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

Thanks, Abbie. And thanks for pronouncing my name correctly. Good morning, everyone, and thank you for attending our 2023 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.

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

Thanks, Sanjiv. Slide 4 provides a summary of third quarter results. Sales of $8.2 billion decreased 7% from last year and 1% sequentially, although these numbers are not indicative of underlying trends. Cost pass-through, which represents the contractual billion of energy cost variances to customers, decreased 6% from last year but had no effect on profit. In addition, the Engineering business decreased 4% from the prior year and 1% sequentially due to timing of project billings. When excluding these items, along with impacts from FX and net divestitures, underlying sales increased 3% over last year and 1% over the second quarter. Price increased 5% over the prior year and 1% sequentially as the business units continue to contractually recover higher levels of inflation. In fact, globally weighted CPI for our countries of operation also increased 5% in the third quarter, further validating this correlation. Volumes were flat sequentially and decreased 2% year-over-year, primarily driven by the Electronics and Metals & Mining end markets. Overall, year-to-date volume trends have tracked closely with globally-weighted industrial production. We regularly monitor tank and cylinder returns to validate this correlation and have not identified any material differences. In other words, the volume decline is driven by existing contractual customers requiring fewer gas refills since their production decreased proportionately with industrial activity in their local economy. I fully expect volumes to recover in line with each local economy. Operating profit of $2.3 billion increased 15% over prior year and 1% sequentially. Operating margin expanded 550 basis points to 28.3% as price actions, cost productivity, and fixed payment contracts enabled greater leverage from the 3% underlying sales growth. Excluding cost pass-through, operating margins expanded 400 basis points across all business segments, led by EMEA at 600 basis points. Note that America has experienced elevated power costs in the third quarter, which had a negative impact on merchant and packaged margins. However, this will be recovered over the next one to two quarters. EPS of $3.63 increased 17% as we continue to deliver on the stated goal of double-digit percent EPS growth. CapEx of $950 million increased 24% from last year, primarily due to project CapEx spending in support of the $4.5 billion sale of gas backlog. As a reminder, the Linde definition of project backlog is unique and the most stringent in the industry. Inclusion requires assured growth, a customer contract with fixed fees, and explicit termination provisions to ensure investment returns. Furthermore, the $600 million of base CapEx includes $320 million of additional growth investments to increase network density. During uncertain times like today, shareholders want to sleep well at night knowing their investment is safe in management's hands, which is further supported on Slide 5. Proper capital management and quality cash generation have always been at the core of our operating rhythm. We've been following the same capital allocation policy for decades. It starts with generating true operating cash flow because contrary to what some might think, working capital does matter. You can see the stable trends, with the most recent quarter coming in at $2.5 billion. Recall that we had some cash tax timing impact in the first half of the year which we've now lapped. Therefore, I expect the operating cash flow to EBITDA ratio to remain in the low to mid-80% range. While our mandate is to maintain an A credit rating and grow the dividend, the priority for our capital is to invest in the business. This follows our time-tested investment criteria, which has enabled Linde to consistently achieve industry-leading ROC year-after-year. After investing in the business, surplus cash is used for share repurchases. Having a strong balance sheet, stable cash generation, and an active stock repurchase program enables value-creating opportunities during turbulent markets. In fact, our best stock repurchases happen when equity markets overreact. This is why we recently announced a new $15 billion stock repurchase program, allowing us to optimize our excess free cash flow and robust balance sheet. We'll continue to take advantage of stock market dislocations and return capital to our owners in a tax-efficient manner. I'll wrap up with guidance on Slide 6. For the full year, we're raising guidance to a range of $14 to $14.10, representing a 14% to 15% growth rate. Consistent with prior quarters, the upper end assumes no sequential economic improvement. The updated full year guidance implies a fourth quarter range of $3.38 to $3.48. Excluding FX, the midpoint is down 4% sequentially due to engineering project timing and base volumes, including seasonality, although we are taking actions to improve this range. As Sanjiv mentioned, global volatility appears to be the norm these days, so we must run our business in a manner which navigates the uncertainty while executing the strategy and delivering on commitments. And while no one can predict what will happen tomorrow, let alone next year, Linde owners can rest assured knowing their capital will be properly managed for sustained compound growth in any environment. I'll now turn the call over to Q&A.

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

Great. Thank you. Good morning. Sanjiv, maybe to start, you talked about some macro crosscurrents impacting risk appetite. And I think there's probably been a bit of a pullback in the clean energy space, maybe a bit more economic rationality in some green ambitions. So can you speak to beyond what's already in your backlog if discussions at all are changing on potential new clean energy products or maybe how is bidding activity today versus maybe earlier this year?

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

We will take our next question from Laurent Favre with BNP. Your line is open.

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

Laurent, that's a good question. Why don't I just kind of give you a feel for what I think is happening in China as we see it today, and then we'll talk a little bit about the medium term as well. So in the near term, one of the good things in China, which is on a slow road to recovery I say to you is that we supply Tier 1 customers that are the most competitive in their field and have been quite stable through this downturn. Now, let me give you kind of a little bit more color on some of the end markets that we're seeing over there. I'll start with chemicals to begin with. Sequentially, we saw a bit of softness, but year-on-year chemical production was actually pretty much flat. For Q4, which is more near-term, we're expecting potentially a mild recovery as a result of a bit more cautious view on domestic consumption and weak external environment. And I see that play out, I expect into the first half of next year as well. Steel volumes have been sequentially stable, but as you know, and we mentioned this a few times now, have been lower year-on-year. Steel output is not expected to improve in Q4. Obviously, they have their own environmental production curtailments that happen in winter. I expect that to play through and most likely into the first half of next year as well. Both steel and chemicals are impacted by the crisis, I'd call it, in the property sector. And unless that ship kind of turns around, you're unlikely to see a lot of tailwind for chemicals and steel. On Manufacturing, the manufacturing PMI for China has been shrinking. It shrunk a little bit again in September at about 50.6% now. We see volumes sequentially stable. Automotive is probably the one bright spark in that space, but I'd say we're seeing positive movements year-on-year largely driven by EV production. EV production is obviously growing in excess of 20% at the moment. There's a bit of momentum around that. I expect that momentum to sustain into Q4 and beyond. On the other hand, machinery and metal fabrication output remained weak in the third quarter. I expect those to remain weak in Q4 as well. Lastly, electronics. Volumes sequentially have been stable but are below last year. As you know, we've said before, on-site electronic volumes are stable. We really see the volatility around merchant and package, potentially around rare gases primarily. Overall, chip output in China did improve in the quarter. In Q3, it was up about 4.1%, and I expect it to kind of remain at that level as we go ahead into the last quarter. So that's kind of a near-term view, Laurent. If I take a view on the midterm, obviously, a lot has to happen over the next 6 to 9 months for that recovery to come back in shape. I expect that to be around mid-2024, but more medium term, if you look at a 2-to-4-year horizon or a 2-to-5-year horizon, I do see moderated growth coming out of China, and we see that reflected in the IP numbers that we get.

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

Good question. Let me finish off that then. And absolutely, the answer to that is yes. We are treating China as a mature economy, one where we are focused on pricing, productivity, cost management. We've got that team reoriented and have done for more than 12 months now, Laurent. So in some ways, we don't comment on that because for us, it's a given. I believe that our business needs to constantly look at what we do and align itself to market conditions, and that's what we started doing in China 12 to 14 months ago and that is now fully in execution today. We manage that business as I would expect any of the mature business to be handled, to focus on pricing, productivity, cost management every day while we continue to look at good opportunities for growth, and we continue to want to invest there should that high-quality growth come through, which meets our investment criteria.

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

Hi. Good morning. Sanjiv, I was wondering if you could maybe talk about some of the recent project wins that your customers have disclosed, specifically the Australian projects and maybe the Indian oil project? And these projects are particularly interesting relative to what you just mentioned in terms of Tier 1 partners and some of the risks around green hydrogen specifically?

Sure, Stephen. Both of those wins were recently announced. Our teams in India have successfully secured a significant hydrogen supply project with Indian Oil at the Panipat refinery, which is a leading facility in the country. The Indian market is experiencing growth, and many infrastructure projects and major refineries are trying to keep up with the demand. It's encouraging to see this comprehensive package, as we will supply both atmospheric gases and hydrogen to support their expansion plans. Our strong relationship with Indian Oil continues to drive momentum, reflecting their appreciation for the technology and operational capabilities we offer. We have been supplying them for several years now. Regarding South Australia, we’re engaged in an exciting project working closely with the state government, who deserve recognition for their innovative efforts. They are focusing on developing hydrogen-fired peaking power plants, which involves integrating hydrogen into the power sector. We are currently conducting a paid feasibility study for them, aimed at delivering 250 megawatts of electrolysis and extensive hydrogen storage to support the peaking plant. As you know, the hydrogen supply for a peaking plant can be somewhat flexible. This study will help us understand what is necessary for the project to succeed. We are collaborating with a well-known power company to develop this initiative together. Once the feasibility study is finalized, we will coordinate with our partners to move towards a final investment decision.

We will take our next question from Duffy Fischer with Goldman Sachs. Your line is open.

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

Duffy, I'll let Matt cover those.

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

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

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

Okay, Jeff, it's Matt. I'll respond to that, but I don't think we have enough time for a complete discussion on our cost of goods sold. To address your point, we need to start with the pass-through. That 6% translates dollar-for-dollar, as you know. The cost of goods is lower than sales, but the dollar amount remains the same, leading to a larger percentage variance. Additionally, Engineering experiences fluctuations based on this, contributing to the overall picture. You saw that Engineering sales were down 4% due to project timing. Another factor to consider is GIST. We divested GIST, and this is the final quarter for that. GIST was a high variable cost, low-margin business, which also contributed significantly to COGS. Besides that, we've put in a tremendous effort on productivity. When energy costs rise as they did, we pass through the energy costs at a fixed contractual ratio. If we're inefficient, we bear the costs, but if we're efficient, we benefit. In many instances, this has allowed us to make more investments in efficiency. Additionally, we have been focusing on our Scope 1 and Scope 2 emission reductions. The combination of our work on distribution and power management has enabled us to be more efficient with variable costs amidst inflation. I don't see any anomalies in this, as everything appears sustainable. The pass-through will remain as it is, but it doesn't impact profit. We will continue to pursue efficiency efforts with variable costs, especially given the greater payback opportunities in the current inflationary environment.

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

Thank you. Good morning. Sanjiv, can you discuss pricing sequentially? Where are you still getting it? I recognize that on a price-mix basis, pricing was flat sequentially in the Americas and APAC. But where are you still getting pricing? And we'll leave it at that. Thank you.

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

Yes. I would just add, David. Thanks, Sanjiv. We're a bit of a victim of what I'd call rounding and footing in the Americas as well. So when you actually calculate the sequential sales change, it comes to like 2.49%, so it rounded down to 2%. But volume, price, and pass-through all rounded to about 1% sequential improvement. But to force it to 2%, one of them had to go down. So we actually are getting a healthy sequential price in the Americas. I think it came to like 0.7%. But given the rounding footing to just make the numbers work, we had to push it to zero. So while it says zero, it's really 0.7%, and it's a trend that we would expect given what the inflation is, to Sanjiv's point.

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

Yes. Good morning, everyone. Sorry, I cannot restrain myself. I have 2. But the first one was on the DOE and the announcement of the hydrogen hubs, which you're not involved in. I don't think anyway. I know a lot of it is focused on mobility, but there is some industrial probably in there, and they are targeting quite a slug of U.S. hydrogen production by 2030. I think it's 30%. So just wondering your views on that? I presume there's something about ensuring returns from this. And then, the second question, EMEA margins now ahead of America, over 30%. I think they're up 1,200 basis points from 2018, so really delivering on the old Linde AG platform. Structurally, I think they should be the highest margin region anyway given the mix, but just where you see the momentum from here because obviously, you've seen this enormous jump. I know you're confident of moving it forward, but just your views on that.

Thanks, Peter. Let’s begin with the DOE hubs that were announced. We are involved in them and have been selected as a participant in the ARCHES hub in California, which we believe has significant potential in mobility. Therefore, we are engaging in that venture. We have also participated in a few others. However, for us, the foundation of our business strategy and its future development focuses on network density. This principle serves as the benchmark we use when developing hydrogen hubs. The DOE has effectively advanced this proposal, but we still have a long journey ahead to secure funding and manage the complex structure with multiple stakeholders necessary for these projects. We will monitor those developments closely. In California, we see the most potential for our business, and we are committed to our role in the selected hub. Now, regarding EMEA, you are correct. Achieving EMEA margins of about 30% is a significant accomplishment. I remember your previous remarks about EMEA being or at least having the potential to be the most profitable region. We are now proving that it can be. If you look back to 2018, EMEA margins were at 19.2%, which means they have increased nearly 1,100 basis points since then, and this growth has been consistent. It hasn’t been erratic; it has been a steady progress, which is a challenging process, and we often discuss the continuous effort involved in pricing and productivity while also seeking growth opportunities. This model has been effective, and the key is ensuring we are maximizing the value from the high net worth density in our EMEA operations. I feel optimistic about this trend. Moving forward, I expect Linde to continue to achieve 20 to 50 basis points of margin expansion annually, which is a target we set for ourselves. Even with EMEA reaching 30%, we will not relax our efforts. They will take all necessary actions to achieve the 30 to 50 basis points improvement we aim for each year.

And we will take our next question from Geoff Haire with UBS. Your line is open.

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

Yes. Sure, Geoff. As Sanjiv had mentioned in his remarks, the economic environment is challenging. I think we can all agree on that. And given that, we have to get ahead of it. We have to do things, especially in those geographies most affected. It was discussed earlier, things like we're doing in China, but we are taking certain actions on the cost to tighten up discretionary spend where we can be very focused on headcount additions. And it's to not only get ahead of a situation but ideally prevent any further need for more severe actions if we can get early on this. We've done very similar approaches when we were, frankly, heading into 2020. We've done this into 2022. We've done this back when you look in prior years as well when we start to see slowing conditions. So we're taking a significant global effort across discretionary spend, headcount, actions such as that to essentially tighten down and be prepared for what will happen because while we don't know what will happen, it's better to prepare for the worst and hope for the best, and that's how we need to go about them on this.

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

Thank you, and good morning, everyone. Matt, did you mention before the margin impact in the Americas from the power issues?

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

Maybe I could just ask it this way. Would America's margins have been higher than EMEA margins without the power spike?

They would have had a free handle.

And we will take our next question from Kevin McCarthy with Vertical Research Partners. Your line is open.

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

Sure, Kevin. So helium, as you know, has been a market that's been reasonably volatile. I expect the helium market to continue to be tight. You've seen that reflected back in the prices as well. And again, in the near term, Kevin, I do not see anything that's going to fundamentally change that. There's been a lot of speculation around what's happening out of Russia. Just to reconfirm to everyone on the call that we have canceled our contracts in Russia, and we're no longer involved with that project. I expect there are technical challenges that that project will continue to go through, and the reliability of any supply chains coming out of Russia will always be suspect, particularly given the increasing sanctions, including around movement of product out of Russia in terms of helium as well. That's just kind of what I'm expecting near term. As far as BLM is concerned, my view is I think BLM is a complex divestiture that the government is trying to undertake. There is some litigation around that already, with one of our competitors going out and litigating that. I expect that will be a long, drawn-out process. But you know that over the last many years, people have relied less and less on BLM. It is important in the larger scheme of the helium infrastructure globally, but it plays a much smaller role today than it would have if you go back 5 to 10 years. So people have kind of factored that in. Our supply chains are all developed with a view that we understand the PLM limitations, and we understand how that gets factored in. So I think I just kind of wrap up by saying expect a tight market. I don't think it's going to lengthen anytime soon.

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

Hi, good morning. On the sequential weakness in Electronics, should we expect some additional drag in the fourth quarter? And you also pointed to signs of recovery in the first half. What the pace of recovery do you see given current visibility?

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

And we will take our next question from Steve Byrne with Bank of America. Your line is open.

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

Steve, you talked about network density, which we often have experience with and sometimes take for granted. I want to explain how we view network density before discussing the nexAir acquisition in more detail. Network density involves various factors, but the key is to establish a concentrated network that can leverage core product economics, which allows us to optimize costs and improve margins. To visualize this, we see network density as a focused approach, much like aiming precisely at a target, rather than a scattered approach that spreads resources too thinly. Now, regarding the nexAir acquisition, it’s performing better than we expected. We acquired a minority stake in nexAir and have now bought out the remaining shareholders to fully integrate it into our operations. We are currently in the integration phase, supporting their growth ambitions in the Southern U.S., a market that is attracting significant investment due to the current trend of near-shoring and re-shoring in the U.S. We're experiencing three main benefits. First, we’re navigating through integration advantages. Second, there's potential revenue growth from cross-selling to the existing nexAir network, where density is crucial. Lastly, as new investments flow into this sector, we're looking to enhance the network density further, optimizing the synergy between our stores and theirs to expand our market reach. Overall, I am pleased with how the nexAir acquisition is progressing.

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

This is Kevin Estok on for Laurence Alexander. So you've touched on hydrogen. I guess, any sense of how many of those hydrogen projects are insensitive to interest rates? And I guess, how many could be viewed as maybe more likely to be delayed if rates continue to move higher from current levels? Thank you.

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

And we will now take our final question from Mike Sison with Wells Fargo. Your line is open.

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

So Mike, we've committed to achieving over 10 percent EPS growth, which we mentioned earlier. You can expect us to continue in this direction. The growth process is quite clear, and I'll outline it briefly. There are three main factors that ensure we achieve this EPS growth, and we're confident in our ability to deliver on this commitment of over 10 percent. Historically, we have exceeded this target over the past four to five years. First, let's discuss our backlog. We expect our backlog to continue to grow, especially with our larger projects, which has been increasing annually. As our backlog grows, it will contribute about 1 to 3 percent to our EPS growth, stemming from strong, contracted growth with reliable customers on developing projects. As Matt also pointed out, we have a strict definition of what counts as backlog; we only include signed contracts with guaranteed cash flows. This means we anticipate 1 to 3 percent EPS growth from our backlog. The next major factor is the combination of pricing and productivity, which is expected to contribute about 4 to 6 percent. We typically adjust this combination based on pricing. I've previously mentioned that you should anticipate us to slightly outpace global CPI, and we've consistently shown this in our results. Our pricing strategy has been effective for over 20 years, and we are adept at navigating high inflation environments. We've also noted that inflation presents an opportunity for more straightforward pricing discussions, a trend we have consistently capitalized on. Productivity, which is deeply embedded in our organization, plays a vital role as well. We oversee thousands of projects every year, with over 11,000 to 12,000 currently underway this year. We validate the results of these projects, which helps reduce costs, contributing positively to our bottom line. Combining pricing and productivity, we expect 4 to 6 percent of our EPS growth to come from this area. However, one aspect we are not counting on currently is volume. As mentioned in our earnings guidance, we are anticipating no sequential improvement, and we are even slightly negative at the midpoint of our guidance. We've shown our ability to remain resilient and deliver the EPS growth targets we set. If volume does increase, it could significantly enhance our earnings growth, as evidenced by our 30 percent EPS growth in 2021. Lastly, another factor that stems from our cash generation is our capital allocation. This quarter, we generated $2.5 billion in solid cash, and Matt highlighted that our conversion to EBITDA is in the low to mid-80s. We're committed to investing in high-quality projects, but any surplus cash will be directed toward share buybacks. We have announced a $15 billion share buyback program, which will contribute around 2 percent to our EPS growth. In summary, these elements combine to support our commitment to over 10 percent EPS growth, regardless of the economic environment we face.

Thanks, everyone, for participating in today's call. If you have any further questions, feel free to reach out to me directly. Have a safe day. Take care.

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