Good day and thank you for standing by. Welcome to the Linde plc, Third Quarter 2021 earnings teleconference. At this time, all participants are in a listen-only mode. Please be advised that today. 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. Please go ahead, sir.

Thanks, David. Good morning, everyone, and thank you for attending our 2021 Third Quarter earnings call and webcast. I'm Juan Pelaez, Head of Investor Relations, and I'm joined this morning by Steve Angel, Chief Executive Officer, Matt White, Chief Financial Officer, and Sanjiv Lamba, Chief Operating Officer. Today's presentation materials are available on our website at linde.com in the Investors section. Please read the forward-looking statement disclosure on page 2 of the slides and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are in the appendix of this presentation. Steve will provide some opening remarks, and then Sanjiv and Matt will give an update on Linde's business outlook and third quarter performance, after which we will wrap up with Q&A. Let me turn the call over to Steve.

Thanks, Ron, and good morning, everyone. Linde employees have delivered another strong quarter, maintaining the record EPS performance we achieved in Q2 despite facing tougher market conditions. We have reached record levels in operating cash flow and return on capital, and our project backlog nearly doubled, laying a solid foundation for sustainable long-term growth. We are also enhancing our commitment to reducing our greenhouse gas emissions, and Sanjiv will outline that plan shortly. This commitment is not new; it is something we promised our shareholders since the merger, and we have consistently delivered regardless of the macro environment. Many of you are aware, but it’s worth emphasizing that our operating culture is deeply ingrained at Linde. Our team takes great pride in showing continuous improvement across key operational metrics. The highlight of the month for our management team is reviewing the operating performance of each of our regional business units. This is what we enjoy doing in Danbury, among other things. Earlier this week, it was announced that I will become the Chairman of the Board, and Sanjiv will become CEO effective March 1st. This change comes after a thorough three-year succession planning process in which Sanjiv clearly proved to be the right choice to lead the company going forward. I will continue to provide guidance as a director and a significant shareholder, but my main responsibility will shift to chairing the Board of Directors while Sanjiv manages day-to-day operations. He will be supported by a highly capable and experienced leadership team. After serving as CEO for 15 years, I have never felt more optimistic about the company's position. Our strategy is clearly effective, and the team is performing exceptionally well. Some describe us as a well-oiled machine, and I wouldn't argue with that. We are a company for all seasons, and I believe Linde's best days are still ahead. Before passing it over to Sanjiv, I want to take a moment to thank [Indiscernible] for their collaboration in making our successful merger a reality, as well as our directors and investors for their ongoing support. Finally, I want to express my gratitude to our employees worldwide for building the leading industrial gases and engineering company globally. I will now turn the call over to Sanjiv.

Thank you, Steve. I'm honored to be given the opportunity to lead this outstanding company into the future. I appreciate your confidence and support over the years. Before I jump into the slides, I wanted to build on Steve's comment of a seamless leadership transition. Here at Linde, we are proud of our industry-leading performance which starts with living our core values while maintaining a disciplined execution culture. As CEO, I fully intend to build upon our foundation. My focus will be on areas that are aligned with the interests of our shareholders: profitable growth, optimizing the business, cash generation, and of course, the truth serum for our industry, return on capital. Linde will remain focused on the things that create value for Linde owners, such as strong pricing and productivity culture and active commitment to sustainability. A disciplined investment philosophy, a shareholder-friendly capital policy, and of course, pursuing high-quality and sustainable growth initiatives with emphasis on return on capital. Ultimately, it's about being the best performing industrial gases and engineering company in the world. This is different; you can expect a seamless transition with minimal change. Now, with that said, let's move on to Slide 3 for an update on our growth initiative. Last quarter, I mentioned some key growth drivers including the secure project backlog, a creative base capital expenditures investments, and the strength of our growth in low capital intensity areas such as healthcare, food and beverage, engineering, and our packaged gas business. Today, I'm happy to report that our project backlog has increased from $7.5 billion to $13.4 billion or up 81% sequentially from the last quarter. You will recall this backlog only includes contractually secured incremental growth with fixed payments to ensure targets and returns. We're also beginning to see a return of the capital cycle, especially in upstream operations such as natural gas production, that bode well for our overall pipeline of opportunities. On top of that, the electronic sector continues to be very active. We recently announced a $600 million sale of gas investment indeed, to supply a world-class facility in Phoenix, Arizona. This is supply only the first phase of this project, and we expect to see further opportunities as that area builds out. Overall, I'm pleased to see how the entire Linde team has come together and is leveraging our combined strengths to secure high-quality growth opportunities through our leading high-density industrial gas network combined with the world-class engineering capabilities. This backlog, combined with our supply network density, enables profitable and secured growth for years to come. Now, before moving to the quarterly results, I want to update you on Linde's new and more ambitious greenhouse gas emission goals. A good way to start this is to first explain the role our products play in people's lives and the overall economy. You will find this on Slide 4. We make products that are critical for society. Products such as medical oxygen for hospitals, ultra-high purity nitrogen for semiconductors, liquid nitrogen for food freezing, krypton to insulate windows, and hydrogen to produce cleaner fuels, to give you just a few examples. In order to make these products, we expect to have a total of 39 million metric tons of scope 1 and scope 2 emissions this year. As you know, the production of gases requires significant amounts of electricity. When such electricity is generated using hydrocarbons, we're penalized for those indirect emissions called Scope 2 emissions. We also have Scope 1 emissions, which are significantly lower than our Scope 2 emissions, but are significant nonetheless. And these emissions are largely due to using natural gas to make hydrogen, which is used by refiners to produce cleaner fuels. Our gases play a critical role in the economy. In addition to saving lives, improving energy efficiency, and increasing shelf life, our products also help our customers eliminate or reduce greenhouse gas emissions. In 2020, we generated a total of 37 million metric tons of emissions to make products that helped our customers avoid more than twice our emissions or 85 million metric tons of CO2 equivalent. In other words, without Linde's products, there would be significantly higher net carbon emissions in our world. At Linde, we have been doing our part to support our planet for many decades, but we know we need to do more. In 2019, we set a goal to reduce the carbon intensity of Linde by 35% by 2028. We are well ahead of that goal and expect to exceed it, which is of course good news. But an intensity goal doesn't fully address the absolute Scope 1 and Scope 2 emissions. We are determined to continue on our mission of making our world more productive, enabling our customers to de-carbonize and commit to reducing our own carbon footprint. With that in mind, I'd like to announce Linde's new medium and long-term emission goals, which you will find on Slide 5. The first goal is to achieve a 35% reduction in our scope 1 and scope 2 emissions by the year 2035, or simply 35 by 35. To achieve this goal, we must materially reduce our scope 1 emissions, which are driven by hydrogen production. We will do this by focusing our efforts on carbon capture and sequestration, developing blue and green hydrogen production, and progressively transitioning to a zero-emission fleet. Our scope 2 emissions are related to electricity consumption. Today, we consume approximately 45 terawatt hours of power, a third of which is from renewable and low-carbon sources. In order to achieve the 35 by 35 goal, we will triple our renewable and low-carbon power sourcing by 2035 through new PPAs and by supporting renewable energy projects with off-take agreements and even co-investments. To put this goal in perspective, the amount of renewable energy we plan to purchase is equivalent to all the power consumed annually in New York City. That's a big number. Of course, in addition to that, we will continue improving the energy efficiency of our plants as well. These goals are being embedded across the entire global organization being reviewed as part of our operating rhythm and will be incorporated into our annual variable compensation. This is what gives me the confidence in our ability to deliver these goals, which is no different than how we would approach anything of importance in our company. Now, in addition to the 35 by 35 goal, we are also committed to pursuing our goal of becoming climate neutral by 2050. We will do our part to achieve this goal, but we also need strong policy and regulatory support. Let me summarize this journey on Slide 6. We have defined a roadmap to reach climate neutrality. The roadmap is underpinned by numerous initiatives and milestones, which will be embedded into our operating system, providing us the greatest opportunity for success. Going forward, we will continue to share our progress and show accountability and transparency for our stakeholders. I'll now turn it over to Matt to walk you through the numbers.

Thanks, Sanjiv. Please turn to Slide 7 for an overview of the third quarter results. Sales of $7.7 billion increased 12% over last year and 1% from the second quarter. Cost pass-through, which represents the contractual billing of energy cost variances, primarily in the On-site business, rose 3% over last year and 2% sequentially. Recall that cost pass-through has no effect on profit dollars, but will impact profit margins as we grow sales and variable costs. Foreign exchange was a 2% tailwind versus the prior year, but a 1% headwind sequentially, as most currencies have recently devalued against the U.S. dollar. Excluding these items, underlying sales grew 11% over the prior year and 1% sequentially. The 8% volume increase over last year was broad-based across all geographies and end markets as we continue to see recovery from the pandemic. Sequentially, volumes are flat as contributions from project start-ups were mostly offset by lower volumes in China. Pricing levels are up 3% from last year and 1% from the second quarter, as we continue to adjust merchant and packaged gas product pricing in line with local inflation. Note that some of these contracts have lagging recovery mechanisms, which may not take effect for 2 to 6 months, depending upon the terms and conditions. Operating margin of 23.6% is 150 basis points above 2020, but 60 basis points below the high mark set in the second quarter. Excluding the impact of cost pass-through, operating margin would have increased 220 basis points above last year and had a negligible decline sequentially. As mentioned, merchant and package cost recovery can lag 1-2 quarters. So going forward, I expect continued pricing momentum. EPS of $2.73 is up 27% over last year from higher volumes and prices over a relatively stable cost base. As both Steve and Sanjiv mentioned, Linde has a strong productivity culture, which enables consistent profit growth irrespective of the economic climate. This is also evident in the 16.7% return on capital, which represents another record as profit continues to grow double-digit percentages over a flat capital base. The reason we've been able to maintain such a steady capital base is due to a combination of disciplined capital management and healthy cash generation, which I'll cover on Slide 8. You can see to the left our operating cash progression, resulting in a record level of $2.6 billion in the third quarter. The three main drivers are stronger earnings, timing benefits from last quarter, and engineering contract prepayments. In light of the record sale of planned backlog, I anticipate further project prepayments into the next few quarters. As far as how we allocated year-to-date cash, the pie chart to the right shows $2.3 billion invested into the business and $4.8 billion distributed back to shareholders through dividends and stock repurchases. Note that investments exclude the sale of plans since we are paid in advance for engineering projects, which means that we are committing much larger amounts towards contractually secured growth than what's shown on this chart. In addition to generating significant surplus cash, we have access to very attractive capital through the debt markets. In September, we issued almost EUR2 billion at 5, 12, and 30-year maturities with all-in coupons of 0%, 0.38%, and 1% respectively. Overall, the combination of excess cash generation and low-cost incremental debt gives us a high degree of confidence to maintain shareholder-friendly allocation policies over the long term. I'll wrap things up with guidance on Slide 9. The fourth-quarter EPS guidance range of $2.60 to $2.70 is 13% to 17% above last year, and 38% to 43% above 2019. Consistent with prior quarters, we believe it's important to distinguish true multi-year growth from mere recovery of 2020 recessionary conditions. Versus the third quarter, this range represents a sequential decrease due to normal seasonal declines plus an estimated 1% foreign currency headwind. Underlying volumes are assumed to be roughly in line with the third quarter. But if current conditions hold out, expect to be at the upper end of this range. This quarterly update results in a new full-year guidance of $10.52 to $10.62, which represents a growth rate of 28% to 29% over 2020 and 43% to 45% over 2019. In summary, another solid quarter despite some challenging conditions, and regardless of the macro, we remain confident in Linde's ability to continue delivering industry leading performance. I'd now like to turn the call over to Q&A.

Thank you. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first question from Bob Koort with Goldman Sachs.

Good morning. Thanks very much. I was wondering if you guys could comment a little bit on hydrogen markets and your engagement there with customers and partners, how that may have evolved over the last several quarters. Maybe from the context, it just seems like there's a massive broadening participation as people start reaching for that opportunity. Just maybe give us some insights into how you've seen that evolving at Linde. Thanks.

Thank you, Bob. I'll respond quickly. I agree that there is significant and ongoing momentum in this space, and I am pleased to indicate that we are witnessing this in our active pursuits. To begin, I'd like to outline the opportunity pipeline, which reflects the level of activity we are experiencing at Linde. Currently, we have around 260 projects in our pipeline, with a conservatively estimated potential investment of over 4 billion anticipated in the next three years. Previously, I've mentioned our expectation to invest about a billion annually in this area, in addition to potential megaprojects that may arise. This gives you an idea of the robust level of activity in this sector. As I've stated before, Linde holds a unique position in the evolving landscape of clean energy. We focus on carbon solutions and hydrogen, particularly blue hydrogen, which we view as a crucial component of the clean energy transition. We are involved in multiple projects with varying investment levels, and they are progressing well. For these projects to succeed, three elements are essential: a technology provider—us in the case of carbon capture, partnerships for effective sequestration, and an offtaker willing to invest in the blue hydrogen and generate value from it. These three components are vital, and I am pleased to report that we are seeing these partnerships gain significant momentum. I'll pause here to see if I answered your question.

That's very helpful. What about the competitive intensity as that landscape has been populated with more and more companies maybe trying to edge it on the turf that has historically belonged to the industrial gas companies?

I would answer that by reminding you that there are many announcements happening regularly. Every morning, I wake up to a long list of these announcements, and many of the people making them have little to no prior knowledge of hydrogen. Most don't even realize we have a colorless molecule now associated with many colors. Putting that aside, there will be many players making an impact in this area, and as a result, we can expect a variety of outcomes. We will compete where necessary and also partner with several of these players.

This is an area that requires strong partnerships for that initial momentum and the ecosystem development to really happen. And I see that development happen where we are speaking to a range of partners across different areas helping move this along. I don't particularly see this as a space that you're going to see the intensity of competition being any different to what we see otherwise.

Yes, good morning. First, just want to say congrats to Sanjiv on a great promotion and thank you to Steve for the decade and a half and from an investor's standpoint, maybe even more in the way the transition was handled, almost picture-perfect. Thank you, guys all for that. I guess my question is around Lincare and maybe the medical business in general. If you go back before COVID started, and just analyze how that business has developed with COVID as the driver, how do you see that business structurally different today and how much is it growing through that period relative to the rest of the business?

Duffy, thanks. Let me take a moment to overview the healthcare space we operate in and highlight our strong leadership in this area. We approach our healthcare business from two main angles: hospital care, where we are the primary provider of medical gases to hospitals, and home care, where Lincare plays a crucial role in the U.S., along with smaller home care businesses globally. Currently, two significant trends are developing. As you know, we’ve been instrumental in supporting and saving lives, aiding hospitals and patients at home during the past 18 months. In particular, our offerings have served as a vital resource for COVID patients at home. The pandemic has led regulators and governments to realize their need for better management of medical gas delivery systems, including storage and piping infrastructure. We have engaged in numerous discussions with governments seeking our expertise to help structure these systems properly. We are leading many initiatives worldwide, assisting governments and regulators in developing effective infrastructure programs for future preparedness. This ongoing engagement indicates that we will see continued activity in this area, which we expect will drive growth. We have previously communicated our expectation for mid-single-digit growth for our healthcare business overall. I maintain that Lincare will experience this growth, along with potential tuck-in acquisitions that excite us, contributing to the overall growth mentioned earlier. I view this as a stable secular growth trend with strong mid-single-digit growth expected. Additionally, I anticipate specific regions, especially Asia, will see faster growth due to our robust presence there, allowing us to leverage our footprint for increased growth opportunities in that market.

Terrific. And then maybe just a quick one. As we start to look into 2022, when you look at just new project growth coming onstream, how will that impact 2022 relative to what we've seen over the last couple of years?

All right. So, I have to say I expected that question, so that's good. Now, allow me to take a bigger step back and just go back to what we said maybe a couple of earnings calls before. We committed to delivering a 10-plus percent EPS growth for the midterm. As you can imagine, I feel pretty confident about that today as I'm sitting here. It's obviously supported by this very strong backlog that you just referenced. I have to say that this strong backlog will provide us with mid-single-digit EPS growth if you like for the next four years or so. So that's a pretty strong contributor right there for you. Now, on 2022 specifically, I'm going to say to you that in about three weeks' time, we're going to spend three whole days with every region around the world going through our planning meeting. Steve mentioned to you how we had fun in Danbury; this is going to be one of those fun events. We will review, we'll dissect, we'll analyze their numbers, and then in the end we'll agree with them on what they need to deliver for 2022. I'm looking forward to coming back in January and giving you an update on the outlook and our guidance for 2022 once we've had this meeting.

Thank you, everyone. Congratulations to both Steve and Sanjiv. I wanted to ask about China. Matt, in your prepared remarks, you mentioned weakness in China. Could you share your observations regarding the direct and indirect effects of energy control measures, both in the current situation and regarding future investment opportunities? My second question is about engineering. Congratulations on this significant project. You've previously mentioned a mid or low to mid-teens margin over the cycle, but we have been seeing margins above that for some time. Is there any reason to expect this new business to have a different margin than what we've experienced recently? Thank you very much.

Sure. Hi, Nicola. I can take this one. Starting with China, yes. To your point, we did see some volume curtailments as you would expect with the power outages. We do feel very confident about our customer base. They're still paying the m-tops. These are Tier 1 customers. This is something you've seen as you probably know in prior times in China when there are some centrally managed slowdowns. So from that perspective, yes, there were reductions on a sequential basis. Now, if you look at the APAC segment, you actually see volumes are up 2% sequentially. And the primary driver there is because our backlog pretty much offset any of that China sequential decline. And then the rest of our APAC business still performed quite well on growth, including some seasonal growth that we tend to see in the South Pacific. So from that perspective, yes, we had some of that. We anticipate a little bit of that to continue here into the fourth quarter. So when we talked about volumes assumed to be flat sequentially into our guidance range, it does take into account some continuing just volume softness based on this. But overall, we feel very good about our asset base. We see this as temporary, and to some extent, we tend to come out stronger on these things with our customer base, so we'll see how that plays out. And on the engineering, you're exactly right. We have been operating mid-teens or a little better, and as you can imagine, this business has pretty much a negative working capital. What you see on the margins can be a pretty good indication of the type of returns you get or can even be a little better just based on the cash profile. Very good business that we have, we're very excited to have this backlog. It will contribute to growth. We tend to focus more on the E&P side as well, which helps with risk management. From this perspective, we still see margins in this, I'll call it, low to mid-teens, and we'll see how it plays out over the cycle. You will always have timing in how you recognize the percent completion. Quarter-to-quarter, it's always tough to gauge on any particular one, but over the multi-year process, we still think that low double-digit to mid-teens is still a reasonable estimate through this business as it goes through the cycles.

Thank you. I would like to ask a follow-up question regarding energy costs, not just in China but on a global scale. It's evident how your business is affected by the pass-through effect. However, I'm curious if you're noticing any effects on your customers' decisions to idle or cut back on production at their facilities due to their own increased operating costs.

Yes, sure. I can handle that one, Nicola. As you could imagine on the onsite business, we have our fixed payments, whether it's a facility payment or an MTOP. So from that perspective, we tend not to really have much risk to the production volumes. Given that it's not really anything I would be overly concerned with. In fact, if anything, what we've seen, especially on our more industrial customers, they tend to run harder. You could think steel, you could think refining, given the environment they're in and the margins that they're making on some of these products as far as the merchant and realized the package, it's a high-rent business, so the volatility of customer demand will really only affect the gas molecules. And what we're seeing, especially in Americas and parts of Europe, is still seeing pretty strong growth across that package business, so I think that's been quite good. But on the merchant side, now we really haven't seen any significant negative changes. It's been up pretty much across the board. And you can imagine, the customers want to produce. They want to make as much product as they can in this environment, given their opportunity to get some pricing. So from that perspective, we haven't seen any material effect on that. There may be some small pockets, but nothing that's coming up to the aggregate level.

Yes, good morning, everybody. I wanted to come back on the margins. On an ex-cost pass-through basis, margins are up all regions in some cases materially. Just wanted to check whether there are any positives in there that we should be thinking about that could wither as we go into 2022. And we're getting now also to a stage where this is about as good as it gets. Thank you.

You answer that.

Yes, I can address that. Tony, you are correct. The margins are increasing as anticipated, and all segments are performing strongly. We are witnessing the momentum from our efforts manifesting in Q3. As I mentioned earlier, we are entering the planning phase for 2022. One consideration as we plan is how inflation and energy costs will evolve in the upcoming year. To be honest, I prefer not to make specific forecasts at this time. However, I want to assure you about our pricing strategy, which directly impacts our margins and responds to your inquiry. You can expect us to consistently align with global inflation, reflecting our management of cost pass-through elements and pricing strategies beyond that. We intend to leverage this for our operating margins, and I hope to provide a more precise outlook for 2022 in January. For now, rest assured that we will keep pace with any cost inflation we encounter.

Just to add a comment to what Sanjiv said, this is Steve. I think as we go forward, I don't like to ever hear the word peak margins because I never have believed in peak margins. And when we say our best days are ahead, you got to keep in mind that we are going through a period where there has been a tremendous amount of cost that came through the system, mostly in the form of power. If you were to look at EMEA, for example, costs increased 25% to 30% between Q2 and Q3. So that's a lot of cost that comes at you at once. We instantly pass that through as I mentioned on the on-site piece, but it takes a few months, up to 6 months to recover all of that through the merchant and the package business. But if you think moving forward over time, and you heard us describe this model before, we take the top line and we're able to leverage that through pricing and productivity to deliver increased EBITDA margins over the long term. And we've been able to do that for many years, and that's really going to be the model that we will be in going forward, especially as we clear this immediate wave of cost inflation that's coming through the system and we deal with that in a very positive way in the coming quarters.

Thank you, that's really helpful. And if I could, just a small follow-up on the 35 by 35 targets. I appreciate that, also the update there. We've heard from some chemical companies that there's extra costs or CapEx required to get sustainability targets. Is that going to be the case for Linde? And maybe if so, you could help us think a bit about what that could look like. Thank you.

Tony, as we establish those targets and develop a roadmap, you may have noticed our approach to achieving them. Our mission is to assist our customers in their efforts towards decarbonization while ensuring we have the necessary technology and solutions. We make these commitments with the broader decarbonization trend in mind. In support of this, we will need to make investments on a project-by-project basis, and we've previously stated that these investments must align with our criteria. They will be backed by incentives and carbon pricing, which are crucial for making the economic case for a successful transition. I fully expect to see economically viable cases that meet our criteria as we support the wider transition within our industry. As you know, our emissions exist to help our customers reduce, avoid, or eliminate emissions, and that remains our focus going forward.

Thank you. Congratulations to Sanjiv and Steve on that impressive deal, and it seems the share price reflects the careful thought put into the transition. I have two overarching questions. Regarding the engineering backlog and its growth, Steve, you mentioned previously that a 50-50 mix of internal and external was ideal. Given the cycle is picking up, we now see a shift to 75-25. I'd like your thoughts on that. I understand you're considering your return criteria, but how do you view this as we progress through the cycle? The second question pertains to your comments about better days ahead. Currently, the return on capital is 200 basis points higher than it was a decade ago at the peak. I'm curious about your perspective on return on capital as we move forward, especially with the momentum supporting it. How do you envision this structurally now, considering the advantages from the merger compared to what we anticipated for gases before that? Those are my two questions. Thank you.

Given that I will not be the CEO after March, I prefer not to discuss long-term perspectives on return on capital. However, referring back to my earlier comments about our ability to convert growth into increased profitability and effective capital management, we should be able to gradually increase our return on capital. Regarding the 50/50 comment, when we book gas projects, they are usually in the hundreds of millions of dollars. The TSMC project, for instance, involves a capital investment of $600 million, which is among our largest investments, alongside Samsung. Large gas projects tend to be significant in scale, and we've successfully secured some substantial third-party projects with Linde Engineering. This has shifted our backlog composition, with approximately 75% to 80% stemming from third-party sales, driven by these major projects. These large endeavors are supported by robust contractual agreements and are of high quality. Our cash inflows from these projects are significantly outpacing our expenditures as we progress, making them excellent opportunities that we are pleased to have.

Thank you. Looking at EMEA in Q3, can you quantify the amount of power costs that were not passed through or recaptured during the quarter?

Yes, David, this is Matt. We're not going to disclose that number publicly. However, if you examine the sequential margin profile and factor in the cost pass-through associated with the on-site business, you might notice that some of the remaining differentials are linked to timing issues we would like to address. As you know, EMEA has a significantly larger package and merchant percentage compared to on-site, which also affects the costs that need to be captured on a delay. I want to emphasize that this lag is typical and has been a part of the industry for decades. In this specific quarter, the changes in energy prices and some of these figures occurred more rapidly than usual. Consequently, we expect some recovery in the next quarter and the following one. However, the lag in EMEA is likely to be disproportionately larger than in other regions due to its package and merchant exposure.

Got it. And given that, would you expect price mix to accelerate further in Q4 from the 3% we had in Q3?

We definitely anticipate the pricing momentum to continue, and as we recover from this, it will factor into our expectations.

Thank you very much. The backlog and first sale of the plant increased by $6 billion sequentially. Can you discuss what you are planning to build? It would be helpful to know about the customers, if possible. How did that growth happen? Does this imply that your capital expenditures may now be $5.5 billion higher than you initially expected over several years to carry out? Lastly, if you're receiving $480 million in your Cash Flow Statement from prepayments, I assume that will be financed with capital expenditures later on. This suggests that your cash flow from operations might be overstated. Can you address these matters?

David, I can start with the cash, and then Sanjiv will cover the backlog project. To clarify, this sale of plant never impacts CapEx. We use percent completion accounting, which means our backlog directly translates to sales, so a $1 backlog equals $1 in sales. As we construct, it goes into inventory, and once we meet certain criteria, it moves from inventory to sales. Therefore, it does not affect CapEx due to how this structure operates. Prepayments appear on the balance sheet as liabilities, and as we perform the work, we offset those liabilities as we deliver. This is a standard percent completion accounting approach. Regarding cash flow, in the engineering industry, a declining backlog typically leads to higher cash outflows than inflows because of ongoing work in engineering and procurement. This is influenced by the book-to-bill ratio; as it decreases, outflows exceed inflows. Recently, we've witnessed more outflows than inflows due to a shrinking backlog, but that trend is changing as the backlog has significantly increased. We expect several quarters of prepayments reflecting this growth, which we will manage over the coming years alongside the cash outflows. However, if we acquire more backlog, it can help alleviate this situation. It's important to note that this does not affect CapEx, which is why I stated earlier that our growth is much more pronounced than what CapEx figures suggest. As Sanjiv mentioned, we anticipate a mid-single-digit contribution. Hopefully, that clarifies things, and now I can pass it to Sanjiv to discuss the project.

Thanks, Matt. Jeff, I'll explain the project a bit more. The $6 billion incremental funding comes from two significant wins, which is why we're seeing a substantial increase in our backlog. We're very pleased with these investments. They involve a high-quality customer, which I won't name just yet, but it's Gazprom. We have a strong relationship with them and great experience so far. The contract terms are solid, giving us confidence in taking on these large projects. As Matt mentioned, we expect strong cash flows. It's important to note that these cash flows typically arrive before we make any commitments, so we maintain a net positive cash position. We are also experienced in executing in this area. Now, what are we building? We are constructing gas processing plants for Gazprom at the Ust-Luga site, and we are also working on a separate but significant LNG plant at the same site. I anticipate that natural gas developments will persist given the global energy challenges, and this represents a major milestone as Gazprom continues to invest in that sector.

Okay, great. And then secondly, I think your cash balance was $4.7 billion. Is that too much? What should your normal cash balance be as you manage your cash flows?

Yes. Jeff, I can answer that. When you're getting paid to take commercial paper at 65 basis points, you do end up a little bit of a grossing up of your cash and your CP. So yeah, we're still getting paid up till five years on the curve with Europe, so our cash balances are swelling a little bit. Now those are U.S. dollar cash balances, so they are earning a return. But we're also earning a return on what we're borrowing. So at this point that is causing a bit of a swelling. But as you've seen, between our projects that we're undertaking, between some of the shareholder-friendly actions we're taking, we're going to keep working those cash balances down.

Hi, thanks very much for the opportunity. I just want to ask a slightly longer-term question on maybe the Sanjiv. Obviously, the sustainability targets you've put out are great. But I think you did mention that to achieve the 30 by 35, you need government support. What happens if you don't get it? What can you do yourself without any government support, particularly thinking about green hydrogen and other areas?

Thanks, Geoff. That's a good question. When considering the sustainability targets we've set for 2035, it's important to recognize the framework within which we're operating. There are actions we can and are taking today that will help us move in that direction, such as efficiency programs and fleet replacement. We're engaged in several ongoing initiatives and will continue working towards these goals. It's also true that there are currently government incentives available; we're not suggesting there's a complete lack of support. In the U.S., for instance, the 45-Q tax credit is actively being used for investments in this area. However, I would prefer that the 45-Q, which currently offers $45 to $50 per ton of CO2, be significantly higher, around $90 to $110 per ton, as that would create a stronger economic case for developing these projects. In Europe, the ETFs trading scheme values CO2 around EUR60 to EUR65 per ton, and similarly, other countries like Canada, South Korea, and Australia are implementing various incentives or penalties. We are operating within this environment and believe more support is needed, but there's certainly some existing assistance. Several of our projects will rely on this support infrastructure to drive further decarbonization efforts. Long-term, as we aim for carbon neutrality, we anticipate that support will range from $100 to $200 per ton of CO2 equivalent to help us reach our climate neutrality goals.

I'll just put a point on Sanjiv's excellent response to that. If you think about decarbonization and the cost of capturing and the cost of sequestration, it can vary $80 to $120, something like that. And to really tip the scales in terms of capital investment, to decarbonize you're going to need something like that in terms of a carbon price. Up until now the 45Q can work in certain projects; it's $50 the low carbon fuel standard California provides some support too. But as we look forward to really make meaningful strides to decarbonization, you're going to need a stronger carbon price. That's our view.

Yes, hi. Good morning. On your slide 18 or slide of blue hydrogen, is that where you're seeing some order activity today? And then looking at your joint venture with ITM in electrolyzers, how do you see blue versus green hydrogen backlog, let's say in the next 5 years? And your industrial customers wanting to go to blue hydrogen first before thinking about green hydrogen.

I'm going to address your question by revisiting some of the points we've made in previous earnings calls. When considering the appropriateness of hydrogen, it's essential to evaluate the strengths and assets of individual countries. Countries that have hydrocarbon resources and natural gas are likely to focus on blue hydrogen because it's a feasible way to advance the transition to cleaner energy. This approach is practical today and doesn't rely on future technological advancements. We see countries such as the U.S., Canada, Australia, Russia, and those in the Middle East actively pursuing this. We are also exploring potential partnerships for these developments. Our technology portfolio at Linde Engineering equips us to deliver any technical solutions for blue hydrogen production, whether through steam methane reforming, autothermal reforming, or gasification. We can provide, execute, and operate these technological solutions due to our expertise. There's significant momentum in the blue hydrogen sector, and we are actively engaged in it. Now, regarding our joint venture with ITM and future order backlog, I can only project that we will ensure our technology roadmap with ITM will facilitate the scaling of the product for capital and operational efficiency for reasonably sized projects. For instance, we are constructing a 24-megawatt electrolyzer complex consisting of the largest two-megawatt PEM electrolyzer modules currently available. We're collaborating with ITM to scale this up to five megawatts and eventually to 20 megawatts. This transition will lead us to projects that we are actively working on today, some of which have received preferential funding in Europe. The scaling will progress from perhaps 50 units of two megawatts to a smaller number of larger units as we advance. The ongoing scale-up and the improvements in our technology roadmap are providing us with the necessary capital efficiency and economies of scale, setting us up for what we can expect in the next five years. While I won't speculate on what the backlog might specifically look like in five years, I am certainly optimistic about the positive developments I am observing.

Great. Thank you for the detailed answer. As you look at this technology roadmap, and green hydrogen cost coming down, where do you see that? Steve had commented on some numbers, maybe a year ago. And what about this production tax credit of $3 for green hydrogen, how would that play out? Thank you.

P.J., that production tax credit will be a very good supporting mechanism. We talked earlier on about in the previous question about how we see the incentive supporting the development; that $3 per kg will be a good support mechanism. We obviously have to read the rules, and it hasn't yet come through, so I'm looking with some eagerness to that coming through and getting an understanding of how those rules come into play. But that would be encouraging. Clearly, we believe that there is an opportunity here for us to move forward. Steve mentioned to you in the past that if we get hydrogen, blue or green. Green, obviously, is more challenging in this reference, at about between $1 to $2 per kg. It's at that point that you see an inflection point and see widespread adoption of technologies utilizing hydrogen, and really hydrogen becoming a reasonable fuel in the portfolio of fuels we'll have. We'll always have fossil fuel, at least for many decades ahead. But it'll be a more important part of that portfolio of fuels and energy basket as well. Steve, you want to add something?

Okay, Sanjiv, I'll add something. Just to build on that, if you were to look at the cost of hydrogen today and you were to use the U.S. Gulf Coast, which obviously we produce a lot of hydrogen, we use a lot hydrogen in the U.S. Gulf Coast, gray hydrogen is about a $1.30 kilogram, and that's at $5-50 natural gas. Carbon capture would add another $0.40-0.50, maybe you're in the $1.70 range, and if you think about green, it's like about $4.50 a kilogram. And out of that probably $2.50, you could call it, is the renewable power cost. And so if renewable power was free, then you would still have $2 and we all know renewable power isn't free, so we have some work to do to bring those costs down in terms of capital costs, operating costs and as we were to work that down below that $2 number, then you've got a chance to have something competitive. So you need the combination of low-cost renewable, low-cost capital, low-cost operate, low-cost capital, and better efficiencies, and then you can drive that number lower. And I would say ideally below two, but certainly in that range would be what's needed.

And our last question comes from Vincent Andrews with Morgan Stanley. Mr. Andrews, please go ahead with your question.

David, it looks like he has an issue. I think with that we can wrap it up.

Okay.

For everyone online, thank you so much for attending today's call. For your reference, a copy of our transcript will be posted on our website within the next 24 hours. Thank you for listening, and if you need anything else, let me know. Take care.

This concludes today's call. Thank you for your participation. You may now disconnect.