Earnings Call Transcript - LIN Q4 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Linde plc Fourth Quarter 2021 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.

Juan Pelaez, Head of Investor Relations

Thanks, Cristina. Good morning everyone and thank you for attending our 2021 fourth quarter earnings call and webcast. I am Juan Pelaez, Head of Investor Relations. And I’m joined this morning by Sanjiv Lamba, Chief Operating Officer; and Matt White, Chief Financial Officer. Today’s presentation materials are available on our website at linde.com in the Investors section. Please read the forward-looking statement disclosure on Page 2 of the slides and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are in the appendix to this presentation. Sanjiv will provide some opening remarks, and then Matt will give an update on Linde’s fourth quarter financial performance and outlook, after which, we will wrap up with Q&A. Let me turn the call over to Sanjiv.

Sanjiv Lamba, Chief Operating Officer

Thanks, Juan, and good morning everyone. By all measures, 2021 was another successful year for Linde. Our employees around the world delivered strong financial results while exemplifying Linde’s core values every day. I’d like to take this opportunity to thank them for their tireless efforts to ensure safe, reliable, and cost-effective supply of critical products and services to our customers. Slide 3 provides full year highlights by four key areas of focus. Of course, this list is not exhaustive. There are many more we manage every day. However, these represent the overarching priorities that I view as important to our continuing success. So let me begin with our shareholders. This year, we once again delivered industry-leading performance. That makes it the third year in a row since our merger. EPS grew 30%. Operating cash flows expanded 31% and ROC increased to 17.7%, with all three metrics reaching record levels. And it’s important to remember, we achieved these numbers from a very strong 2020 base, which also grew double-digit percent from 2019. We clearly demonstrated the resilience of our business in 2020 and the ability to leverage the economic recovery in 2021. We shared the success with our owners by distributing $7 billion in the form of dividends and stock repurchases, and I fully expect this trend to continue. This was all done while implementing an orderly CEO and Board share transition to ensure future performance without any disruption. In fact, we have positioned ourselves quite well for the future by winning high-quality opportunities that meet our disciplined investment criteria. 2021 ended with a record $13 billion of contractually secured backlog projects, including more than $1 billion for new semiconductor fabs with leading customers in the electronics end market. In addition to that, we made $2 billion of base CapEx investments, including a record 43 small on-site plants also with long-term contracts. And we have also committed close to $500 million in clean energy initiatives. Currently, we are reviewing roughly 300 decarbonization projects globally with probability adjusted add to more than $4 billion of potential investment opportunities. Of course, none of this is possible without the thousands of talented employees that run our businesses each day. We achieved best-in-class safety performance while improving gender diversity to 28%, well on track for our 30 by 30 goal. In addition, we improved on several other country-specific diversity goals to ensure we run and manage our businesses in a way that best reflects and supports the communities we live in. We are a very local business and it’s critical that we always strive to give back. In further support of that commitment, every Linde business contributed to the 400 community engagement projects executed around the world. And all these actions were undertaken in another year of the pandemic with our teams providing reliable and uninterrupted supply of gases and services to our customers, including critical oxygen to millions of patients in hospitals and at their homes. Finally, we maintained a strong commitment towards sustainability by doubling down on our existing carbon intensity goals and announcing more ambitious, absolute emission reduction goals for 2035 and also a roadmap for climate neutrality by 2050. And while it’s encouraging to see independent recognition of our employees’ efforts in this area, including a few listed here from Dow Jones Sustainability and CDP, I know we can further improve. Overall, I’m proud of how the Linde team came together against several headwinds and delivered industry-leading performance once again. So as I sit here today, I’m more confident now than ever in our ability to deliver another record year in 2022. I’ll now hand over the call to Matt to walk you through the financial numbers. Matt?

Matt White, Chief Financial Officer

Thanks, Sanjiv. Please turn to Slide 4 for an overview of the fourth quarter results. Sales of $8.3 billion were up 14% versus prior year and 8% sequentially. You can see the effects of cost pass-through at 6% and 3% versus last year and the third quarter. While this is the highest quarterly number we’ve seen in over a decade, it demonstrates the strength of our contracts by protecting returns from higher energy costs. Remember, this has no impact on operating profit dollars, but will negatively affect operating margins since we gross up both sales and costs. As anticipated, engineering contributed a solid 3% growth on the strength of their record project backlog. This trend should continue in the foreseeable future as they work through their multiyear $10 billion sale of plant backlog. Excluding these items, organic sales increased 9% over last year and 2% sequentially from a combination of higher volume and price. The volume increase over 2020 was broad-based with one-third coming from project start-ups and the remainder from base volume improvement across all end markets. Sequentially, volumes were flat as growth in Food and Beverage, and Energy and Chemicals were offset by lower metals and seasonal reductions in our Southern Hemisphere LPG business. Price increased 3% over prior year and 2% sequentially across all geographic segments, with the largest increase coming from EMEA due to greater inflationary pressures. We continue to experience some pricing lag for the merchant and packaged business. So, we fully expect strong pricing in Q1 and throughout 2022 to recover inflation. Note, actual merchant and packaged price increases are mid-single to low double-digit percent across all segments. Operating profit of $1.8 billion is up 14% from last year and 2% sequentially. Operating margins of 22.2% are flat with prior year, but down 140 basis points sequentially. There are three drivers currently having a negative effect on operating margins. The first factor is, of course, cost pass-through. As mentioned earlier, a 6% increase is the highest we’ve seen. This is a standard part of our contracts that has no effect on profit dollars but had an unfavorable impact on operating margins of 120 and 70 basis points versus prior year and third quarter, respectively. The second factor relates to the Engineering segment becoming a larger part of the growth. This will improve profit dollars and cash growth but has a negative effect on mix since this business has a different margin profile due to the lack of capital intensity. Finally, the last factor is that energy prices have increased faster than the price actions in the merchant and packaged business. This pricing typically lags one to two quarters, and the higher inflation in Q4 caused this to push out another quarter. You can see in the table what the gas segment margin trends look like excluding the cost pass-through impact, up quite nicely year-over-year and down slightly on a sequential basis from this lag effect. I fully expect we’ll recover this inflation with underlying margins expanding in 2022. EPS of $2.77 was 20% above last year and 1% above the third quarter. We also included a full year summary on Appendix Slide 8, showing sales and EPS growth of 13% and 30%. To Sanjiv’s point, this growth rate comes off a 2020 base, which also performed quite well. Full year and Q4 2021 EPS increased from 2019 by 46% and 47%, respectively, which emphasizes the continued growth of our business through any scenario. In fact, the business is well-positioned to outperform in all economic cycles. Our portfolio has ample resilient market exposure for recessions like 2020, high-quality cyclical customers across all supply modes for expansion periods like 2021. Significant sale of plant capabilities to immediately benefit from capital cycles like we’re seeing today and sale of gas expertise, which has delayed capital cycle benefits, two to three years down the road. Simply stated, the Linde model can deliver leading performance regardless of the macroeconomic climate. The last point I’d like to make on this slide relates to capital management. You can see that ROC, which we view as the single most important metric for this industry, reached a new record of 17.7%. This doesn’t just happen overnight. It takes considerable effort from thousands of our employees to continuously deliver industry-leading profit and cash growth underpinned by a disciplined and consistent capital allocation process. A big part of that effort went toward delivering the record operating cash flow of $3.2 billion, which is covered in more detail on Slide 5. The left side shows our quarterly operating cash flow trend. You can see that cash has increased each quarter for three straight years, and that 2021 was a record by growing 31% over prior year. The operating cash flow to EBITDA ratio reached 96% for full year 2021, well above historical levels. Part of this is driven by project prepayments in the $1.3 billion inflow of contract assets and liabilities, which is the accounting term to describe working capital for the engineering business. As stated before, engineering is a strong cash-generating business that delivers returns well within our investment criteria. These prepayments are from the record project backlog, which will benefit the income statement over the next three to four years. Due to timing effects, I expect 2022 contract assets and liabilities to be substantially lower than the 2021 level, but we still anticipate strong cash performance across the rest of the business units. Overall, I expect ongoing operating cash flow to EBITDA ratios in the low to mid-80% range. The right side shows how we deploy the $10 billion of full year cash flow. One-third was invested back into the business in the form of contractually secured growth projects and base CapEx, which represents both growth and maintenance investments. While a substantial portion of our business, including packaged gases, health care services, and engineering don’t require much CapEx to grow, so this only represents a portion of the future growth potential. In addition, we returned two-thirds or $7 billion back to shareholders in the form of dividends and share repurchases. Our January 2021 share repurchase program of $5 billion is substantially complete, and we will review the future capital allocation in our upcoming Board meeting in two weeks. Overall, strong cash contribution from all business units enabled Linde to invest for future growth while rewarding shareholders. I’ll wrap up with guidance on Slide 6. First quarter guidance is in the range of $2.70 to $2.80, up 8% to 12% from prior year or 11% to 15% when adjusting for the assumed 3% currency headwind. Sequentially versus Q4, this range assumes flat economic conditions with seasonally lower volumes offset by higher inflation recovery. Q1 is traditionally the weakest quarter of the year, including for cash flow due to payment timing. Full year 2022 guidance is $11.55 to $11.85, representing an 8% to 11% increase versus 2021 or 10% to 13% when adjusting for the 2% FX headwind. The midpoint of this range assumes flat economic conditions and thus, no base volume improvement. Consistent with our prior approach, this is not our economic forecast, rather, it merely represents the underlying assumption in the guidance range. You can insert your own view of the 2022 economy. If it does better, I’d expect to be at the top end or above this range. If we experience a recession, we’ll take actions to meet this commitment as we did in 2020. There remains a lot of uncertainty heading into 2022. Despite all the expert forecasts, nobody knows what will happen. However, we have an industry-leading business portfolio and contractually secured project backlog. So regardless of the economic challenges, we remain quite confident in our ability to continue delivering shareholder value. I’d now like to turn the call over to Q&A.

Operator, Operator

We’ll take our first question from Steve Byrne with Bank of America.

Steve Byrne, Analyst

Yes. Thank you. I’d like to drill in a little bit on your engineering business. You had this kind of pop in revenue in the fourth quarter, and you have had this sale of plant chunk, the $6 billion project recently. But when you look over the last four years, revenue hasn’t changed much. Backlog hasn’t changed much, but your margins have doubled. Can you comment on what you have done to do that? Is that just productivity? Or is this a mix shift? And how has your view of the value of this business and the benefit to the broader operating units changed since the last few years?

Sanjiv Lamba, Chief Operating Officer

Steve, I’ll let Matt take that question, and then I’ll add on to that.

Matt White, Chief Financial Officer

Sure. Hi Steve, so first, on your question on the history, the backlog on the third-party actually has declined if you go back a couple of years or the last year or so. But the margins have been able to maintain quite well because recall, we showed the segment of the third-party business. In addition, the engineering organization also works on our intercompany sale of gas backlog. They have the ability to gain absorption of the labor and build that, and our sale of gas backlog that they support and perform will be part of the CapEx of the organization, and the sale of plant backlog that they perform and execute become third-party sales and profits for the organization. So this was something – as you probably know, we talked about even at the merger time, this combination of the companies bringing all of the opportunities, both sale of plant and sale of gas not only give our engineering organization a good backlog to work with, but also really helps with their very strong technical capabilities across growing in both areas. Now when you think about looking forward, I think the simple way to think about how to model this business, the sale of plant third-party backlog is translated dollar for dollar. So our sale of plant backlog is $1 backlog equals $1 of sales in the future. And as you probably know, the sale of gas backlog is $1 of CapEx. So it has a different ratio to sales. So for the engineering business, about a $10 billion backlog means we will get about $10 billion of future sales, and it’s usually over three to four years on how that’s recognized. And from a margin perspective, as long as they continue to have a good backlog of both third-party and sale of gas, it will allow them to efficiently manage their costs and obviously leverage our global footprint in terms of what the hourly rates are. So hopefully, that answers your question.

Sanjiv Lamba, Chief Operating Officer

Let me just add on to that a little bit, Steve, in terms of how we see that business. So there are a couple of things that the engineering business allows us to do on the gas side as well, which makes it quite unique and important for us. One is early insight into projects. So when one of our customers is looking at a large project, they will reach out to the engineering team and get some inputs. We get very early insight into that and obviously are able to leverage that. Now the next step from that is our ability then to be able to say whether we want a particular project to go down the sale of gas or a sale of plant option. And again, that optionality is something that comes intrinsically by having the engineering in-house. Lastly, it is really a competitive advantage as we look at the transition that’s going to happen with clean energy. There is a whole new market opening up. And of course, right in the heart of that is technology, which is owned and proprietary to Linde Engineering and their ability to take other technologies and build them into solutions that will hold us in good stead as we look ahead.

Steve Byrne, Analyst

Thank you for that. And one – quick one on your European business. Can you provide a split on revenue between on-site and merchants and cash? And the sequential price/mix increase of 4%, were you aggressive about pushing through price early in the quarter in order to achieve the results we did?

Sanjiv Lamba, Chief Operating Officer

Right, Steve. So the split roughly around the EMEA business, which spans about 40 countries, but that split is roughly about one-third on-site, whereas you know well, the pass-through goes automatically from the contractual structures we have, and about two-thirds of merchant and packaged, where, again, a lot of hardware goes in. To your point, we’ve been – you might recall, Steve, that for about four quarters now, we’ve been talking about inflation. It isn’t new. And while it’s not well recognized, I thought it’s worthy of just a quick reminder. We operate in about 100 countries. Some of the best businesses that we have in parts of the world, including Latin America, Asia, and Europe, have been actively managing inflation over decades. It is not new to us. It’s a muscle that we flex from time to time, and it’s part of our performance culture, getting into the details, digging in, and showing we’re executing on pricing and productivity actions day in, day out. So that’s what the guys have been doing over there. We treated it as part of our ongoing business process, and they run that every day in that quarter. It isn’t something that we do at the end of the quarter or at the beginning of the quarter.

Steve Byrne, Analyst

Thank you.

Operator, Operator

Our next question comes from P.J. Juvekar with Citi.

P.J. Juvekar, Analyst

Good morning, Sanjiv and Matt. You just talked about your 300 decarbonization projects, you said potential of $4 billion in pipeline. How advanced are these projects? And when are they likely to get added to the backlog?

Sanjiv Lamba, Chief Operating Officer

Right, P.J. Thanks for that question. So obviously, we are very excited about seeing the number of projects, and the momentum that’s building up around that. Very importantly, we must remind ourselves that these projects have long lead time and development. We are seeing that on any major project, of course, even more so on some of these clean energy projects. Typically, these projects are divided into three – we categorize them into three headings, if you will. There are a number of projects around mobility. You read about them every day. Many of these projects are smaller in size relative to the other two segments, but many of these are progressing at different paces. Large numbers in green, but a number of blue projects linked to mobility as well. The second bucket is around industrial applications. This is where we are seeing either incumbent customers or new customers look at blue hydrogen, green hydrogen, and how they convert and decarbonize their processes, whether it’s steel, chemicals, refining. It’s a long list. All of those activities. Now being at the heart of that, and in most cases, incumbent in there, we are working actively with our customers to help them understand their decarbonization strategy. As a consequence of that, we provide the input needed from our perspective to support that. The last segment is where we are looking at the energy transition. So, the use of hydrogen, in particular, as an energy source, either through a carrier, which gets talked about a lot, or hydrogen by itself. That’s a large segment, as you would expect, but is complex because it has its dynamics around larger projects. While we see development in all of these three, I think those 300 projects kind of fall neatly into there. Again, while momentum is building up, I accept that you’re reading lots of announcements every day. I do too. But I don’t really see many of those announcements translate into projects immediately. There is a lead time for that development. Do I see that the $4 billion that you referenced? Remember, that $4 billion is probability-adjusted. If I was to open up the Pandora’s box and tell you what the absolute value is, we’re talking $20-plus billion in terms of absolute value of those projects, but probability-adjusted on a reasonably conservative lender basis, as you would expect, we think about $4 billion will come into kind of decisions, FID decisions for us in the next three years.

Matt White, Chief Financial Officer

And P.J., this is Matt. I may just add to that as well. Recall that our definition of project backlog is really the most stringent in the industry. We have been executing right now on some of those green projects as part of our base CapEx. If you noticed sequentially, it even popped up here about $130 million, $140 million. These are ones where we’re building density and converting to blue or green on some existing hydrogen network. They are happening, but to meet our project backlog definition, it requires a very stringent approach, but we fully expect to see some there in the future, to Sanjiv’s point.

P.J. Juvekar, Analyst

Great. And just a question on the flip side of the energy prices. So these high energy prices, does that accelerate your green-blue hydrogen projects? And just with higher power costs, what is the cost of green hydrogen today? Thank you.

Sanjiv Lamba, Chief Operating Officer

So P.J., that’s a fairly broad question. Let me just take a step back and mention something to you, which I think is important. One of the areas around energy transition, and we are seeing a bit of pragmatism in Europe, as you know now, because the taxonomy now describes both natural gas and nuclear as being in the green zone, if you will. But one of the things to remember is that natural gas will continue to be very important as we look ahead. So I see certainly momentum building up on natural gas, more investments, the capital cycle that Matt referenced in his comments earlier on, and we see some of that playing out. The projects we are talking about in Linde Engineering are serving that natural gas, growing natural gas business and developments linked to that. So that’s important to recognize because we see that as part of the energy transition, and you’ll see a role, a very important role that natural gas will play. Let me move on and talk about whether the energy costs are supporting this transition. I believe there are two transitions happening. I believe in the next decade or so, you will see scalable technology for blue hydrogen pick up and actually create a transition to the ultimate greener energy transition that is often talked about. I really see blue playing a big role. The power pricing that you referenced earlier does not have a direct impact on that. Therefore, that momentum is on its own. On the green side, yes, as you see energy prices move up, there is a bit of a challenge around that, and that will get factored in. All of this will normalize. The reality is what you see today isn’t what’s going to be for the next five years. So we should look at green hydrogen with that perspective. There is a lens of maybe a five to seven-year development cycle. Our technology roadmap suggests that there’s a five to seven-year cycle for that scale-up to happen and for green hydrogen to start, then still be at a premium but a more acceptable premium to maybe blue as we look ahead.

P.J. Juvekar, Analyst

Thank you.

Operator, Operator

We take our next question from Nicola Tang with BNP Paribas.

Nicola Tang, Analyst

Hi, everyone. Thanks for taking my questions. First, I wanted to dig in a little bit more on the pricing dynamics. I think you mentioned that in your opening remarks that the cost inflationary pressure was bigger in Europe. So I was wondering why the sequential change in – or the sequential margin squeeze was actually larger in the Americas than it was in Europe on an ex-cost pass-through basis. Is that due to, I don’t know, Americas not being as effective at pricing? Or is it perhaps due to the pricing dynamics in Lincare? And could you talk a little bit about how the pricing dynamics in health care versus other industrial exposures and how the contract structures work? That’s the first one. Thank you.

Matt White, Chief Financial Officer

Hi, Nicola, it’s Matt. First, we’ll start by saying there are no structural concerns. I just want to make sure we’re aware of that and understand that. It’s important also to realize that, as you may recall in our last quarter, Europe right now is in the middle of some larger cost actions that they’re taking as well. You remember, Americas and APAC had done those earlier. We always said that EMEA would be a little later, and so they’re in the midst of those. What you’re seeing in EMEA is a combination of, yes, higher inflation and pricing actions, but also in the middle of some cost actions they’re taking, which will help the margin profile. In the Americas, I would not say there’s anything concerning or different. To your point, the health care profile on pricing will be different, right? That won’t price as fast to inflation. It tends to be a little more structured. That being said, at least in the U.S., they are getting a large inflationary price increase that will be effective here January 1. This is a normal part of the process, but I would say it’s more a function of how the cost actions are being taken in EMEA right now on a delayed basis, which is causing that.

Nicola Tang, Analyst

All right. Thanks. And then just a quick one around volumes. It looks like all end markets were up sequentially apart from metals and mining. Could you maybe give us a whistle-stop tour of what you’re seeing so far across some of your key end markets? And specifically comment on the metals and mining points.

Sanjiv Lamba, Chief Operating Officer

Sure, Nicola. Why don’t I do that? I’ll walk you through Q4 just to kind of build the base and then quickly talk about the outlook we’re looking at. I’ll talk specifically about metals and mining in China, as you know, that’s quite intrinsically linked. So let me start off with the Americas as maybe the starting point. In Q4, you saw strong growth, about 7% up. It was pretty broad-based when I look at the market breakdown: metals, manufacturing, chemicals, and refining, all cyclical end markets strongest, followed, of course, by electronics and food and beverage, which also did quite well. Just very quickly, I’m going to cover refinery because I know a number of you are interested in that. Our refinery volumes are up higher than pre-COVID levels. Excluding start-ups, we are about 15% up. Including start-ups, about 24% up when I look and compare the fourth quarter of 2019. Sequentially, we saw chemicals and energy continue to be strong. Metals lagged a little bit in the Americas as well, largely due to customer turnarounds that happened in the last quarter. Manufacturing is slightly weaker, but that’s as we typically expect in the third and fourth quarters. Nothing unexpected there. The other way to look at the economy is what happens on the packet side of the business. In the U.S., we saw good growth across all end markets, which is great. Both gases and hard goods saw double-digit year-on-year growth. Sequentially, gases might have been about flat, but hard goods continue to grow. So that’s good to see. Looking ahead into the current quarter, I can tell you we are seeing that fundamental demand stay strong. There are supply chain challenges, and the inflation number that came out this morning will worry people, but we still see the underlying demand being solid around the Americas with no indication of any shift from what we’ve seen. Moving to EMEA, broad-based growth was led by industrials recovering, metals, and manufacturing, showing high single-digit growth in Q4. Food and beverage was also strong. Thank you to everyone on the call who went out and bought a beer at the pub because we were up 20% overall, and in the UK in particular. That’s good news. Sequentially, volumes are more or less flat even though we had fewer workdays in the quarter. I see that trend holding for now. I can’t identify anything other than some marginal adjustments in health care, where we had a bit of a spike in a few countries around medical oxygen, but we’re seeing elective surgeries pick up. I see a bit of offset in that coming into Q1 as well. APAC volumes were up 7%, about what I’d expect, led by electronics, chemicals, energy, and manufacturing. Metals and minerals or mining for us were lower than last year, mainly due to curtailments in China as you’ve heard before. Sequentially in APAC in Q4, we also saw about 2% down, largely linked to metals and mining in China and some customer turnarounds in chemicals. There was some seasonal adjustment for LPG volumes in South Pacific that tends to happen every year. On China, specifically, January has shown preliminary data indicating steel production was down about 10% to 11%. The key production cuts and constraints in provinces like Hebei, Tianjin, Beijing, and Shandong are expected to extend until early March. After that, we anticipate returning to the previous year's levels. Overall, for the year, we’d expect something which is flat or slightly up, factoring in adjustments for the Chinese New Year. Across segments, electronics seem to be holding, and automobile production is up about 6% in the first three weeks of January. The last week of January typically sees reduced activity due to the Chinese New Year. We’re keeping a close eye on the recovery trends next week.

Nicola Tang, Analyst

That’s great. Thank you so much for the detail.

Operator, Operator

We’ll take our next question from Bob Koort with Goldman Sachs.

Bob Koort, Analyst

Thanks very much. Sanjiv, I want to go a little deeper on the pricing and the electricity and power costs in Europe. It seemed like there was quite a bit of investor consternation, and some market players were talking about four and fivefold increases in those costs. You guys did a remarkable job in the quarter. Do we have more to come? Is there a peak pinch point coming up in the first or second quarter? And then if you could, could you just talk about how you specifically introduce price through your three primary distribution methods? Thanks.

Sanjiv Lamba, Chief Operating Officer

Sure. Thanks, Bob. Let me take a step back and talk about inflation in general because it seems to be on everyone’s mind. Talk about how we address inflation more broadly and then talk about the different supply modes. In gases, about 70% of our costs are really in three buckets: power and natural gas, the first; wages, and distribution, the other two. Energy cost increases are a part of the industrial gases business. It’s something we manage every day. If power or natural gas costs go up, we make sure all our on-site contracts are passing that energy cost through. You can see that in our pass-through line, seeing a 6% year-on-year for the quarter, and 3% sequentially. Matt mentioned earlier; it’s one of the highest in a decade. That’s pretty high. It’s part of the norm of the business. In parallel, our merchant and package businesses know what needs to be done. They’re out in the field pricing our products to cover these cost increases. There are price escalation clauses, and surcharges, etc. When you see that overall pricing line is 3% year-on-year, and 2% sequential, it signifies that merchant and package pricing is about double that amount. Across segments, the range is somewhere from mid-single digits to low double digits. Clearly, that isn’t enough to cover the power inflation in the quarter itself. We referenced this earlier. But we see a lag of one to two quarters to recover the full cost inflation. Expect continued pricing going forward, and we'll recover that cost inflation as we have over decades. Wages are another cost bucket I monitor closely, and our teams are aware that productivity must offset cost inflation. I’m pleased, as I’ve said before, with how we’ve embraced productivity culture across this merged organization. I see progress in all fronts. We’ll allow for productive reviews in the next few weeks. I’m confident that our employees across segments will have several hundred projects focused on efficiency, automation, and leveraging technology to improve our work streams. It’s an ongoing piece; it’s in our DNA. Distribution costs are still being managed. I can’t deny driver shortages and associated costs. There needs to be more work done regarding hiring drivers, which comparatively is a challenge in the business but also in ensuring that each business is passing cost inflation through. Overall, we’re working to pass the cost inflation through and assess every element of cost inflation at our GBRs every month. They’ve done a fairly good job, but there's more needed to entirely offset price inflation. Expect further pricing and productivity reflection as we proceed. For three segments, on-site is a direct pass-through, while merchant and package work utilizes an ongoing approach. Historically, we haven’t run negative pricing; it continues to be positive. Managing energy price increases is part and parcel of the industrial gas business.

Bob Koort, Analyst

That’s terrific. Very comprehensive, thanks, Sanjiv.

Operator, Operator

We’ll take our next question from Duffy Fischer with Barclays.

Duffy Fischer, Analyst

Good morning, gentlemen. First question, just around the guide, so $275 million, if you annualize, I get to 11%, your midpoint is $0.70 higher than that. Can you just talk about as we go from Q1 through the next three quarters where that $0.70 comes from?

Matt White, Chief Financial Officer

Duffy, it’s Matt. First, as you know, Q1 is always our seasonally weakest, due to events such as Chinese New Year, Brazilian Carnival, and other factors. So you expect that component. Our backlog is ramping up, and our projects are contributing, which will continue to ramp forward and bring value. We expect strong pricing throughout. Our full-year guidance reflects the first quarter’s seasonality. Looking at historical trends, Q4 to Q1 is usually flat or slightly down if excluding FX effects. We feel good about the full year, with anticipated ramping and improvements in EPS due to project contribution, pricing actions, and cost management.

Duffy Fischer, Analyst

Great. Thanks. And then could you talk a little more in depth about the health care business? How has it grown over the last year relative to the overall business? Particularly like the home health care delivery business, how does it price? As I recall, its mechanism is a little different with bids and stuff. So how does it price in a situation like this where you’ve got a lot of inflation?

Sanjiv Lamba, Chief Operating Officer

Duffy, I’ll cover that as you made the question in two parts, right? Let’s talk about the business that deals with the hospitals and where we supply products. Our teams did a fantastic job in the course of the year, ensuring critical medical oxygen needs were met across the world. The medical oxygen volumes are starting to trend down. We’ve seen normal elective surgeries trend back up, balancing the offset volumes. We see a view of mid-to-long-term growth in health care at mid-single digits. Seeing that trend for the quarter is around 3% growth year-on-year. So I don’t expect anything exceptional there. Regarding home care, we witnessed some peaks with rising COVID infections. Typically, the volumes on the home care side offset what we see in hospital needs. We’ve observed that behavior throughout the pandemic. The home business serves about 150,000 patients supporting home oxygen requirements after critical care, which contributes positively to combating the pandemic. On the pricing side, the CMS and similar agencies have recognized the importance of these services. We haven’t seen competitive bidding that played out over the past two to three years. There’s some stability in pricing.

Duffy Fischer, Analyst

Great. Thank you, guys.

Operator, Operator

We take our next question from Jeff Zekauskas with JPMorgan.

Jeff Zekauskas, Analyst

Thanks very much. In one of your slides, you say that you’ve sourced more than a third of your global electricity from low-carbon sources. Do your customers want you to do that? Do they want to pay a premium for electricity from low-carbon sources? And how do you manage the issue of passing through raw material costs if you’re accessing more from low carbon sources and that electricity is more expensive? How does that negotiation work with your customers? Can you expand on this?

Sanjiv Lamba, Chief Operating Officer

Sure, Jeff. We’ve been sourcing renewable and low-carbon energy for some time now. It’s not new. In various parts of the world, we can source renewable and low carbon energy. We've passed those costs through. You’re right; in some markets, we’re more advanced than others. The UK is a good example. In parts of Europe, we manage to have those relationships integrated, where pass-through mechanisms have been built in. Customers then accept these, with a separate stream of green products emerging. Although it’s a nascent market, there’s a growing demand for customers to certify green components in their products. That’s an area where we get some premium pricing, though it's not exorbitant, it’s a growing segment. As we move forward, many customers globally are inquiring about our long-term green strategies in power sourcing. There are two components to consider: the grid itself is greening, and how actively will we venture into renewable or low carbon sourcing. Both elements contribute to what has been noted: sourcing about a third from renewable and low carbon.

Matt White, Chief Financial Officer

I would just add, when considering low carbon, think holistically. The first thing that comes to mind is always solar and wind, which can be more expensive. However, consider hydro power, which we utilize where we can. Hydro tends to be lower cost energy sources. By blending that with some of the new green opportunities, we can still enjoy a very attractive average cost of power.

Jeff Zekauskas, Analyst

And then secondly, in the quarter, was there maybe $75 million or $100 million of increased energy costs that you weren’t able to recover from pricing that you expect to recover in the future? What’s your gap right now?

Sanjiv Lamba, Chief Operating Officer

Jeff, without getting to the numbers, the principle to emphasize is that we fully expect to recover the lag from the previous quarter’s inflation. As a principle, you should expect our pricing to ensure that this lag is covered.

Operator, Operator

Take our next question from Peter Clark with Societe Generale.

Peter Clark, Analyst

Hi, yes. Good morning. The first one is on productivity actually. It never ends, of course. I saw on the APAC slide it’s being stepped up, if I remember rightly. Obviously, APAC started quite early after when the merger started. So just wondering what’s going on there? And then within Europe, you alluded to the fact productivity is helping in the fourth quarter. Am I right in thinking there’s still a bit of positive momentum in Europe? So when we reach maybe Q2, Q3, would you expect a margin bump?

Sanjiv Lamba, Chief Operating Officer

Why don’t I start with Europe first? Yes, there is a lot of ongoing productivity activity, especially in high-cost countries. There is a specific cost program that the European business is pursuing. You saw us take a restructure charge in the previous quarter, which is now processing. That will positively impact the margins you mentioned. As for APAC, a lot of businesses there have embraced productivity initiatives. They focus particularly on digitalization efforts. We believe digitalization provides the right boost to our productivity. I’ve set some internal goals for them, they’re pursuing aggressively, and I’m pleased with the progress achieved.

Peter Clark, Analyst

Okay. Thank you. Matt, you alluded to the fact the backlog is ramping up this year. You have the target for backlog providing mid-single digits to EPS. Is 2022 going to be one of those years, and what could that mean for topline kicker, considering the 2% I think you mentioned in the fourth quarter? Would it go towards 3% or 4%?

Matt White, Chief Financial Officer

Sure, Peter. The 2% I referenced was specifically on the sale of gas. In totality, considering the backlog and the sale of plant combined, you’re correct in saying, mid-single digits is our target for 2022, and we see that continuing for several years, influenced by a significant backlog time frame.

Peter Clark, Analyst

Good, and I am looking forward to the new share buyback. Thank you.

Matt White, Chief Financial Officer

So am I.

Operator, Operator

And we’ll take our next question from John McNulty with BMO Capital Markets.

Bhavesh Lodaya, Analyst

Hi. Good morning, Sanjiv and Matt. This is Bhavesh Lodaya on behalf of John. Thanks for all the color on the pricing and inflation side. A quick follow-up on the volume side of things. Are you seeing any impact from the ongoing higher pricing either through demand destruction or just delays in the volume recovery in the economy? Is that something that could come back once prices moderate?

Sanjiv Lamba, Chief Operating Officer

The simple answer, Bhavesh, is no. We are seeing underlying demand growth continue to be strong. You saw in the Americas, up 7%. You saw in APAC, up 7%. EMEA plus 2% and growing. I can't see or reference any demand disruption. We’re on a solid demand trajectory at the moment. The effects are primarily from supply chain issues and logistical challenges.

Bhavesh Lodaya, Analyst

Understood. Fair enough. Looking at your backlog, you’re clearly being very active in semiconductor electronics space. Those customers are investing a lot in capacity. Can you provide some color on how the electronics part of your backlog looks like now and how do you see its share of sales growing from the 8% it currently is?

Sanjiv Lamba, Chief Operating Officer

Absolutely, it's one of my favorite topics. From a market perspective, it’s one of those end markets that I referenced earlier on—winning $1 billion of projects in this past year, serving top-tier customers in electronics with those wins. I’m confident that electronics will be among the strongest growth contributors to our sale of gas backlog for the next couple of years—this year and possibly another two. Currently, it's about 8% of our sales, and I expect that to continue growing, potentially reaching double digits.

Bhavesh Lodaya, Analyst

Got it. Got it. Thank you.

Operator, Operator

We’ll take our next question from David Begleiter with Deutsche Bank.

David Begleiter, Analyst

Thank you. On the sales gas backlog, do you see this increasing over time? Or do you think it will stay in this roughly $3.5 billion plus range?

Sanjiv Lamba, Chief Operating Officer

Hey David. The way I see the backlog, as I referenced before, is around the electronics side and the activity we’re seeing there. On the backlog of about $3.5 billion, we have about $1 billion of start-ups this year primarily in the second half. So $1 billion of that will come out of backlog, which starts generating revenue and profits for us. I’m seeing substantial proposal activity supporting my expectation that we’ll fill that backlog at this level or perhaps even higher by year-end. The electronics opportunity pipeline is solid, and I fully expect to see the electronics contributing strongly to our SOG backlog this year and for several more to come. Additionally, chemicals demand remains strong, with new projects appearing, including methanol and ammonia. As I mentioned, clients are considering investments in these segments, which is a promising sign. On refining, increased requests for blue and green hydrogen studies are ramping up, with customers inquiring about how we can assist with carbon capture. We’re also seeing a slew of decarbonization projects progressing. Some will translate into decisions this year.

David Begleiter, Analyst

Very great. And back on health care, Sanjiv, can you parse out the benefits from COVID this year that might not repeat next year or in 2022?

Sanjiv Lamba, Chief Operating Officer

David, regarding this request, the way I think about this is, while I see the trend declining, we’re also observing normal health care volumes returning. Hospitals, in particular, had all surgeries on pause as they solely focused on COVID patients. With a decline in COVID infections and hospitalizations, we expect those critical elective surgeries postponed to be rescheduled, thus driving up demand for oxygen for those procedures. We foresee a ramp-up for that aspect, thus seeing more normalization and progression in our health care volumes.

David Begleiter, Analyst

Thank you.

Operator, Operator

And our last question comes from Laurence Alexander with Jefferies.

Laurence Alexander, Analyst

Good morning. I have two quick ones. Some of the questions assumed or implied that the pricing would catch up to the cost gap within a quarter or two. I just want to clarify, is that true? Or do you think it would take longer than that? And secondly, as you look at the longer term with the energy transition and the uncertainty around the industrial architecture and how that might be rearranged, does that affect at all your interest in doing larger portfolio optimization, streamlining the number of countries you’re operating in?

Sanjiv Lamba, Chief Operating Officer

The simple answer for pricing is that whatever gap there is will be recovered. That’s how we operate, and I do not see any gap lingering at the end of the process. With respect to energy transition and industrial architecture, it merits a longer discussion. However, we see opportunity emerging from the transitions underway, particularly with blue ammonia and blue hydrogen and developments around green hydrogen. We see varied industries opening up and fresh opportunities flowing from this transition. Portfolio rationalization is something we usually evaluate, irrespective of the energy transition. Should there be overlaps, we will factor those into our considerations. We consistently review our portfolio to identify positions that enhance our leverage. Over the past year, we have exited certain businesses while also acquiring minority stakes in others with the intention of improving focus and delivery without distraction from listing obligations.

Laurence Alexander, Analyst

Thank you.

Operator, Operator

That concludes today’s question-and-answer session. Mr. Pelaez, at this time, I will turn the conference back to you for any additional or closing remarks.

Juan Pelaez, Head of Investor Relations

We’re seeing a nice job, and thank you, everyone, for participating in today’s call. If you have any further questions, you know where to reach me. Take care.

Operator, Operator

This concludes today’s teleconference. Thank you for your participation. You may now disconnect.