Earnings Call Transcript
LINDE PLC (LIN)
Earnings Call Transcript - LIN Q1 2022
Operator, Operator
Good day, and thank you for standing by. Welcome to the Linde Plc First Quarter 2022 Earnings Teleconference. At this time all participants are in a listen-only mode. Please be advised that today’s conference is being recorded. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir.
Juan Pelaez, Head of Investor Relations
Thanks, Sergey. Good morning everyone and thank you for attending our 2022 first quarter earnings call and webcast. I'm 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 the teleconference. The reconciliations of the adjusted numbers are in the appendix of this presentation. Sanjiv will provide some opening remarks, and then Matt will give an update on Linde's first quarter financial performance and outlook. After which, we will wrap up with Q&A. Let me now turn the call over to Sanjiv.
Sanjiv Lamba, CEO
Thanks, Juan, and good morning, everyone. I'd like to start off by addressing the recent global events and the tragedy occurring in Ukraine. A senseless invasion has caused widespread casualties and destruction at a level not seen in Europe for generations. As a global company, integrated within countless communities across the globe, Linde must do its part to help. I'm happy to report that all of our 121 Ukrainian employees are safe. And I'm incredibly proud of the courage and determination they've demonstrated throughout the crisis, including several who've chosen to continue producing and delivering life-saving medical gases. We are supporting their needs directly and indirectly, including through contributions of approximately $2 million. I can only pray that all the global pressure and support is enough to bring this war to an end and allow the efforts to begin towards healing and rebuilding Ukraine. Given these circumstances, we are scaling back gas operations in Russia. We have already ceased supply to certain customers and initiated the divestment process for some industrial assets, all in an effort to reduce our footprint, which is already quite small at approximately 1% of sales. Furthermore, we have stopped new investments and business development while winding down several engineering projects. Given this, we have removed the second half Russian earnings contribution from the guidance. Matt will speak more on this. However, we are scaling back responsibly as we continue to support our employees and their efforts to supply critical gases for medical and safety needs. Now in light of the uncertain economic climate, I thought it would be helpful to highlight trends we're seeing by end markets and geographies. Let me now go on to Slide 3, which gives you a summary of Q1 growth rates by key end markets. Two overarching points are that the organic growth is 9% from a strong 2021 foundation and broad-based increases across both consumer and industrial-related end markets. At 17% of sales, healthcare trends are roughly flat as greater medical procedures in developed markets were offset by lower hospital oxygen in developing markets such as Latin America and Eastern Europe. Now fortunately, it appears COVID oxygen needs are abating. So I expect health care to return to its long-term growth rate of mid-single-digit percentage as we continue to expand patient offerings for both hospital and home. Food and Beverage continues robust year-on-year growth as most parts of the world have returned to restaurant dining as well as increased applications for bulk food and beverage production. This resilient market should grow low to mid-single-digit percent. Note that the sequential trend is down due to normal seasonality from the fourth quarter holiday season. Electronics, at 9% of sales, remains one of our fastest-growing end markets, especially in the Americas and APAC. The primary gases sold to these customers are ultra-high purity nitrogen, hydrogen, helium, and rare gases such as neon, which represents less than 1% of total sales. However, given the amount of attention this molecule has recently received, it's fair to say that we're well positioned as one of the largest producers of neon in the world, with the vast majority of it being refined at our own sites in the U.S. and Germany. We are, of course, working closely with our customers to address their increased demand. The electronics market grew 13% versus last year with a mix of underlying growth and project start-ups, and I fully expect to announce more new project wins during the course of this year. Turning to industrial end markets, Chemicals and Energy, up 24% of sales, grew double digits, led by the Americas, which drove more than half of that increase. We are seeing very strong demand across all phases of energy development as U.S. refining rates are close to record levels, driving even more demand for hydrogen and other gases. In addition, merchant hydrogen volumes rose by almost 60% from the last year in support of clean energy initiatives. Our chemical customers in the U.S. are some of the lowest cost producers in the world and thus saw high demand for their end products, requiring significant on-site gas supply. The current combination of high energy prices and the transition to clean energy should drive continued growth in this end market for years to come. To this point, we are currently reviewing close to 300 clean energy projects, with the probability-weighted spend exceeding $5 billion for these clean energy projects. Thus, I feel quite good about our prospects for future growth in this space. Metals & Mining at 14% of sales grew 7% from last year and 5% sequentially as lower volumes in China were more than offset by other regions, increasing their production to meet global demand. The Americas improved sequentially and from the prior year as U.S.-based steel mills increased production in support of higher industrial activity. In APAC, lower Chinese steel volumes were mostly offset by higher production from other countries. As the world races to replace Russian-based mining metals and energy sources, I expect to see our customers continue to increase their production and investment levels. Finally, the manufacturing end market grew 11% from the last year and 4% sequentially. Versus the prior year, growth was broad-based in every segment, but led by the Americas from increased aerospace and general manufacturing. Now last week, we announced another new long-term agreement with a major space launch company to provide rocket propulsion gases out of our recently expanded Florida plant. Currently, rocket and satellite propulsion demand is at its highest level we've ever seen, going as far back as NASA's Apollo program. Linde is proud to be the leading industrial gas supplier to all key players in the U.S.-based program. Looking ahead, there are clearly concerns around energy security, especially in Europe, which could result in persistent inflation. Additionally, shortages of Russian-sourced commodities, coupled with Chinese production curtailments from COVID, could put additional pressure on global production levels. Regardless of what ultimately happens in the economy, Linde has demonstrated time and time again that we weather the storm better than most. We have a committed team, a high-performance culture, and an integrated network across all three supply modes; that's why I'm confident Linde will continue being the best-performing industrial gases and engineering company in the world. Now I'd like to turn the call over to Matt to walk through the financial numbers.
Matthew White, CFO
Thanks, Sanjiv. Please turn to Slide 4 for an overview of the first quarter results. Sales of $8.2 billion increased 13% from the prior year but declined 1% sequentially from the fourth quarter. Versus the prior year, cost pass-through increased 6% from a contractual billing of higher energy costs, but currency translation reduced sales by 3% from a stronger U.S. dollar, primarily against the euro and pound sterling. Excluding these items, organic sales grew 9% from 3% more volume split between project backlog and base and 6% more pricing as we continue to price to inflation. Recall that actual price increases are much higher for the combined packaged and merchant gases. Sequentially, when excluding the 1% currency headwind, organic sales increased 2% as 3% higher pricing was partially offset by a 1% decline in volume. The volume decline was driven by lower EMEA medical oxygen and seasonal effects from food and beverage, Chinese New Year, and Southern Hemisphere LPG. Engineering volumes are up 1% from the prior year, but down 2% sequentially as we have begun winding down several Russian projects, and we expect that trend to continue into Q2. Operating profit of $1.9 billion increased 13% from 2021 and 3% sequentially. The operating margin of 23.2% is roughly flat with the prior year, but up 100 basis points from the fourth quarter. The contractual cost pass-through has no effect on operating profit dollars but will impact operating margins as we adjust both sales and cost with energy prices. Excluding this effect, operating margins are up 130 basis points from the prior year and 120 basis points sequentially. You can see the table to the right, showing underlying margins by geographic segment, with almost all up triple digits across both periods. Despite the unprecedented geopolitical events and subsequent inflationary pressure, the business quality continues to improve, and we anticipate that margins excluding cost pass-through should increase going forward. You may have noticed the higher-than-normal engineering segment margins at 19.6% and lower-than-normal global other operating profit at a $44 million loss. These are driven by project timing differences and one-off costs, which both should return to normal run rate levels by the second quarter. EPS of $2.93 increased 18% from last year and 6% sequentially, as we continue to demonstrate strong leverage down the entire income statement. Disciplined capital management is supporting lower interest costs and reduced share count, which I'll speak to more on the next slide. The final number I'd like to highlight is return on capital, which represents one of the most important financial metrics in our industry. Three years ago, this figure was 10.4%. Today, we're at 18.9% and still growing. This progress doesn't happen overnight. It requires a sustained high-performance culture across all levels of the business. We're quite confident that Linde is and will continue to be a long-term value compounder with a healthy blend of high-quality growth, tremendous resilience, and significant shareholder returns. Slide 5 provides more color on our capital management trends. Q1 operating cash flow of $2 billion was slightly below last year, due to unfavorable working capital timing in January and February. While March was a much stronger month, it wasn't enough to catch up. I expect improvements in Q2 as our DSO and DPO levels are still quite stable. Also recall that Q1 tends to be one of the weakest quarters of the year due to cash payment timing. Engineering cash flow was positive in Q1 but down year-over-year on project payment timing. In light of the accelerated Russian project wind downs, I expect more payment outflows to vendors as we closed out several projects, consistent with how all projects are closed out, but at a significantly faster pace. Overall, I still anticipate a full-year operating cash flow to EBITDA ratio in the low to mid-80% range. As far as how we deployed that cash, we announced a 10% dividend increase for 2022, which marks the 29th consecutive year of dividend increases. We also announced a new $10 billion share repurchase program on February 20, of which we've already spent $1.7 billion by the end of April. And of course, we will always reinvest in the business, which is our priority for capital. Despite the economic challenges, we still have access to low-cost capital as evidenced by our most recent bond deal. We issued over €2 billion across three tranches. And as you can see, the attractive pricing, we had a weighted average maturity of 10 years with a weighted average coupon of 1.4%. Irrespective of the economic climate, we will maintain a steady and predictable capital allocation policy to invest in the business while rewarding shareholders. I'll finish up on Slide six, which provides the updated earnings outlook. Second quarter guidance range of $2.90 to $3.00 represents 7% to 11% growth over the prior year or 10% to 14% when excluding currency translation impact. For the full year, the new guidance range is $11.65 to $11.90, a 9% to 11% growth rate from 2021 or 11% to 13% when adjusting for currency. Both estimates have two key underlying assumptions. First, there is no assumed base economic growth at the midpoint. Consistent with last quarter, this is not our economic projection but rather a placeholder for the guidance. You can insert your own view of the economy. If it does better, we will do better. And if it does worse, we'll take actions to mitigate. Second, we have removed the contribution of Russian earnings by the second half of the year. As we continue to wind down engineering projects, cease certain operations, and sell industrial assets, we felt it was appropriate to remove Russian earnings from the outlook and associated projects from the backlog. These actions are ongoing. So we anticipate some residual earnings in Q2, which are projected to cease by Q3. While this is a fluid situation with many complexities, we are committed to following all sanctions and scaling down operations in a safe manner. Overall, despite economic uncertainties, we are raising the full-year outlook. In fact, as Sanjiv mentioned, Linde has demonstrated industry-leading performance year after year. We only need to look at the last three years to prove that. At the start of 2019, when some investors doubted the merits of the merger, we quickly came together as one and grew EPS 19%, finishing the year at an all-time high stock price. Moving into 2020, when the pandemic struck, Linde stock was sold off from apparent concerns of too much cyclicality without enough resiliency, only to ultimately achieve 12% EPS growth and finished the year at a new all-time high stock price. And when 2021 began, Linde stock was once again sold off. This time, from apparent concerns of too much resiliency without enough cyclicality. Yet, we grew EPS by 30% and once again, finished the year at another new all-time high stock price. Now in 2022, Linde stock has been sold off again from concerns of economic uncertainty and high inflation. Time will tell how we ultimately finish this year, but personally, I like our odds. I'll now turn the call over to Q&A.
Operator, Operator
Our first question comes from Mike Sison from Wells Fargo. Please go ahead.
Mike Sison, Analyst
Hey guys, nice start to the year. I guess at the midpoint, where you're talking about no assumed economic growth, what type of volume growth will you be able to generate? And maybe talk about each of the regions as you sort of walk us through that?
Sanjiv Lamba, CEO
This is Sanjiv. I want to start by discussing the guidance point that Matt mentioned and then provide an overview of the regional performance. Matt highlighted that at the midpoint of our full-year guidance, we are assuming no assistance from the economy, meaning a 0% volume benefit. You can make your own assumptions about the economy's performance and how it may affect our results. If the economy improves, we will also improve. If it doesn't, we'll implement mitigation actions as we've done before. Now, let me touch on the end markets and outline the three major segments we have. First, regarding the Americas, we are observing strong underlying demand across all key end markets, particularly in chemicals and refining, which are performing exceptionally well. Healthcare remains flat, with an offset of increased elective procedures countered by a slight decline in the need for medical oxygen in Latin America as COVID-related needs diminish. We also see continued growth in semiconductors. Manufacturing, especially in our packaged and hard-goods business, is doing very well, with double-digit growth in the U.S. package and hard goods for the quarter, consistent with previous quarters. Particularly in refining, we have seen about 30% year-over-year growth, driven by refineries operating at full capacity with utilization rates above 90%. Crack spreads are currently at $38, the highest we've seen since the mid-2000s, indicating strong demand patterns in the Americas. Moving on to the Asia-Pacific region, we see broad-based, consistent demand growth. In China, while there are reports of lockdowns affecting the market, our on-site business remains stable. We have observed some decline in volumes for small and medium enterprises early in April, but they have since stabilized, albeit below our expectations. I anticipate no significant changes for the rest of the quarter and have incorporated this into our guidance. Finally, regarding EMEA, it has performed surprisingly well. Both the on-site and merchant volumes show impressive resilience, even amidst fluctuating energy prices. Our pricing measures in EMEA are aligned with inflation, and our operating margins, excluding pass-throughs, are up 130 basis points year-on-year and 120 basis points sequentially across all segments. The future impact of energy pricing remains uncertain, especially concerning natural gas sourcing, but I am very pleased with how our EMEA team is managing the situation. Overall, I wanted to provide you with this comprehensive perspective.
Mike Sison, Analyst
Thanks for that. And just a quick follow-up. Industrial gases tend to help customers reduce their energy costs. So your sale of gas backlog has been pretty steady at $3.5 billion. Are you seeing sort of more bidding potential? And does the backlog potentially go up as in this inflationary environment?
Sanjiv Lamba, CEO
Yes, we are noticing a significant increase in proposal activity. Regarding the sale of gas backlog, remember that about $1 billion is set to come off this year, which indicates we are initiating projects that will generate revenue and earnings throughout the year. It's encouraging to see. We're also replenishing that with an additional $1 billion in project wins that are developing and progressing well. I anticipate that the backlog will continue to increase and move positively. There is indeed a lot more activity across various end markets, including energy, refining, chemicals, and electronics manufacturing. This is broad-based, solid proposal activity, which I believe will result in wins. We just need to determine how quickly we can secure those.
Operator, Operator
Our next question comes from Kevin McCarthy from Vertical Research Partners. Please go ahead.
Kevin McCarthy, Analyst
Yes, good morning. Sanjiv, can you comment on your outlook for return on capital? You had an impressive level of 18.9% in the quarter. Can you continue to move that higher? And how do you view ROC in the context of rising interest rates? Are you starting to take higher costs of debt, for example, into your project bidding? And have you seen that in the marketplace as well as it relates to your peers?
Sanjiv Lamba, CEO
Kevin, I'll give you a quick response to that. Matt is passionate about this topic, so I’ll let him address it as well. I've mentioned before that return on capital is like a truth serum for our industry. It's often surprising to see how we stand out against our peers. Managing both the numerator and the denominator is critical, and we do that consistently as part of our business operations. These are record levels of return on capital for our industry, which haven't been seen before, coming from our daily operational efforts and a disciplined approach to capital management. We aim to continue growing this. However, return on capital depends on various factors that I've mentioned, and as we see capital expenditures increase and projects ramp up, there will always be some fluctuations in that return on capital. Matt?
Matthew White, CFO
Yes, sure. Kevin, I can just add a few points to that. I think as far as the outlook, it's probably safe to say we're overachieving with what some of your expectations probably were. And the obvious answer is we're growing earnings faster than our capital base, but the underlying thing to take into consideration is we are less capital intensive than I think people realize. We have a lot of avenues of growth that don't require significant capital. We're demonstrating that through our end markets. We're demonstrating that through our supply modes of packaged and some of the other services we have, and we see a continued opportunity to see expansion of return on capital through significant growth that does not require significant capital. Now of course, we have great opportunities for large projects that we're going to pursue and that we're going to win. But we also have a very diverse business that allows us strong year-in, year-out growth without the need of significant capital. And as far as the inflation impact on what you asked, we get asked this question when rates rise, when rates fall. We get asked over and over again, and we have the same answer, which is we take a very long-term view. When we lock in these projects, these are 15-, 20-year views, and we don't try to estimate what inflation or rates will do; rather, we protect ourselves against inflation on how we contract both on the execution and the long-term fees that we will charge for facility fees. So given that we build a model that is independent of what the Fed does around the world and how inflation is structured. And I think our results recently have demonstrated that. I think our results during the disinflationary periods, post the Great Financial Crisis showed that. So from that perspective, we build it agnostic of it and just to generate value for the long term.
Kevin McCarthy, Analyst
Thank you for that. Matt, secondly, if I may, can you walk us through the financial impact from your exit in Russia as it relates to earnings and also any cash flows associated with the exit costs there?
Matthew White, CFO
Sure, Kevin. So to be clear on how we did this, it starts with the guidance. And what we want to do in the guidance, as we stated, is by the second half remove any impact from Russia, and that includes projects or our business in the gas, which is about 1%. As we stated on the prepared remarks, it's a fluid situation. This is something that we are committed to scaling back. We're committed to reducing our footprint, obviously, following all the sanctions, and it's something that we're continuously working on, but we wanted to take the prudent and conservative view of removing that impact going forward. As we stated, the gas business is about a little less than 1% of sales and corresponding operating profit and assets. In the Engineering business, obviously, you saw the effect of the backlog of those projects, and they're continuing to work through. From a cash perspective, I'd separate it into two pieces. There's the normal aspect, as I mentioned, where when you wind down projects in this type of percent completion business, it is a normal outflow. That is a normal part of this business. You get paid up front. And then as you work the project down, you pay your vendors, and you cover the cost to build that project. We fully expect that same effect. It will just be on a more accelerated path than what it normally would have been. Separately, on the deposits that we have upfront at this stage, we see the need for them. That is something we don't see a significant effect other than obviously working through paying vendors and paying the cost to wind down the projects. And as I stated, we still anticipate that operating cash flow to EBITDA will be low to mid-80s for this year considering all these items. So that's how I think you should think about it and model it.
Operator, Operator
P.J. Juvekar, Citi. Please go ahead.
P.J. Juvekar, Analyst
Yes. Hi, good morning. Sanjiv, some have suggested that with the rise of natural gas prices in Europe, the cost of green hydrogen today is the same as the cost of gray hydrogen. So you would think that Europe would accelerate green hydrogen, which would make sense from an energy security standpoint. Have you seen any increased discussions and initial orders or anything about green hydrogen in Europe?
Sanjiv Lamba, CEO
That's a good question, P.J. It's very relevant right now. What we're observing is that even before the current crisis, Europe was clearly intending to pursue a green agenda. The gap between green and gray hydrogen is definitely closing in Europe. From a policy perspective, we see increased momentum stemming from this crisis that is pushing us toward a green roadmap. The main challenge, however, is scaling up green production, accessing renewable energy, and integrating all of this to produce hydrogen and find a cost-effective carrier once it's scaled up. We're actively collaborating with several customers who are eager to advance in this direction. You may have seen our announcements, including a 200 megawatt order from RWE, aimed at enhancing their green hydrogen energy balance. However, these projects require time, and scalability remains a significant challenge.
P.J. Juvekar, Analyst
Thank you. And I have a question on Neon. You mentioned you are supplying the U.S. and Germany. I believe you're adding some new capacity as well. And can you talk about sort of supply-demand of neon, I know a lot of that was in Ukraine. And then also, you talked about onshoring. And if electronics are onshoring, you see Intel build big clients. Do you have the supply in the U.S. to supply if the need comes up?
Sanjiv Lamba, CEO
P.J., sure. So let me just take a step back and give you the overview and then let's get into the details in terms of where we stand. So the overview is that about one-third of the world's refined neon comes out of Ukraine and Russia, about a third. Most players around the world have that sourcing built into their model. We are lucky in that our refining capacities really sit in Germany and the U.S. and free the entire world. So our kind of dependence on Ukraine and Russia is in the mid-teens relative to other people being around a third. That positions us well. Obviously, prior to all of this happening in terms of the war in Ukraine, last year, we'd already made decisions, recognizing that semiconductor growth and, in fact, even space were likely to make rare gas demand continue to grow. So we're going to see some of that capacity come online this year and some early next year as well. As far as things stand, you referenced Germany and the U.S., we produce refined neon in Germany and the U.S. to multiple locations, which ensures that we're able to meet the entire global demand out of these locations. Of course, we can also meet all the onshoring needs that our customers like Intel, Samsung, TSMC, and others have in terms of coming out of either Germany or the U.S. as well. So we are very well positioned, and we are, of course, the largest producer of refined neon in the world.
Operator, Operator
Our next question comes from Jeff Zekauskas from JPMorgan.
Jeff Zekauskas, Analyst
Thanks very much. When I look at your electronics sales or sales growth, it seems that you're taking market share in that area, as best as I can tell. Is that true? And Air Products and Air Liquide and Linde are all very, very competent companies that supply the electronics industry. Is there something that you can now technically do that the other two companies find it more difficult to do? Or are the wins that you're achieving more the result of intangibles, better service, or better customer relationships?
Sanjiv Lamba, CEO
Thanks, Jeff. So the electronics wins that we had last year, Jeff, and you've heard me say this before in the last quarter as well. We did about $1 billion worth of project wins last year. And I may not have said this already, but I'm going to just say this now, which is that I expect that we'll have a healthy project backlog growth this year from electronics as well. So clearly, it does point to the fact that we are providing a solution to our customers that is very appealing for them. And that's really a combination. I think you hit on all of the elements within that. We have some great technology. We've been able to take the relationships that we had with the practical relationship with Samsung and with Linde's relationship with TSMC and both dealing with Intel. We've been able to take that and be able to create both solutions, leveraging relationships, and of course, operational excellence, which is critical as far as the electronics business is concerned. Those fabs want to see highly reliable, extremely safe operations, and we are able to package all of that and bring it to bear to get those win rates up where we like to see them.
Jeff Zekauskas, Analyst
Okay. And just a follow-up. When I look at your income statement, it seems that your SG&A costs, again, I think last year, they were about flat. And this year, at least in the first quarter, they're up a couple of percent. There's really no movement in research and development expenses. How do you keep your overhead growing at such a slow rate?
Sanjiv Lamba, CEO
I'm going to kind of touch on the principle of that and just kind of tell you how we look at that business every day, essentially, Jeff, as you've probably heard me say before. So when we think about how we manage our business and how we leverage what comes at the top line right down to the bottom, we think about it coming through our variable margin. So that's where the productivity measures kick in and then tight management of total cash fixed costs. That's something that gets attention every month. It's something that our guys are managing every day. And as part of that, the sales and admin costs are something where we spend a lot of time scrutinizing. Now how does productivity play a role over there? Jeff, you've heard me talk about digital solutions previously. One of the things we do extremely well around our productivity actions, particularly when it comes to the fixed cost piece, is actively provide a lot of digital solutions into that space to make sure you're automating, to make sure that you're taking out where possible you're taking our heads where we're possibly taking out effort. And I think all of that plays into that effort around managing your total cash fixed cost and within that, the subset being SG&A. I won't say to you that's rocket science there, Jeff. It's just the grind of managing that every day.
Jeff Zekauskas, Analyst
It looks like rocket science to me. Thanks so much.
Sanjiv Lamba, CEO
I could get excited about rockets, but we'll talk about that later.
Operator, Operator
Our next question comes from Nicola Tang from BNP Paribas Exane. Please go ahead.
Nicola Tang, Analyst
Hi, everyone. Thank you. I wanted to ask more about energy security and diversification, especially given the situation in Europe. We've discussed green hydrogen on this call, but could you elaborate on how Linde might contribute to diversifying energy sources, perhaps through LNG as part of the EU repower initiative? Additionally, if we hypothetically saw energy rationing or restrictions regarding Russian gas, what potential impacts could that have on Linde? Would your take-or-pay contracts in the on-site business still be applicable? I’d like to understand this better. Thank you.
Sanjiv Lamba, CEO
Thanks, Nicola. Let me begin by discussing the energy diversity initiatives taking place across Europe and the role we can play. With the increase in engineering capacity, we are now able to provide more support to governments in their pursuit of energy diversity. I see us playing a significant role in LNG development because of our expertise in that area. We are currently in discussions with several governments to develop projects that will assist in this effort. These projects are complex and take time, but we are glad to be involved. The EU's focus on diversified energy portfolios is clearly showing intent on how essential this will be. As we mentioned earlier about clean hydrogen, I believe that the intent we are discussing with governments will soon turn into action. I feel more optimistic about a transition between green and blue hydrogen, acknowledging that blue hydrogen or blue ammonia can serve as a bridge to green, which seems to be a pragmatic path forward. I am noticing increased traction for this idea, and there is a growing understanding that scaling up blue offerings can happen more swiftly. This also means we will see a mix of local projects, many of which will be green, and imported carriers for ammonia or hydrogen, either piped or in liquid form. There appears to be a greater willingness to address logistical challenges across countries, establishing frameworks similar to Germany's use of contracts for differences to ensure access to developments worldwide. This will facilitate the establishment of an import market and the infrastructure needed for energy distribution. Overall, Linde has a significant role to play in engineering and participating in downstream efforts once energy becomes available. However, I must be honest that these processes take longer than expected. While we would all prefer quick results, these changes usually take years instead of months. Regarding energy curtailment, we have a business planning effort in place across most of our operations in Europe. In Germany specifically, we are running various scenarios and actively engaging with power and natural gas providers, as well as local governments. Our air separation business provides essential products, including medical oxygen for hospitals, which has government priority. We appreciate their recognition of this critical need. While we do not have direct exposure to Russian natural gas, some of our customers do, and we are collaborating with governments and customers to ensure we have contingency plans ready. The situation in Poland is also of concern, and we expect to feel some impact from those developments.
Nicola Tang, Analyst
Thank you. And maybe I can give you an opportunity, Sanjiv, to talk about rockets and just ask a little bit on the side of the business. On Helium, you've announced this offtake agreement with Freeport from 2024 onwards. Can you talk a little bit about your expectations for the helium market, given I think there's some supply disruptions elsewhere? And just remind us maybe how big your exposure is? Thank you.
Sanjiv Lamba, CEO
Sure. So thanks, Nicola. I appreciate that question. I'm going to talk about Rocket for get excited about it and then touch on helium a little bit and wrap it up. So as far as rockets are concerned, aerospace for us represents about 2% of our sales. And at some point, I think we're going to designate its own end market. It's been growing strong double digits for us for quite some time. And Linde is the largest supplier in this entire sector, so we're quite proud of that. Our rockets consume many gases. And while it's primarily liquid oxygen, liquid hydrogen, some helium, often liquid nitrogen for densification of the fuel that is used. We also use Crypton and Xenon to help satellites with their propulsion systems to keep them in orbit. In addition to that, the reason I get excited is because here, we're able to bring a full benefit of Linde's portfolio, and we provide atomized powders for advanced manufacturing or 3D printing as it were for specific components and parts. And we also provide some specialized coatings out of our PST unit. So all in, it's kind of a comprehensive package of solutions that we can bring to these companies. And obviously, they greatly appreciate that. And I expect this to grow, as you can see from the number of launches you see in the news every other week now. So it's a good growth market. We are excited about it. We have some great tremendous solutions over a year, and that really positioned us extremely well, and the U.S. market is growing leaps and bounds. On Helium itself, as you know, Helium is short. There are two major components at the moment driving that. There is BLM in the U.S., which has the most significant impact. And most people were banking on some helium coming out of Amur in Russia. We recognize that, that's going to be delayed. So it's likely for the rest of this year. I expect helium to remain quite tight. We're obviously seeing that incremental costs and pricing reflect a lot of that as we speak. So from our perspective, we didn't have any Russian helium in our sourcing last year. We have a good balance of sources across the world, multiple sources to exactly manage these kinds of issues that ultimately come up. So managing dozens of sources, ensuring that we kind of mitigate that risk and meeting our customers' needs is really kind of where helium is at, and we're seeing pricing trends hold up. I expect that to hold up for the rest of the year as well, given the tightness in the market.
Operator, Operator
Our next question comes from Peter Clark from Societe Generale. Please go ahead.
Peter Clark, Analyst
Hi, guys. Good morning everyone. First one for Matt, actually. You made a very good point about the sell-off that Linde seems to suffer much smaller than its closest peer. It tends to be in the first quarter of the year. Obviously, that creates the opportunity for the share buybacks. And you've always made it clear when there's a correction in the share price, you go in big. You could certainly argue the share price remains depressed. You've been big entering Q2. I assume the pace of share buybacks is going to continue at quite a pace unless the shares correct upwards? That's the first question.
Matthew White, CFO
Peter, sure. So I can say we have very healthy cash flow. As you know, we follow our very disciplined capital allocation policy, which, to repeat for those on the call, is we have a mandate to maintain an A rating, raise the dividend. Our priority is to invest in the business, and all the excess cash goes to our buybacks. And right now, we still have a lot of excess cash. We expect a lot of excess cash, and we have the $10 billion authorization program. So to your point, we did about $1.7 billion or so in Q1. We are in blackout right now into the 10b5-1 just given we are into the earnings. We'll be active again come Monday. And yes, we will continue to sweep excess cash to the buybacks, and we see that as a great opportunity right now, frankly, based on the pricing. So we will be active, and we will be in the market every day.
Peter Clark, Analyst
Excellent. One for you, Sanjiv. On Europe, I think you made the comment, you're surprised it held up so well, I think, in terms of the activity, maybe, I don't know. But I mean, certainly, one of your peers pointed to the bulk gases starting to get sluggish through the quarter. I'm just wondering your thoughts on Europe, particularly when I look at Balkans, I guess your merchant pricing must be something like 20% now as you pass on this energy surge. Just wondering how you feel about the demand outlook in Europe, particularly? Thank you.
Sanjiv Lamba, CEO
Thanks, Peter. So that is the point I was making, that I was really pleased to see how resilient the merchants, i.e., the bulk and the package side of the business has been right through the first quarter despite the fact that we had to put significant price increases through as a result of the energy cost increase that we saw. So that's held up reasonably well, Peter, I'm hesitant to try and speculate what that market might do. There are, of course, a number of variables in that market. But I was surprised pleasantly that it had held and been quite resilient. And I have to say that as we move beyond the first quarter, that trend hasn't changed in any significant way thus far.
Operator, Operator
Our next question comes from John McNulty, BMO Capital Markets. Please go ahead.
John McNulty, Analyst
Good morning. Thank you for taking my question. Sanjiv, in your opening remarks, you highlighted the various business segments on Slide 3. You mentioned that the healthcare sector has been performing well, possibly due to COVID, but it seems to be declining a bit and may continue to do so. Can you help us understand how the other major markets you serve are performing compared to pre-COVID levels in terms of volume? Are there some markets that are still noticeably below those levels? I believe you mentioned that Food & Beverage is seeing a nice recovery, but I'm not sure if it's back to normal yet. Could you provide some insight into how each of those businesses stands relative to normal expectations or volumes at this point?
Sanjiv Lamba, CEO
Sure, John. So let me first clarify health care, and then let me talk about some of the other end markets as well. So on health care, we saw the trend was flat. And really, what I was emphasizing was in developed countries, I'm finding that elective surgeries are increasing. As you know, these have been kind of put on hold through the COVID period. They are all coming back. That's where a lot of the oxygen usage is there. And then we're finding COVID volumes offset by a declining, particularly in the emerging markets. So that trend is why we are seeing the flattish kind of volume around the healthcare piece. And I said earlier, I expect healthcare will be back at its kind of long-term trend of mid-single digits in due course. Coming back to your other question around pre-COVID levels versus where we are on all our end markets. And I'll say to you more broadly, most end markets across most geographies are at or above pre-COVID level. So we've seen good recovery. We've seen that embedded in those different markets. And we've been quite pleased to see that recovery. You saw most of that in 2021 as well. And clearly, the momentum, as you can see from that Slide 3 that I put up, there's a lot of green on that slide, which is a good sign, as you can see. So if I kind of maybe pick up a couple. Electronics, no need to comment on that. As you know, it's well above pre-COVID levels and has been highly resilient and continues to grow. And as I said earlier, I expect that growth to continue. Momentum around investments is still there, and we are winning more than our fair share of that. So I feel good about that. The ones that I think people kind of are watching carefully, chemicals and energy, again, very strong market movement over here. We are finding that 17% year-on-year growth, pretty solid number out there, John. But also, as I think about our footprint in the U.S. and just to emphasize this, this is where I see the growth going to be as we go forward. That is crucial because U.S. refiners and U.S. chemical companies have a natural advantage from competitive natural gas pricing that gives them that ability to export into markets elsewhere, where that energy price increases make local production a lot less competitive. And I expect that momentum to continue in the mid- to low single digits over the next 2 to 5 years, if you will. Metals & Mining, again, impacted really around the Chinese curtailments, the dual control policy, et cetera, which is helping the rest of the world pick production up. And again, I am seeing continued investment in that space. We will see some decarbonization efforts happen in that space as well, which will provide a different kind of growth for us. But notwithstanding that, again, we expect to see that continue. Manufacturing is where a lot of people have questions, obviously, supply chain challenges, chip shortages for autos, et cetera. And again, the underlying growth over there, the underlying demand looks solid, and we feel good about where that stands today. Obviously, we'll have to watch carefully how IP develops, and that's going to kind of be driven in part by how manufacturing continues to demonstrate that resilience.
Operator, Operator
We'll now take our last question today from Mike from Barclays. Please go ahead.
Unidentified Analyst, Analyst
I have a question for Sanjiv regarding the 300 unique carbonization projects you're examining. Last quarter, you mentioned the probability-adjusted investment potential to be around $4 billion, but today you indicated it might be $5 billion. I'm trying to understand if you are considering more projects now or if you have gained more confidence in the ones likely to move forward.
Sanjiv Lamba, CEO
Mike, last quarter I mentioned we had around 300 projects. The portfolio of projects tends to change frequently, which is expected. We're also adding some larger projects, and I'm pleased to see increased activity in the industrial sector. We're well positioned in many of those areas, working with our existing customers, which boosts my confidence. We are selective about the projects we pursue, aiming for agreements related to clean energy and ensuring we can support them with accessible technologies that we already have operational experience with. All of this contributes to the $5 billion estimate. The differences between $4 billion and $5 billion shouldn't be overstated; the actual figure is in the 20s. We applied a robust probability adjustment to the portfolio to arrive at that $5 billion figure, and it might actually be higher. I'm optimistic about the quality of the projects we're encountering, and as we collaborate more with our customers and partners, there's a greater level of confidence in their success.
Operator, Operator
With this, I would like to hand the call back over to our speakers for any additional or closing remarks.
Juan Pelaez, Head of Investor Relations
Sergey, thank you. Thank you, everyone on line. Really appreciate it. 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, ladies and gentlemen. You may now disconnect.