Earnings Call Transcript
LINDE PLC (LIN)
Earnings Call Transcript - LIN Q1 2021
Operator, Operator
Good day, and thank you for standing by. Welcome to the First Quarter 2021 Linde Earnings Call. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Mr. Juan Pelaez, Head of Investor Relations. Sir, you may begin.
Juan Pelaez, Head of Investor Relations
Crystal, thank you. Good morning, everyone, and thanks for attending our 2021 first quarter earnings call and webcast. I'm Juan Pelaez, Head of Investor Relations, and I'm joined this morning by Matt White, Chief Financial Officer; and Sanjiv Lamba, Chief Operating 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 and Matt will now give an update on Linde's business outlook and first quarter performance, and we'll then be available to answer your questions. Sanjiv, all yours.
Sanjiv Lamba, Chief Operating Officer
Thanks, Juan, and good morning, everyone. Once again, the Linde team delivered another stellar quarter across all fronts, 32% growth in EPS, 57% growth in operating cash flows, operating margins expanding 320 basis points and of course, ROC at 14.5%. And of course, very strong progress across our ESG goals of reducing carbon intensity and making strides in gender diversity. Matt will walk through the details on the financial numbers. But frankly, they speak for themselves. A few months ago, we marked the 2-year anniversary of the merger. So I'd like to take the opportunity to recap both our performance and also provide you a medium-term outlook on expected financial performance going ahead. Let me move on to Slide 3. Slide 3 shows our 2018 to 2020 growth relative to key competitors across 4 major financial metrics: EPS, operating profit margin, operating cash flows and, of course, very importantly, return on capital. From my perspective, these are the 4 most important financial metrics to determine performance in this industry. And it is, of course, quite clear from that slide, as you see, that we have led across all 4. In fact, I'd say with some pride that Linde has the undisputed best performance in the entire industry since our merger. Our employees have accomplished this while integrating 2 global companies during possibly the worst pandemic in a century. But of course, this is nothing new. We have been the industry leader for almost 3 decades now. And I want to move on to Slide 4 and talk a little bit about that history of over 25 years from 1993 to 2017 as the last full year before the merger. The compound annual growth rate of Linde's sales, EPS, dividend and operating cash flow exceeds both competitors across the board. We have a long history of generating compound value for our shareholders while sustainably and profitably growing the company. And of course, Linde's outperformance extends beyond just our industry. On the right-hand side over there, you can see the EPS CAGR that we've had over the same period against the broader S&P 500. So it's clear we've been the industry leader for many years, and we fully expect to continue that trend for decades to come. Our midterm strategy, which is on our next Slide 5, provides a road map on how we plan to get there. Most of you have seen this strategy before. It's fairly straightforward and simple enough that we can summarize it on one page. It starts, of course, with optimizing our base business of industrial gases and engineering. I've said this before, our unique operating rhythm provides a real competitive advantage on how we extract value year in and year out, irrespective of the macroeconomic climate. We've, of course, proven this in the prior recessions and some black swan events, including the most recent COVID pandemic. So while our resilient business model provides downside protection, we also have the ability to leverage any economic recovery due to our exposure to the cyclical end markets, primarily here through merchant and packaged gases. Of course, the pricing structure here also helps as it closely correlates with inflation. You've already seen some of that demonstrated in the last few quarters, and I anticipate further upside if the economy continues to recover. Finally, we will continue to grow by capitalizing on future opportunities. Linde has demonstrated the highest compound growth rate in the industry across all key financial metrics, and we expect to maintain this distinction. Currently, there are secular growth drivers around 2 of our key markets that comprise about 30% of our sales. These are health care and electronics. You're all familiar with what is happening in the electronic space today. Our customers are looking to expand production of chips to meet soaring demand while improving and strengthening local supply chain logistics. We are an integral part of this development as industrial gases are a critical component to successfully operating a modern fab today. I fully expect electronics to comprise the largest portion of backlog wins over the next couple of years as we continue to see high levels of interest for new customer builds. Furthermore, the health care market continues to grow as well, a combination of demographics and trend towards telehealth. As you know, our health care business, particularly the home care business, served as a critical second line of defense during the recent pandemic. And, of course, we expect future trends to create new growth opportunities, allowing us to leverage our leading dense network to support momentum towards a distributed health care market. The combination of these strategic elements should enable us to grow annual earnings per share on average more than 10%. That is something we've demonstrated throughout our history, and we feel confident we can continue for the long term. Now you will notice, I said 10% EPS outlook excludes the impact from the transition to clean energy. Currently, we view the benefits from this transition as incremental to our EPS outlook. Clean energy, of course, is a hot topic, as you all know. In fact, I haven't quite realized how many global hydrogen experts there really were until only 6 months ago. However, producing, storing and supplying hydrogen to enable cleaner fuels is something we've been doing for decades. In fact, hydrogen has been one of our fastest-growing molecules over the past 10 years. So given this, I'd like to use the last few slides to provide you a view on the overall clean energy market, explain why Linde is exceptionally well positioned to succeed and share with you our overarching strategy going forward. But before I start, I want to state that we are not providing specific guidance on either expected sales or wins from clean energy at this time. This is a rapidly evolving landscape with many countries taking different paths. So the pace of the transition is just too uncertain to make multiyear detailed projections. However, what I can confirm is that Linde has the experience, the technology and the asset network to be a significant player in the transition. To further elaborate on this, I'd like to provide you our view of the clean energy market on the next slide, Slide 6. It's safe to say that nobody really knows how the decarbonization market will ultimately play out. So it may be helpful to start with an overview of the potential opportunity. We think of clean energy transition in 2 main pieces. The first being how we can provide solutions to managing carbon and the second relating to clean hydrogen development. Now we already have a number of significant applications that reduce, capture, sequester or clean and monetize gas streams for use. A good example of this is our current carbon dioxide business at about $1.3 billion, serving several key end markets. Looking ahead, we see more opportunities for our technologies and solutions to enable our customers to reduce their carbon footprint through capture and removal of their emissions. Furthermore, we believe blue and green hydrogen will both play an important role in the transition to cleaner energy. In theory, the total available opportunity can be represented by the current $6 trillion of hydrocarbon market. However, that will be served by a blend of solutions, and it will take years to evolve. So as an example, one estimate assumes clean hydrogen will reach $100 billion by 2030, or say, roughly 1.5% of today's hydrocarbon market. But time will tell. Given the uncertainty, as I said before, I'm not going to provide you a specific estimate or timeline today, but I do want to reiterate that this is a significant opportunity for Linde and something we see as an upside to our base business. So with this as a backdrop, it may be helpful to understand what Linde brings to the table regarding technology, asset network and experience, which you can find on the next slide, Slide 7. Whether it's production, distribution or application and services, we have over 50 years of experience as an owner and an operator of billions of dollars of hydrogen infrastructure. We are agnostic to how that molecule is made, whether it's through reforming chemistry or by electrolysis. We have the technology and the operating expertise for all of them. Furthermore, we have the largest and the most dense hydrogen distribution network in the world. This will be crucial to ensuring a safe, reliable and cost-effective energy transition. Our technology, many proprietary applications, and extended service capabilities position us exceptionally well for this opportunity. And finally, we also have the ability to leverage our engineering business to integrate various technologies into solutions and to offer sale of gas or selectively, sale of equipment, providing us a unique competitive advantage. Overall, we have a very long and successful history supporting the transition to clean energy, and I believe we are incredibly well positioned across the entire value chain as this initiative accelerates. I'd like to wrap up the clean energy discussion on the next slide, Slide 8, with a view of our overarching strategy and give you some key supporting examples as well. The strategy on the left is something we've mentioned before. It represents a proven approach to profitably growing an industrial gas business, including hydrogen. It starts with leveraging a leading integrated asset network. In addition to that, we execute locally market-driven strategies. We believe many of these initiatives will vary by country. We also expect to continue to advance and grow our technology leadership in this space across the value chain by leveraging the expertise of our engineering team as well as developing partnerships that provide us access, insight, and hopefully accelerate opportunities. Now on the right-hand side of the slide, you'll see 3 projects we recently announced. I just want to remind you that these are part of our base CapEx and, therefore, not included in the $3.5 billion backlog. Now these projects are over $350 million for green and blue hydrogen infrastructure in South Korea, Germany, and the United States. Just to pick on the example in South Korea. We are partnering with one of the largest industrial conglomerates to build out a liquid hydrogen infrastructure to fuel municipality buses there. We continue to evaluate a significant and growing number of opportunities from large megaprojects to very small ones. But irrespective of the size of the opportunity, we will always maintain our disciplined approach to pursuing projects that meet our investment criteria. This summarizes our midterm strategy and how we currently see the clean energy market. But this is something I'll provide more updates on in the future as it continues to evolve. Now before I hand over to Matt, I want to make one final point on our ESG initiatives. Simply said, ESG is embedded in our culture. It's part of our operating rhythm and it's part of our compensation philosophy. It has been an integral part of our values and forms the foundation of Linde's mission statement, making our world more productive. I'm pleased to say we are currently tracking ahead in many of the initiatives we laid out in early 2020, including carbon emission intensity reduction and increasing gender diversity, but this isn't enough. We know we need to do more. We are therefore in the process of thoughtfully developing more ambitious ESG goals, which I expect to share with you in a future call. But until then, you can be certain that we will continue to improve our performance in this area. So with that, I'd now hand over to Matt, who will take you through the financial results and our guidance.
Matt White, Chief Financial Officer
Thanks, Sanjiv. Please turn to Slide 9 for an overview of the first quarter results. Before I jump into the numbers, I'd like to remind you that we deconsolidated a joint venture in APAC, which reduces sales and operating profit by about 3% but has no effect on EPS since we are maintaining a consistent ownership position. This deconsolidation is shown as a divestiture, and we provide further details in the APAC segment results, which you can find in the appendix. Total sales grew 7% from last year and were flat sequentially. Underlying sales increased 5% from the prior year and 2% sequentially. Volumes continue to recover, growing 3% over last year and 1% over the fourth quarter. Sequentially, negative seasonal effects and temporary outages in the U.S. Gulf Coast from Storm Uri were more than offset by a broad-based increase in volumes. Industrial production levels have consistently risen in most geographies, which supports volume recovery in the packaged and merchant supply modes. And note that while Uri had a temporary negative effect on sales for the first quarter, profit impact was immaterial due to our contractual structure. Referring to our end market trends in the appendix, every end market grew sequentially and over the prior year, except for food, mostly due to restaurant closures and seasonality in GIST, our distribution business in the U.K. Pricing improvements of 2% is in line with globally weighted inflation, since the majority of our contracts have mechanisms in place to adjust for local cost inflation. Operating profit increased 25% over the prior year from a combination of higher pricing, incremental volumes and a lower cost base. Furthermore, operating margins expanded 320 basis points, which marks the seventh consecutive quarter that we have expanded operating margins more than 200 basis points. EPS of $2.49 grew 32% from last year and 8% sequentially. You can see the wider than normal growth rate differential between operating profit and EPS, which is mostly driven by the joint venture deconsolidation. We had another strong quarter in capital management, with operating cash flow up 57% and return on capital reaching 14.5%. ROC levels have been trending well as we continue to grow earnings by double-digit percent while maintaining a disciplined and focused capital allocation process. CapEx is down 5% from the prior year as temporary declines in project backlog spending more than offset increases in growth projects categorized as base CapEx. Approximately 40% of base CapEx is for growth, including the clean energy projects Sanjiv mentioned as well as the majority of small on-site wins we announced yesterday. Overall, these results clearly validate our positive leverage to the economic recovery while offering significant downside protection as evidenced in 2020. Slide 10 provides an update on our capital management process. It starts with cash generation, which you can see on the left side. Linde employees have done a great job focusing on cash conversion and thus making more capital available for the company to deploy. Available operating cash flow, which we define as operating cash flow less base CapEx, has exceeded $1.5 billion for the last 2 quarters. And while we continue to generate healthy levels of cash, how we spend it is equally important, which is shown on the right half of the slide. Our capital allocation process is simple and consistent. We have a mandate to maintain an A credit rating and raise the dividend every year. After which, our priority is to invest in growth that meets our criteria. And then any leftover cash is used for stock repurchases. The pie chart represents how we spent the first quarter operating cash, investing $0.8 billion to grow and returning $1.4 billion to shareholders. This approach provides balance, but more importantly, forms the foundation of the strategy and earnings outlook provided by Sanjiv. I'll wrap up with guidance, which you can find on Slide 11. The second quarter guidance range is $2.50 to $2.55. The midpoint represents an increase of 33% over 2020 and 38% over 2019. I believe it's important to provide the 2019 comparison to properly distinguish between true growth, which this demonstrates, from mere recovery which other companies may be showing. This guidance includes an estimated year-over-year FX tailwind of 4% since Q2 of 2020 was the low point on foreign currency weakness. Sequentially, this range assumes stable economic conditions with a moderate improvement related to normal seasonality. In other words, the Q2 guidance range does not assume any improvement in the underlying economy from Q1. Note that preliminary April results came in better than our internal estimates. So if these conditions persist, Q2 EPS would be at the upper end or above this range. The updated full-year guidance range is $9.60 to $9.80 or $0.50 higher than what we provided last quarter. The midpoint of the range is 18% above 2020 and 32% above 2019. I'd like to explain how we approached full year guidance especially as it relates to the half-year comparisons. At this point, we have updated full year for the better performance in Q1 and the latest Q2 outlook of which this first half year combined was approximately $0.50 better. However, we have not updated the second half guidance. In other words, we left the second half alone until we get a better sense of the recovery pace. Rest assured, we will capture any improvement in the economy as we have recently demonstrated. Furthermore, we will provide a more detailed update next quarter. However, today, we are refraining from adjusting the back half until we get more visibility. Of course, if economic conditions hold or improve, we will be above this full-year range. But for now, we believe this is the most prudent approach given the global uncertainty.
Operator, Operator
And our first question comes from Bob Koort from Goldman Sachs.
Bob Koort, Analyst
I appreciate the comments, Sanjiv, on the hydrogen markets and obviously, a lot of uncertainties how it all develops. I was curious, you put forth maybe an implied green hydrogen price in the future that's still 2 to 3x the price of gray hydrogen. And I'm just curious, do you think the world is going to need some carbon tax or some other ways to incentivize adoption of green hydrogen? How do you sort of see that developing?
Sanjiv Lamba, Chief Operating Officer
Thanks, Bob. That's a great question. I'm sure a lot of people are discussing that very fact as we speak, Bob. So you're absolutely right. Today, we do see that differential between green hydrogen to gray and blue hydrogen. Obviously, blue hydrogen somewhere in the middle, providing a more immediate scalable option. But green hydrogen, for it to kind of get to a point of inflection where adoption really happens, essentially, 3 things need to happen. The first, regulators across the world need to get to a view on what carbon tax, what carbon pricing or other mechanisms that create that incentive to go and do something about it are put in place. We can talk about what that range might look like, if you like. But that's a necessity. The second is, you've got to see the technology evolve and get down to a point where you're seeing significant reduction in costs. There are 2 costs for green hydrogen, as you're well aware, Bob. One is obviously renewable energy becoming cheaper. I know there's a lot of work happening in that space. And equally, we're doing a lot of work on the second option, which is about making sure that our planned CapEx comes down. So working through ITM on the PEM option as an example, but also making sure that efficiencies around that, the membranes improve sufficiently to give us a little bit of lift there as well. So all of those 3 things need to happen, Bob, for really adoption to happen, the inflection point that I referenced earlier on.
Operator, Operator
Our next question comes from P.J. Juvekar from Citi.
P.J. Juvekar, Analyst
Yes. First of all, I want to thank you and acknowledge your employees in India who provided significant support in delivering oxygen to hospitals during this difficult time. My question is, as commodity prices rise across various sectors, with strong demand in metals, chemicals, and general manufacturing, if your customers are experiencing inflation, does that allow you to also secure higher prices from them? Additionally, it seems your pricing in the Americas has accelerated in the first quarter compared to previous quarters. Can you elaborate on this pricing dynamic?
Sanjiv Lamba, Chief Operating Officer
I appreciate the recognition, P.J. With family in India, I'm acutely aware of the challenging situation there. I want to take a moment to express how proud I am of our team in India, who are working tirelessly to support hospitals and save lives. Their efforts are focused on that mission. They've completely transformed their operating philosophy to produce over 3,000 tonnes of medical oxygen per day, nearly ten times what we were delivering just four weeks ago. A tremendous amount of work has gone into this. We've deployed about 1,200 drivers serving around 1,000 hospitals across the country. It's been remarkable work. Given the circumstances, I felt it was important to mention this. Linde as a global corporation has also contributed by airlifting more than 40 ISO containers to aid supply chains in India, with another 40 on the way. Governments have implemented many of our suggestions, which include the Oxygen Express that has been set up across India, often using the armed forces to transport oxygen to various locations. It's a country facing extraordinary challenges, but we are doing everything we can. I also want to acknowledge our teams in Brazil, Mexico, and other Latin American countries. They haven't received as much attention, but they are facing similar challenges and have been doing exceptional work to support hospitals and patients. I'm truly proud of our teams worldwide who are making a difference in their communities during this pandemic. Now, regarding your question about inflation, we typically price based on a weighted average of inflation. As inflation increases, we expect to see prices rise as well. We have a proven track record of managing pricing effectively, even during times when inflation wasn't a significant factor. Our history in pricing has been positive over the last 20 years, and that approach is part of our team's strategy. We fully expect to see this pricing trend continue as inflation becomes more pronounced.
Matt White, Chief Financial Officer
And P.J., this is Matt. I would like to add a couple of points to what Sanjiv mentioned. As a reminder, we pass through any commodity costs or input expenses, as this is contractual. The second point I want to make is that we've seen patterns in the past, notably in years like 2011, 2006, 2007, and even 2016, where a rebound in commodities leads to a significant increase in our customers' volumes and gas consumption. We'll observe the extent of this trend moving forward. We are already beginning to see some effects, and this generally serves as a positive tailwind for overall industrial activity.
Operator, Operator
Our next question comes from Tony Jones from Redburn.
Tony Jones, Analyst
I wanted to ask about margins, and there are 2 parts to the question. So first, you reported margins, which continue to surprise. We've got 100 basis points or so with sequential improvement. I wanted to just ask, is this now a sustainable level? I know you call out the deconsolidation effect, but are there any temporary gains we need to adjust for with OpEx down now around $2 billion? And then the second part of it, and maybe it's more important, is this as good as it gets? Or do you think there's further potential for margins to improve as you get further product improvements over time?
Matt White, Chief Financial Officer
Matt here, Tony. I can take that and check with Sanjiv for any additional thoughts. Regarding the margins, yes, we view them as sustainable. There’s nothing temporary about this. To clarify, the deconsolidation did not impact the margins. If you examine the APAC section in the appendix, you'll see that the margins remain largely unchanged. The deconsolidation has no effect, especially when discussing operating margins and operating profit. We firmly believe this is sustainable. We're focused on creating a quality business and operating it efficiently and effectively. We often get asked if this is the peak, but I would suggest looking at the segments. The geographical segments of Americas, EMEA, and APAC are fundamentally similar. We operate in the same manner across the board. Their supply modes and end market distributions are not drastically different, which outlines the opportunity set. In 2018, the Americas were at 23% and EMEA was at 17%. Now, EMEA has surpassed 25% while America is at 28%. This demonstrates improvement across all segments, including APAC, which has also risen to almost 25% from 17%. This is part of our strategy to manage this business, and I do not perceive any temporary factors. Whichever segment is currently leading is setting the benchmark for us.
Sanjiv Lamba, Chief Operating Officer
The only thing that I'd add is actually both EMEA and APAC are heading for that Americas margin, right? They're pretty competitive guys out there.
Operator, Operator
Our next question comes from Nicola Tang from Exane BNP Paribas.
Nicola Tang, Analyst
First, I wanted to ask a little bit about the second half outlook. I know we completely hear you on sort of the volume assumption or the sort of lack of volume assumption, I suppose. But if I look at how you've guided, it sort of implies an H2 EPS growth of only about 5% versus, I don't know, 30-plus in the first half, which I was just thinking it seems a bit aggressive just thinking about the productivity gains that you just talked about and support from the buyback, I guess, even the FX tailwinds before you even think about volumes. So I was just wondering if there was anything I was missing there in terms of the H2 versus H1 dynamics on a year-on-year basis? And then the second question is on the other H2 on hydrogen. Thanks a lot for that detail on clean energy. Actually, again, I hear you in terms of the timing being uncertain and some of the opportunities being long dated. But when you look at those pipeline of projects that you're sort of evaluating, in which part of the sort of value chain in hydrogen are you seeing the most project proposals at the moment? Is it broad-based across the sort of production and the distribution and fueling end, or is it in a specific kind of activity?
Matt White, Chief Financial Officer
Okay. Nicola, it's Matt. I can take the first question, and Sanjiv will handle the second. As I noted earlier, we really haven't made any changes. Many companies aren't providing guidance right now. We have a strong level of confidence in our plans and our ability to achieve them. For the second half of the year, we decided to leave things as they are, adjusting our outlook based on what we've shown and our perspective on Q2. However, in three months, we will update our outlook for the latter half of the year. If conditions remain favorable, we could outperform our expectations. If conditions improve, we could also do better. For now, we prefer to take a cautious, quarter-by-quarter approach, so I wouldn't read too much into our projections for the second half at this point.
Sanjiv Lamba, Chief Operating Officer
Thanks, Matt. And Nicola, now moving on to the exciting H2 part of the question that you asked. So let me just take a step back and give you a sense of the projects we're looking at and then dive a little bit deeper and tell you where we see some of that kind of buildup that you were asking about. So we're evaluating at the moment between 210 to 220 opportunities individually. Some, as I mentioned, some very large megaprojects and down to the smaller ones as well. And we see, obviously, many of them progressing, some maybe not. And there'll be others that we will probably not want to do because they don't meet our investment criteria, so we'll be kind of selective about that as well. Now we see that spread focused in 2 specific areas primarily. I think mobility driving a lot is kind of well ahead, if you like, in its development. And then carbon capture and sequestration picking up, particularly in geographies which have oil and gas assets and, therefore, want to understand how best to manage the energy transition through this piece. To your exact point on which part of the value chain we see, I think in mobility, it tends to be a little bit of a balance between what we see around production versus distribution and dispensing. We have technologies across the entire value chain. So in many ways, we are really fortunate to have the ability to kind of be able to provide that holistic solution to our potential customers. On CCS, obviously, it tends to be a lot more on the production side, which is where the blue hydrogen piece, in particular, as a consequence of CCS, comes into play. I hope that gives you enough color to what you were asking for, Nicola.
Operator, Operator
Our next question comes from David Begleiter from Deutsche Bank.
David Begleiter, Analyst
On the same point, how much of your project CapEx this year is focused on clean energy and/or hydrogen? How do you anticipate that will trend or increase over the next three to five years?
Matt White, Chief Financial Officer
David, this is Matt. So I think right now, there's very little to any. And as we mentioned in the prepared remarks, most of the clean energy are in the base CapEx. So those 3 projects we highlighted are all base CapEx. And to Sanjiv's point, you're seeing a lot in either areas of mobility. This is more distribution assets or assets around the density that we're building in certain areas. So that is something that when they do come into the backlog, obviously, we'll note that. But at this point, the vast majority of what we're doing right now is part of that growth in the base CapEx.
David Begleiter, Analyst
Very good. Regarding merchant pricing, what amount are you realizing this year? Considering the current inflation, should we expect it to increase over the next few quarters?
Sanjiv Lamba, Chief Operating Officer
So David, regarding merchant pricing, we're observing low to mid-single digit increases across the various markets we typically discuss. The Americas and EMEA are leading, as reflected in their pricing figures, while APAC is lagging slightly. However, they are aware of this update and I expect them to show sequential improvement in the next quarter as well. Overall, we are seeing a general upward trend in pricing. Regarding your point on inflation, I mentioned earlier that our pricing will increase in response to inflation, which has historically been the case for us. We are well-prepared and have already begun discussions within the organization about how we will manage this. Therefore, I anticipate that as inflation continues, pricing will move accordingly.
Operator, Operator
Our next question comes from Duffy Fischer from Barclays.
Duffy Fischer, Analyst
I wanted to just follow up on that one, if I could. The pricing in APAC, in particular, has kind of been flat at 1% for the last 4 quarters, even though at the beginning of that period, volumes were kind of down 9% and now they're up 10%. And I understand it's not a commodity business. But generally, when you're getting that kind of volume increase, asking for price gets a little bit easier. Is there something offsetting your ability to get price there, where maybe somebody who owns their own oxygen units is dumping more on the market as they're ramping up their steel production or something like that? So how should we think about APAC pricing in particular, given the strong volumes we're seeing there?
Sanjiv Lamba, Chief Operating Officer
Thank you for your question, Duffy. I'm pleased you brought it up, as my APAC team will be listening. There aren't any significant structural changes that should alter the pricing targets we've set for our teams in that region. The market dynamics differ somewhat, especially regarding the distributor model in some larger areas, and the level of on-site presence varies as well. That said, we believe that APAC pricing should reach the company's target of 2%. Currently, I see progress being made, although the 1% performance is disappointing, and they are aware of that. I expect to see at least a 1% improvement in Q2 sequentially and hope to achieve a 2% year-on-year increase in Q2. There are no obstacles preventing them from reaching those targets.
Operator, Operator
Our next question comes from Jeff Zekauskas from JP Morgan.
Jeff Zekauskas, Analyst
In listening to Matt's description of prices going up 2% but there being inflationary pressure, does that mean that the price cost benefit in the quarter was 0? That is, prices went up 2% and costs went up 2%? And secondly, do you have an update on your project with Exxon in Singapore? That is, have you begun to spend for that?
Matt White, Chief Financial Officer
Jeff, I can take the first one, and Sanjiv here will take the second one. So as you well know, the spread of our price less cost inflation of productivity is a very important metric that is part of our operating rhythm that we look at, at every country at the lowest levels of detail because that spread is very important, how we manage that spread as the compound decades go. And every country is different, right? Every country has different inflation profiles, but the spread is something we constantly look at. So given in the first quarter here, obviously, we have the price at the top of the house at 2%. On our cost front, they were lower, as you probably saw, especially on the fixed cost just due to some efficiencies we were able to achieve. We're also achieving efficiencies in the variable cost. So the spread was probably a little wider in this first quarter. But nevertheless, on a go-forward basis, we always have to make sure we manage that spread, and we feel quite confident in our ability to do it. And also the things, the large commodity inputs since we pass them through, they don't create as much issues on that as you might see in other types of industries. So for us, it's really managing a lot of the fixed costs and the operating costs and the SG&A, which is part of what we do with this rhythm.
Sanjiv Lamba, Chief Operating Officer
And Jeff, let me move on and talk a little bit about the Singapore project that you mentioned. So as far as our project is concerned, we have obviously been impacted by COVID on the schedule itself. But we have been executing the project. We've been spending on the project. We have commitments in place, and the project is currently underway. Our first modules, in fact, very large modules, have now reached the site and are in the staging area. So progress happening as we speak.
Operator, Operator
Our next question comes from Steve Byrne from Bank of America.
Steve Byrne, Analyst
Yes. Sanjiv, you were talking about having a couple of hundred clean energy projects that you're looking at and you lay out a pretty clear case on the Slide 7 about Linde's expertise and capabilities in that whole supply chain. There's one area that I don't see mentioned that would seem to be an advantage for you, but I welcome your comment on that, and that is access to renewable power or maybe restated, the contracts that you have with power suppliers, it would suggest that you would have a meaningful advantage there in terms of electricity pricing from renewable power versus the many new entrants that are getting into this business. Can you comment on that?
Sanjiv Lamba, Chief Operating Officer
Thanks, Steve. You make an excellent point, and we should have highlighted that on the slide. It's true that we consider renewable power a priority. We are among the largest consumers in most of the countries where we operate, which gives us leverage to engage with our power suppliers. When it comes to renewable power, the grid and many of these suppliers are responding positively to our discussions, leading to an increase in renewable power availability within the grid. That's encouraging to see from these larger players. Additionally, we actively enter into Power Purchase Agreements with renewable energy developers. These contracts can be negotiated individually or collectively, often with us supporting their larger projects. Thanks to our established presence, we have a proven approach to securing competitive pricing for renewable power, whether through the grid or specific agreements. This is indeed a competitive advantage for us, and we intend to continue focusing on it as we move forward.
Matt White, Chief Financial Officer
Yes. And Steve, it's Matt. I can just add a few things as well. So as you may know, today, about 1/3 of our power is renewable already. So we've already been quite active in that space, and it's not something we built overnight. This has taken many years to get to that point. And as we mentioned, we will give a more wholesome ESG or fulsome, I should say, ESG update in the future. And this is an integral part of our ESG initiatives, especially around managing Scope 2 emissions is the renewable power effort. So this is something that we absolutely are actively doing. We have been doing for quite a long period of time, and we'll give further updates as it relates to that on our initiatives for ESG. And to your point, given our position, we are able to help these investments, and it's something we're actively working on and looking for today. In response to your question about cost synergies, there is always room for us to be more efficient and productive. This is an ongoing commitment that is woven into our culture. As you know, we assess our performance based on our results and how we deliver. We’ve provided you with a specific number, but we also encourage you to evaluate us on our overall performance, including how we improve margins, grow earnings per share, manage returns on capital, generate excess cash, and achieve growth. Reflecting on the past two years, I believe we've shown that we have made significant progress. We have established a solid foundation that we will build upon as we move forward.
Operator, Operator
Our next question comes from John McNulty from BMO Capital Markets.
John McNulty, Analyst
I wanted to dig into the release that you had put out the other day on the small on-site contracts for 2020 to maybe get a little bit more color around it. Can you speak to whether this was a lot of oxygen units for COVID or if it was more a sign that this recession is maybe a little bit different and the snapback from some of the smaller customers out there was maybe quicker? And then, I guess, as a follow-up to that, would you say that business is a little bit of a leading indicator for how we should be thinking about the larger scale projects and the demand for those?
Sanjiv Lamba, Chief Operating Officer
Thank you for your question, John. We are very proud of our small on-site portfolio, which we believe presents significant growth opportunities for our businesses globally. There are various perspectives on how to evaluate that portfolio in relation to market trends. Importantly, we are observing growth that is not linked to COVID. Most of these units are VPSA units with slightly lower purity, primarily serving industrial processes such as pulp and paper, where we have seen considerable growth. Additionally, we are experiencing growth in related sectors like metals and glass, among others. Overall, our portfolio supports a diverse array of industries and serves as a good indicator of general industrial activity. I do not see a specific correlation to larger projects if that was your question. However, there is a connection to industrial activity, and as demand increases, our services become more relevant.
Matt White, Chief Financial Officer
I was just going to add one quick point to that. I think it's probably a little bit to Steve's earlier question. I mean, as you know, we never gave revenue synergies. That was not something we committed a number to. But this area was an area where when we brought both companies together, it really filled out the product line portfolio of the small on-site plants. And this is an area where I think we've had a very strong execution given the combination of the technologies and capabilities from the merger of the company. And I think the success rate kind of speaks to that.
Operator, Operator
Got it. No, it makes sense. And I guess maybe, again, as a follow-up to that, I know that typically, in the context of recessions, it takes about 18 to 24 months for larger-scale projects and project backlogs to start rebuilding. Considering the recovery we've observed in much of the industrial economy, do the conversations you’re having suggest that this process might occur more quickly in terms of getting the momentum going on significant projects again? How should we approach this?
Sanjiv Lamba, Chief Operating Officer
So John, I want to briefly comment on the level of activity we are observing, as it is a leading indicator. We are noticing an increase in proposal activity in the U.S. and across Asia, particularly in China, South Korea, India, and several ASEAN markets. There are significantly more projects underway, particularly in electronics, which have shown strong growth this quarter. I anticipate we will see further growth in electronic projects as new fabrication facilities are established. These projects are progressing well and remain on schedule, as highlighted in recent announcements from companies like TSMC, Samsung, and Intel. Additionally, I feel more optimistic about traditional markets—steel, chemicals, and refining—where project activity is also picking up. While I won't specifically comment on whether this is a snapback, I view it as a fundamental increase in underlying activity leading to more pursued projects, and we have the opportunity to participate in these.
Operator, Operator
And our next question comes from Peter Clark from Societe Generale.
Peter Clark, Analyst
I have two questions. The first one is for Sanjiv. Regarding productivity being integrated into the PLC, is the current narrative on productivity more focused on avoiding cost additions if volumes continue to rise, rather than aggressive cost cutting? I noticed that in Q4, we will get the Q1 numbers later, particularly concerning headcount and severance costs. However, those did slow down in the fourth quarter compared to earlier in the year. For Matt, regarding cash flow, the Q1 performance seems to align with what we typically expect from legacy companies in Q4, which is usually the most robust quarter. I'm curious about how that will progress throughout the year, especially since earnings generally increase in the second half.
Sanjiv Lamba, Chief Operating Officer
Peter, thanks. I'm going to give you a quick view on productivity. So you've heard me say this before, and I think Matt kind of made a very good observation earlier on, which is that we are always going to be very, very focused on managing our cost base. Our total cash fixed cost is something we kind of discuss every month at the business reviews that we carry out. So adding cost back is something we kind of manage actively. I think it doesn't necessarily translate into productivity because for productivity, we want to see that incremental action as well, which makes it tough. But it is in the DNA of the organization, Peter, and you've heard me talk kind of passionately about the fact that every individual in our organization has got a mandate to go out and look for productivity every day. It's thousands of projects, which add small benefits but actually flow into the entire productivity part that we put together. There's one other thing which I think is now enabling that or helping us accelerate that, and that's around digitalization. And again, hopefully, you've heard me speak about this as well before. We're using digitalization, not as a significant tool that's going to create Earth-shattering new discoveries for us, but it's something that we apply in our business to deal with pain points every day. Our organizational model is embedded within the organization. So digital kind of expertise is being built up within every business across the world, and we are encouraging them. And in fact, I track it every quarter to ask them what percentage of productivity is coming from digital work or initiatives that we put in place. So that is an enabler that I see in actually ensuring our productivity stays on track. Matt?
Matt White, Chief Financial Officer
Yes, Peter, we had solid cash performance in Q1. When I consider our operating cash flow as a percentage of EBITDA, it was nearly in the high 80s this quarter. Typically, Q1 is seasonally lower, so it's a mix of factors. First, EPS grew by 32%, with half of the benefit coming from earnings. As we continue to experience strong earnings growth, it will positively impact cash flow. The other half of the year-over-year improvement came mainly from working capital, as we saw net gains in other areas. We're witnessing robust performance globally in collections, management of payables, and inventory handling, which contributes to managing our asset and liability base effectively. Engineering also showed strong working capital performance as they efficiently managed their projects despite challenges. Looking ahead to the second half, I expect continued earnings-driven results supported by diligent working capital management. If we maintain strong results, it will reflect positively on our cash flow. Cash is crucial to our compensation structure, and we monitor it closely each month. We're seeing the benefits of our efforts, and I believe that will carry on moving forward.
Operator, Operator
Our next question comes from Geoff Haire from UBS.
Geoff Haire, Analyst
Just 2 quick questions. First of all, I was just wondering if, Matt, if you could help us sort of think about what your pricing assumptions are within the guidance for the second half of the year? And then also, obviously, you had very strong pricing in Europe and North America relative to at least one of your peers. I was just wondering what was driving that and how sustainable that is.
Matt White, Chief Financial Officer
Yes, Geoff. So probably as stated before, I guess, 2 points. Number one, we fully continue to expect to price to weighted inflation. And since the second half guidance, we really didn't touch, it would be based on kind of a 3-month ago view. But as you know, last quarter, we had about a 2% pricing. This quarter, 2% pricing. Now you don't see the first decimal, but we are seeing a bit of improvement as inflation kind of picks up. But that's what the expectation would be. Just continue to price to the weighted inflation is what our views are when we look forward.
Operator, Operator
Our next question comes from Vincent Andrews from Morgan Stanley.
Vincent Andrews, Analyst
Just wanted to follow up on the green hydrogen discussion. I heard sort of very clear and very confident point of view on the opportunity set and, in particular, that it would be in excess of the 10% compounding that you anticipate sort of from the core business. And I guess I just want to better understand, as we think about sort of our CapEx that we're putting in our models in the sort of the medium to long term, how much do you think that would scale up and overall, what implications that would have to broader capital allocation?
Matt White, Chief Financial Officer
Vince, it's Matt. I think it's important to note that currently, most of these projects are categorized under base CapEx. We expect to see continued growth in base CapEx, mainly focusing on distribution and infrastructure assets, as well as some production assets like electrolyzers or smaller hydrogen-producing facilities. From this standpoint, I would project that 40% or more of the growth in base CapEx could accelerate due to these initiatives. Any backlog projects would likely be announced as additions to the backlog. However, regarding our CapEx spending and benefits, our investment criteria remain unchanged, and our approach is consistent. Therefore, I would suggest modeling this as incremental to the EPS growth rate exceeding 10% that we aim for. What we can integrate into this should be beneficial in the coming years.
Operator, Operator
And we'll take our last question from Kevin McCarthy from Vertical Research Partners.
Kevin McCarthy, Analyst
Matt, in your prepared remarks, you made a comment that April results exceeded your internal expectations. I was wondering if you could comment on what accounted for that variance, if anything stood out in terms of region or end-use market? And then secondly, if I may, you mentioned Uri was a drag on sales. What was that drag? And how did you insulate the profit from being impactful? I appreciate you have contracts, but I would have thought maybe there would be a slight impact in your merchant and/or packaged gas business. I'm wondering if you just simply recover by the end of March or if you're able to offset through electricity sales or otherwise.
Matt White, Chief Financial Officer
Kevin, it's Matt. I can do the first one and Sanjiv will take the second one. So my comment related to April, it was fairly broad-based. I would say, for the most part, what we've been seeing is recovery in developed markets on an industrial front. Some developing markets are still, in some areas, going through some challenges. But the expectation is probably by the back end of the quarter, we hope to see some industrial activity rebounding. But I would say it's, for the most part, incremental industrial activity, especially in certain developed markets that you're seeing in North America, especially places like Asia. It's really what's driving it, pretty much a continuation of what we've been seeing.
Sanjiv Lamba, Chief Operating Officer
And Kevin, moving on to Uri then and just kind of briefly giving you a sense. So again, I think it's a good opportunity for me to just mention that our team in Texas did an outstanding job. They've managed to ensure that we shut down and started up safely, quickly. We were able to support our customers. And even in some cases, some of the players who are not our customers to just make sure that they remain safe and helping them with their start-ups as well. So our customers really have actually started up and are operational now, whether it's refineries, chemicals, all of them back online. And we're seeing volumes back to pre-COVID levels in some cases as well, particularly on the chemical side. Our bulk customers, again, I think we saw a quick turnaround over there post the winter freeze and again, with some support from us, our customers are back up and running. We see levels back to January already in that space as well. Refinery is probably the most specific one where you know that they have a longer lead time to startups. Even there, we were quite pleased to see that they were up and running in 3 or 4 weeks. And today, hydrogen volumes are about 12%. I think they're about higher than where we were earlier in the year. So again, it's been pretty good in terms of how that overall piece has been managed. I guess the point that the guys in Texas said to me, which I think holds here as well, is we're used to seeing storms, hurricanes, freezes. This is not new. This is something that we work on every year, and we've got a team that fully understands that and getting plants back online is significantly important, making sure our customers have the product available to keep them safe and ready to go. Now contractually, obviously, we are well protected, as you've just remarked. So that's one of the reasons we don't see a significant exposure, while we see some top line movement. But again, from March to April, we've seen that uplift come back fairly quickly as well.
Juan Pelaez, Head of Investor Relations
Crystal, thank you. And everyone on the line, thank you very much for participating today. If you have any further questions, please feel free to reach out. Have a great rest of your day. Take care.
Operator, Operator
This concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a great day.