Chief Executive Officer at Linde
Thanks, Juan, and good morning, everyone. Linde employees once again delivered a strong quarter despite the economic challenges. EPS increased 21%, excluding FX, while operating margins expanded 90 basis points when adjusting for contractual cost pass-through, all underpinned by $2.6 billion of operating cash flow, and a record ROC of 21.8%.
Now in addition to achieving this financial performance, the company recently received approval for its absolute emission reduction targets by the science-based targets initiative, confirming our road map to help de-carbonize the planet. I'm pleased to see these results, which are truly a testament to the quality of our team, and our relentless execution culture.
These financial results highlight both the resilience and growth capabilities of the business in any environment. In times like these, it's important to remind investors of our stable and diversified growth trends, which you can find on slide three. We continue to experience robust underlying sales growth this quarter, with each business segment growing double digit versus last year.
Resilient end markets which make up about one-third of sales are collectively growing double-digit percent, with food beverage and electronics up almost 20% and health care slightly down from prior year pandemic volumes.
Our gases are critical for the production and packaging of everyday consumer items such as food, carbonated beverages, respiratory applications, and electronic components. These volumes track to broad consumption levels rather than specific technologies, or trends. So they are quite stable even during volatile economic periods.
Furthermore, despite what you may be reading in the news, we continue to see healthy supplies of gases into electronics fabs in every region. In fact, our total electronics project backlog increased to $1.4 billion, after recently being awarded a second large sale of gas contract for a major semiconductor manufacturer in the US.
The bottom half of the table provides the trends for the more cyclical end markets. And similar to electronics, these trends probably don't align with what you're hearing and reading. Recall that a significant portion of these sales are underpinned by fixed payment structures independent of customer volumes, including on-site fees and cylinder rentals. It's important to note that, we spend a lot of time on contract language, to ensure our returns are protected and force majeure clauses are absolutely clear.
I won't speak for the industry, but I have confidence in the strength of Linde contracts. We've demonstrated this through countless regional and global challenges, including the most recent pandemic, and so I don't see today being any different. In addition, a large portion of our customers represent the most competitive in their markets, with assets that tend to be the last ones running.
A disciplined long-term approach to capital allocation continues to be validated during these challenging times. And almost 60% of sales, the cyclical end markets are also up double-digit percent. While growth is broad-based, we continue to see strength in mining for battery materials; merchant hydrogen sales; aerospace including commercial space; and general manufacturing especially in Americas.
In fact, the US continues to be our best growth market as a combination of natural resource security, consumer resiliency and a strong dollar to support further economic expansion. This is especially true for the Gulf Coast, which is experiencing one of the highest investment activity in quite some time driven by lower cost energy and the ability to economically decarbonize with the passage of the US Inflation Reduction Act or IRA, which you can find on the next slide four.
The IRA has accelerated significant growth prospects from our unrivaled hydrogen and atmospheric gas network, as well as potential new markets being developed across the US. With this effect, we've grouped these activities into three different categories of Decarbonized Linde, Decarbonized Customers and New Markets.
Let me start with Decarbonized Linde, which represents the ability to sequester existing CO2 emissions generated from our own hydrogen production. This provides simultaneous benefits: the production and supply of blue hydrogen into our network, and the reduction of Scope 1 emissions for our stated sustainability goals.
The potential investment to Decarbonize Linde exceeds $3 billion while considering our existing hydrogen production asset base. The second category of Decarbonize Customers, represents two separate opportunities. The first, to enable our customers to decarbonize their processes through fuel switching. That is by using low carbon intensity hydrogen, as fuel in their refineries frackers or furnaces.
The second opportunity is our ability to capture and sequester, existing carbon emissions from customers, currently connected to our pipeline network especially in the Gulf Coast. This will be a revenue model similar to our current on-site business and customers would benefit by decarbonizing their own operations in addition, to monetizing tax credits over the contract period.
Together our potential investment in this category could easily exceed $10 billion, which I view to be on an accelerated path given the incremental IRA benefits and the strength of Linde's existing network and asset base to support it.
The third category, of new markets represents greenfield opportunities that are starting to materialize with the signing of the IRA and I expect to announce some new project wins very soon. These too, will be similar to our current on-site business with fixed payment contracts and stable returns. We estimate more than $20 billion of potential investment with some of the larger ones related to blue and green hydrogen and blue ammonia.
Regardless of which projects are pursued, we plan to follow a few overarching principles. The first, we intend to partner with subsurface experts for all underground operations. We at Linde are not geologists. Second, all projects will follow our investment criteria. In other words, earn a commensurate return for the risk undertaken. Third, we will stick to our core, which is management of industrial gases. We have no interest to own or speculate on globally traded chemicals. Rather, we have offtakers for our products. Finally, it's important to understand the nature of the tax credits in the IRA.
While the first five years are direct pay essentially like grants, year six through 12 are tax credits that must be used against our US tax liability up to a cap. Therefore, it's important for us to have an understanding on the monetization of these tax credits as we develop these projects whether used by Linde or sold to a third-party. Of course, we won't speculate on the market value of excess tax credits over the next decade. The IRA has accelerated the US clean energy transition. And from what we are seeing today, the total investment opportunity for Linde in the US alone exceeds $30 billion over the next decade.
Overall, I'm very bullish on the clean energy opportunities in front of us and I expect to announce meaningful projects in the near-term. This secular growth driver coupled with our operating discipline and relentless focus on pricing and productivity within our base business is what gives me the confidence in our ability to keep delivering 10-plus percent EPS growth over the next several years.
I'll now turn the call over to Matt to walk you through the financial numbers.