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.

Thank you, Elaine. Good day, everyone. Thank you for attending our 2022 second 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. 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 to this presentation. Sanjiv will provide the opening remarks, and then Matt will give an update on Linde's second quarter financial performance and outlook. After which, we will wrap up with Q&A. Let me turn the call over to Sanjiv.

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. 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 that contractually limits our financial exposure to customer volatility. Now, I'm not going to speculate on 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 actions and 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 the 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 a 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 the 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 the 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% in 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 to reducing absolute greenhouse gas emissions by 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.

Thanks, Sanjiv. Before I jump into the numbers, I'd like to explain the Russian deconsolidation in a little more detail. Over $900 million of the charge relates to net Russian asset impairments. Note these assets have increased almost 25% in the last few months due to the strengthening of the Russian ruble. There were several factors that led to this outcome, including the unprecedented sanctions and severe capital restrictions. Deconsolidation essentially means we cease reporting any business activity on our financial statements. However, we still own these assets and will continue to scale back operations while working to divest some industrial assets. We will only recognize cash that can be repatriated from Russia into a consolidated Linde entity. And as Sanjiv stated, we are laser-focused to continuously extract economic value consistent with every other business we own. Please turn to Slide 5 for an overview of the second quarter results. Sales of $8.5 billion increased 12% from the prior year and 3% sequentially. Versus the prior year, contractual cost pass-through increased 7%, primarily from the on-site business, but this was partially offset by a currency translation decline of 5%. Foreign currency is anticipated to remain a significant headwind, which I'll speak to later on the guidance slide. Organic sales increased 9% from last year and 4% sequentially. Gas volumes increased 2%, primarily from project startups. Base volumes were relatively flat, as increases in manufacturing, food and beverage, and electronics were mostly offset by lower healthcare volumes from COVID. Pricing of 7% was broad-based and once again demonstrated our ability to price in extraordinary inflation environments. Recall this figure primarily represents merchant and packaged, so underlying price increases are higher. Operating profit of $2 billion resulted in a 23.5% margin. Excluding the effects of contractual cost pass-through, operating margins expanded 100 basis points from the prior year and 80 basis points over the first quarter. This represents the second quarter in a row that operating margins have sequentially improved, which confirms the one to two-quarter recovery lag we discussed late last year. You can see the table showing operating margin trend by segment, excluding the effects of cost pass-through. It's important to highlight that America segment margin declined more than 100 basis points from one-time charges incurred during the second quarter, which are classified as other expenses. This will not repeat. So I fully expect America's margins to return to the normal run rate in the third quarter. Separately, APAC and EMEA continue to show solid margin expansion versus all periods as price and cost management continue to improve business quality. You'll see in the appendix how the global other segment had positive operating income. As mentioned last quarter, Q1 had one-time charges which we lacked. And now you're seeing the benefit of lower corporate costs coupled with higher volumes to the aerospace market in the coatings business. Note we are in the process of divesting the non-core GIST business which will result in lower sales and operating profit for this segment going forward. EPS of $3.10 increased 15% from last year, or 20%, excluding FX. Despite the various geopolitical headwinds, the business continues to generate EPS well in excess of our midterm commitment. Return on capital reached 20%, almost doubling from the 2018 merger baseline level. This was accomplished from double-digit earnings growth, strong cash generation, and disciplined capital deployment, all during a highly volatile economic environment. Slide 6 provides more details on our capital management. Available operating cash flow, which we define as operating cash flow less base CapEx that is used for maintenance or non-contractual committed growth, has held steady during 2022 at $1.5 billion per quarter. During the second quarter alone, we deployed $3 billion of capital with approximately one quarter invested into the business and the remainder distributed back to shareholders as dividends and repurchases. This approach is only possible with steady and reliable cash flow, a highly valuable trait to have these days. I'll wrap up with an updated outlook on Slide 7. Third quarter guidance range of $2.85 to $2.95 represents year-over-year growth of 4% to 8% or 10% to 14% when excluding an estimated 6% FX headwind. The FX assumption was based on spot rates from a few weeks ago, so it reflects some of the recent devaluations. This sequential EPS decline of $0.15 from Q2 to the top end of the Q3 range is driven by $0.10 of FX and $0.05 from the deconsolidation of Russia. Therefore, this range assumes no base growth at the top end with recessionary conditions below that. Consistent with prior guidance, this is not our prediction of the economy, but rather an assumption used in the figures. You can insert your own view of the economy. If it does better, we'll be above this range. And if it does worse, we'll take mitigating actions. Full-year EPS guidance range of $11.73 to $11.93 is 10% to 12% above the prior year, or 15% to 17% when excluding the negative 5% currency impact. This range was increased from last quarter since improved business performance more than offset the larger FX translation headwind. Irrespective of the geopolitical landscape, we will relentlessly take actions to improve the business and outperform expectations. As Sanjiv stated, we've been doing this for over a century. Consistent with prior crises, I fully expect to not only overcome these challenges but emerge even stronger than before. And while the financial markets may temporarily underprice our stock from misperceptions of the business model, we'll continue to pursue quality growth while deploying excess cash towards stock repurchases, all in an effort to reward long-term shareholders. I'll now turn the call over to Q&A.

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

Yes. Good morning. Congrats on a nice quarter. First question is just around the price versus cost. When you look out over the next one to two quarters, how much visibility do you have on your non-pass-through cost? And the price that you've already taken, is that enough that we should continue to see a positive spread on price versus cost sequentially over those next two quarters?

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.

Fair enough. Thank you. And then just to dig in on Europe a little bit, if energy prices stay high, what percent of your customers do you think have a long-term issue? And so it may be that you're made whole on your take or pay contract, but it may be that that customer just isn't viable? Do you have kind of a walking-around number in your head? Is it 5%, 10%, 15%? What percent of customers would struggle to remain in business if, let's say, $25 in MMBtu natural gas or higher?

So Duffy, let me take a moment to discuss what we observed in the markets during Q2, as it's a good starting point. Energy prices have been elevated for some time, not just this year but actually starting last year before the war. When I assess the end markets across EMEA, I notice that sales are increasing in all areas, except for healthcare, where we are comparing against COVID volumes, particularly in Eastern Europe and the Middle East. Regarding our distribution modes, this provides another perspective on our customer profile. We experienced sales growth across all distribution modes, including on-site, merchant, and package, significantly boosted by strong pricing and the pass-through you mentioned, with stable or improving volumes in healthcare. Looking ahead, I don't see any trends suggesting that customers are fundamentally changing their operations or failing to manage challenges. Many are certainly focused on cost-saving measures. For instance, we are collaborating closely with them to help achieve those savings. Additionally, we understand that companies are actively reviewing their pricing strategies, which we are noticing across most industries we support. As an illustration of cost-saving programs, with natural gas prices being where they are, customers are exploring industrial gases to enhance efficiency and throughput. Our oxyfuel offering is an example of this. Given the current global energy prices, particularly in EMEA, we've gained significant traction with customers in the first half of this year by helping them enhance their processes through oxygen injection and partial air substitution, which also reduces their natural gas consumption. We already secured 10 wins in the first half and have at least 15 to 20 more proposals in progress. This exemplifies how we are using industrial gases to assist customers in managing their costs and addressing some of the issues you mentioned.

Great. Thank you, guys.

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

Thank you. Good morning, everyone. Obviously a lot of questions over the last couple of months about what would happen if there's a gas supply issue in Europe. Maybe you just want to give us the sort of the state-of-the-art on how your take or pay contracts work? And maybe in particular, how they would work in a situation if you are yourself unable to get electricity and operate your facilities?

Sure, Vincent. I’ll use Germany as an example since it’s currently a focal point. We previously addressed this issue by illustrating the stability of our business, particularly in Germany, which you can see on Slide 3 highlighting our exposure there. To remind you, Germany accounts for about 5% of our total sales. Currently, two-thirds of those sales are considered defensive, supported by contracts or serving stable markets. Specifically, we've established six facility fee or rental agreements in Germany that safeguard those two-thirds of our business. Consequently, the remaining portion represents about 1% to 1.5% of our overall sales. I want to emphasize that the extent of the volatility we are discussing in the context of Germany is limited to approximately 1% to 1.5% of Linde's total revenue. Regarding our contract structures, there are two key components: a fixed fee to recover capital and operational costs, and a pass-through element for the feedstock we utilize, in this case, natural gas. We are very confident in the caliber of our customers, which is vital during uncertain times, as well as in the robustness and enforceability of our contracts, including the fixed fees that provide us with protection.

What about in the event that you would not be able to operate your facility? How would your contracts work?

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 minuscule. So that is kind of, from our perspective, what provides the confidence that we have that those operations will continue to be operating.

And, Vince, this is Matt. I would just add one more thing to that. This is why density is so critical in this industry, because the density helps bring tremendous reliability in events like this. So to your question, we have the ability to run other assets. Now, of course, you'd have higher distribution costs, which would need to be recovered via either surcharging mechanisms. But that option also presents itself that when you have a large density platform, you can leverage other areas that you can still bring those critical gases. Now, clearly, it will be at a distribution penalty, which you need to recover, but you still have the reliability to ensure that supply. So that is another element why we view this density of our models so critical to enable times like these.

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

Thank you. Nicola Tang from BNP Paribas Exane has our next question. Please go ahead.

Thanks. Hi, everyone. The first question is a follow-up on the situation in Europe. Looking at the longer-term perspective, do you expect any of your potential customers to reconsider their investment decisions in Europe due to the high and volatile energy costs?

Nicola, I guess our customers are looking at that investment criteria and looking at their risks. And we would expect that customers will constantly look at that and look at diversifying their risk profile. I wouldn't say to you right now that our customers would stop investing in Europe. Absolutely not, but I think they would want to understand the risks as they go about looking at those investments. What you will obviously also see is as the European transition around energy picks up momentum, you will see more people then use that as a basis to try and understand how they can benefit from that and minimize the risk around their investments. But if I'm kind of giving you a straight answer to what I'm seeing today, I'm not seeing a conversation on that which suggests that customers are walking away from investments in Europe.

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?

Sure, Nicola. So let's just talk about engineering. I'm spending a lot of personal time over there with the team. So I want to just kind of maybe walk you through three steps around engineering, so it kind of illustrates where we are. Step one, you know that we went out last quarter and said to you guys that we would wind down our projects over there in compliance with sanctions and beyond. We've completed that process and the team has obviously gone through that. Now last quarter, we also told you that there was a very dramatic drop in the backlog for that business. And clearly any business that goes through that kind of a change needs to ensure that they reset their cost base, in this case that significant reduction in backlog means that the engineering team is putting together their plans for resetting their cost base to remain competitive and to achieve the target margins that we've set for them, which are low to mid-double-digit margins, expected longer-term. So they are in the process of doing that. And I do want to add, though, if I may, because we're on engineering, just to say, I was really pleased that in the last quarter, we saw order intake very encouraging at about $1 billion. So it was good to see that while we are managing our cost base actively, rightsizing that organization and ensuring we remain competitive longer term, we're also in the short-term rebuilding that backlog with high-quality projects. And again, seeing the team kind of work on both of those fronts is how Linde typically wants to see their businesses operate.

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

We are constantly rightsizing. We've said this before, Nicola, you might recall my comments in previous quarters, where I've said that one of the things we do actively is constantly benchmark within segments and across segments. And one of the reasons we benchmark is because we want to understand where are the best practices and where are the best ratios in terms of the individual productivity that we get for sales per employee, operating profit per employee, et cetera, and we try and apply those. So we are actively doing processes across all our businesses. And there are programs in place at the moment in APAC. You're aware of the program in EMEA. We announced that last year when we took a charge that we were going to reduce a significant number of heads in our German business. That's already in progress today. And similarly, across Americas, we are undertaking a similar benchmarking exercise as well. So for us, that's a constant process. We don't call that a special program. We do that on an ongoing basis.

Thank you.

Thank you. Mike Leithead from Barclays has our next question. Please go ahead.

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?

Yes, Mike, so first of all on your second question, yes, you're correct. These are included in all the numbers, everything we're showing on the segment, that's included. And maybe a simple way to clarify it a little more that might help, I would reference Slide 20 in the appendix on the investor slides that you have. If you look at Slide 20, what you'll see, and this is on the consolidated level, is something that's called adjusted other income expense. So this is part of our obviously adjusted results that we give you. It's part of our adjusted EPS that we give you. And it represents costs that are other income and other expenses. And these are things that generally are not indicative of kind of the current normal operations, but they are part of operating profit. So they can include things like gain and loss on sale of assets. It can include things like above the line kind of tax or legal type items that would have various accruals. And when you look at the history of this number, it is up and down. And this is a normal type of pattern for a large multinational company like us. In fact, if you look at last year, it ranged anywhere from income of $33 million to outflow expense of $7 million in any given quarter. I'd say on an average year, we tend to be net positive, could be $10 million, $20 million, but it is lumpy. So when you look at Q2 of this year, it was a $31 million expense. And the Americas charges we're talking about, which there were a few, in aggregate were actually even greater than that number. But this is a one-off. I have absolutely no concerns over the American margin profile. And we fully expect this will bounce back here in Q3 back to the normal run rates.

I just want to clarify that the underlying margin for the Americas is increasing, in case there is any confusion from the reports I've seen.

Yes. Okay. No, that's great. And then secondly, maybe just for Sanjiv, I just kind of want to touch on your electronics outlook. If I look, I think it makes up about 30% of your current backlog, but it’s only about 8% of your current business. So you obviously are increasing your spend towards that. So could you maybe just talk about the attractiveness of that end market for Linde over, say, the next few years there?

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.

Great. Thank you.

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

Thanks for taking my question. Sanjiv, maybe you can give us a little bit more color as to what you're seeing in China, just post the lockdowns, if there are any specific end markets that are maybe surprising you to the upside and either that are maybe a little slower to start, maybe a little bit more color there would be helpful?

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 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 the 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.

Got it. That's helpful. I have a question about APAC pricing. You've had a decent trajectory over the last couple of quarters and it seems like you're reaching a level higher than what we’ve seen before. Would you say that's broad-based in terms of the pricing initiatives, or are there some one-off factors, like specialty gases, that might be significantly influencing those numbers? How should we approach this?

John, for the 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 the most part that is broad-based across all geographies and across all end markets.

Got it. Thanks very much for the color.

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

Thanks very much. Linde is roughly 1x levered. So if you were, I don't know, 3x levered, you could put another $20 billion of capital to work. Do you have a leverage level goal? I know that you've got some decarbonization projects that are pending, government subsidies. I don't know how large these are. Where do you think your leverage level is going to go, and why you're going to make acquisitions over the next couple of years?

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 digits on our EBITDA and our operating income, which is enabling 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, 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.

Okay. One of the differences between Linde and the other industrial gas companies is that your SG&A expenses don't grow year-over-year and your competitors, some are growing at a low double-digit rate, some are growing at a high single-digit rate. And I get that currencies are probably depressing SG&A levels. But what's the difference? What is Linde doing or what is Linde doing that's differentiating itself versus the other industrial gas companies competitively?

Jeff, I anticipated your question and was ready to address it. We had similar discussions last quarter. I would like to point out that our expenses have decreased. While there is an impact from foreign exchange, the primary reason lies in our active management of SG&A every month. Two key factors contribute to our SG&A results. Firstly, we have a robust productivity program, and more recently, we have initiated an automation program using our digital tools. The benefits from these initiatives lead to simpler processes, allowing us to reduce headcount where appropriate and run efficient programs at every level. I have mentioned previously that we have thousands of projects aimed at examining each line item and ensuring each is addressed. For instance, we are currently implementing a productivity program that evaluates our total cash fixed cost base across our businesses in Europe, aware of the external challenges we face. Every expense has an assigned owner, and each has a target, which is crucial for decreasing that number. This is reviewed monthly, and I discuss it with them every other month. The level of focus and attention is what helps us reduce costs, allowing us to identify waste, eliminate duplication, and find process improvement opportunities. This is a continuous effort, not something we only focus on during a recession or good times; we do this every day, every month.

Okay, great. Thank you.

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

Thank you. Nice quarter. The after-tax return on capital of 20% is at record levels, and it's still going higher. How does that compare with returns on new sale of gas projects? And how high do you think it can go before customers start shifting to sale of plant instead?

Hi, John. It's Matt. To clarify the reason behind the 20% return, our expectations regarding risk, reward, and returns have remained steady. The returns on our on-site projects have not changed substantially either. The continued improvement in this metric is primarily due to the numerator increasing at a much faster rate than the denominator, which represents our capital base. This improvement is driven by our integrated model, which is supporting our non-capital intensive businesses such as engineering, packaging, and merchant services, as well as some other global businesses that are growing robustly and generating cash without requiring additional capital. This integration is what enhances our return on capital performance rather than a sole focus on the returns from individual projects. This is the significance of our density model for cash generation, return on capital, and consistent profitable growth, which is how we create value in this sector. So, the driving factors are the integrated model, the density model, and the ongoing contributions from our non-capital intensive businesses, rather than a change in our return expectations.

And then secondly, do the higher gas prices actually benefit the hydrogen business? I think you're constantly improving the yields and efficiencies at your plants, and I think you get to keep those energy savings. So even though the efficiency gains are small, they're worth a lot more now with these kinds of super high gas prices. So is that becoming material?

John, I suggest thinking about this in two ways: from the customer perspective and the internal perspective. You are correct regarding the internal view; as gas prices rise, we benefit more from our productivity and efficiency programs, which positively impacts our margins. Our margin expansion results from our pricing and productivity initiatives. Another perspective to consider is how our customers are affected by rising gas prices. For instance, in the first half, we had significant success with oxyfuel, with momentum building. Typically, when natural gas prices increase, our customers seek to cut costs and find substitutes, which presents an opportunity for our applications. This allows us to explore where we can place those volumes and secure mid to long-term contracts to support the growth we aim for through our applications.

Great. Thank you.

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

Yes. Good morning, everyone. Just on the U.S. packaged gas business, which obviously has been a great business for you and you have been winning share. I just wanted to check on the industrial gas side of that in the packaged gases that you've actually still got growth there. So I'm excluding healthcare and I'm excluding electronics because the number one actually saw some softening I think in the second quarter. So that's the first question.

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, with strong pricing and good volume growth continuing in that space.

Got it. Then a second question, well done on GIST. Obviously Linde AG had a crack at this six years ago and then had to give up. So I'm reading from this, you definitely think it's going to happen, but we don't expect a big windfall from it, obviously given the profitability in the UK outlook and logistics.

That's correct. As you know, we've been trying to address the challenge Linde AG faced in getting rid of a non-core business with low single-digit margins for a while. We will see some sales decrease, but from a profitability standpoint, it was a burden and removing it will be beneficial for us.

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

Great. Thank you very much for taking my question. Can we just get a very quick update on how you're viewing the helium market over the intermediate to long term just given the past events in Russia, the sale of the BLM? I'd be very curious to just hear your perspectives over the next few years. Thank you so much.

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 the Middle East having potential to kind of grow new sources and we're seeing some traction over there already on that.

That's very helpful. And just as a quick follow up, turning back to the electronics market and the semiconductors within that, I guess it gets an $8 billion market growing in the high single digits, perhaps even low doubles. Just given your exposure across on-site spec, bulk and everything that can flow in to the multiple facets there, how much of that is really turning out to be a competitive advantage, just given the outlook, especially in geographies outside of Asia? Thank you.

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.

Thank you very much.

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

Thank you. Good morning. Sanjiv or Matt, can you discuss your hedging strategy in Europe? Additionally, is there a potential earnings challenge as we move into next year due to the increased natural gas prices in that region?

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?

I would agree. It's absolutely right. We don't utilize financial hedges for commodities of any consequence, of any materiality. To Sanjiv's point, we just have commodity purchase contracts. And then we have contractual structures with our customers for pass-through. So that is how we manage it around the world. And that's how we'll continue to manage it.

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?

Yes. So despite disruptions or volatility around the LNG piece, our contracts very clearly ensure that our conditions ensure we get paid a base facility fee.

Thank you. Our final question today comes from Kevin McCarthy of Vertical Research Partners. Please go ahead.

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?

Thanks, Kevin. To summarize, we are currently working on between 290 to 300 projects, with a significant portion focused on mobility, which tends to involve smaller initiatives. However, I am concentrating more on the industrial sector as this aligns with our expertise and customer relationships. Our clients are interested in advancing toward blue or green hydrogen or ammonia. Additionally, we have developments in energy export, which involve fewer but larger projects with substantial backing. We commit to projects only with off-take agreements or participants who are invested, which is crucial for our investment criteria. Regarding progress, the projects in the industrial and energy export sectors typically have long lead times. They often require pre-feed studies to define their scope, followed by feeding studies to clarify technical solutions before reaching a final investment decision. The process from pre-feeding to final investment can take two to three and a half years. Once we achieve that decision, we can start moving forward and integrating them into our backlog. I see positive advancement in several projects on both industrial and energy export fronts. Smaller mobility projects, such as hydrogen refueling stations and electrolyzers, are also progressing well. We are noticing the emergence of new projects related to liquid hydrogen, and I believe we hold a technological edge in this area. Developing a liquid hydrogen network will be vital for us, and momentum is building in this sector as well. Overall, regarding the project landscape you mentioned, the potential value may actually exceed $20 billion at this time.

Thank you for that color. And secondly, if I may for Matt, can you speak to some of the assumptions that are embedded in your new EPS guidance range? It sounds like you're baking in some level of negative macro activity at the south end of your range? And also, where are you marking currency amidst all the volatility that's occurred?

Sure, Kevin. I'll begin with the foreign exchange aspect. We will record the average rates at the end of each period as required by U.S. GAAP. However, for our guidance, we used the spot rates from a few weeks ago. In hindsight, we might have taken them at what appears to be the lowest point, so the rates have improved somewhat since then. Time will reveal the true situation, but we had to make an assumption, which is reflected in our guidance. We will finalize the rates when the period ends. Right now, we are referencing the spot rates from about two to three weeks ago. Regarding the macro situation, you are correct that the upper end shows no significant volume growth. The assumptions there have various factors to consider. One would expect a natural sequential decline in regions like EMEA due to holiday effects and current conditions. There may be increases from specific project contributions or growth in other areas, but overall, it leads to no growth. Further down, we're mostly looking at lower volume assumptions. As I noted, this is not a prediction; it's what's incorporated in our guidance. If conditions improve, that would be an upside. So far, through July, we haven't noticed much negative change compared to June, but we’ll need to observe how this unfolds. One month does not determine a quarter, and we’ll see how it all plays out.

Okay. Thank you very much.

Thank you very much everyone for attending. If you guys have any further questions, feel free to reach out. Have a great rest of your day. Thanks, guys.

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