mentioned to you across the different end markets. Matt?

Geoff Haire:

Thanks.

John Roberts:

Thank you. Do you think the new EPA greenhouse gas proposed rules for power plants will drive US adoption of ammonia combustion, which could help your hydrogen backlog, or do you think it's going to simply accelerate the replacement of coal-fired power plants?

John Roberts:

Thank you. Nice quarter.

Christopher Parkinson:

Great. Thank you so much. You had a little on your backlog commentary and what you plan to deploy. But can you just talk about the prioritization and about the $3 billion of Linde specific projects you've previously been highlighting? Thank you so much.

Christopher Parkinson:

Very helpful. Thank you so much.

Andrew Hain:

My most questions have been answered. Only two small ones are left. If I look on the EMEA margin and compare that with Americas and the difference, if I look on Q1, it's just 100 basis points. As you outlined that the sales margin is function of energy prices and energy prices in Europe are obviously significantly higher than in the Americas. I would come to the conclusion that at this stage, your unit margin in EMEA is basically substantially higher in America. Is that a fair conclusion? That's the first. And secondly, could you give some flavor how big this do contract might be as it is more the energy part and the product itself you delivering to? I would assume that the Dow project would be significantly smaller than that of line. And these are my questions.

A – Matt White:

Sure. Andreas, and maybe it also kind of gets a little bit to Mike's first question. I think you can analyze the margins on the increment in a lot of different ways. But from my perspective, I think the way to think about it is the broader longer-term view and something we've said a lot on many calls going back for several years now, which is when you look at geographic segments of APAC, EMEA and Americas. We view them internally as essentially homogeneous-type businesses on how we operate and how we run them. And based on that view in theory, they should all be able to achieve similar margin profiles. And to Sanjiv's exact point, 2018 is the baseline when we initially merged we had very disparate margin profiles across three geographic regions that we viewed essentially homogeneously. And through the years, through a lot of great hard work -- this is not something that's easy, and it's something that takes time, we have started to see them converging. Now clearly, the Americas, who's the leader now, they're not stopping, they're not resting on their laurels. They are doing things to help continue to improve the quality of their business, and that's a lot of different actions across many fronts. But what you are seeing is a convergence. You're seeing EMEA start to catch up. You're seeing APAC start to catch up. And in my view, in theory, all three should be quite similar in the long run. And so that's how I would think about it in terms of a long-range view rather than individual quarterly analysis because at the end of the day, these businesses are quite similar.

A – Matt White:

Yes. I actually would disagree with that. I think we're talking about a couple of different things here, and maybe we can sort of talk about them. From a return perspective, the energy will make no difference to us, right? When we look at project investments, we look at unlevered after-tax IRRs. And as you know, in these investments, we pass through energy. So from that perspective, the energy price really does not have any bearing on how we look at cash returns. Separate and distinct when you are in a gas region that is high energy costs that may create high inflation and hence high pricing, to your point, and what we're seeing in EMEA is a higher pricing environment because of that inflation, but also realize there is a lot higher pass-through in general, which also dilutes margins. So it tends to work both ways. When you see high inflation, you may have more pricing, but you also have higher pass-throughs which will have no effect on the operating profit dollars will create a dilution effect on the margins. So this is a part of something we've been seeing for decades across many countries with inflation movements, pass-through movements, but at the end of the day, our investment view is irrespective of energy and then the way the profile works within each segment will be a function of pricing and pass-through, but these margins we view should eventually start to converge over time.

Operator:

We will now take our final question from Mike Harrison with Seaport Research Partners. Your line is open.

Sanjiv Lamba:

Thanks, Mike. Both good questions. So let me start over the US packaged gas business. And again, just to kind of recap, we had double-digit sales growth in the quarter. So that is pretty solid. Even base volumes for both gases and hard goods grew mid-single digits. Now I'd say within the hard goods space that we did see towards toward the back end of the quarter, we saw particular equipment which you are referring to, that growth was starting to trend down. Still growth year-on-year has started to trend down a little bit. And I expect that we will continue to see that as we move forward as well. So I think those -- I mean, that's the leading indicator, as you've pointed out, and we're obviously watching it carefully. I'd say to you, I'm not going to try and speculate but there will be a recession and of that state to you that whatever we're seeing at this point in time would suggest, and if there is a little bit of a downturn, it is going to be just that a little bit of a downturn. But we'll wait and see what the economy really does and track that. As far as nexAir is concerned, firstly, very happy with the fact that we closed it. As you know, we announced that it has about 400 million in top line. We have a great platform in our LG&E business, the Linde Gas and Equipment business that we run in the US, which manages our packaged gas to integrate onto that platform, to get benefit from synergies and particularly that part of country is seeing a lot of inbound investment, and we see that through the nexAir footprint that we now have in the geography in Southeast US as being very healthy, as we see new projects emerge and that should drive growth and provide an opportunity for us to cross-sell more into the established network that already exists. As far as further consolidation, Mike, I'm all for going and getting as many tuck-in acquisitions as we can. I don't think we can do many large ones. I'd love to do them if we could. But I think between FCC and other -- I don't think that's a climate that affords that. But all small tuck-in acquisitions, we continue to do. We do a number of these every year, and I certainly expect to see as many if not more this year.

Operator:

I'd now like to turn the call back over to Juan Pelaez for any additional or closing remarks.

Operator:

That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

Operator:

Good morning and thank you for standing by. Welcome to the Linde Full Year and Fourth Quarter 2022 Earnings Teleconference and Webcast. At this time, all participants are in a listen-only mode. Please be advised today's conference is being recorded. And after the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.

Sanjiv Lamba:

Thanks, Juan, and good morning, everyone. By all measures, 2022 was another successful year for Linde, despite the significant and unprecedented headwinds. I'm incredibly proud how every employee rose to the challenge by not only delivering record financial performance but also living our core values and supporting key initiatives for all stakeholders. And while there are hundreds of daily examples where Linde employees have created real value through their commitment and determination, I'd like to highlight just a few on slide 3. Starting with shareholders. We delivered record financial performance against the backdrop of an energy and inflation crisis not seen in half a century. Three important metrics for our owners

Operator:

[Operator Instructions] Our first question comes from Duffy Fischer with Goldman Sachs.

Sanjiv Lamba:

Thanks, Duffy. So, let me just take a step back and tell you why projects like this become attractive to have Linde as a partner with. And in the OCI project, as an example, there are a few things that work in our favor. And then, that kind of translates into your question as to why outsource versus captive. Linde brings a number of things to the table

John McNulty:

Maybe just another one on the blue hydrogen opportunities. You're in a position now where you've got a partner on the carbon sequestration side. I guess, when we think about the Q45 credits or the value of them, so maybe there's some negotiation there, I guess, how should we think about how much you capture as part of this carbon capturing that you set up versus how the sequestration gets allocated? Is there a way that we should be thinking about that or a rule of thumb? I'm sure every contract is going to be a little bit different, but your partner sounds like it's going to be a steady and long-term one.

Operator:

Our next question comes from Mike Leithead with Barclays.

Sanjiv Lamba:

So Mike, you're right that there is some excess blue hydrogen that we will have out of this facility. We've obviously scoped for that. The linkage into the U.S. Gulf Coast hydrogen pipeline network is both space, right? It works as a reliability factor, very attractive for OCI, at the same time, gives me the opportunity to take that surplus blue hydrogen and put it back into my system. We have demand for that blue hydrogen. And yes, there is a premium. In the past, I've explained between gray and blue, the premiums that exist, and we will be putting that into the pipeline for customers who are moving onto blue hydrogen and have the willingness to pay for it. So to that extent, whatever surplus we have, we have factored that into our economics. As you'd expect, we tend to be fairly conservative around how we model some of that stuff, and you will see that also here. Is there a potential upside longer term? There is always going to be as that transition to blue hydrogen happens.

Nicola Tang:

Thanks, everyone. Hi. I’m getting off theme. I'd like to ask a little bit about the buyback actually. I see that it stepped down a little bit from the usual sort of $1 billion per quarter in Q4, which I assume was due to restrictions around ahead of your AGM. If I understand correctly through the delisting process, there may be a few restrictions around your ability to pay dividends or do a buyback until you get the approval from the Irish court. So, can you just sort of clarify whether that you see any constraints in terms of your buyback or timing of the dividend around the delisting period? Thanks.

Matt White:

Sure. Hi, Nicola. So, to your two questions, I think, first, just on the buyback pace. Yes, we were -- since this is classified as a merger of the actual structure, we were essentially out of the market entirely for most of the month of December. We are back in as our traditional 10b5-1, and then it will open up again to active buybacks in a couple of days. So that would drive some of the quarterly reductions given that we needed to be officially at. As far as the Irish distributable reserves, which you're referring to on dividends and buybacks, as you know, this is the same process we went through on the original merger between Praxair and Linde AG. It is a somewhat perfunctory exercise, especially now that we have a track record in history. So, we don't see this as any issue. We are well ahead of it, and this will not affect the dividend. It will not affect the buybacks. And we've got that well accounted for. So, there's no concerns on that in my part.

Jeff Zekauskas:

With all of the winter storms, did Linde itself have operational issues in hydrogen in the fourth quarter?

Jeff Zekauskas:

Great. Thank you so much.

David Begleiter:

Thank you, Sanjiv. Back to the OCI project, should we think about the 45Q tax credit as additive to your low-double-digit return or is it embedded in that assumption?

David Begleiter:

Very good. And you mentioned last quarter about 30 projects you're working on, I think, in the U.S. on the back of the IRA implementation. Would we stand in additional projects, like OCI be announced perhaps in the next few months or a few quarters? Thank you.

Operator:

Our next question comes from Peter Clark with Société Générale.

Sanjiv Lamba:

So Peter, I'm going to give you the example of Germany and Leuna where we have exactly the -- that we have here in the U.S. Gulf Coast. Peter, can you hear us?

Sanjiv Lamba:

We do. And I was going to give you an example of Germany and Leuna where we have exactly the same structure, multiple customers, pipeline network, serving refineries and chemical companies in that industrial network. So, that's an example of where we have incumbent strength. In fact, we are building our electrolyzers there to provide some green into that very pipeline network. So, that's one example where we do have the ability to expand and use that incumbent position that we have as a leverage to win more into that industrial activity and the part that we operate in Leuna in Germany. So, that's an example in Europe. What I'd say also to you is I think the nature of the projects in Europe is going to tend to be quite different, where there will be a complex producing product and then putting it into a pipeline network. Our ability, therefore, to participate in these islanded developments remains very strong. And I can also tell you that of the number of projects that I referenced previously in response to David's question, I see a number of those currently being developed in Europe as well.

Sanjiv Lamba:

So Peter, the way I think about energy costs and their implications for our business is twofold, right? In terms of power cost and natural gas costs, anything that happens in terms of it going up or down gets accounted for in our contractual cost pass-through mechanism. So, if that moves up and down, yes, you will see some shifts happen as a result of that. For the rest, the way we recover inflationary impact and the way we manage our business is pricing. And as you know, we've got a 30-year track record now of positive pricing. And I see no difference -- nothing different to suggest that there'd be any different as we move forward. If fuel costs go up, we manage that through a pricing mechanism. That's the cost inflation piece. If other costs go up, we manage that through a pricing mechanism as well. One of the things that we do is we manage that through product pricing and not only surcharging. And therefore, the stability of that pricing longer term is quite sound. And we feel pretty good about where it stands and how we'll be able to cope with that as we move forward.

Operator:

Our next question comes from Kevin McCarthy with Vertical Research Partners.

Sanjiv Lamba:

Sure. So Kevin, just talking about the APAC business overall, and I'll just walk you through APAC more broadly. That would give you the color that you're looking for. Again, we had solid pricing, as you saw. We had record operating margins. They are up at 26.5%. I've said to you folks before that there's a target on the back of the Americas business, and APAC and EMEA are moving in that direction to try and bridge that gap. Sales were pretty strong in electronics, in particular, across APAC followed by chemicals energy and then a bit of manufacturing. It is a story of two halves, if you will. Ex China, again, electronics, very strong chemicals, engineering, energy and manufacturing also extremely strong, some seasonal impact of LPG business in South Pacific that you would normally expect. We see that level stable, and I'm seeing that in January, the same momentum carrying through. In China itself, in the last quarter, we saw steel automotive being reasonably weak. The Chinese New Year, obviously, in January kind of impedes our ability to really see how that recovery is going to come through given the reopening that's been touted now. I think the next couple of weeks, I'm watching carefully to see how that trend shapes up, and that's really going to determine what that long-term view on China is going to be. I said last year that I expect moderated growth out of China, and that's kind of what we've considered in our guidance.

John Roberts:

Is Linde interested in the disassociation of ammonia back to hydrogen and nitrogen? And I don't know if any of the OCI ammonia is targeted for export for local disassociation, but I'm more interested in general. Since there are a number of blue ammonia projects underway by companies who don't sell hydrogen and nitrogen and I guess, there could be some extra cargoes that will be available eventually in that market.

Operator:

Our next question comes from Steve Byrne with Bank of America.

Sanjiv Lamba:

Steve, when a fab has been constructed -- and we're talking about solid contracts with long -- Tier 1 players across the world. When a fab is constructed, they have to manage that operational elements to a point, right? So that capacity utilization works in our favor. And we are actually growing that market both in terms of ramp-ups that are happening on new fab that came up two or three years ago, and we continue to ramp our gases into increasing production that is happening over there. And in addition to that, we also continue to improve some of the molecules that we bring into these fabs given the new technologies that are there. We call them electronic special gases. That -- we are continuing to see growth over there as well. And of course, I'll always add that there is a good strong pricing element to that.

Sanjiv Lamba:

Sure. So, these projects typically take many months to develop, in some cases, years. And so, we have been working on this project for a while, Steve. So, that's the reason why we are reasonably confident about getting this up and running in 2025 and in commercial production. So, I feel pretty good about where things stand with that. Having a local engineering organization with ability to do EPC on very complex projects obviously helps and is a competitive advantage from a Linde perspective. Our customers have obviously been working on their project for a period of time as well and are well advanced in terms of their own construction activity. So again, for you, good watching that. And I am not concerned about delays on their end. Having said that, contractually, we always protect ourselves, and we have date certain contracts to ensure that we are -- if we have done the investments and done the construction that we needed to do that we are able to then ensure that our facility fees or facility charges are then paid to us on a date certain basis. Coming on to the downhole activity. We are talking to at least three, if not more, very competent world-class companies that are experts in carbon sequestration. And those discussions are progressing well. And obviously, you would expect us to do some diligence around their ability to get permits sake, where they stand in that process. Some have already applied. Others are fairly advanced in terms of their preparation. Again, we feel good about how they are kind of in terms of readiness to manage the sequestration when it comes to the pipeline.

Vincent Andrews:

Just sticking with that global end-market trend slide, two aspects of it. One, is this going to be the last quarter of difficult healthcare comparisons? And should that yellow box start to turn green? And then secondly, the other piece within industrial actually had the worst sequential sales growth. So, what in particular within that other bucket was driving that minus 6% sequentially?

Vincent Andrews:

And just to that other end market, which is the bottom one on that slide, under industrial, is there anything specific in that other piece?

Matt White:

Yes. Sure, Vince. So a couple of things on other. Generally, what it represents, clearly, items that wouldn't fit in the categories above it represents a competitor or it would represent distributors that we don't have an actual end market identified. It is the smallest percent, so large moves could shift it. In this particular case, it's the seasonal component of LPG. That's the big driver since that is a sort of a retail component of our Southern Hemisphere business. And that just shows on the year-over-year, right? You can see the year-over-year is still up slightly. This is mainly driven by the seasonality component of some of that residential LPG component.

Tony Jones:

I just wanted to ask about volumes. With the good visibility you have over the next couple of quarters, do you think some of the new projects ramping up will offset slower end-market trends, particularly EMEA, and maybe even the U.S., if things deteriorate from here?

Operator:

Our next question comes from P.J. Juvekar with Citi.

Sanjiv Lamba:

P.J., let me talk about the hydrogen price quickly and then we can talk about the three buckets and how we look at them. So, as far as hydrogen price is concerned, we've been in the hydrogen business for about 50 years now. So, we've got some long-term experience around hydrogen pricing. In terms of how we think about hydrogen pricing, we look at our projects, the capital that we put on the ground and look at, as I said before, double-digit unlevered post-tax IRRs to make sure that those projects stand on their feet. You walk that back into the hydrogen pricing. And obviously, given that we lead the hydrogen market, both in the U.S. and elsewhere in the world, we feel pretty good about being very competitive in terms of what we bring to offer. Now, the hydrogen price development that you're referencing over here is largely going to be that variability is largely going to come on the green side of things, a lot of scale-up needed. Green is neither scalable today, nor is it cost-effective today. Even with the PTC of $3 per kg that might come out of the IRA, I would say to you that the inflection point for green isn't quite there yet. I see a journey of at least 5 to 7 years there. But you're right. You'll see some pricing curves on that will kind of develop in the next 5 to 7 years to make it -- get to a point of inflection on volumes. The three buckets that we spoke about, you're right, they are three different buckets. There are two specific elements in there that you can think about the first. When we have assets on the ground in the U.S. Gulf Coast, as an example, today, when we add capture capability to that and then work with the sequestration partner to put a downhole, there is an existing asset base on to which I'm adding a little more incremental capital and getting the leverage of that installed base that I have. So clearly, the return will look more attractive. For the rest, whether it's decarbonizing our customers or new markets, we are largely setting up new assets, which will be just as we have in the OCI case, in an ASU plus an ATR plus carbon capture. You put that together, we would then again look for a traditional industrial gas contract structures and return profile where we would expect to have returns commensurate with the risk that we undertake. So, that's how I would kind of say to you that those two buckets would really play out.

Christopher Parkinson:

On the last earnings call, you had a very helpful slide for, I'm sure you remember, it was the IRA and accelerating the U.S. clean energy transition. Can we just hit on actually one of the smaller buckets, the decarbonized Linde? It seems like you have a lot of projects, $3-plus-billion opportunity, fairly low-hanging fruit. How should we be assessing those opportunities in terms of your prioritizations versus, obviously, the -- I'd say short, intermediate and longer opportunities with customers as well as new markets? Thank you.

Operator:

That concludes today's Q&A session. I now turn the call back over to Juan Pelaez for closing remarks.

Operator:

That concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

Operator:

Good day, and thank you for standing by. Welcome to the Linde plc Third Quarter 2022 Earnings Teleconference. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. And after the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.

Sanjiv Lamba:

Thanks, Juan, and good morning, everyone. Linde employees once again delivered a strong quarter despite the economic challenges. EPS increased 21%, excluding FX, while operating margins expanded 90 basis points when adjusting for contractual cost pass-through, all underpinned by $2.6 billion of operating cash flow, and a record ROC of 21.8%. Now in addition to achieving this financial performance, the company recently received approval for its absolute emission reduction targets by the science-based targets initiative, confirming our road map to help de-carbonize the planet. I'm pleased to see these results, which are truly a testament to the quality of our team, and our relentless execution culture. These financial results highlight both the resilience and growth capabilities of the business in any environment. In times like these, it's important to remind investors of our stable and diversified growth trends, which you can find on slide 3. We continue to experience robust underlying sales growth this quarter, with each business segment growing double digit versus last year. Resilient end markets which make up about one-third of sales are collectively growing double-digit percent, with food beverage and electronics up almost 20% and health care slightly down from prior year pandemic volumes. Our gases are critical for the production and packaging of everyday consumer items such as food, carbonated beverages, respiratory applications, and electronic components. These volumes track to broad consumption levels rather than specific technologies, or trends. So they are quite stable even during volatile economic periods. Furthermore, despite what you may be reading in the news, we continue to see healthy supplies of gases into electronics fabs in every region. In fact, our total electronics project backlog increased to $1.4 billion, after recently being awarded a second large sale of gas contract for a major semiconductor manufacturer in the US. The bottom half of the table provides the trends for the more cyclical end markets. And similar to electronics, these trends probably don't align with what you're hearing and reading. Recall that a significant portion of these sales are underpinned by fixed payment structures independent of customer volumes, including on-site fees and cylinder rentals. It's important to note that, we spend a lot of time on contract language, to ensure our returns are protected and force majeure clauses are absolutely clear. I won't speak for the industry, but I have confidence in the strength of Linde contracts. We've demonstrated this through countless regional and global challenges, including the most recent pandemic, and so I don't see today being any different. In addition, a large portion of our customers represent the most competitive in their markets, with assets that tend to be the last ones running. A disciplined long-term approach to capital allocation continues to be validated during these challenging times. And almost 60% of sales, the cyclical end markets are also up double-digit percent. While growth is broad-based, we continue to see strength in mining for battery materials; merchant hydrogen sales; aerospace including commercial space; and general manufacturing especially in Americas. In fact, the US continues to be our best growth market as a combination of natural resource security, consumer resiliency and a strong dollar to support further economic expansion. This is especially true for the Gulf Coast, which is experiencing one of the highest investment activity in quite some time driven by lower cost energy and the ability to economically decarbonize with the passage of the US Inflation Reduction Act or IRA, which you can find on the next slide 4. The IRA has accelerated significant growth prospects from our unrivaled hydrogen and atmospheric gas network, as well as potential new markets being developed across the US. With this effect, we've grouped these activities into three different categories of Decarbonized Linde, Decarbonized Customers and New Markets. Let me start with Decarbonized Linde, which represents the ability to sequester existing CO2 emissions generated from our own hydrogen production. This provides simultaneous benefits

Operator:

Thank you. [Operator Instructions] We will now take our first question from Peter Clark from Société Générale. Please go ahead.

Sanjiv Lamba:

Peter, there are two things that I'd say that happened as a consequence of inflation coming through. You might recall Peter that very early in the process, we said that, we were looking at inflation and working through it and not believing it's transitionary. I think that's obviously been proven now. And we brought in the LatAm teams as one example of best practice within the group shared that more broadly. The difference that lies over here Peter is all about execution. And we have a relentless execution culture. That's what drives that pricing every day. You know as well that our performance culture requires that every month we sit down and review the progress that's been made. And that cadence of operating rhythm of doing that is the other piece that I think drives pricing as we look at it. Decisions are made every day. They're not made every week or every month, because they know that at the end of the month we have to have a conversation about the decisions we've made and any deviations that come out of that. It is really under driven by -- or underwritten by the performance culture of the organization.

Sanjiv Lamba:

Peter, there are a couple of ways to address that. As I look at the different end markets and obviously, we're paying a lot of attention to the medium and small-sized customers across Europe, there are two factors that we particularly look at. One is what's happening to receivables. And I can confirm to you that cash generation receivables remain within expectation, which I think is a very important indicator as to how the markets are currently responding. I'm not going to predict what's likely to happen in the next quarter or beyond, but I can say for now that, I think we've seen that accounts receivable reflect a certain amount of resilience across that customer base as well. The other piece I'd just mention to you is, when you look at EMEA volumes and I know you see a minus three over there, if you strip out the significant pandemic impact that came out of the health care, for most other end markets, volumes remained reasonably stable. Yes, they've softened a little, but they remain reasonably stable. And that includes the small and medium-sized customers as well.

Operator:

We will now take our next question from Duffy Fischer from Goldman Sachs. Please go ahead.

Sanjiv Lamba:

Thanks, Duffy. Let me start off with the backlog question first. As you will recall, Duffy, in the past calls, I've talked about a probability weighted number of about $5 billion. That's obviously a global number. Today, when I look at that number, that's trending close to $7 billion to $9 billion. Remember, we tend to be quite conservative. These are decisions in the next two to three years. And I'm expecting something of the order of $7 billion to $9 billion in actual decisions around projects in the next couple of years related to this obviously accelerated in part by the IR and those decisions will obviously then end up in the backlog, given the size of these projects. As far as sale of gas and sale of plant is concerned we have in this -- in our industry we have the unique advantage of being able to do both capability to execute both and ensure that both of them actually enhance our returns. So from that perspective that optionality is something that I certainly want to keep. And I want to make sure that we work our way through the quality of the projects, the risks associated with that before we make that final call. Our customers and developers recognize that and actually appreciate the fact that we have that flexibility to offer as well. So, I'm not going to give you a kind of percentage in terms of what you see out of sale of gas versus plant. It is fair to say as a principal though that principally we like sale of gas as a base model and it's where we find that the risks are probably a little bit different to what we would expect. That's where we would opt out then for the sale of plant model. Largely on size of projects I say to you as you look at this number of $30-plus billion that we're talking about you're going to see projects probably 20 to 25 large projects happen to make up that number. That kind of gives you a bit of an average view. There is no particular size that I can attribute to these projects they range depending on the scope of the project itself.

Operator:

We will now take your next question from Steven Richardson from Evercore ISI. Please go ahead.

Sanjiv Lamba:

Thanks Steve. So let me talk about the scope first. So typically carbon capture is absolutely within our scope in almost every instance. That is capability that we bring. There is proprietary technology that we are pushing hard at the moment. We think we've got some world-leading technology that we call HISOP, PSAs [ph]. These are CO2 PSAs that absorb that CO2 capture rate and allow us to then take it forward for storage and sequestration. So quite excited and that's the part of the technology that we want to make sure will always be within our scope. Beyond that ensuring that you pressurize and transport that CO2 is something that we also would like to do typically, but are more flexible on. It's part of the scope that we would obviously give to our partner would be all around that CO2 going downhole and what happens to that CO2 beyond that including monitoring longer term etcetera. As far as the approach to subsurface partnerships are concerned there are various models Steve that we would follow. There's a whole range from consortium approach that we've been working on already and hopefully we'll announce in the near term to having them as being partners joint venture partners within the project itself. So that whole range is available to us. We find that depending on the market and the actual project scope that kind of best defines where that partnership is then put together.

Sanjiv Lamba:

Steve it's definitely the latter where a number of customers are very actively engaged in conversations with us. What tends to happen is you have to think about this as an incremental service offer if you like on an existing asset. When we talk about Decarbonize Linde as an example that's where we would capture CO2 of our existing facilities and transform that gray hydrogen of today into blue hydrogen that goes into the network and feeds existing customers. So that's kind of one way to think about it. And that's where we're seeing a number of customers quite interested given the strength of our network and the asset footprint that we have in the U.S. Gulf Coast. In addition to that, there will be conversations for sure that happen it just depends on the timing of the contracts in many cases. The underlying takeaway from this that I want you to kind of keep in mind is there is urgency in the customer base to want to progress given that both 45Q and 45V in many ways is actually pushing them to try and monetize the benefit that comes out of this decarbonization kind of effort that IRA is supporting.

Operator:

We will now take our next question from Steve Byrne from Bank of America. Please go ahead.

Sanjiv Lamba:

Right. Steve, you've got good memory or good, as the case might be. So it was 1.30 for gray, 1.50 for blue and about 4.40 for green that I offered I think a couple of quarters ago. And that was all at I think natural gas price if I'm not wrong of around 350. Obviously natural gas prices change along the way as well. But the moot point over here that you make and I will validate for you is gray and blue are coming close to parity today with the benefit of the 45Q in place. They are almost at parity, I would say. As far as green is concerned with the 45V the $3 a kg is pretty attractive. The issue with green remains scalability and I'll talk a bit more about blue and green in that context. But from a cost point of view that 440 is now trending anywhere between, 250 to three. So it has come down substantially, but again, because of lack of scale and the availability of cheap renewable energy that pricing for green remains a little bit higher than what I would see as long-term inflection point which you've heard me talk about 150 as a long-term inflection point for us to see huge acceleration happen. Not quite there, but certainly heading in the right direction as far as we concern. Coming on to where I see this development moving and really I think for me blue today is available at scale. It's technology that's tested. And it's an offering that's available in the market today which is why a lot of the conversations I referenced in my previous answer are being driven, because that ability is available today. The challenge with green remains the ability to scale-up and get access to reliable renewable energy at reasonable costs. That combination isn't quite here. And while the 45V has some really good incentive at its max $3 per kg of green hydrogen unfortunately the impediment really is around scale-up to getting that to a point of inflection and significant acceleration. So you summarize that, I expect a decade plus of blue as a great bridge to ultimately large-scale industrial scale green which is reliably available at cost where that conversion makes a lot of sense.

Operator:

We will now take our next question from Mike Leithead from Barclays. Please go ahead.

Matt White:

Hi, Mike. So taking them in order. Yes, you are correct recapitalize the balance sheet essentially means, essentially reduce our equity through buybacks and that could imply the debt building up. So that is absolutely correct. As far as the ideal leverage ratio again you are correct the single A under the S&P scale and A2 under Moody's is what we are aiming for. And as you know they do have their own proprietary metrics, which rely on certain adjustments for things like capitalized leases and pensions. But when looking at what I call the simplified metric that we use which today we're showing at 1.1 times on debt to EBITDA, I think, you can get that in the mid-twos or higher as options and we've seen that in the past. Clearly you'd have to work with the rating agencies to ensure your rate -- your ratings are still aligned. But I think that is definitely a feasible area. And then as far as guidance yes generally when we look at that we, sort of, take that on kind of our share count. There might be a little bit of benefit of some of the buyback. But realize as you know probably the buyback the way it affects into the EPS it's, sort of, a cumulative effect. So what you're doing in any given quarter tends to have more of a lag effect anyways. So it would more be a function of what we've done to now, and maybe a little bit of what we do in the fourth quarter. And then what we do in the fourth quarter will have a bigger impact in Q1 and going forward. So there will be a little bit in there but it will be more a function of what we completed here in the third quarter.

Operator:

We will now take our next question from Nicola Tang. Your line is open. Please go ahead.

Sanjiv Lamba:

Nicola I didn't get the question entirely, but I heard Exxon and sale of gas for next year. And I want to just confirm to you that that project is progressing on track and we expect to have that from a commercial structure in place for next year and you'll see that reflected next year as well. I didn't get the second part of your question Nicola.

Sanjiv Lamba:

Right. We expect to see a similar start-up contribution, obviously, upped by what we see from an Exxon perspective, which is a single large project that you would see. But you should expect -- excluding that we should expect the same level of start-ups next year as this year, which we said earlier on was about $1 billion of start-ups in the course of this year.

Operator:

We will now take our next question from Jeff Zekauskas from JPMorgan. Please go ahead.

Sanjiv Lamba:

Jeff, I'll take the first question and ask Matt to talk you through what we're seeing on the interest side of things.

Sanjiv Lamba:

So the way to, kind of, best describe it is you will see sequentially our margins in the Americas improved. APAC was stable and slightly up. And we did have a slag in the EMEA region which obviously you've seen as well. We put a table on the EMEA slide just to explain that. So, yes, as far as sequentially, our recovery was more than offsetting inflation and Americas and APAC were able to reflect that. We're seeing some record pricing there. In EMEA we had record pricing of 14%. This obviously excludes any pass-through 14%. But despite that there is a lag. We were seeing electricity price increases in EMEA and Germany and UK in 80s and 60%. And that lag will be there for a month or so, as you've seen from previous quarters. And I fully expect the team in EMEA is very conscious of that and working through both pricing and cost actions to make sure we have a recovery as we move forward.

Jeffrey Zekauskas:

Okay. Thanks so much.

David Begleiter:

Thank you. Back to Slide 4. Sanjiv, how should we think about the returns on these projects? And how is the competition shaping up for these projects? Is it more or less intense on your traditional projects? My first question can we return actually above your normalized rate given the uniqueness of these projects?

David Begleiter:

Very good. And just on Europe on your take or pay contracts, are you seeing any issues with any contracts given the current elevated energy price environment?

David Begleiter:

Great. Thank you very much.

Vincent Andrews:

Thank you and good morning, everyone. Matt, just wanted to circle back on the balance sheet question and get a mark-to-market from you on where you think Linde can borrow at these days and then how that feeds into. As you're discussing new projects how are you baking in higher financing costs in terms of project returns and the like?

Vincent Andrews:

Okay. Good to hear. Thanks so much.

Dan Rizzo:

This is Dan Rizzo on for Laurence. Thank you for taking my questions You talked a bit about the return on capital for the -- for investments. I was just wondering, with the new opportunities in gray, green and blue hydrogen, at this point if we should assume the return on capital is below the traditional products, but should exceed it within, I don't know the next five to 10 years? Or how we should think about the return on capital, on these new opportunities?

A - Matt White:

And maybe I could just add one more point, Dan. When we make our decisions, we make it on an essentially cash basis an IRR unlevered after-tax cash basis. So, that won't change. As you know, the ROC is more of an accounting metric. So, I wouldn't look at that 21.8% in a benchmark in any way or in any form. I mean obviously, we're getting benefits there from the noncapital portion of our business today, which we expect to continue going forward. But when we make project decisions as Sanjiv mentioned, it's more on an IRR basis on how we think about that.

Operator:

We will now take our next question from Geoff Haire from UBS. Your line is open. Please go ahead.

Sanjiv Lamba:

That's a great question, Geoff. It's topical as well because I had -- over the last couple of days I've had a number of conversations, with political leadership in different parts of Europe. Two things. First, the IRA I think came as a surprise to many people including many of the political leadership in Europe, and they have recognized that it has a galvanizing effect in terms of moving the pace at which change happens on clean energy in the US and obviously, are envious of that change given that European Commission requires time and a fair amount of work to kind of be able to get to its point of decision-making. The other piece, I think is that that awareness has then led them to recognize that some urgent actions are needed. I'll give you two quick examples of conversations. I may not quote them in detail, but I'll let you know that the fact that Europe was all about green hydrogen only, clearly has changed and there is a greater acceptance of the fact that blue provides a very effective bridge to getting to clean energy in due course. Today Europe just needs energy. They are burning more coal than they had planned for as you know. So really that pragmatism, which was lacking in the past on making sure that low carbon intensity hydrogen was welcomed into Europe on par. There was no discrimination against blue versus green, et cetera. I think that's a change that I think is fundamental and we'll see some of that. And the fact that Europe also recognized that while they can talk about developing projects in Europe, they desperately need to ensure that they have processes in place to import significant amounts of clean energy and in this case blue, green hydrogen, ammonia, et cetera into Europe to be able to leverage and build infrastructure needed is the other change that I'm expecting to see in the near term. So I'd say the IRA has provided some real soul searching opportunity for Europe and they are going to do something about it.

Operator:

We will now take our next question from John Roberts. Your line is open. please go ahead.

Sanjiv Lamba:

John, when we look at customers and discussions that we're having, the customers are themselves trying to leverage that blue hydrogen into their own product slate in some cases moving towards more renewable fuels, which then attract significant and attractive further benefits that come out of places like California as an example. So moving to renewable fuels accessing California's low-carbon standard framework and accessing further incentives allows them to consider premiums that would become available on -- and pay for on the blue hydrogen as well. But in truth, I'd say to you that if I look at broad-based adoption of blue hydrogen, the IRA provides through the 45Q credit a significant benefit in terms of accelerating that decision and does come from a point of return perspective does support the return to moving to blue hydrogen even with marginal premiums on it.

Operator:

We will now take our next question from Kevin McCarthy from Vertical Research Partners. Your line is open. Please go head.

Sanjiv Lamba:

Thanks. So hardgoods business both on the package side, I'd say to you both gases and hardgoods business are both growing double digits as things stand. On the hardgoods side, we look at two different aspects of it, when you talk about kind of leading indicators to what we're seeing around economic activity, we see both on equipment sales as well as consumable sales. I can tell you I see demand and growth on the equipment side as well would suggest that people are still putting some cash on the ground to make sure that they are able to catch up with many of the supply chain issues that have plagued manufacturing more broadly. So I still -- at this point in time still feel pretty good about where we are seeing hardgoods development as things stand. And I'm talking about the US here.

Operator:

We will now take our next question from Mike Sison from Wells Fargo. Please go ahead.

Sanjiv Lamba:

Hey Mike, I'd love to speculate but I'm not going to do that. We'll come back to you in the next quarter you know and we'll give you a full outlook for 2023. We're going to go through our own very detailed planning exercise. I'll have the guys in here from all over the world over a three-day period where we'll run through each one of their planning processes. A lot of these assumptions will get tested and challenged in the course of that. But again, I just want to -- I think the point that you make is that resilience stands out Mike and sometimes people take that for granted. But in our case, we recognize and our volumes showing through is just another element of that resilience in addition to the fact that I explained at the last earnings call, our defensive business model, including the contractual structure that we have, even when volumes are down we're able to actually preserve much of our profit and our top line as well. Again, just a recognition of that is quite important in these times particularly. But we'll give you more in the next quarter for sure.

Operator:

We will now take our final question from Mike Harrison from Seaport Research Partners. Please go ahead.

Sanjiv Lamba:

Thanks Mike. So, just on natural gas very quickly on EMEA. Obviously, we've seen continued volatility around natural gas pricing. We've been able to push that through our contractual cost pass-through structure. We will continue to do the same. If natural gas prices come down significantly, margins will get enhanced as a consequence. As you know, it's a clear math around how pass-through works, and really no concerns from our perspective. Obviously, lower natural gas pricing will help the broader economy and hopefully some economic tailwind as a result of that which should be positive for us. As far as Electronic segment is concerned, let me kind of break that up into two parts. Let's start with the long-term in terms of investments being made and the CHIPS Act out of the US and a similar act out of Europe pushing to have localized investments in their regions continues to drive fab investments as we move forward. In conversations with some of our largest customers more recently, I have seen commitments from them of staying at the same level, if not increasing their investment levels. Some of them tend to invest countercyclical. That's been a strategy that's worked well for them. And I expect to see those levels remain fairly stable in the mid-term, I'd say. So that's from now until the next four to five years. Of course, we are winning more than our fair share of those and I feel good about the fact that we'll see continued growth as a result of that. In the near term most of our large customers continue to consume, which is what I -- the pointed comment I made earlier on that despite what you read in the press, our consumers continue to consume gases at every fab that we supply. And that's a really good position to be in. There are some concerns around China that I've heard from investors as well. And again, I want to confirm that our volumes in China continue to be unimpacted by current embargoes and so on and so forth that might exist. They might have an effect on longer-term investments in China, but we are yet to kind of see that reflected in the demand pull that we see from the markets.

Operator:

I would now like to turn the call back to Juan Pelaez for any additional or closing remarks.

Operator:

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

Operator:

Good day and thank you for standing by. Welcome to the Linde plc Second Quarter 2022 Earnings Teleconference. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations for any additional or closing remarks. Please go ahead.

Sanjiv Lamba:

Thanks, Juan, and good morning, everyone. I'd like to start by addressing the 1 billion charge this quarter, primarily related to deconsolidating our Russian subsidiaries. Impairing assets is not something we take lightly. However, the current situation in Russia is unprecedented with the extraordinary sanctions and capital restrictions. And while deconsolidation means we will not report Russian results going forward, we are actively working to safely and economically scale back operations. We fully intend to recover value for these assets, including potential divestitures, but it will take some time. Despite this non-cash accounting charge, the global business continues to be resilient and performed quite well in the second quarter with strong pricing, solid cash flows and margins expanding sequentially and year-on-year, excluding cost pass through. Slide 3 demonstrates the defensive nature of our model. Now it may look familiar since many of these elements were presented in the second quarter of 2020. The world may change, but our business model does not. We've been around for well over 100 years, and through that demonstrated our resiliency during some of the most difficult periods in modern history. Approximately two thirds of the business is protected through contractual fixed payments, such as facility fees and rent, and sales to resilient end markets like food and beverage, healthcare and electronics. This portfolio provides tremendous downside protection during difficult times, like the early 2000 recession, the great financial crisis, the 2020 pandemic, and of course now in 2022. In addition, strong cash generation coupled with relentless price and cost management support the business when volumes contract. And, of course, we can benefit from a recovery as demonstrated after each recession. These facts apply to all geographic segments, including EMEA, where there appears to be some potential investor misconceptions around our business. So you can see on the bottom right, our exposure to EMEA and some additional color, specifically to Germany. We run our business in Europe like anywhere else in the world, safely, reliably, and in a matter contractually limit our financial exposure to customer volatility. Now I'm not going to speculate what will happen in Europe regarding the energy situation. But I have confidence in our business model and contracts that we can weather challenges, and we will capitalize on opportunities that may lie ahead. Now before I hand it off to Matt, I'd like to provide some color on end markets by segment. Slide 4 shows our organic growth is still quite positive across all end markets with the exception of healthcare, which is due to lapping COVID-related oxygen volumes in developing nations. Overall growth is driven by pricing action, project backlog, even as base volumes are relatively stable although underlying trends by geographic segments vary a little. Let me start off with the EMEA region since it seems to be getting most press recently. Volumes were down 1% from last year and flat sequentially, while price increased 12% and 3%, respectively. The team has done a great job pricing inflation, while keeping a tight lid on costs and I fully expect this to continue. On-site volumes have been quite stable from a combination of highly competitive top tier customer base and strong contracts. Merchant and package are slightly down as a reduction in COVID oxygen and low manufacturing volumes more than offset growth in food and beverage, metals and mining and electronics. So far in July, we haven't seen any material change from June trends, despite certain countries navigating their energy challenges. You will recall in the second quarter of 2020, Eurozone industrial production levels dropped roughly 20% due to COVID lockdowns. At that time, our EMEA segment organically declined only 7%. And since that time, the EMEA segment operating profit has grown approximately 80%. In other words, the EMEA business has successfully navigated unprecedented economic shocks in the past. And I see no reason why that won't continue going forward. The APAC segment had another solid quarter, despite COVID lockdowns in China. Volumes increased 3% from prior year and 5% sequentially, while prices improved 5% and 1%. On-site customers across all end markets continue to run steady, including China. We saw similar trends in past recessions, which speak to the quality of our customer base. Now China merchant was weaker from the production curtailment of small to medium-sized customers, which was partially offset by merchant growth in other countries, as well as higher package gas volumes, especially our specialty gases used in electronics such as helium, neon and xenon. In July, China merchant volumes have recovered to levels more consistent with normal run rates as we've been seeing, but we haven't been seeing material COVID impact at this time. I do expect some volume ups and downs in the second half, but that should smooth out by the end here. Aside from China, organic growth across Korea, South Pacific, South and Southeast Asia remain healthy from a combination of project startups, pricing actions, and of course our capability to supply gases across all three supply modes. Our largest segment, the Americas, had some of the best growth trends and opportunities for the near term. Organic growth of 9% from last year includes 3% volume and 6% price. All major end markets have expanded, led by food and beverage, electronics, manufacturing, chemicals and energy, excluding Latin America and healthcare trends related to COVID. In the U.S., our integrated model across all three supply modes enables reliable and seamless gas supply for all customers, regardless of size or end market. In fact, our U.S. packaged gas business has been one of our fastest growing businesses, with underlying sales up 16% from prior year led by aerospace, construction, electronics and met fab. The underlying trend appears stable in July, although we expect some normal seasonal slowing for the summer holidays. Also, we continue to see more project backlog opportunities in the U.S. than anywhere else. Recent wins for electronics have been the largest driver, but progress on potential new U.S. Gulf Coast projects, especially for blue hydrogen, are encouraging. And as I look at our overall current sale of gas backlog report, there are several projects we expect to sign before the year end, which could take this number close to the 4 billion mark, even after starting up close to 1 billion in projects during the course of the year. Now I'd also like to highlight that we recently issued our Annual Sustainability Report, which provides a comprehensive view of our SDG-based initiatives and tracks our progress. I'm pleased to see that in this quarter, we reported a reduction of 31% on our GHG emissions versus the 2018 baseline, well ahead of our projections to reach our target of 35% reduction by 2028. But we realized that an intensity goal was not enough. And therefore last year, we communicated our ambitious 35 by 35 goal. As you know, we're committed in reducing absolute greenhouse gas emissions 35% by the year 2035, on the way to becoming climate neutral by 2050. As you'd expect, our 35 by 35 target is science-based and aligned with the Paris accord goal. Overall, our technical capability, unrivaled network density, disciplined operating culture, and a committed team allows us to quickly capitalize on any growth opportunities that meet our investment criteria. Now some investors mistakenly look at one or two countries in our portfolio and come to conclusions about growth prospects of profitability. But what they miss is our ability to capture that growth anywhere in the world while simultaneously right-sizing the businesses in an efficient manner. This ability has enabled us to consistently deliver double-digit EPS growth, and this year is no different. The Linde model is well suited for a fast changing world, and our performance will continue to demonstrate its resilience. I'll now turn the call over to Matt to walk through the financial numbers.

Operator:

Thank you. [Operator Instructions]. Our first question today comes from Duffy Fischer of Goldman Sachs. Please go ahead.

Sanjiv Lamba:

Thanks, Duffy. So let me just go back and maybe reiterate how we think about staying ahead of that cost inflation and how are we managing our pricing over the last many quarters? Essentially, you think about pricing in our industry and for us in three key buckets. You've got the energy bucket. You've got the fuels bucket. As you know, we travel a lot of kilometers delivering products. And then we've got essentially the wages bucket which we managed quite actively. Through the last four quarters and of course if you go back into history over the last 20 years, we've demonstrated positive pricing over that period. The last four quarters have shown we've been able to keep ahead of cost inflation. We've talked about a lag of one to two quarters. That's kind of the visibility we had. We continue to have the same visibility. And in fact as you see margins over the last two quarters expand, you know that that lag of one to two quarters is being fully covered and reflecting into margin expansion that we've been able to show across all the segments. We do actively manage that spread, Duffy to your point, on how we look at pricing versus inflation. And that's something that we have good visibility on within the organization. And we pursue quite actively with our monthly reviews, et cetera, that you're aware of.

Sanjiv Lamba:

So Duffy, maybe why don't I just take a step back and just talk about what we saw in the markets in Q2, because that's a good starting point. As you know, energy prices have been higher for a while. This is not -- this hasn't certainly peaked only in this year. In fact, it started last year well before the war itself. And when I look at the end markets across EMEA, I see sales growing across all end markets, expecting healthcare which we talked about and are lapping the COVID volumes, particularly in Eastern Europe and Middle East. If I think about our distribution modes, that's the other way to look at the profile of the customers. Across all distribution modes, we saw sales grow as well; on-site, merchant and package, obviously held by strong pricing, the pass through that you just referenced, but also we saw volumes at healthcare continue to stay stable or move forward. So when I think about the outlook, my view is at this point in time, there isn't anything in the trend that we look at, which is suggesting that people are fundamentally changing how they operate or are kind of not managing the challenges. Yes, a lot of them are looking at how to save costs clearly. I'll give you a good example of where we are working very closely with them to get that done. But also we are understanding that people are actively looking at their own pricing measures and we're seeing that across most of the industries we serve. I'll give you a quick example of how cost savings programs are running. So clearly with natural gas costs being where they are, people are now starting to look at industrial gases to help them become more efficient, increase throughput as well while they do that. A good example of that is our oxyfuel offer that we have. And recently, obviously, given where energy prices are across the world, but in EMEA in particular, we've had a lot of traction with customers in the course of the first half of this year, helping them improve their processes by injecting oxygen and substituting in part air, but also reducing their natural gas consumption as a consequence. 10 wins already in the first half. We've got at least 15 to 20 other proposals that we're working on. That's a good example of where we are using industrial gases to help people manage their cost base and address some of the points that you raised.

Operator:

Thank you. Next, we move to Vincent Andrews from Morgan Stanley. Please go ahead.

Sanjiv Lamba:

Sure, Vincent. So I'm going to use Germany as an example, because it's kind of -- that's where everyone's attention seems to be at the moment. And we tried to address this issue when we showed you the defensiveness of our business, right, and we showed you Germany on Slide 3 and the exposure we have over there. So using Germany as an example, I'll remind you Germany's about 5% of our company sales. We said that two thirds of the German sales at the moment are what we would call defensive, and we talk about those being underpinned by contracts or supplying to resilient markets. When I talk about underpinned by contracts, we've got six facility fee or rentals in place over there. The two thirds of the business is protected through that. If you now look at what's left [ph], that's about 1% to 1.5% of our overall sales. So I just want to kind of make sure that the magnitude of the volatility that we're talking about is actually limited from our perspective in the example of Germany to about 1% to 1.5% of our overall Linde revenues. Coming to the contract structures themselves, our contracts basically have two components within them, a fixed fee that allows us to recover on the capital and the operations that we do and then a pass through element that essentially passes through the feedstock that we use, in this case, natural gas. We are very confident on both the quality of customers we serve, because that is quite important in times like this, but equally on the quality of the contracts and our enforceability of those contracts and those fixed fees that we have within the contract that protect us.

Sanjiv Lamba:

Actually, yes, I should cover that part. So you're essentially talking about our atmospheric business now if you talked about electricity earlier on, right? And I just want to make the point. Obviously, we are in very intense conversations with the German government around electricity and how the energy kind of allocations will happen. Just as a quick reminder, in all our countries, including Germany, we are one of the key players producing medical gases and safety critical process gases. For instance, even if you turn down operations, you need nitrogen as part of that. Even if you shut down operations, you need nitrogen for safety purposes. Because we produce gases, which are critical, either from medical or a process safety perspective, the German government, to illustrated one but others as well, allocate us on a preferential or priority basis and therefore, the unlikely event of us not being able to operate, Vincent, is really very, very miniscule. So that is kind of, from our perspective, what provides the confidence that we have with those operations will continue to be operating.

Vincent Andrews:

Thanks very much for all the detail, guys. It was really helpful.

Nicola Tang:

Thanks. Hi, everyone. Actually, the first question was a bit of a follow up on the European situation, not specifically about the sort of shorter term trends but just thinking longer term. Are you or would you expect to see any of your customers rethink or -- no, sorry, potential customers rethink whether to make investment decisions in Europe, given the high/volatile energy cost environment?

Nicola Tang:

All right, great. That's clear. And the second question, I think Sanjiv in your comments you mentioned sort of that there was rightsizing, which I think you've talked about in the past. I was wondering if you could talk a little bit more about, I guess, measures that you're trying to put in place at the moment to rightsize, and in particular maybe you could comment on, I think there was a recent Reuters article talking about headcount reduction in the engineering business?

Nicola Tang:

And is there anything to do in terms of rightsizing in other parts of your business?

Nicola Tang:

Thank you.

Michael Leithead:

Great. Thanks. Good morning, guys. First question maybe for Matt, just wanted to follow up on the Americas one-time charges in 2Q. I was hoping maybe could you give just a little bit more color on what that was? And secondly, I just wanted to confirm. Those are included in the 910 million of EBITDA in the quarter. So if I hold all else equal, if you get some of that back next quarter, EBIT would theoretically be higher. Is that fair?

Sanjiv Lamba:

And I guess [indiscernible] that the underlying -- Mike, that the underlying margin for Americas is growing, just in case. I kind of read a couple of reports that seem to confuse that.

Sanjiv Lamba:

Absolutely. So as you've probably seen over the last few years, Mike, we have grown that business, that position, and we now call it the resilient market, has grown and clearly we are making massive investments having won a significant amount of the new fab investment that is happening. For us the attractiveness lies in three different ways. One, we deal with some of the best quality customers in the industry on that. So some of our largest customers are Samsung, TSMC, Intel, and others, GLOBALFOUNDRIES, Micron, et cetera. That's a good mix to have. We have diversified our risk, but with top tier customers over there with great technology. So that helps. We have a very unique offering in the sense that we are able to leverage our engineering crew to be able to create the technology best suited for the new fabs that are coming up. So we believe we have a technology advantage, alongside our operating expertise of working closely with fabs for decades now. We're able to leverage that and we are winning more than our fair share in terms of the new projects that are coming up. So we feel good about the technology offering translating into a competitive advantage visibly available for us. And then the last piece is there is a piece around specialty gases on electronics. Again, we have strong positions over there. In previous calls, we talked about neon, et cetera. Our strong positions and the fact that we are integrated in our supply chains for some of those internally and not having to source a lot of those externally, we are well positioned to be able to use those gases as a growth driver for us in the electronics space as well. So overall, feel pretty good about it, feel that we really are winning more than our fair share here and feel good about where the industry is and the customers we're dealing with.

Operator:

Thank you. We move to John McNulty of BMO Capital Markets. Please go ahead.

Sanjiv Lamba:

Absolutely, John. So let me just kind of talk about what I'm seeing from a volume perspective, break it down by our distribution modes, because that's probably the best way to address that a little more granular. So let's look at on-site volumes, what we've seen in the second quarter, and then I'll talk a little bit kind of in terms of outlook. On-site volumes have been stable right through the lockdown. It's an important piece to note high quality customers across end markets, good on-site volumes have been held steady. Merchant volumes, obviously, as you'd expect through that period, given that there were restrictions through the lockdown process, including transportation, distribution, et cetera, we saw merchant volumes move down initially. By end June, we were back at pre-lockdown levels as far as merchant volumes are concerned. So we saw that reasonably quick recovery towards the back end of the quarter as well. Now as I look ahead, I expect to see those on-site volumes remain stable. I think if I am thinking about any volatility, my view would be the steel industry is the one area that I'm watching closely. And if I see movement, that's where I expect that we will see some volatility. As far as merchant volumes are concerned, we might see a little bit of ups and downs, a little bit of variability on those volumes on the merchant side. And largely because as you know, you read about in the press, they have four asymptomatic cases and 1 million people get tested or lockdowns might come back in and out. But for most part, my expectation is over the course of the second half, you'll see all of that kind of sorted out and you'll see normal merchant volume growth levels achieved back in China.

Sanjiv Lamba:

John, for most part, I'll tell you that that is broad based. Obviously, we have a couple of specialties in there and you know specialties in Asia Pacific around the electronics piece helped that pricing number. But for most part that is broad based across all geographies and across all end markets.

Operator:

Thank you. We move to Jeff Zekauskas of JPMorgan. Please go ahead. Your line is open.

Matthew White:

Hi, Jeff. It's Matt. I can handle that one. So just to probably really quickly restate, as you may recall, our capital allocation policy, which I think is probably relevant for those on the call, but it starts with an overriding mandate. And the mandate for us is to grow the dividend every year and maintain a single A rating on basically our credit rating. And then our priority after that is to invest in the business. And that includes acquisitions, that includes projects, that includes investing in base growth. And then whatever is left of that from our cash, we put towards stock repurchases. We follow that through all good times, recession times, irrespective of the macro environment, the resiliency and the defensiveness of our model enables us to continue to follow that. So to your question, the specific answer, it will be what an A rating is. And you're absolutely right. Right now, we're probably maybe 1.1 levered. I think the team did a good job to balance euro-based debt with our euro-based EBITDA. We continue to grow double digit on our EBITDA and our operating income, which is enabling a strong growth and which is continuing to keep that metric suppressed. So we are deploying capital. We are buying back shares. As you probably saw, year-to-date, we're in excess of $3 billion. But by no means are we ever going to be capital constrained on growth. We're going to go into every growth opportunity. I don't care if it's an acquisition, a decap [ph], a project or base project. If it meets our investment criteria, we're doing it. And so there's no saving or waiting. It's just a continual deployment of capital under this model, but the business continues to perform very well. And so it's just an ongoing effort to deploy all this capital we're generating.

Sanjiv Lamba:

Jeff, I was going to preempt that question and answer already ahead of your asking that. But I'm going to try and attempt to answer that. We had the same conversations last quarter as well. And I'd say to you that our expenses are down. As you can see, there is a FX impact in there. But primarily, there is the action around managing our SG&A actively every month, which is what keeps it there. And the benefit really comes from two key drivers as far as our SG&A numbers are concerned. We have a very active productivity program. And more recently, using our digital tools, we've got a very active automation program. You see the benefits of those two flowing into simpler processes, ensuring that we take heads out where we can and should, and including running productive programs at every level. And I've said this before many times, thousands of projects that look at every line item and each line item gets addressed. And I'll give you a couple of kind of concrete examples just to illustrate that. So we are running a productivity program at the moment looking at our cost -- our total cash fixed cost base, we call it TCFC, across our businesses in Europe. We recognize the external challenges that that business faces. Every line item has an owner, every owner has a target. And that's how you get that number down. That's reviewed every month. I review it every other month with them. And essentially, that level of focus and attention is what gets those costs. And that's where you find wastage, you find duplication, you find opportunities to improve processes. It's something that happens continuously. We don't do that for a recession. We don't do that when we have good times. We do that every day, every month.

Operator:

Thank you. We move to John Roberts of Credit Suisse. Please go ahead.

Matthew White:

Hi, John. It's Matt. I think maybe to explain probably why we're getting the 20% might be better. And then hopefully that will help address your question. The way -- our expectation of risk reward and returns hasn't changed much. And when I think about what returns we're getting on our on-site projects, that also hasn't changed very much. The reason this metric continues to improve, the obvious reason, is the numerator, which is [indiscernible] is growing much faster than the denominator, which is our capital base. And the reason that's happening is the integrated model that we have is enabling our non-capital intensive businesses, and this includes our engineering business, this includes our packaged business, our merchant business, and even some of what I'll call the global other businesses are growing at a very strong rate, generating cash without the need for capital. So it's the integration of the model that is enabling this return on capital performance, rather than a singular view of what a return expectation is on a single project. This is why the density model we view is so important for cash generation and return on capital and profitable continual stable growth, which is how we deem a way to create value in this space. So that's really what's driving it. It's the integrated model. It's the density model. And it's a lot of the non-capital intensive businesses continuing to contribute rather than us changing our return expectations.

Sanjiv Lamba:

John, I'd suggest there are two ways to think about this. There is a customer view and then there is the internal view. You're absolutely right on the internal view where obviously the higher the gas price, the more benefit we get from our productivity program or efficiency programs, and that flows in. And clearly, when you looking at margin expansion, our margin expansion is a consequence of actions we take on pricing actions, we take on productivity, all of that falls into that and kind of gets factored in. The other piece that I'd just offer is there is another perspective to this, which is what is happening with their customers who are seeing higher gas prices? I gave the example of oxyfuel wins that we had in the first half, 10 wins. That was -- the momentum is picking up on that. Here what tends to happen is as natural gas pricing moves up, our customers are looking at ways to both reduce costs, but also substitute and that's where our applications come into play and we have an opportunity then on the upside to try and understand where those volumes can be placed, where we could get those mid to long-term contracts put in to ensure that we're able to then sustain some of that growth that we want to see happen as a consequence of our applications as well.

Operator:

Thank you. We move to Peter Clark of Société Générale. Please go ahead.

Sanjiv Lamba:

So the U.S. packaged gases business, Peter to your point, is a very strong business. You've heard me talk about this before. And we are still seeing mid to high double digit growth on the gases side, right? When we talk about our packaged business, we tend to separate that into gases and hard goods. And I have to say both segments are growing reasonably well, strong pricing and good volume growth continuing in that space.

Sanjiv Lamba:

That's correct. As you know, we've been trying to -- as you point out, Linde AG had the challenge of trying to get rid of it for a while, non-core business, no single digit margins on this. So we'll see some sales come off, but from a profitability perspective, it was a drag and it will help kind of get us out of that.

Operator:

Thank you. We now move to Christopher Parkinson of Mizuho for your next question. Please go ahead.

Sanjiv Lamba:

Thanks, Chris. Helium is a very global business. As you know, it's different in many ways to our more traditional industrial gases. The ability to have multiple sources and diversify that helps. As I look ahead more broadly at the kind of overall industry level, I'd say to you in the short term very tight, in the kind of intermediate midterm I'd say to you largely tight until new sources come on and get fully ramped up. Longer term, you might see that come back into some level of balance. And when you think about sources coming on, there is usually a lead time anywhere between two to three, three and a half years for sources to come online and then be available to you. There was an expectation in the market that sources in Russia would come online. Obviously, with everything that's happening over there, that's going to have its own set of challenges, which is why I say in the short to mid-term, you should expect that market to remain tight. As far as BLM is concerned, it's a little bit of a tragedy. It's been run so poorly. Everyone's been impacted by that, as you know. We expect that as the government comes to a decision on how BLM goes forward, there'll be some relief over there, but really from being a very large source, BLM has declined over the many years and therefore will probably not be the substantive source going forward for us. We do see Middle East having potential to kind of grow new sources and we're seeing some traction over there already on that.

Sanjiv Lamba:

So I'd say that in our recent win in TSMC for their first, a couple of fabs, in the U.S. was the ability to leverage both our technology offer and our existing relationship with TSMC out of Taiwan. So that was a competitive advantage that we were able to leverage given our operating experience with them and given their kind of confidence in what we offer. But we do have a technology upside. I mentioned this earlier on. I feel from a technology and an operating expertise point of view, we bring something that is super important for fabs which is high reliability on highly spec product. You have to meet the spec every time and you have to be extremely reliable. And that's where our competitive advantage, given our own engineering division and their ability to do R&D on these new plants, drives a lot of our innovation and drives some of that competitive advantage that we look at. So I feel there is that advantage with customers that we have and the relationships we carry, the advantage around the operating expertise that we have. And then, of course, technology becomes a tipping point for us to win.

Operator:

Thank you. We now move to David Begleiter of Deutsche Bank. Please go ahead.

Sanjiv Lamba:

David, we don't really hedge. I'll let Matt comment around the financial hedges. But as far as sourcing is concerned, we essentially have contracts in place based on which we source both electricity and natural gas. Matt, do you want to talk about it?

David Begleiter:

Understood. And just to go back to the first question on the take or pay contracts in Europe and Germany, if you guys can't operate due to natural gas curtailments, do you still get paid your base facility fee?

David Begleiter:

Excellent. Thank you very much.

Kevin McCarthy:

Yes. Good morning. Sanjiv, can you provide an update on clean hydrogen project activity? You've talked in the past about 300 projects with 20 billion of potential and 5 billion to Linde on a probability adjusted basis. How are things progressing with your industrial customers or opportunities in particular? And when do you think that the flow into the pipeline will become more meaningful for you?