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

Chris, thank you. Good morning everyone and thanks for attending our 2023 first quarter earnings call and webcast. I am Juan Pelaez, Head of Investor Relations. And I'm joined this morning by Sanjiv Lamba, Chief Executive Officer; and Matt White, Chief Financial Officer. Today's presentation materials are available on our website at linde.com in the Investors section. Please read the forward-looking statement disclosure on page two 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 first 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 a very good morning everyone. We had a strong start to the year as Linde employees once again delivered on their commitments, irrespective of the geopolitical and economic headwinds. Earnings per share, operating margin, and return on capital all reached new record highs. Robust pricing, coupled with dependable return on capital have more than compensated for a weaker economy, just like the last four years. Linde's ability to consistently deliver earnings growth in any environment is a testament to the resilient portfolio, operating excellence, and capital discipline. And when global economies recover, which they always do, there's an opportunity to further leverage the base volume growth just as we've demonstrated in 2021. However, during uncertain times like today, we continue to execute our strategy of optimizing our base business every day, capitalizing on growth projects, including high-quality clean energy projects. All of this while maintaining our industrial gases model, coupled with a disciplined approach to capital allocation. Slide three provides a brief update on clean energy, including key projects that are both under construction and an example of a project being developed. Let me begin by reiterating our strategy with respect to clean energy and you'll notice it hasn't changed over the last three years, which it shouldn't. Let's start with the first principle. We will stick to the core of the industrial gases model. This has been a cornerstone of our strategy for decades. We are experts at designing, building, operating, and distributing industrial gases and equipment. We serve many markets where our customers are experts at what they do, making our customers more productive and competitive through our core strengths is what makes Linde successful. This has been true for the last 100 years and I expect it will continue to be true for the next 100. Another certainty within our industry is how customers demand the same three requirements for the gas supply, which are safety, reliability, and the lowest total cost of ownership. This holds irrespective of the molecule, the end market, or supply mode. This is why a key element of our strategy is to leverage our world-class engineering capabilities and existing asset network of our $3 billion hydrogen business to deliver the most reliable and lowest-cost supply systems for our customers. Following these principles, we've successfully won and advanced many clean energy projects, of which I'd like to highlight just a few. The left side represents projects currently under construction. These are projects with executed contracts, fixed payments, and incremental growth with predictable returns. With project CapEx of just under $2 billion, including the new OCI project in Texas, where Linde will supply nitrogen and clean hydrogen by capturing CO2 for underground sequestration through our partner, ExxonMobil. Currently, this project makes up the majority of clean energy projects in our backlog since most electrolyzer investments are designated for the merchant market and therefore considered base CapEx. There are a few projects like the recently announced Evonik agreement that meet backlog criteria. But even here, we support local networks and supply high-purity clean hydrogen to electronics and other industrial customers as well. Currently, we view these electrolyzer projects as modules in our local supply network for the supply of merchant hydrogen. They're often integrated into our existing hydrogen network, sometimes side by side, leveraging the same storage and transportation infrastructure, helping optimize distribution costs. Furthermore, these projects leverage various electrolyzer technologies, including PEM and alkaline to provide the best fit to customer needs. The sale of Plug is another avenue for Linde to participate in growth opportunities, which may have different customer demands or which may not benefit from integration with our existing supply network. Now, in addition to these projects being constructed, we have over 200 different projects under development. Of course, the profitability of these projects being approved or won by us varies from project to project. On the right side of the slide, I'd like to highlight one such opportunity which was recently made public by our customer. Dow recently announced that it has selected Linde as an industrial gas partner for the supply of clean hydrogen and nitrogen for its proposed net-zero carbon emissions integrated ethylene cracker site in Alberta, Canada. Under the framework agreement, Linde will complete the design and engineering for a Linde owned and operated world-scale air separation, autothermal reformer, and carbon capture complex. This complex will potentially be integrated with Linde's existing operations in Alberta. Engineering work is underway, and both companies are working to obtain their respective board approvals and regulatory approvals. Final investment decision is anticipated by the end of the year, so I don't really have many additional details until then. We continue to work on a number of other projects aligned with our strategy to decarbonize our own operations, help customers decarbonize their operations, such as the Dow project above, and address new market needs such as the OCI project. Overall, the total opportunities are likely to exceed $50 billion over the next decade, representing one of the best long-term growth environments I've seen in a long time. Of course, time will tell how many we ultimately sign and announce, but you can see we are making meaningful progress. And despite the many differences across these projects, our full suite of offerings, coupled with a strong balance sheet, will enable us to win more than our fair share. But rest assured, our participation will consistently follow our strategy and proven investment criteria. I'll now turn the call over to Matt to walk you through the financial numbers.

Thanks, Sanjiv. Please turn to slide 4 for an overview of first-quarter results. The sales of $8.2 billion were flat with last year, but up 4% sequentially. Versus prior year, FX was a 3% headwind. Although we continue to see foreign currencies strengthen, as evidenced by the sequential tailwind. Cost pass-through was also a headwind as energy prices have fallen in most parts of the world. As a reminder, we pass through power and natural gas costs contractually, which have no effect on profit dollars but will impact profit margins. Net divestitures resulted in a 2% decrease as the sale of GIST and deconsolidation of Russia more than offset the recent nexAir acquisition in the United States. Engineering is down 2% since we have not lapped the impact from sanctioned Russian projects, which ceased Q2 of last year. Excluding these items, underlying sales increased 8% from last year and 3% sequentially. The inflation levels remain elevated in most countries and thus are driving higher pricing. As mentioned in prior calls, globally weighted inflation tends to be the best proxy for our price changes since most contracts have clauses that specifically address local inflation. Volumes were flat from prior year as contributions from project start-ups offset lower base volumes. When looking at segment-based volumes, Americas are growing due to the US APAC is mostly flat since volume recovery is offset by prior year equipment sales. And EMEA is lower, primarily from on-site customers adjusting to slower economic conditions. From a supply mode perspective, we continue to see resilient or growing packaged and merchant volumes. Although certain on-site customers are lower from a combination of weaker conditions and planned turnarounds. Sequential volumes are flat as US pipeline recovery from Q4 weather offset seasonal slowdown in APAC and Latin America. Despite flat volumes, operating profit of $2.2 billion increased 16% from prior year and 10% sequentially. This growth was driven by project start-ups and prudent inflation management through price increases and cost productivity efforts. These actions resulted in a record operating margin of 26.9%. And you can see to the right that every segment contributed to this improvement. In the appendix, you'll notice the engineering segment once again delivered an operating margin in excess of 25% above the low to mid-teens we view as a long-term run rate. Similar to last quarter, this is due to favorable timing from the wind down of sanctioned projects. While this led to favorable benefits on the income statement, it also resulted in unfavorable cash timing, which I'll discuss on the next slide. For the next few quarters, engineering results may continue to be lumpy as we wind down the remaining projects. However, we did not include any potential profit upside in the earnings guidance. EPS of $3.42 was 17% above last year or 20% higher when excluding the effects of currency. This represents the 10th quarter in a row of growing EPS ex-FX by 20% or more. From a cash flow perspective, CapEx increased 28% from growth investments in both base and project CapEx. Furthermore, ROC reached another record at 24%. As we continue to deliver double-digit percent profit growth on a stable capital base. Slide 5 provides more details on the first-quarter capital management. While cash trends are relatively steady, the Q1 operating cash flow to EBITDA ratio was 64% or 11% lower than last year. The majority of this difference relates to timing of engineering working capital, both from a reduction in contract liabilities and an outflow from accruals and payables. So, said differently, we met a contractual milestone this quarter and thus booked current income related to a customer cash deposit received over a year ago. In addition, we paid third-party vendors for work related to that project. Normally, you wouldn't experience a cash flow swing of this magnitude, but the lumpy and accelerated wind-down of sanctioned projects are creating this effect. Excluding engineering timing, working capital levels remain quite healthy across the company. Overall, I expect our long-term operating cash flow to EBITDA ratio to remain in the low to mid-80% range. But the next few quarters could be more volatile as we continue to wind down remaining projects. And recall, this ratio in 2021 was 96% and driven by customer pre-payments related to these sanctioned projects. So the multi-year average is a better indicator of performance. Available operating cash flow, which represents operating cash flow less base CapEx is stable at approximately $1.5 billion per quarter. We continue to deploy cash to growth initiatives, dividends, and share repurchases as part of our stated capital allocation policy. I'll wrap up with guidance on Slide 6. For full-year 2023, we're raising guidance $0.30 at the bottom and top end for a new range of $13.45 to $13.85. This represents a growth rate of 9% to 13% versus 2022. Note, we do not assume any FX impact since currencies have mostly recovered. The $0.30 raise comes from the outperformance of the first quarter. In other words, we left alone the remaining quarters for now. In addition, and consistent with our prior approach, this assumes no economic improvement and hence, no base volume improvement. This does not represent our macro projection, but rather is just a placeholder, so you can insert your own view of the economy and adjust accordingly. If the economy improves, we'll be above this range. And if not, we'll take actions to mitigate. The second-quarter EPS guidance range is $3.40 to $3.50, representing 10% to 13% growth from 2022 or 11% to 14%, when excluding a 1% FX headwind. Similar to the full year, this assumes no economic improvement from current levels. Although on a sequential basis, it reflects some seasonal recovery, partially offset by lower engineering. Overall, we had a strong start, but one quarter doesn't make a year. We believe it's appropriate to remain cautious while continuing to manage the things within our control, including price, cost, and capital discipline. But regardless of how the year unfolds, we're highly confident we can continue to deliver compound value for our shareholders by executing on the basics and securing high-quality customer contracts for long-term growth. I'll now turn the call over to Q&A.

Our first question is from Mike Leithead with Barclays. Your line is open.

First question, I wanted to focus on the EMEA segment. Can you just speak to the step change in profitability here this quarter? I appreciate you don't really give segment level guidance. But the business used to be running, call it, $300 million, $400 million quarterly EBIT, we averaged around $500 million the quarter last year, and now in a pretty uneven macro environment, we broke $600 million. So is this sort of the right run rate going forward, or is there something else kind of underlying the step up here?

Sure, Mike. Let me start off by just kind of going back and telling you how the EMEA business has been looking at actions they need to take, management actions. So the underlying impact that we're seeing come through is driven by two levers: pricing and productivity. Productivity are actions that they've been undertaking for an extended period of time, as you're aware, we've talked about it over the last couple of years now. So they've reset their cost base effectively and continue to do that every quarter. That obviously has an impact on the run rate that you're seeing going forward. But more importantly, we're obviously seeing some upside from pricing come through. And you might recall, if you go back late 2021, when inflation started moving up, we'd explained to you that there is a catch-up that happens around pricing, particularly around merchant and package businesses. Of course, in the current environment, when energy costs are coming down as an example, we're getting some uplift as a result of that as well, which you can see in that pricing number, pretty impressive 13% that they have posted. So you have to keep those in account as you think about EMEA's business, but underlying performance driven primarily around pricing and productivity.

Perfect. Thank you.

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

I wanted to ask a little bit more about this $50 billion opportunity that you spoke about now in terms of clean hydrogen. I think two quarters back when you talked about that greater than €30 billion opportunity. You're talking about the U.S. alone, but you broke it down into those three buckets of decarbonize Linde's decarbonize customers in new markets. So I was wondering if you could do the same on under the extra €20 billion, which I guess is outside of the U.S. And perhaps in terms of geography, you could talk about where you expect to see the most momentum in the next couple of years in terms of project findings. Thanks.

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

The next question is from Jeff Zekauskas with JPMorgan. Your line is open.

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

Sure, Jeff. So as you think about the evolution of the hydrogen market, there are three aspects to keep in mind. The first is that a lot of the development around clean hydrogen is driven through a range of partnerships. And you'll recall, when Linde laid out our strategy, we said that partnerships are a key component of that. And you heard me speak earlier and mention that ExxonMobil will be a partner for us as we look at sequestering the CO2 downhole as well. So just to keep in mind that that's one of those developments, and we are actually partnering with a number of players including IOCs and NOCs that have an intent to try and develop their own projects around hydrogen because they're lean on us to provide either technology, operating experience, or indeed, sometimes the benefit of our network. So that's one. The second thing to keep in mind is we have the ability to leverage our existing infrastructure that we have built over decades that supports that $3 billion business that we have in the US Gulf Coast. And really, I think that's where a competitive advantage for Linde turns up. Very often, other partners or potential partners reach out to us because they recognize the impact and advantage that we carry as a result of that infrastructure investment and want to partner with us as well. So that's the other piece to kind of keep in mind. The last, a number of players will want to decarbonize their operations. And what you're speaking about the specific example, Jeff, is driven around the decarbonization of their operations in Baytown. Here, what they're attempting to do is to actually produce significant hydrogen. You mentioned one billion cap, and a large portion, if not most of that will actually go into decarbonizing their own operations. Obviously, the support from 45Q makes that more attractive, making the hydrogen going as an input into their crackers into their chemical systems, downstream, and to the refining systems, a lot more attractive from a pricing point of view. And you're seeing that is a development that's happening. I'm pretty hopeful that we will have a role to play in those projects that people like ExxonMobil and others will undertake through the provision of our technology and operating capabilities as well. And Jeff, this is Matt. Maybe just one other thing I'd add. I think another way to think about it is when you look at the hydrocarbon market today for transportation and energy, it's somewhere in the order of a $6 trillion market. My number may not be exact, but it's something in that order. And when you look at the industrial gas industry, our participation in that market is a fraction of a percent. So in my view, a lot of that $6 trillion market is what is being addressed and potentially converted to things like hydrogen. And so if that happens, I think that actually creates opportunities in areas that we had a very, very small participation in in the past. But time will ultimately tell.

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

Yeah. Good morning. Two questions really. One, around the projects. So the OCI, the Dow, roughly, what would be the cadence you would expect announcements like that over the next three or four years? Is it three or four years? Is it more than that? And then two, Matt, on your guidance, you said you're putting in no volume improvement, but that's not your base case. Could you talk about just what you're seeing macro-wise volume in what you would expect this year? What would be a decent base case?

Duffy, I'll start off by just talking about the clean energy projects. And I think the important thing to remember there is that these projects have a life cycle that they need to go through before they get announced. There is no way to predict what types of announcements and frequency of announcements you will see on these projects. I think it's important to maybe remind you of just the project development stages that go through. So typically, a project of this size will go through a feasibility study followed by a pre-FEED, followed by a fee, which is where you actually get to a point where you've got the quantities and the investment requirements in place based on the detailed engineering and design, which results in the FID. All of those stages put together would take anywhere between 18 to 24 months, in some cases, if it's a complex project, stretching up to two and a half years. Beyond that, you will then see another two and a half to three years in execution before final start-up happens. So that's the way I think about the frequency that you would expect to see projects. These projects have been under development for a while, and you kind of continue to see those announcements reflecting the different stages these projects are at. And as far as the guidance, Duffy. So I'll start with and as you probably know, when you think about two economic metrics that might be proxies to think about would be industrial production and then CPI translation. I'm not going to tell you what we think because whatever it is, it's wrong; nobody knows what the future will bring on that. But what I can say is we continue to internally focus on a model that can quickly adapt to whatever does happen. And clearly, we're seeing inflation continue to be elevated, and we need to make sure that we can locally manage that through our contract structures to capture that inflation through pricing to make sure that we can continue to stay on top of that. On the volume side, we are well positioned to capture when it recovers. As you know, we are a contractual business. As Sanjiv mentioned, we demonstrated that in 2021 with the recovery if and when that comes back, we will be very well positioned to do that. But for now, we just left out this sort of no improvement view, similar to what we've been doing over the last two to three years, and we'll see how it plays out. But I feel quite good that no matter what it does bring, we'll be prepared to quickly adapt and manage it.

The next question is from David Begleiter with Deutsche Bank. Your line is open.

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

So David, I've mentioned earlier that in terms of pricing, we consider pass-through mechanisms, specifically the on-site contracts where there's a direct connection between costs and energy prices, as well as inflation and how we manage that. We also think about balance as a pricing method. We discussed before that when inflation began to rise in 2021, there was typically a lag at the start of that cycle. Now, as we're at the end of that cycle with energy costs decreasing, that same lag exists. We've indicated that the lag period is between one to two quarters, and we're experiencing some of that lag benefiting us in terms of pricing on the merchant and package side of our business. Pricing requires significant effort, and our team has worked hard to maintain that base price. In cases where we implement surcharges, we continuously strive to convert those surcharges into base product pricing, ensuring that our pricing efforts are sustainable in the long term.

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

In terms of EMEA volumes, we are observing some softness year-on-year, particularly in the on-site business related to chemicals and energy. However, sequentially, we have noted a slight uptick, especially in metals and steel production in the region. On-site volumes have increased slightly, while merchant and package volumes have remained flat. This is positive, as we anticipate that as industrial activities improve with the stability in energy costs, we will see some volume leverage later in the year. We are monitoring the situation carefully, but due to various influencing factors, I won’t speculate on the specific outcomes in Europe. Should conditions improve, we are positioned to capitalize on the expected base volume growth.

Thank you very much.

The next question is from Peter Clark from Société Générale. Your line is open.

Good morning, everyone. Thank you. I have two questions. First, regarding the sequential pricing in America, one of your competitors mentioned a significant increase in medical gas pricing, which they attributed to the Americas. I would like to know if your medical gas pricing has also seen a similar increase, or if you are already ahead of the competition in that regard. The second question pertains to Europe and the cylinder business. You have indicated that this segment has been performing well, particularly in terms of pricing and margins. I’m curious if this positive performance is due to strong pricing, as we have heard that pricing remains robust. Competitors are also reporting good volumes in Europe for cylinders, so I want to know if this is contributing to the margin improvements you are experiencing in Europe. Thank you.

Thanks, Peter. In terms of pricing, we have experienced strong pricing over the last three quarters across all our segments, and we are pleased with the results. I won’t delve into the specifics regarding the medical or healthcare sectors, but overall, most of our businesses and end markets have shown significant pricing growth, which leaves us satisfied. We tend to lead the industry in this pricing growth. Regarding Europe and our packaging business, we monitor this closely. The positive aspect is that volumes have remained strong and resilient over the past 18 months, which is crucial. Pricing has also been favorable. The broader EMEA pricing has positively influenced packaging, showing solid performance throughout this period, including the first quarter we're discussing. I anticipate that as industrial activity increases, the stability in energy costs will be a key factor. Currently, that stability appears to be maintained, though it's uncertain what long-term impacts it may have. However, in the short to medium term, this stability is contributing to a slight increase in industrial activity, which supports both the merchant and packaging businesses. Therefore, I expect this volume trend to continue as these developments unfold.

The next question is from Steve Byrne with Bank of America. Your line is open.

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

Okay. So let me start off by just providing a headline that says as far as pass-through is concerned, there is no impact on our operating profit in dollar terms. It kind of adds to the top and it doesn't add anything to the OP. And when it's on its way down as it is at the moment, it goes away from the top and doesn't add any dollars from an OP point of view. Of course, it does impact the margin numbers and the mathematical combination of the margin does improve as a consequence of that when you're on a down cycle as far as costs are concerned. Addressing your specific question, contractually, we're able to manage the pass-through on what I would consider a real-time basis. So effectively, our contractual invoicing methodology would allow us to pass it on every week, fortnight, or month depending on how the contracts are structured. There isn't any significant lag, as I mentioned, on the pricing action for merchant and package where there tends to be a lag of one to two quarters, not in the case of pass-through.

Okay. Thank you.

The next question is from Michael Sison with Wells Fargo. Your line is open.

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

So Mike, at the moment, I think I referenced this earlier. We've got about just under $2 billion. That's what the slide would show you in the sale of gas. We got about just under $2 billion of backlog coming out of decarbonizing projects, if you will. Our expectation is that in the next two years to three years, we will be making investment decisions anywhere between $9 billion to $10 billion worth. This is based on the projects we're developing, which are further advanced than others. And those decisions, depending on the ones that we pursue and win and sign up will then get moved into the backlog and would then start providing the impact that we look for once they start up in due course. So you can expect the backlog to continue to grow. I do not expect it to peak up and down. I expect it to be a reasonably steady growth in the backlog over the years ahead. And those decisions that we make in clean energy projects that I've referenced before, of anywhere between $9 billion to $10 billion over the next three years will determine what finally happens in that backlog.

The next question is from Vincent Andrews with Morgan Stanley. Your line is open.

Thank you. Good morning everyone. I wanted to ask about the buyback. I would have assumed that given the delisting from Frankfurt and the large cash balance at the end of the year, you might have utilized more funds in the buyback during the first quarter, but it seems you didn't. Since you still have a significant cash balance and have made the packaged gas acquisition, how are you planning to utilize that cash and the additional capital generated from free cash flow this year in relation to returning capital to shareholders?

Sure, Vince. This is Matt. Regarding Q1, as you may remember, for most of January, we were unable to engage in any buybacks due to the merger structure that facilitated the delisting. Consequently, we lost about a month, which limited our action days. However, we adopted an aggressive stance right up to that point, capitalizing on favorable opportunities. Moving forward, our approach will remain consistent with our established capital allocation model. To reiterate for everyone on the call, our primary mandate is to maintain a single A rating and ensure annual dividend growth. After fulfilling that mandate, our next priority is to invest in the business. This includes any initiatives that meet our investment criteria, such as acquisitions, growth capital expenditures, and base capital expenditures. We evaluate these long-term investments based on their risk and return in accordance with our core model. Any remaining capital will be allocated toward buybacks. Considering our current cash situation, we still have significant capital available, which allows us to buy in the market nearly every day. As we identify more opportunities, we will increase our buyback activity. This capital allocation strategy will remain consistent, regardless of economic conditions, and it is something you can count on from us over the long term.

Great. Thanks for the update.

The next question is from Laurence Alexander with Jefferies.

Good morning. This is Dan Rizzo for Laurence. Thank you for taking my question. You mentioned earlier about your outlook not assuming any significant improvement in the macro environment. Can you meet your guidance if the macro environment in North America, in particular, significantly weakens?

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

Thank you very much.

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

Yes, good morning. Sanjiv, can you provide an update on your carbon offtake strategy? Last quarter, I think you indicated you were in discussions with three companies. And earlier this month, we learned that you've chosen to partner with ExxonMobil. My understanding is that partnership relates to OCI Beaumont specifically. So, a couple of questions would be in the case of future blue hydrogen projects, do you need to navigate the offtake each time on a case-by-case basis? And also, can you comment on the costs and recovery of those costs as you negotiate these projects? Thank you.

Thank you, Kevin. In our previous discussion, I noted that we consider two primary approaches for capturing and storing CO2, especially in relation to blue hydrogen projects in the US. This is largely influenced by the benefits provided under the IRA through the 45Q tax credits, which offer $85 per tonne of CO2 captured and stored. The first model involves a tipping fee, where Linde captures CO2 and creates a pipeline to supply it to a partner who charges a fee for its sequestration and management. The alternative model is to sell the captured CO2, allowing our partners to benefit from any tax credits associated with the 45Q program through their ownership of the carbon capture and sequestration assets they establish. We’ve been in discussions with several players and, as you noted in the announcement, we have chosen to collaborate with ExxonMobil moving forward. In this partnership, the CO2 generated from our OCI assets and blue hydrogen production will be supplied to ExxonMobil, who will handle its long-term sequestration and management. As we develop new projects, we will work with partners like ExxonMobil and others on a project-by-project basis, taking into account the geology and infrastructure necessary for effective sequestration. Regarding cost recovery, the parameters of the 45Q credits are quite clear. The direct pay mechanism for the first five years facilitates recovery, and the subsequent seven years provide a tax credit that appears below the line, allowing us to introduce flexibility into our operational models for these discussions. We have solidified one approach with ExxonMobil, and we will handle others similarly on a case-by-case basis.

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

Yeah. Good morning. I just had a quick question on Asia. I noticed that on volumes, you were sequentially down 4%. I just wonder how that plays out for the rest of the year or there was something specific in Q1? And then just one small question additional, if you don't mind, I think Matt you said that there were some issues around the engineering business and the cash flow. How does that play out for the rest of the year, just given obviously, as you wind down the Russian businesses or projects?

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

Yeah, sure. Thanks, Sanjiv. So Geoff, I can start with when you think about engineering, it follows what's called percent of completion accounting. And the basics of that, for the most part, we get paid in advance. So it's negative working capital, which is a good thing. And essentially, what happens is the customer will pay us in advance of a project, and then we will debit cash and then we'll credit what's called a contract liability. And then over time, we work against that contract. And then as we recognize that work, that would go to the income statement and then we would reverse a portion of that liability and it would go and be recognized as revenue. And in a normal project, that's about a three, maybe four-year very structured, very well-disciplined and defined engineering build rate. And that's what you've seen from us essentially since the merger, right, for the last four years. In the case of the sanctioned projects that obviously created an event where we needed to immediately stop all work in Q2 of last year. Now, the good news is our contracts address this; they have what's called a suspension clause. But you can imagine in these contracts, what we do primarily is what's called E&P, Engineering & Procurement. We really don't do much construction. So with the E, that's our labor internally and the P are things we are procuring around the world from vendors in China or Europe or the United States. So when you get a contract in suspension like we've had due to sanctions, you have lots of work you've accomplished, but you have to go through a process to determine at what point and how to settle that with the customer. So that takes time, sometimes many quarters, and it could be very lumpy. And so that's what's creating this volatility. And what you'll see in the 10-Q when we issue that later today, is the total contract liabilities for engineering as of the balance sheet date, so end of March, stands at about $4 billion. So again, what that means is we received $4 billion essentially in customer payments, of which we have yet to work off. Now within that, 1.8 billion are specifically part of projects that have been sanctioned. So that's kind of the number we're working with. Within that 1.8, $1.2 million is one specific project called RCA that will probably take some time to address. My view is it could be a year or more. So it's the remaining $600 million that are a handful of projects that were substantially close to completion, and we've done a substantial amount of work. And that's the portion that will probably create some volatility looking ahead in the next few quarters as we resolve. But I would say all in, these are projects that had good contracts. We were paid in advance, and we've done a substantial amount of work and it will just take time to get the final recognition given the process of suspension that the contracts address.

Thanks.

The next question is from John Roberts with Credit Suisse. Your line is open.

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

John, that's a very complex question. I'm not sure I'm going to do justice to it in this call, but I would say to you, there are three things that we are considering. Clearly, when we think about the thermal power plants, they have a couple of avenues to work through. What we're seeing in Japan and Korea, as an example, is ammonia blending. So it is possible they currently have a number of pilots successfully operating there going up to 20% to 30% of ammonia in thermal plant usage to bring down emissions by a significant amount. So yes, I do believe that we will see some level of ammonia blending as part of the development to manage emissions around thermal power plants. The other piece that is obviously being worked on at the moment is to see if direct injection of ammonia into new power turbines would be effective. Again, there's a 40-megawatt part turbine that's currently operational, being piloted on this. Initial results seem to suggest that it looks promising. And therefore, I would see ammonia potentially benefit longer term as a direct power source for such turbines as and when they get deployed and installed. Lastly, there is always the option to consider, right? It's hard to abate. But there's always the option to consider given the geology in the U.S. in particular, the opportunity to try and capture even though it's small levels of CO2 in the emissions to try and capture that and sequester it as another option, particularly made a little more attractive with the 45Q tax credits that become available as well. So we think there will be a combination of things that will happen. We are working with OEMs on the ammonia injection. We're working with partners to look at ammonia development to support that injection, but all of that will take time to play out.

Thank you. Nice quarter.

The next question is from Christopher Parkinson with Mizuho. Your line is open.

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

Chris, you're right. So, I mean when we go back and look at what we put out earlier on when we talked about the $30-plus billion we said decarbonizing our own operations to invest about $3 billion. We have about 11 assets in the US Gulf Coast that we think would qualify for that. There is active work happening. And in fact, later today, I'll have a discussion on one of those first projects that we're looking at in that space. I'd be upfront and tell you that I'm looking at a combination of two things when we make those decisions on that $3 billion that we talked about. Obviously, the timing is in our control. But what I'm looking at is to make sure that we have an asset that has a long-term contract underpinning it, so that I have the ability to generate blue hydrogen and provide that back into my customer network. And the second is to just make sure that I have an effective project that meets that investment criteria we set out. While I'm clearly committed to reducing our emissions for Scope 1, which is what happens when I decarbonize our own operations. At the same time, I'm also committed to making sure that we provide appropriate returns to our shareholders as a consequence of putting assets or money on the ground in terms of assets. We're trying to match those two to make sure that we have customers who have the willingness to offtake the blue hydrogen and allow us to then go ahead with projects like that. I certainly expect to see that momentum building up in the next five to seven years; we'll see a lot more of that happen.

The next question is from Andrew Hain with Stifel. Your line is open.

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

Andrew, let me begin with the Dow contract. I'll let Matt provide more details on the margins. I want to highlight the margin improvement we've observed in EMEA, which has been quite significant. Regarding the Dow contract, at this point, I can say that we are learning a lot from the OCI contract that we are applying to our work on the Dow side. We feel optimistic about the size and scale of the ongoing Dow projects as we continue our FEED process. However, it's still too early to provide definitive insights. We expect to reach an FID before the year's end, and at that time, we will be able to clearly outline what that investment entails and the size of the asset. Before I pass it to Matt, I want to remind you that some may overlook this, but if we consider the fourth quarter of 2018, margins in EMEA were around 17.5%. Since then, EMEA margins have improved annually, not only due to energy factors but also thanks to the management actions we deemed necessary, increasing by almost 1,000 basis points to reach the 27.9% we’re discussing today. The EMEA team has put in tremendous effort, and I want to acknowledge that this gradual improvement has been remarkable in many respects. Matt, do you have anything else to add regarding the margins?

Sure. Andreas, this relates to Mike's earlier question. Margins can be analyzed in various ways, but I believe it's important to adopt a broader, long-term perspective. Over the years, we've discussed how we view the geographic segments of APAC, EMEA, and the Americas as essentially similar in how we operate them. Therefore, in principle, they should achieve comparable margin profiles. Referring to Sanjiv's point, 2018 serves as the baseline since the merger, when we observed significant differences in margins across these regions. Through considerable effort and time, we have begun to see these margins converge. The Americas currently lead and are actively working to enhance their business quality through various initiatives. Meanwhile, EMEA and APAC are also making progress and starting to catch up. Ideally, all three regions should achieve comparable margins in the long run. This perspective emphasizes a long-range view rather than focusing on individual quarterly results, as these businesses are fundamentally similar.

And maybe, if I add to this, the margins you mentioned are still sales margins. If I look at that, energy prices and energy are a very significant input factor for industrial gases and vary greatly across these regions. If I then say that the investment might be similar for a given unit, then the capital return at the same margin would be much higher in Europe than in other regions. Is that a fair assessment when considering how energy...

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

Thanks a lot.

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

Hi there. Good morning. Congrats on a nice quarter. A couple of questions. First of all, in terms of concerns around recession in the US, you guys actually do have some interesting leading indicators that you can look at for manufacturing within the US packaged gas business. I'm curious what you're seeing on the hard goods side in areas like capital equipment and robotics. Are you seeing any signs of a slowdown? And my second question is, now that you've brought nexAir into the fold, maybe talk a little bit more about how that deal is helping to expand your footprint and drive potential synergies? And do you see further opportunities to consolidate in US packaged gases?

Thanks, Mike. Both are good questions. Let me start with the US packaged gas business. We experienced double-digit sales growth in the quarter, which is solid. Base volumes for both gases and hard goods increased in the mid-single digits. However, toward the end of the quarter, we noticed a decline in growth for certain equipment within the hard goods space. While year-on-year growth has started to decrease slightly, I anticipate this trend will continue. That's a leading indicator, as you've mentioned, and we're monitoring it closely. I'm not going to speculate too much, but if we encounter a recession, the current indicators suggest that any downturn would be minor. We'll wait and see how the economy develops and keep track of it. Regarding nexAir, I’m pleased that we finalized the acquisition. As you know, it brings about $400 million in revenue. We have a robust platform through our LG&E business and the Linde Gas and Equipment operations in the US, allowing us to integrate packaged gas services and benefit from synergies. The Southeast US, where nexAir operates, is experiencing significant inbound investment, and we’re seeing healthy growth opportunities as new projects arise. This will allow us to cross-sell into our established network. As for further consolidation, I'm keen on pursuing small tuck-in acquisitions. Large acquisitions aren't feasible in the current climate, but we are consistently engaging in smaller ones, and I expect to see as many, if not more, this year.

All right. Thanks very much.

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

Chris, nice job, and everyone online, thank you for participating. If you have any further questions, feel free to reach out to me directly. Have a great day. Stay safe.

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