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

Thanks, Cecilia. Good morning, everyone, and thank you again for attending our 2022 third 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 some opening remarks and then Matt will give an update on Linde's third quarter financial performance and outlook. After which we will wrap up with Q&A. Let me now turn the call over to Sanjiv.

Thanks, Juan, and good morning, everyone. Linde employees once again delivered a strong quarter despite the economic challenges. EPS increased 21%, excluding FX, while operating margins expanded 90 basis points when adjusting for contractual cost pass-through, all underpinned by $2.6 billion of operating cash flow, and a record ROC of 21.8%. Now in addition to achieving this financial performance, the company recently received approval for its absolute emission reduction targets by the science-based targets initiative, confirming our roadmap to help decarbonize the planet. I'm pleased to see these results, which are truly a testament to the quality of our team, and our relentless execution culture. These financial results highlight both the resilience and growth capabilities of the business in any environment. In times like these, it's important to remind investors of our stable and diversified growth trends, which you can find on slide 3. We continue to experience robust underlying sales growth this quarter, with each business segment growing double-digit versus last year. Resilient end markets, which make up about one-third of sales, are collectively growing double-digit percent, with food, beverage, and electronics up almost 20% and health care slightly down from prior year pandemic volumes. Our gases are critical for the production and packaging of everyday consumer items such as food, carbonated beverages, respiratory applications, and electronic components. These volumes track to broad consumption levels rather than specific technologies or trends. So they are quite stable even during volatile economic periods. Furthermore, despite what you may be reading in the news, we continue to see healthy supplies of gases into electronics fabs in every region. In fact, our total electronics project backlog increased to $1.4 billion, after recently being awarded a second large sale of gas contract for a major semiconductor manufacturer in the US. The bottom half of the table provides the trends for the more cyclical end markets, and similar to electronics, these trends probably don't align with what you're hearing and reading. Recall that a significant portion of these sales are underpinned by fixed payment structures independent of customer volumes, including on-site fees and cylinder rentals. It's important to note that we spend a lot of time on contract language to ensure our returns are protected and force majeure clauses are absolutely clear. I won't speak for the industry, but I have confidence in the strength of Linde contracts. We've demonstrated this through countless regional and global challenges, including the most recent pandemic, and so I don't see today being any different. In addition, a large portion of our customers represent the most competitive in their markets, with assets that tend to be the last ones running. A disciplined long-term approach to capital allocation continues to be validated during these challenging times. And almost 60% of sales, the cyclical end markets are also up double-digit percent. While growth is broad-based, we continue to see strength in mining for battery materials; merchant hydrogen sales; aerospace including commercial space; and general manufacturing especially in the Americas. In fact, the US continues to be our best growth market, as a combination of natural resource security, consumer resiliency, and a strong dollar to support further economic expansion. This is especially true for the Gulf Coast, which is experiencing one of the highest investment activities in quite some time, driven by lower cost energy and the ability to economically decarbonize with the passage of the US Inflation Reduction Act or IRA, which you can find on the next slide 4. The IRA has accelerated significant growth prospects from our unrivaled hydrogen and atmospheric gas network, as well as potential new markets being developed across the US. With this effect, we've grouped these activities into three different categories of Decarbonized Linde, Decarbonized Customers, and New Markets. Let me start with Decarbonized Linde, which represents the ability to sequester existing CO2 emissions generated from our own hydrogen production. This provides simultaneous benefits: the production and supply of blue hydrogen into our network, and the reduction of Scope 1 emissions for our stated sustainability goals. The potential investment to decarbonize Linde exceeds $3 billion while considering our existing hydrogen production asset base. The second category of Decarbonize Customers represents two separate opportunities. The first, to enable our customers to decarbonize their processes through fuel switching, that is by using low carbon intensity hydrogen as fuel in their refineries, frackers, or furnaces. The second opportunity is our ability to capture and sequester existing carbon emissions from customers currently connected to our pipeline network, especially in the Gulf Coast. This will be a revenue model similar to our current on-site business and customers would benefit by decarbonizing their own operations, in addition to monetizing tax credits over the contract period. Together, our potential investment in this category could easily exceed $10 billion, which I view to be on an accelerated path given the incremental IRA benefits and the strength of Linde's existing network and asset base to support it. The third category of new markets represents greenfield opportunities that are starting to materialize with the signing of the IRA, and I expect to announce some new project wins very soon. These too will be similar to our current on-site business with fixed payment contracts and stable returns. We estimate more than $20 billion of potential investment, with some of the larger ones related to blue and green hydrogen and blue ammonia. Regardless of which projects are pursued, we plan to follow a few overarching principles. The first, we intend to partner with subsurface experts for all underground operations. We at Linde are not geologists. Second, all projects will follow our investment criteria. In other words, earn a commensurate return for the risk undertaken. Third, we will stick to our core, which is management of industrial gases. We have no interest to own or speculate on globally traded chemicals. Rather, we have offtakers for our products. Finally, it's important to understand the nature of the tax credits in the IRA. While the first five years are direct pay, essentially like grants, years six through twelve are tax credits that must be used against our US tax liability up to a cap. Therefore, it's important for us to have an understanding of the monetization of these tax credits as we develop these projects, whether used by Linde or sold to a third-party. Of course, we won't speculate on the market value of excess tax credits over the next decade. The IRA has accelerated the US clean energy transition. And from what we are seeing today, the total investment opportunity for Linde in the US alone exceeds $30 billion over the next decade. Overall, I'm very bullish on the clean energy opportunities in front of us and I expect to announce meaningful projects in the near term. This secular growth driver coupled with our operating discipline and relentless focus on pricing and productivity within our base business is what gives me the confidence in our ability to keep delivering 10-plus percent EPS growth over the next several years. I'll now turn the call over to Matt to walk you through the financial numbers.

Thanks, Sanjiv. Please turn to slide 5 for an overview of the third quarter results. Sales of $8.8 billion grew 15% over last year and 4% sequentially. Cost pass-through, which represents the contractual billing of higher energy costs, reached 8% year-over-year as energy prices continue to escalate. As a reminder, this is merely a contractual gross-up and has no effect on operating profit dollars, but will dilute operating margins. This is mostly offset by unfavorable currency translation of 7% as the US dollar has strengthened against every major currency. Divestiture headwind of 1% is from the Russian deconsolidation. And the 4% growth in engineering relates to favorable timing of project billing. Excluding these items, underlying sales increased 11% over 2021. Volume expanded 3% as one-third came from the project backlog and the remainder from increases in Americas and APAC, partially offset by slightly lower volumes in EMEA. Pricing of 8% continues to be strong as all regions around the world are taking proactive and sustainable actions to recover inflation. Underlying sequential growth of 3% is driven by similar factors as broad-based price improvements and volume growth in Americas and APAC more than offset weaker volumes in EMEA from a combination of macroeconomic conditions and normal seasonal factors. Operating profit of $2 billion resulted in a 22.8% margin, which is 90 basis points above last year when excluding the effects of cost pass-through. Sequentially, operating margins ex pass-through declined 20 basis points from both weaker volumes and a lag effect of merchant and package pricing in EMEA. We still expect consolidated operating margin ex pass-through to expand more than 100 basis points for the full year. EPS of $3.10 increased 14% over the prior year or 21% when excluding currency. This represents the eighth quarter in a row of EPS ex-FX growth exceeding 20%, demonstrating the breadth of Linde's portfolio. Return on capital of 21.8% reached another record from double-digit percent profit growth over a stable capital base. Our unrivaled asset network across all three supply modes enables industry-leading growth without significant capital intensity, although we have ample capacity for greater investments, of which we expect to announce large wins in the near future. The ROC trend is also a result of disciplined capital and cash management. Sanjiv mentioned how we intend to approach clean energy investments no different than other opportunities, which is an integral part of our multi-decade successful track record. Our owners expect stable long-term returns commensurate with risk, making ROC one of the most important metrics in our industry. Slide 6 provides more details on the third quarter capital management. Cash flow continues to be a key indicator of company stability and longevity, especially against the current backdrop of geopolitical uncertainty and rising interest rates. You can see operating cash flow trends with Q3 being the highest of 2022, up 24% sequentially and 3% from last year. In addition, available cash flow, which we define as operating cash flow less base CapEx, remains steady at $1.5 billion to $2 billion per quarter. Recall that base CapEx represents all non-project investments, of which approximately half are dedicated to growth initiatives. The right part of the slide shows how we deployed year-to-date cash flow. As a reminder, our capital allocation policy is simple and stable. We have a mandate to maintain an A credit rating while growing the dividend each year. Our priority is to invest in core business opportunities that meet our criteria, and any leftover cash is used for stock repurchases. Currently, our metrics are better than a single A credit rating, and thus we are actively recapitalizing the balance sheet. Year-to-date investments have totaled $2.4 billion between CapEx and acquisitions, of which I anticipate an acceleration based on the current set of opportunities. Finally, we've returned $6.3 billion back to shareholders in the form of dividends and stock repurchases, an increase of 31% from last year. This slide clearly demonstrates that irrespective of the macro climate, Linde will continue to drive steady long-term quality growth while sharing a substantial portion with our owners each year. I'll wrap up with guidance on slide 7. For the fourth quarter, EPS is anticipated to be $2.80 to $2.90 or 9% to 13% growth, excluding an estimated 8% currency headwind. This represents a $0.25 or 8% sequential decline from Q3 to the midpoint. There are three major assumptions driving this. First, the 4% decline is driven by engineering project timing. Engineering results are naturally lumpy due to project progress and we had a sizable Americas project billing in Q3. And while the engineering business has been streamlining the organization and rebuilding the backlog to maintain strong competitiveness and quality results, I still expect Q4 to have lower sales and profit from this timing. Second, we anticipate currency rates to worsen, driving down sequential EPS by another 2%. Rates seemed to stabilize in October, but we'll have to wait until January to see where they ultimately finish. Finally, we completed the divestiture of the non-core GIST business at the end of September. This had a minor effect at 1%, but we provided more details in the appendix so you can better model the future impact. Note, we are also assuming no base growth at the top end of Q4 guidance and thus recessionary conditions at the midpoint. Consistent with prior quarters, this economic assumption is merely a placeholder. So if conditions are better, we'll do better, and if they're worse, we'll take actions to mitigate. The full year guidance of $11.93 to $12.03 represents 17% to 18% growth from last year when excluding currency. The midpoint of the range is $0.15 higher than last quarter, driven by better Q3 results. Overall, the Linde team continues to execute despite the global challenges. We've demonstrated resilient, high-quality performance through recessionary conditions, and 2023 will be no exception. So, regardless of what you read in the news, you can count Linde to deliver. I'll now turn the call over to Q&A.

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

Yes. Good afternoon everyone, or good morning, sorry. You called out good inflation management across the gases regions. And I know you brought in White Marketing's team I think over a year ago to try and pitch best practice. Just wondering, what you added from that and how you think it gave you an advantage or a heads-up against the competition in this price inflation environment? Thank you.

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

And can I sneak in a little one? On the European smaller customer, medium-sized customer, industrial customer, are you seeing any change in behavior at all? Because we've heard other companies getting quite concerned about how these small customers are suffering in the current environment.

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

Perfect. Thank you very much.

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

Yes, good morning, guys. Just a couple of questions around your slide four and the Inflation Reduction Act. So, first, if you look out maybe two or three years, how much can it absolutely grow your backlog do you think? What kind of bogey should we have for backlog increase? Second, what percent of that do you think will end up being sale of gas versus sale of plant? And then just the last one, relative to the size of your typical projects historically, what do you think the average size of the projects around the IRA will be?

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

Terrific, thank you, guys.

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

Hi, good morning. I appreciate the comments on limiting your expertise to industrial gas and limiting some of the exposure in the subsurface. A couple of questions on that. Where would your scope of CapEx end in these projects Sanjiv in terms of how you're thinking about them in a greater blue kind of hydrogen setup? And then also do you think that that subsea partner needs to be part of the project consortium, or is this something you think you can secure for a fee?

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

That's great. And if I can have a quick follow-up just on how you're thinking about the decarbonized customers. Again we appreciate all the detail here. But if we think about on-site in the Americas for example in hydrogen, is it right to think that you've got a natural jump-off point at the end of contracts where you can start opening the conversation about okay can we convert this to a blue hydrogen project and what that looks like? Or is the incentive now so high that the customers are coming to you saying, can we work together on some interim solution? Just curious what the contract tenor if anything could mean for the timing of this build-out.

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

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

Thank you. Sanjiv, I remember you mentioning during the summer your long-term estimates for production costs of gray, blue, and green hydrogen. I thought you indicated that gray would be $1 per kilogram, blue $1.50, and green $4.50. I might have misheard, but that was before the IRA. I suspect your Niagara Falls project could have a cost structure below $4.50. Now, post-IRA, these three seem to be getting closer together. Do you agree with that perspective? Where do you see the most incremental demand in development currently? Blue seems like an easy option for your pipeline customers, but what about the demand for green hydrogen?

Right. Steve, you've got good memory or good attention, as the case might be. So it was $1.30 for gray, $1.50 for blue, and about $4.40 for green that I offered I think a couple of quarters ago. And that was all at I think natural gas price if I'm not wrong of around $3.50. Obviously, natural gas prices change along the way as well. But the moot point over here that you make, and I will validate for you, is gray and blue are coming close to parity today with the benefit of the 45Q in place. They are almost at parity, I would say. As far as green is concerned, with the 45V, the $3 a kg is pretty attractive. The issue with green remains scalability, and I'll talk a bit more about blue and green in that context. But from a cost point of view that $4.40 is now trending anywhere between $2.50 to $3. So it has come down substantially, but again, because of lack of scale and the availability of cheap renewable energy, that pricing for green remains a little bit higher than what I would see as long-term inflection point, which you've heard me talk about. $1.50 as a long-term inflection point for us to see huge acceleration happen. Not quite there, but certainly heading in the right direction, as far as we're concerned. Coming on to where I see this development moving, really, I think for me, blue today is available at scale. It's technology that's tested. And it's an offering that's available in the market today, which is why a lot of the conversations I referenced in my previous answer are being driven, because that ability is available today. The challenge with green remains the ability to scale up and get access to reliable renewable energy at reasonable costs. That combination isn't quite here. And while the 45V has some really good incentives at its max $3 per kg of green hydrogen, unfortunately, the impediment really is around scale-up to getting that to a point of inflection and significant acceleration. So to summarize that, I expect a decade plus of blue as a great bridge to ultimately large-scale industrial scale green, which is reliably available at cost where that conversion makes a lot of sense.

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

Great. Thanks. Just three quick ones for Matt. I think you made a comment about recapitalizing the balance sheet. And since EBITDA is growing I'm assuming that should mean buybacks should be growing faster from here. I guess one is that correct? Two, what's the ideal leverage ratio? Obviously, with staying within your kind of credit parameters you'd like to be at? And maybe three just a quick housekeeping. Do you include buyback benefits in your 4Q guidance, or is that just using a third quarter share count?

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

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

Could you provide an update on the start-up contribution for 2023? Is Exxon still on track for next year? You mentioned a 1% volume impact in Q3. What can we expect for next year? Thank you.

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

I was just asking for the overall project start-up contribution in 2023.

We anticipate a similar contribution from start-ups next year, aligned with what we observe from Exxon's perspective, which involves a significant single project. Excluding that, we expect the same level of start-ups next year as this year, which we previously indicated would be around $1 billion in start-ups throughout this year.

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

Thanks very much. In the third quarter, did your price compared to raw materials lead to a widening or shrinking of that margin? Also, can you discuss the impact of higher interest rates on Linde and its interest expense for returns over time?

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

Thank you.

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

And Jeff, this is Matt. Regarding interest expense, I can provide a high-level overview before addressing your specific question. When modeling interest expense, there are two key components to consider. The first is our current net debt structure, which includes both cash and debt, whether variable or fixed, along with the associated interest income and outflow. The second component involves the foreign exchange volatility that affects our interest line, primarily due to derivatives on intercompany loans, which fluctuate with currency changes. However, the main volatility arises from unhedged intercompany loans, which are marked to market based on prevailing interest rates. While these loans create interest line volatility, they don't impact cash since they are intercompany transactions. Excluding this factor, our run-rate interest number currently falls in the low-20s to mid-20s range. Our capital structure indicates that our cash, which earns deposit interest, is roughly aligned with our variable debt, mainly consisting of commercial paper, while the remainder of our debt is fixed through bonds. I don't anticipate significant changes until the next bond issuance, which will reflect market yields at that time and will incorporate maturing bonds with potentially lower interest rates. Essentially, today’s fluctuations are primarily due to FX rates, and as we approach the bond market in the future, I expect net interest to begin rising based on prevailing rates.

Okay. Thanks so much.

We will now take our next question from David Begleiter from Deutsche Bank. Please go ahead.

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

David, we believe these projects must meet the same investment criteria we established. When we mention that we expect returns to align with risk, we mean that there are no exceptions for clean energy projects. They need to deliver the same return profile in relation to the risks we are taking. You can be assured that our return profiles will consistently reflect this. Regarding competition, it's somewhat varied in this sector. We have a range of participants, all contributing in different ways. Partnerships seem to be becoming increasingly important in terms of the decarbonization offerings coming to market. We strongly believe that establishing solid partnerships is beneficial for us, particularly in managing our risk profiles. Subsurface serves as a good example of this. Additionally, it's crucial to have partners who are committed, especially when bringing in an offtaker to ensure they have a vested interest, making the offtake agreement more substantial as we progress. The market is evolving, and we are monitoring how the competitive landscape develops. Currently, that’s the situation we observe.

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

Simple answer to that is no. We have strong takeaway contracts. There are some customers who are below take-or-pay at the moment in Europe, but those contracts are being enforced and payments are happening.

We will now take our next question from Vincent Andrews from Morgan Stanley. Please go ahead.

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

Sure, Vince. I think with the projects to me we don't take the current prevailing rates and bake it into that perspective. And the reason is, as you know, we're making 15-20-year investments. And embedded with that, we already incorporate inflation recovery on the facility fees. So when you tend to see elevated rates, that does come back through the inflation adjustment mechanisms as it is anyways. And we don't need to debt finance these projects as we build them. As you know, they take several years to build anyways. So from that perspective, we've been through many decades as you well know on interest rate cycles and our long-term model continues to be quite resilient with the contractual inflation recovery that enables to incorporate that. As far as borrowing rates, I mean we – yes, we're a single A but lately we've tended to be more AA or better on the spreads. When we decide to go to the market, I would expect our spreads should be some of the better ones you would see. But of course, it's from a benchmark that's higher today. So you can take the benchmark today, and just take some of the spreads you've seen demonstrated at kind of our rating or better and that's sort of what we would borrow at. But at this point, I feel pretty good about our access to capital and still get some of the lowest cost capital around.

We will now take our next question from Laurence Alexander from Jefferies. Please go ahead.

This is Dan Rizzo speaking on behalf of Laurence. Thank you for taking my questions. You mentioned the return on capital for investments. I’m curious about the new opportunities in gray, green, and blue hydrogen. Should we expect the return on capital for these to initially be lower than traditional products, but potentially exceed them in the next five to ten years? How should we approach the return on capital for these new opportunities?

In terms of return on capital, I want to reiterate what I mentioned earlier regarding our investment criteria for projects. We aim for double-digit unlevered returns, which are aligned with the risks we undertake. This standard is evident in the projects we examine and approve, influencing the return on capital within our business today. I anticipate that these projects will continue to enhance our return on capital, and our criteria for investments in the clean energy sector, whether blue or green, remain unchanged. There is also some support from the IRA that helps maintain this return profile and speeds up the decision-making process for our customers.

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

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

Good morning. Thank you for the opportunity to ask the question. I'm going to fly the flight for Europe slightly. With a lot of talk about the Inflation Reduction Act in the US, how does that influence politicians' thinking in Europe, from what you understand in terms of changing the way investments are done for low carbon hydrogen in Europe?

That's an excellent question, Geoff. It's particularly relevant because I've had several discussions with political leaders across various parts of Europe recently. Two key points emerged from those conversations. First, the Inflation Reduction Act took many by surprise, including a lot of political leaders in Europe. They now see its significant impact on accelerating clean energy initiatives in the US and, understandably, they are envious of that progress, especially since the European Commission often requires more time and extensive work to reach decisions. Secondly, this awareness has prompted them to acknowledge the need for urgent action. For instance, Europe’s previous focus on green hydrogen has evolved, leading to a broader acceptance of blue hydrogen as a viable interim solution toward cleaner energy. Currently, Europe is in need of energy and is burning more coal than anticipated. This shift toward a pragmatic approach, which was previously missing, emphasizes the importance of integrating low carbon intensity hydrogen, treating blue hydrogen equally alongside green hydrogen. I believe this represents a fundamental change that we will witness. Additionally, Europe has recognized that, while they can develop projects domestically, establishing processes to import considerable volumes of clean energy, including blue and green hydrogen and ammonia, is crucial for building the necessary infrastructure. Overall, the IRA has sparked significant introspection in Europe, and I believe they will take action in response to it.

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

Thank you. If you add sequestration to hydrogen for an existing refinery customer, do you expect that existing refinery customer to pay a premium for blue hydrogen, or where you just expect to get the credits to cover the cost of adding sequestration? And how do the existing contracts anticipate this? I'm just trying to understand from the customer's perspective how this is going to work?

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

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

Good morning. This is Cory Murphy on for Kevin. In your packaged gases business, can you comment on what you're seeing in terms of demand for hardgoods as opposed to gas and rent? I recall the hardgoods tend to be a leading indicator, so curious if you're seeing any trends in the business that would portend slower macro growth ahead? Thank you.

Thanks. The hardgoods business, particularly in packaging, is experiencing double-digit growth. We analyze it from two perspectives. Regarding economic activity indicators, both equipment and consumables sales are increasing. There's noticeable demand and growth in equipment sales, indicating that companies are investing to address ongoing supply chain challenges in manufacturing. Overall, I'm optimistic about the current development of hardgoods, particularly in the US.

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

Hi, guys. Nice quarter. Just curious I'm sort of impressed that your volumes remained positive given recessionary conditions or no growth. If demand firmly goes negative in 2023, what do you think your volume outlook would sort of unfold in that scenario?

Hey Mike, I would love to speculate but I’m not going to. We’ll revisit this in the next quarter and provide a full outlook for 2023. We’re going to conduct a very detailed planning exercise. I’ll have people from around the world here for three days to go through their planning processes. Many of these assumptions will be tested and challenged during that time. However, I want to emphasize that resilience stands out, and sometimes people take that for granted. In our case, we recognize that our volumes reflect that resilience, along with our defensive business model, which includes a contractual structure that allows us to preserve much of our profit and top line even when volumes decline. Acknowledging this is particularly important during these times. We'll provide more information in the next quarter for sure.

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

Hi. Good morning. I have two questions. First of all, in Europe, any thoughts on the recent decline in natural gas prices and what that could mean for your costs? Are you going to realize some of that? And then the second question is around electronics. You acknowledged that there has been some negative headlines around semiconductor producers. Curious for some additional color on the near-term and longer-term impacts that might have on your electronics business, if there is some reduction in capital spending from those fabs? Thank you.

Thanks, Mike. Regarding natural gas in EMEA, we've noticed ongoing volatility in pricing. We've managed to navigate this through our cost pass-through structure and plan to continue doing so. If natural gas prices decrease significantly, it will improve our margins. The math behind the pass-through process is clear, and we have no concerns on that front. Reduced natural gas prices could support the larger economy, potentially creating a beneficial economic backdrop for us. Concerning the Electronic segment, there are two main aspects to discuss. First, long-term investments are being influenced by the US CHIPS Act and a similar initiative in Europe that promote localized investments, which is driving fab investments as we progress. Recently, discussions with some of our largest customers have shown their commitment to maintaining or even increasing investment levels. Some customers follow a countercyclical investment strategy that has proven effective for them. I anticipate that these investment levels will remain relatively stable in the medium term, which I view as the next four to five years. Importantly, we are capturing more than our fair share of these opportunities, and I feel positive about continued growth as a result. In the short term, most of our major customers are still consuming at the levels we've seen, which I highlighted earlier — despite what may be reported in the media, our clients are actively using gases across all the fabs we service. This puts us in a strong position. There have been investor concerns regarding China, but I want to clarify that our volumes in China remain unaffected by any current embargoes. While there may be implications for long-term investments in China, we have yet to notice any impact on demand from the markets.

End of Q&A: I would now like to turn the call back to Juan Pelaez for any additional or closing remarks.

Cecilia, thank you. And thank you everyone on the line for participating in today's call. Please feel free to reach out if you have any further questions. Have a great rest of your day. Take care.

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