Earnings Call Transcript
LINDE PLC (LIN)
Earnings Call Transcript - LIN Q4 2022
Operator, Operator
Good morning and thank you for standing by. Welcome to the Linde Full Year and Fourth Quarter 2022 Earnings Teleconference and Webcast. At this time, all participants are in a listen-only mode. Please be advised today's conference is being recorded. And 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, Devon. Good morning, everyone, and thank you for attending our 2022 fourth 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 fourth 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. By all measures, 2022 was another successful year for Linde, despite the significant and unprecedented headwinds. I'm incredibly proud how every employee rose to the challenge by not only delivering record financial performance but also living our core values and supporting key initiatives for all stakeholders. And while there are hundreds of daily examples where Linde employees have created real value through their commitment and determination, I'd like to highlight just a few on slide 3. Starting with shareholders. We delivered record financial performance against the backdrop of an energy and inflation crisis not seen in half a century. Three important metrics for our owners: operating margin, EPS and ROC, all reached record highs, both for the fourth quarter and the full year. In fact, we achieved our ninth quarter in a row of growing EPS excluding FX by 20% or more. On top of that, $7 billion, almost 5% of our average market cap, was returned to owners in the form of dividends and share repurchases. We also expanded shareholder focus beyond fundamental results by identifying persistent technical constraints on Linde's stock valuation. The Board recommended a solution to simplify our exchange listing, which was approved by an overwhelming majority of shareholders. However, achieving sustainable long-term value creation requires more than just a commitment to our owners. We need to successfully integrate all stakeholders, including employees, customers and the very communities we operate in. So on the environmental front, we continue to make great progress, and 2022 was no exception. Looking at the numbers, we added 50 additional zero-waste sites in 2022, reaching 760 sites around the globe. We reduced absolute Scope 1 and Scope 2 greenhouse gas emissions by over 1 million tons of CO2 versus 2021, despite growing volumes. This is a good start towards our stated goal of reducing 35% greenhouse gas emissions by 2035, which was recently validated by the science-based targets initiative. In addition, through the use of our technology, products and services, we help customers avoid more than double the CO2 emissions from our operational footprint. These achievements have been recognized by the Dow Jones Sustainability Index, CDP and several other independent organizations. And we are not only committed to reducing our own carbon footprint, but we're also playing a major role in the global energy transition, which I'll cover later. Of course, none of this is possible without the commitment of our employees. When I measure performance and human capital, I first look to our longstanding company values of safety, integrity, inclusion, community and accountability. Our safety performance continues to be best in class as defined by a double-digit improvement over 2021 in lost workday cases and commercial vehicle incidents. Creating a diverse and inclusive environment where employees can achieve their full potential remains a priority for us. In support of this commitment, Linde has recently implemented a number of development programs across the enterprise. We're currently at 28% for gender diversity, and I fully expect us to exceed 30% by 2030 across the entire organization. The local nature of our business has also enabled over 500 different community engagement projects, an increase of 25% from 2021. Linde donated more than $10 million to support various charitable and STEM programs, including over $2 million in support of our Ukrainian employees and relief efforts. These highlights represent only a handful of accomplishments during the challenging 2022. However, here at Linde, we have a relentless focus on how to improve, including better positioning ourselves for the future. And while we've had four great years since the merger, I'm even more optimistic looking ahead. The $9.2 billion project backlog, which we define as contractual growth projects with secured returns, increased $2.4 billion versus the third quarter due to our OCI win, which I'll talk about shortly. Additionally, 2022 was another record year for small on-site wins as the 52 new contracts will provide secured revenue for the next decade or more. With this in mind, for 2023, we expect to invest almost $5 billion in CapEx and acquisitions across all three supply modes, enabling high-quality growth while increasing asset density and reliability. Furthermore, we expect to start up over $2 billion in sale of gas projects this year, including our $1.4 billion project with ExxonMobil in Singapore. You'll recall that this project is expected to start up in phases, beginning this summer. Therefore, we'll remove it from the backlog sometime during the middle of this year. Of course, it's difficult to talk about growth today without mentioning key secular drivers. I'd like to remind everyone that a few years ago, we stated how we would leverage the secular driver of electronics capacity expansions and win more than our fair share of high-quality projects. Our current project backlog of Tier 1 electronics customers validates that strategy as we continue to lead the industry. I view clean energy opportunities as being no different. I expect to win more than our fair share of high-quality projects across the energy transition spectrum. We are already partnering with global leaders and actively developing large-scale projects with contractual terms and conditions and scope that you've become accustomed to with Linde. This approach is consistent with what I mentioned last quarter. Of course, it never hurts to reiterate. First, we intend to partner with subsurface experts for all underground operations. We're not geologists. Secondly, all projects will follow our investment criteria. In other words, earn a commensurate return for the risk undertaken. And finally, we will stick to our core, which is management of industrial gases. We have no interest in owning or speculating on globally traded chemicals. Rather, we'll have offtakers for our products. Our recent win with OCI perfectly aligns with these principles, which you can find on slide 4. We will invest $1.8 billion as the long-term supplier of nitrogen and blue hydrogen into OCI's ammonia facility with terms and conditions and a return profile consistent with our traditional on-site contracts. OCI is an expert in ammonia production, logistics and marketing, something Linde doesn't want to engage in. In addition, we are partnering with a world-class oil and gas company for the CO2 sequestration. This blue hydrogen project is a great start, and we have several more large-scale energy projects under development. These opportunities follow our traditional gas model and involve partners that are global leaders in their space. Additionally, we will continue to execute in our base business, managing pricing, productivity and increasing density across all three supply modes because we recognize that our owners appreciate the resilience of the industrial gas model. Overall, 2022 was another stellar year despite the many headwinds. We achieved new highs across several key financial metrics while relentlessly focusing on our core values. This is the fourth year in a row of double-digit EPS growth, and I see no reason why this won't continue. Stated simply, I have confidence that we will deliver strong results irrespective of the economic and geopolitical climate. From my vantage point, I've never been more confident about Linde's future. I'll now turn the call over to Matt to walk you through the financial numbers.
Matt White, CFO
Thank you, Sanjiv. Please refer to slide 5 for a summary of the fourth quarter results. Sales totaled $7.9 billion, which reflects a decrease of 5% year-over-year and 10% sequentially. It's important to note that underlying sales grew by 7% year-on-year but fell by 2% sequentially, indicating various factors influencing the trends. Specifically, foreign exchange negatively impacted sales by 6% year-on-year due to a strong U.S. dollar, although this trend has started to reverse as shown by a flat sequential effect. I will discuss our guidance later, but at current foreign exchange rates, we may see some positive developments ahead. Divestitures from GIST and the removal of Russia from our consolidation resulted in a 4% headwind compared to last year and a 2% headwind compared to the third quarter. We expect to compare against these factors starting in June and continuing in September, although I anticipate a sequential benefit in the first quarter from our recent acquisition of nexAir in the U.S. The engineering sector saw a 4% decline from last year and a 3% fall sequentially. The year-over-year decline is attributed to Russian projects, while the sequential decrease is due to timing related to a U.S. project. I foresee a few more quarters of volatility in the engineering segment until we work through and compare against suspended Russian projects. Although we halted all operations in Russia in July 2022, we are still addressing balance sheet liabilities as we reach settlements with our suppliers and former clients. Trends in cost pass-through are beginning to stabilize, showing a 2% increase compared to last year but a 3% decline sequentially. This reflects contractual pass-through of energy costs and does not affect operating profit dollars, but it does impact operating margins as we adjust sales and variable costs. Volume decreased by 1% year-over-year and 4% sequentially. This decline was mainly due to economic weakness in EMEA and harsh weather conditions in the U.S., which offset growth in APAC and project start-ups. The bulk of the volume reduction came from pipeline customers, resulting in a greater impact on sales than on profits due to the nature of contractual fixed payments. Compared to the third quarter, the drop in volume stemmed from weather-related issues affecting U.S. pipeline customers, a softer economy in EMEA, and typical seasonal impacts from Southern Hemisphere LPG. We experienced an unusually high number of outages among U.S. pipeline customers towards the end of the quarter due to weather, particularly in December, although most customers have returned to their normal operational levels. Thus, this is not anticipated to pose an ongoing challenge. Pricing remains strong, with an 8% increase from 2021 and 2% from the third quarter. These increases are widespread and in line with inflation rates. Operating profit reached $2 billion, leading to a record operating margin of 25.3%. Excluding pass-through, operating margins improved sequentially and year-over-year across all gas segments as pricing adjustments outpaced cost inflation, enhancing the overall quality of the business. The engineering division recorded an unusually high operating margin this quarter due to favorable project timing. It's worth noting that engineering follows a percent of completion accounting method, so customer cash deposits are recorded as liabilities on our balance sheet until we can bill the customer. When we have the right to bill, the liability is recognized as revenue on the income statement. This quarter, we resolved a significant contract, allowing us to keep all associated cash deposits and recognize the remaining liability as current period revenue. I do not expect this margin to remain sustainable beyond this quarter. Many of you may be curious about how to forecast engineering moving forward given recent developments. I recommend modeling based on the sale of plant backlog, which should represent the next 3 to 4 years of revenue with average profit margins in the low- to mid-teen percent range. In periods of increasing backlog, cash inflows and margins are typically higher, whereas in declining situations, the opposite tends to happen. However, current circumstances are diverging from this trend due to significant project reductions caused by sanctions, suggesting that we may face more volatility in the upcoming quarters. Our earnings per share stood at $3.16, a 14% increase from last year or a 20% rise excluding foreign exchange effects. As Sanjiv noted, this marks the ninth consecutive quarter with over 20% EPS growth when excluding foreign exchange. Operating cash flow decreased compared to both the previous year and sequentially, primarily due to the timing of engineering projects. Please turn to slide 6 for an overview of our capital management for 2022. Operating cash flow for 2022 was $9 billion, which represents 82% of EBITDA and aligns with our multi-year average. The business has consistently generated stable levels of cash across different economic conditions. On the right, you can see how we allocated that cash in line with our defined capital allocation policy that focuses on growing the dividend, reinvesting in the business, and utilizing surplus cash for share buybacks. Over the year, we invested $3.3 billion while returning $7.5 billion to shareholders. We expect a significant increase in 2023 regarding new business investments while continuing to increase the dividend and maintaining a robust share repurchase program. I will conclude with our guidance on slide 7. For the first quarter, we project an EPS range of $3.05 to $3.15, representing a growth of 4% to 8% compared to the previous year or 9% to 13% when excluding foreign exchange. Sequentially, this estimate accounts for recovering U.S. pipeline volumes and an acquisition that will primarily offset the impacts of seasonal trends in China and reduced engineering profitability. The full-year guidance is forecasted to be between $13.15 and $13.55, showing an increase of 7% to 10% or 9% to 12% when excluding an anticipated 2% headwind from foreign exchange. Both projections assume no significant changes in economic conditions at the midpoint. Additionally, we expect a 4% foreign exchange headwind for the first half of the year, resolving to a flat impact in the second half, although recent patterns have improved. At this moment, we feel it is prudent to maintain a cautious stance in light of an unpredictable environment. If the economy grows, we will see upsides; if it does not, we will implement measures to mitigate impacts similar to our responses in 2020 and 2022. Our responsibility as management is not to forecast future events but to act effectively in a volatile world and fulfill our commitments. I will now turn the call over to questions and answers.
Operator, Operator
Our first question comes from Duffy Fischer with Goldman Sachs.
Duffy Fischer, Analyst
Yes, good morning. I have a couple of questions regarding the new project announcement. Historically, many fertilizer companies relied on captive production. With this outsourcing, does that suggest a move towards an ATR or something related to the IRA, or is it tied to your pipeline? Does this give you a competitive edge in the industry regarding outsourcing hydrogen in the future? Additionally, regarding the project itself, if we consider your $0.10 of operational profit for every dollar of capital, should we anticipate a run rate of about $180 million starting in 2025? Is that an accurate way to view this?
Sanjiv Lamba, CEO
Thank you, Duffy. Let me take a moment to explain why projects like this become appealing for Linde as a partner. In the case of the OCI project, several factors work in our favor, which leads to your question about why to outsource versus keep it in-house. Linde offers various advantages: we have the engineering, procurement, and construction capabilities with a proven record of executing large and intricate projects, and we can integrate diverse technology packages. You mentioned ATRs, which are new for many operators. However, we already manage one at our facility, making that advantage accessible to those considering an outsourcing model. Additionally, we provide reliability that a standalone unit cannot offer. We also anticipate having the hydrogen pipeline connected to our U.S. Gulf Coast system, which includes the capacity to store excess hydrogen during peak production times, along with strong operational expertise in managing the ATR ASU complex. As I mentioned, we already operate one at Clear Lake, which enhances our capabilities. Ammonia producers increasingly view Linde as a complementary partner in their expansion efforts for blue and eventually green technologies. Considering all these aspects, I believe it's a strong argument, Duffy. Regarding the expected returns, we maintain a disciplined approach to capital and investments. We aim for double-digit unlevered post-tax returns when assessing projects like this. It aligns with our traditional industrial gas projects, and that’s how we would factor the returns back into the earnings per share.
Operator, Operator
Our next question comes from John McNulty with BMO Capital Markets.
John McNulty, Analyst
Maybe just another one on the blue hydrogen opportunities. You're in a position now where you've got a partner on the carbon sequestration side. I guess, when we think about the Q45 credits or the value of them, so maybe there's some negotiation there, I guess, how should we think about how much you capture as part of this carbon capturing that you set up versus how the sequestration gets allocated? Is there a way that we should be thinking about that or a rule of thumb? I'm sure every contract is going to be a little bit different, but your partner sounds like it's going to be a steady and long-term one.
Sanjiv Lamba, CEO
Exactly. So, let me start off by quickly identifying that there are three components to this deal coming together. There is a customer who is the offtaker, which is a core part of our strategy. Without an offtaker, we don't develop these projects. There is the Linde scope, which includes the ASU, the ATRs, and the carbon capture equipment that we are investing in. The 45Q is linked to the entity that captures the CO2. In this instance, we are working with numerous partners to develop multiple project streams like this. Currently, we are in advanced conversations with several partners for this project. Essentially, we are discussing what could be termed a tipping fee, where we would have arrangements allowing them to cover the costs of transmitting and injecting the CO2 for underground storage and managing it on a permanent basis. This is how you would structurally see it. The 45Q benefits are part of the discussion and negotiation that we are currently engaging in with a few different carbon sequestration experts.
Operator, Operator
Our next question comes from Mike Leithead with Barclays.
Mike Leithead, Analyst
I'll stay on the theme and ask another one on the OCI project. You mentioned it will connect to your existing pipeline. For your existing customers on that pipeline, I assume you're currently supplying them traditional gray hydrogen. I'd assume there's also now an opportunity to sell them blue hydrogen at some price or value premium. Am I thinking about that correctly? And then, when you think about your base returns or hurdle rates for this project, would those incremental home upshift opportunities, the blue hydrogen on the pipeline, be considered in your base returns, or is that, call it, potential upside from here?
Sanjiv Lamba, CEO
So Mike, you're right that there is some excess blue hydrogen that we will have out of this facility. We've obviously scoped for that. The linkage into the U.S. Gulf Coast hydrogen pipeline network is both space, right? It works as a reliability factor, very attractive for OCI, at the same time, gives me the opportunity to take that surplus blue hydrogen and put it back into my system. We have demand for that blue hydrogen. And yes, there is a premium. In the past, I've explained between gray and blue, the premiums that exist, and we will be putting that into the pipeline for customers who are moving onto blue hydrogen and have the willingness to pay for it. So to that extent, whatever surplus we have, we have factored that into our economics. As you'd expect, we tend to be fairly conservative around how we model some of that stuff, and you will see that also here. Is there a potential upside longer term? There is always going to be as that transition to blue hydrogen happens.
Operator, Operator
Our next question comes from Nicola Tang with BNP Paribas.
Nicola Tang, Analyst
Thanks, everyone. Hi. I’m getting off theme. I'd like to ask a little bit about the buyback actually. I see that it stepped down a little bit from the usual sort of $1 billion per quarter in Q4, which I assume was due to restrictions around ahead of your AGM. If I understand correctly through the delisting process, there may be a few restrictions around your ability to pay dividends or do a buyback until you get the approval from the Irish court. So, can you just sort of clarify whether that you see any constraints in terms of your buyback or timing of the dividend around the delisting period? Thanks.
Sanjiv Lamba, CEO
Nicola, I'm going to headline that by saying I don't see any constraints, but I'll ask Matt to just give you a little more color on that.
Matt White, CFO
Sure. Hi, Nicola. To address your two questions, regarding the buyback pace, we were out of the market for most of December due to the merger structure. We are now back in with our traditional 10b5-1 plan, and active buybacks will resume in a few days. This will impact some quarterly reductions since we needed to be officially at a certain level. Regarding the Irish distributable reserves related to dividends and buybacks, this is a process similar to what we experienced during the original merger between Praxair and Linde AG. It's mostly a routine task, especially now that we have a solid track record. We are well ahead of it, and this will not impact the dividend or buybacks, which are all accounted for. I have no concerns on that front.
Operator, Operator
Our next question comes from Jeff Zekauskas with JPMorgan.
Jeff Zekauskas, Analyst
With all of the winter storms, did Linde itself have operational issues in hydrogen in the fourth quarter?
Sanjiv Lamba, CEO
Jeff, the impact of the winter storm was primarily on our on-site customers, resulting in customer outages. We were there to support them with whatever nitrogen requirements, etc., were there, but the outages were at the customers' end.
Operator, Operator
Our next question comes from David Begleiter with Deutsche Bank.
David Begleiter, Analyst
Thank you, Sanjiv. Back to the OCI project, should we think about the 45Q tax credit as additive to your low-double-digit return or is it embedded in that assumption?
Sanjiv Lamba, CEO
It is embedded. The relevant portions are appropriately included in the economic model. A double-digit return is a broad range, making it an appealing project for us as it all comes together.
David Begleiter, Analyst
Very good. And you mentioned last quarter about 30 projects you're working on, I think, in the U.S. on the back of the IRA implementation. Would we stand in additional projects, like OCI be announced perhaps in the next few months or a few quarters? Thank you.
Sanjiv Lamba, CEO
David, I've mentioned that we have a large number of projects we're working on. We've said that we had visibility over a decade now of about $30 billion in overall terms of decisions that we expect to be making. I also mentioned that I see $7 billion to $9 billion of decisions on projects for investment over the next two to three years. And that, despite the $1.8 billion that we've now announced, I still see that $7 billion to $9 billion number as being robust in terms of decisions over the next two to three years.
Operator, Operator
Our next question comes from Peter Clark with Société Générale.
Peter Clark, Analyst
Again, it's going back to the OCI a little bit. I mean, obviously, that plays to your strengths. You can see that with the infrastructure, the pipelines and everything. Obviously, there's a lot of talk now coming out of Europe, though with a response to the IRA. And I see your footprint there. It's not quite the same as the Gulf Coast. You don't have the hydrogen pipelines, the same expense and stuff. Just wondering how you see your advantages there, if there is a real risk.
Sanjiv Lamba, CEO
So Peter, I'm going to give you the example of Germany and Leuna where we have exactly what we have here in the U.S. Gulf Coast. Peter, can you hear us?
Peter Clark, Analyst
Well, I think yes. In Europe, you don't have the same pipeline infrastructure that exists on the Gulf Coast. So...
Sanjiv Lamba, CEO
We do. And I was going to give you an example of Germany and Leuna where we have exactly the same structure, multiple customers, pipeline network, serving refineries and chemical companies in that industrial network. So, that's an example of where we have incumbent strength. In fact, we are building our electrolyzers there to provide some green into that very pipeline network. So, that's one example where we do have the ability to expand and use that incumbent position that we have as a leverage to win more into that industrial activity and the part that we operate in Leuna in Germany. So, that's an example in Europe. What I'd say also to you is I think the nature of the projects in Europe is going to tend to be quite different, where there will be a complex producing product and then putting it into a pipeline network. Our ability, therefore, to participate in these islanded developments remains very strong. And I can also tell you that of the number of projects that I referenced previously in response to David's question, I see a number of those currently being developed in Europe as well.
Peter Clark, Analyst
Got it. Can I add a quick question on trading? In Europe, the margin increased significantly even though volumes were down, largely due to the on-site business. I assume that contributed to the margin improvement. How do you view the price versus cost dynamics regarding the selling price in relation to the current energy cost situation? I believe most adjustments have been made, so I’m curious about how you see this evolving in 2023. Thank you.
Sanjiv Lamba, CEO
So Peter, when I consider energy costs and their impact on our business, I see it in two ways. In terms of power and natural gas costs, any fluctuations in these costs are reflected in our contractual cost pass-through mechanism. Therefore, if these costs rise or fall, you will observe some adjustments as a result. For other aspects, we handle inflationary impacts and manage our business through pricing. As you know, we have a 30-year history of positive pricing, and I don't see any reason for that to change moving forward. If fuel costs increase, we handle that through our pricing mechanism, which addresses cost inflation. Similarly, if other costs rise, we also manage that via pricing. We focus on managing this through product pricing rather than just surcharging, so the long-term stability of that pricing is quite robust. We feel confident about our position and our ability to adapt as we move ahead.
Matt White, CFO
And Peter, this is Matt. I would just add to Sanjiv's point. I mean, I think a good indication to see these changes you're looking for are the sequential trends. So, when you look at EMEA sequential trends in this most recent quarter, you can see that, to Sanjiv's point, pass-through is negative 6%. That is the energy pricing, that is the natural gas pricing coming down, yet pricing was up 4%. So, we're still seeing stability in the pricing levels. But of course, we are seeing large reductions in the pass-through as that energy comes in.
Operator, Operator
Our next question comes from Kevin McCarthy with Vertical Research Partners.
Kevin McCarthy, Analyst
Sanjiv, would you comment on your expectations for China as they emerge from the Lunar New Year holiday? What are you baking in there in terms of baseline demand trajectory for '23? And then, I'd welcome any thoughts on non-China, Asia as well, taking into account your ExxonMobil project start-up in Singapore.
Sanjiv Lamba, CEO
Sure. So Kevin, just talking about the APAC business overall, and I'll just walk you through APAC more broadly. That would give you the color that you're looking for. Again, we had solid pricing, as you saw. We had record operating margins. They are up at 26.5%. I've said to you folks before that there's a target on the back of the Americas business, and APAC and EMEA are moving in that direction to try and bridge that gap. Sales were pretty strong in electronics, in particular, across APAC followed by chemicals energy and then a bit of manufacturing. It is a story of two halves, if you will. Ex-China, again, electronics, very strong chemicals, engineering, energy and manufacturing also extremely strong, some seasonal impact of LPG business in South Pacific that you would normally expect. We see that level stable, and I'm seeing that in January, the same momentum carrying through. In China itself, in the last quarter, we saw steel automotive being reasonably weak. The Chinese New Year, obviously, in January kind of impedes our ability to really see how that recovery is going to come through given the reopening that's been touted now. I think the next couple of weeks, I'm watching carefully to see how that trend shapes up, and that's really going to determine what that long-term view on China is going to be. I said last year that I expect moderated growth out of China, and that's kind of what we've considered in our guidance.
Operator, Operator
Our next question comes from John Roberts with Credit Suisse.
John Roberts, Analyst
Is Linde interested in the disassociation of ammonia back to hydrogen and nitrogen? And I don't know if any of the OCI ammonia is targeted for export for local disassociation, but I'm more interested in general. Since there are a number of blue ammonia projects underway by companies who don't sell hydrogen and nitrogen and I guess, there could be some extra cargoes that will be available eventually in that market.
Sanjiv Lamba, CEO
I'll answer that in two parts. First, let’s discuss technology and then the commercial aspect. Regarding technology, Linde has developed strong capabilities around backtracking ammonia to separate it and obtain hydrogen. Currently, we are conducting pilots on new catalysts and advancements to enhance the efficiency of this process. We are collaborating with one of the largest oil and gas companies in the world for these trials. I am optimistic about our technology and that specific project, and you can expect more updates in the coming weeks. On the commercial side, this is a more challenging topic. To produce blue or green ammonia, we invest significant energy into the process. Once we obtain the ammonia molecule, it is transported via large ships to storage, after which we back-crack it. The energy losses throughout this process make the economics seem unfeasible to me. Therefore, I believe that directly using ammonia, whether for fertilizers or as a fuel source, is more logical in the short term. As our technology evolves and energy balancing in our pilot projects improves, it may become more viable in the long run.
Operator, Operator
Our next question comes from Steve Byrne with Bank of America.
Steve Byrne, Analyst
Can you provide a little more granularity on how you got the 21% sales growth in electronics year-over-year given that end market that's clearly slowed?
Sanjiv Lamba, CEO
When a fab has been constructed, we are talking about solid contracts with top-tier players around the globe. Once a fab is set up, they need to manage the operational elements effectively to ensure that capacity utilization works in our favor. We are experiencing growth in this market due to the ramp-ups from new fabs that started a couple of years ago, and we are increasing our gas supply to support the rising production there. Additionally, we are continuously improving some of the materials we provide to these fabs in light of emerging technologies. We refer to these as electronic special gases, and we are seeing ongoing growth in that area as well. Furthermore, it's important to note that there is also a strong pricing factor involved.
Steve Byrne, Analyst
Regarding the OCI blue ammonia project, the planned start-up in 2025 appears quite ambitious. Is construction already in progress? Specifically for your partner, does your contract with them begin in 2025 if their plant is not operational? Additionally, is your partner for sequestration making progress on developing a classic injection well? Could you provide insights on these potential bottlenecks?
Sanjiv Lamba, CEO
These projects usually take a long time to develop, often months or even years. We've been working on this project for some time, which is why we are fairly confident about launching it in 2025 and moving into commercial production. I feel optimistic about our progress. Having a local engineering team capable of handling complex projects gives us a competitive edge. Our customers have also been progressing in their construction activities, so I don't foresee any delays on their part. Contractually, we always safeguard our interests with specific agreements to ensure we receive our facility fees when we complete our investments and construction. Regarding downhole activity, we are in discussions with several experienced companies specializing in carbon sequestration, and these conversations are moving forward positively. We are conducting due diligence on their permitting capabilities and current progress. Some have already submitted applications, while others are making good headway in their preparations. We are confident in their readiness to manage the sequestration related to the pipeline.
Operator, Operator
Our next question comes from Vincent Andrews with Morgan Stanley.
Vincent Andrews, Analyst
Just sticking with that global end-market trend slide, two aspects of it. One, is this going to be the last quarter of difficult healthcare comparisons? And should that yellow box start to turn green? And then secondly, the other piece within industrial actually had the worst sequential sales growth. So, what in particular within that other bucket was driving that minus 6% sequentially?
Sanjiv Lamba, CEO
We are nearing the point of comparing our current volumes to those during COVID. As you mentioned, we are seeing improvements in that area. The sequential movement indicates we are moving in the right direction, and you can expect to see more positive developments in the upcoming quarters. Overall, we have a mix of sequential elements at play. I want to highlight a few specific points. First, the U.S. on-site business experienced customer outages due to the winter storm, which impacted metals, chemicals, and energy sectors. However, our trends in January look very promising. Most on-site customers have returned to their seasonal run rates, meeting or exceeding expectations, which we noted in our Q1 guidance. In terms of EMEA, there has been lower economic activity this year, particularly affecting the on-site business due to volatile energy costs, impacting customers in metals, chemicals, and energy. Consequently, our volumes have decreased compared to last year. Nevertheless, our strong contracts and quality clients have helped maintain the EMEA margin at 25%, which is a target I set for that region as they work to improve their margin relative to the Americas. In Europe, sentiment is gradually improving, and with more stability in energy pricing, we are beginning to see a slow increase in on-site volumes, although they remain below last year's levels. We are monitoring how these developments progress.
Vincent Andrews, Analyst
And just to that other end market, which is the bottom one on that slide, under industrial, is there anything specific in that other piece?
Sanjiv Lamba, CEO
Matt, do you want to take this?
Matt White, CFO
Yes. Sure, Vince. So a couple of things on other. Generally, what it represents, clearly, items that wouldn't fit in the categories above it represents a competitor or it would represent distributors that we don't have an actual end market identified. It is the smallest percent, so large moves could shift it. In this particular case, it's the seasonal component of LPG. That's the big driver since that is a sort of a retail component of our Southern Hemisphere business. And that just shows on the year-over-year, right? You can see the year-over-year is still up slightly. This is mainly driven by the seasonality component of some of that residential LPG component.
Operator, Operator
Our next question comes from Tony Jones with Redburn.
Tony Jones, Analyst
I just wanted to ask about volumes. With the good visibility you have over the next couple of quarters, do you think some of the new projects ramping up will offset slower end-market trends, particularly EMEA, and maybe even the U.S., if things deteriorate from here?
Sanjiv Lamba, CEO
Tony, as I said, the volume trends that we were looking at in January look really good. And I mentioned the on-site customers in particular, we're seeing them back at seasonal run rate that I would expect them to be at or slightly above that. More broadly around manufacturing, we're also seeing a snapback after the holiday period, so the seasonal impact. And kind of watch out for what happens beyond that. Again, January showed us a good clear path to that in the U.S. as well. In Q4, our packaged goods, if I look at the gases and hard goods, both grew sales double digits, and we are seeing momentum continue into January on that as well.
Operator, Operator
Our next question comes from P.J. Juvekar with Citi.
P.J. Juvekar, Analyst
Yes, good morning. Sanjiv, previously, you mentioned three categories of capital: $3 billion for decarbonized Linde, $10 billion for decarbonized customers, and $20 billion for greenfield projects. Are the returns in these three categories similar? Additionally, how do you approach forecasting long-term hydrogen prices, considering these projects might span 20 to 30 years and hydrogen costs have been decreasing significantly? Thank you.
Sanjiv Lamba, CEO
Let me briefly discuss hydrogen pricing and we can then move on to the three categories we mentioned. Regarding hydrogen pricing, we have been in this business for about 50 years, giving us significant experience. We evaluate our projects based on the capital we invest and aim for double-digit unlevered post-tax IRRs to ensure their viability, which in turn informs our hydrogen pricing. As leaders in the hydrogen market in the U.S. and globally, we feel confident in our competitive offerings. However, the pricing volatility you're inquiring about will mainly arise from the green hydrogen segment, which requires considerable scaling. Currently, green hydrogen is not scalable or cost-effective. Even with the anticipated production tax credit of $3 per kg from the IRA, we believe green hydrogen has not yet reached a critical inflection point. We anticipate a development period of at least 5 to 7 years before we see significant pricing shifts. Regarding the three categories we discussed, they indeed differ. For instance, in the U.S. Gulf Coast, when we incorporate capture capabilities into existing assets, we're effectively adding incremental capital to an asset base that already exists, resulting in more attractive returns. In other areas, such as decarbonizing clients or exploring new markets, we are primarily establishing new assets. In these cases, similar to what we've done with OCI, we combine an ASU with an ATR and carbon capture, looking to secure traditional industrial gas contracts that align returns with the risks we take. That outlines how we view the dynamics of these two categories.
Operator, Operator
Our final question comes from Christopher Parkinson with Mizuho.
Christopher Parkinson, Analyst
On the last earnings call, there was a very helpful slide regarding the IRA and the acceleration of the U.S. clean energy transition. I’d like to focus on one of the smaller areas, specifically the decarbonized Linde. It seems you have numerous projects, representing over $3 billion in opportunities, which appear to be relatively easy wins. How should we evaluate these opportunities in relation to your priorities, considering the short, intermediate, and long-term opportunities with customers as well as new markets? Thank you.
Sanjiv Lamba, CEO
Thanks, Chris. So, that bucket, and I referenced this briefly to P.J.'s question earlier on as well. That bucket is installed assets that we have today. There are about 11 to 13 assets that we have on our list for that, $3 billion spend that we talked about. And really, I expect that in the midterm, we will be looking at decarbonizing that. There are two drivers for that. One, we're seeing conversions and demand buildup of blue hydrogen across our existing network. So clearly, we want to make sure our assets are ready and able to supply that. The second, remember that from a sustainability point of view, we've made a commitment that we will bring absolute reductions to our Scope 1 emissions, which are coming from that installed base of steam methane reformers that we operate in the Gulf Coast. So, we will be tackling that both from a point of creating economic value, but also living up to our sustainability commitments that we made in reducing absolute scope of emissions. In the midterm, you'll see actions on all of that.
Juan Pelaez, Head of Investor Relations
Devon, thank you, and thanks to everyone, for participating in today's call. If you have any further questions, feel free to reach out. Have a safe day.
Operator, Operator
That concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.