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Linde plc (LIN) Q1 2019 Earnings Call Transcript

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Linde plc (NYSE: LIN)
Q1 2019 Earnings Call
May 10, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2019 Linde Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question and answer session and instructions will follow at that time. If anyone should require operator assistance, please press * and the zero key on your touchtone telephone. As a reminder, this call will be recorded.

I would now like to introduce for today's conference, Juan Pelaez. Please, go ahead.

Juan Pelaez -- Director of Investor of Investor Relations

Thanks, Chris. Good morning, everyone, and thank you for attending our first quarter earnings call and webcast. This is Juan Pelaez, Head of Investor Relations, and I am joined this morning by Steve Angel, Chief Executive Officer, and Matt White, Chief Financial Officer.

Today's presentation materials are available on our website at Linde.com in the Investor's 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 pro forma numbers are in the appendix of this presentation.

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Steve and Matt will now review Linde's first quarter results and provide a full-year outlook. We will then be available to answer questions. Let me know turn the call over to Steve.

Stephen F. Angel -- Chief Executive Officer & Director

Thanks, Juan. Just a few comments before I turn it over to Matt. Our whole separate order was lifted on March 1st, so the first quarter contains only one month of combined operations. Good start to the year, 12% EPS growth, some positive leverage from sales to operating profit as a result of pricing and cost synergies. We paid $477 million in dividends and purchased $700 million of stock, in addition to the $600 million purchase in December of last year.

The backlog remains healthy at $3.5 billion. This excludes a project that many of you have heard about, which is a project with ExxonMobil in Singapore that's value to us will be about $1.4 billion of capital investment. Jurong Island in Singapore is ExxonMobil's largest integrated manufacturing complex and it's anchored by a 600,000 barrel per day refinery. They are investing $5 billion in their largest downstream project, which goes by the acronym of KRISK [phonetic]. We are building four gasifiers to tie into two existing gasifiers that Linde operates today. We will be taking pitch from ExxonMobil and returning hydrogen, OXXO Gas, and nitrogen to ExxonMobil as well as hydrogen and carbon monoxide to multiple customers via our pipeline system. You can see our project is very much integrated into ExxonMobil's new project.

This project will be executed by Linde Engineering. We see a solid return anchored by a base facility fee structure and we expect contract signing to be in the next 30 to 60 days.

Regarding key milestones. We completed the squeeze-out of our minority-Linde AG shareholders on April 8th. We announced the divestiture of our South Korea assets on April 30th, which represents about 75% of the expected value from our required divestitures in Asia.

All our employees are excited about the merger. We see a strong pull for application technologies as we begin to appreciate each other's capabilities, a strong pull for plant capabilities, and best practices in every aspect of our business.

We are currently working through a very detailed cost and restructuring initiatives. We held our first zero-based budget review for all corporate functions a few weeks ago. And I have to say that I'm pleased with the progress we're making.

Key priorities going forward. A successful integration, obviously, price management to make sure that we're covering cost inflation all around the world, delivering on our cost, CapEx, and growth synergies, and building a high-performance culture in every sense of the word.

Regarding guidance, I'll let Matt elaborate further, but we may be a bit conservative at this point. Just keep in mind we're only one month into this merger. And I'll turn it over to Matt.

Matthew J. White -- Chief Financial Officer

Thanks, Steve. And good morning, everyone. On slide 3 you'll find the First Quarter Adjusted Pro Forma Results. As a reminder, these figures are modified from US GAAP in two ways. First, they're pro forma, which means all periods are recast to reflect the merger, including removal of the regulatory-mandated divestitures.

Second, figures have been adjusted to exclude items not indicate of ongoing business trends, which primarily relate to purchase price accounting and one-time merger and restructuring-related costs. Going forward, we'll continue to present numbers in this format, since they best represent the trends of the combined business.

Sales of $6.9 billion are even with prior year, driven by a -5% foreign currency headwind. Virtually every foreign currency has devalued against the US dollar, with most losing 5% to 10%. You may recall that the first half of 2018 had a weaker US dollar than the second half, so I expect this trend to continue for the second quarter.

Excluding foreign currency, underlying sales grew 5%, comprised of 3% volume and 2% [audio cuts out]. We achieved mid to high single-digit growth rates across every segment, with the exception of EMEA, which only grew 1% due to a slowing economy, evidenced by weaker industrial production levels. Global price of 2% was in-line with inflation, although we are active working to further increased prices to recover higher input costs.

The combination of price improvements and volume contribution enabled 6% growth or 40 basis point improvement to underlying gross margins. Note that the late start to the merger hampered our ability to achieve variable cost savings this quarter. However, since March 1st, we've been actively integrating procurement, productivity, and logistical resources to enable further improvement in gross margin as existing supply contracts are renegotiated.

Operating profit grew faster than gross profit, resulting in a 30-basis point improvement in operated margin to 17.7%. Overall, fixed cost synergies are tracking to expectations, although we are making faster progress in corporate than the segments due to the restricted commercial and operational interfaces prior to March 1st. We fully anticipate synergies to continue to ramp throughout the year as we have more time to integrate the two organizations.

Diluted EPS of a $1.69 was 17% above the prior year, when excluding foreign exchange impact. The improved leverage from operating profit was due to lower net interest, lower tax rate, and a lower share count. Net interest was favorable the prior year primarily from higher cash balances and lower debt levels. The effective tax rate for the quarter was 24% and is anticipated to remain around that level for the rest of this year. The global treasury and tax teams are actively working to find further capital structure synergies above the stated $1.1 billion target and I believe they're off to a solid start.

Finally, net share count is lower due to the stock repurchase program. Through April the company has repurchased approximately 9 1/2 million shares and will continue to buy more throughout the year.

At the end of March, net debt was $8.1 billion when excluding purchased priced accounting effects. This does not include the Linde AG squeeze-out cash payment of $3.2 billion or the Korean divestiture proceeds of $1.2 billion, both of which occurred in April of this year.

The Sale of Gas Project Backlog remains at $3.5 billion, as a start-up in South Korea was replaced with a new project win in the Netherlands.

In addition, our engineering business is off to a good start with a healthy project backlog of $5 billion. Both backlogs will provide future, contractually secured growth over the next three years.

Please turn to slide 4, which provides an update of the 2019 outlook. We are increasing the full-year EPS growth rate to a range of 9% to 13%, or 12% to 16%, excluding anticipated currency headwinds. We expect positive contribution from cost synergies to continue to ramp each quarter, as integration efforts are implemented. Furthermore, the projected FX headwind of -3% is primarily front-end loaded with a -4% to -5% occurring in the first half of this year, a -1% to -2% headwind for the second half.

Although we are not providing second quarter EPS guidance at this time, we anticipate moderate Q1 to Q2 sequential improvement from ramping synergies. We expect further improvement into the third quarter, so second-half EPS levels should be higher than the first half.

Overall, this outlook incorporates improving cost synergies, but some softening of industrial production growth rates. If current volume trends and economic conditions maintain, or improve, we would be at the upper end of this range or possibly better. However, at this time, we believe it's prudent to guide to these levels while we integrate the combined organization in an uncertain economy.

...

I'd now like to turn the call over to Q and A.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the * and the 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we ask that you please press your line on mute once your question has been stated.

And our first question comes from the line of Mike Sison with KeyBanc. Your line is now open.

Michael Sison -- KeyBanc Capital Markets, Inc. -- Analyst

Hey guys, nice starter to the year. Matt, just in terms of your outlook regarding softening of industrial production, you know you did 3% volume growth in the first quarter total. Some of that has project growth. What's sort of the underlying like current growth rate that you're seeing that would sort of get you to the upper end, if it stays at this level?

Matthew J. White -- Chief Financial Officer

Yeah, I think, Mike, as discussed, if you assumed things were flat, flat to declining is how we viewed the current. Now, obviously on a year-over-year basis things were pretty strong, especially in the first and into the second and third quarter of last year. So, on a year-over-year basis, I wouldn't anticipate much change on those rates. It's more sequential, the way to think about it. But as discussed, if sequentially this kind of trends hold, we would definitely believe we'd be at the upper end. So, we'll have to see, but we absolutely feel quite confident on our synergies and what we can deliver in the self-help. And it's just a matter of where foreign currency rates go, where underlying volumes go.

Michael J. Sison -- KeyBanc Capital Markets, Inc. -- Analyst

Okay. And as a quick follow-up, you know it does sound to some degree that there could be some conservatism here, when you think about what you can control to help move yourself to the upper end. Where do you think that'll come from and is it more just your ability to execute on the synergies, growth, pricing? Give us your thoughts there.

Stephen F. Angel -- Chief Executive Officer & Director

Mike, this is Steve. Obviously, currency is something that's difficult to control. And volumes, you know to a large extent we don't control. The things we do control are obviously cost synergies and that's something we're all very, very focused on today and we want to deliver that as soon as we can.

And I'll also add price management. We have to make sure that in every corner of the world that we're doing everything we can to offset cost inflation, both prior cost inflation and the current cost inflation that we're seeing. Those are things that we can control. Matt talked about net interest benefits, so I won't say anything more about that. But those are the controllables and that's where we're focused.

Operator

Thank you. And our next question comes from the line of David Begleiter with Deutsche Bank. Your line is now open.

David I. Begleiter -- Deutsche Bank Securities, Inc. -- Analyst

Thank you, good morning. Steve, your Asia's margins are well below those of your US peer. Can you discuss the reasons why and the opportunity to raise those margins over the medium to longer term?

Stephen F. Angel -- Chief Executive Officer & Director

Well, I mean we all have different geographical profiles when you look across Asia. And, for example, in our case, the new Linde case, China is a prominent player, but also Australia is a prominent player. And Australia, unfortunately, has had a long period of, I'll call it, deindustrialization, more of a secular trend. And so that's something that we have to address.

And you can see in the comments that Asia sales, if we take out Australia and take out the effect of the divestitures, the rest of it is +10%. So, those numbers are pretty good and that's without the benefit of really much of the way of large project contribution.

So, clearly we have some opportunities here. We had more integration. From a regional business standpoint, there's more integration in Asia than anywhere else. So, we have some cost synergy opportunities there. Clearly, inflation has been something that's been very apparent in that region for many years and we need to make sure that we focus on that, but clearly the objective is to steadily increase the quality of our business there, as measured by operating margins.

Matthew J. White -- Chief Financial Officer

And I would just add, David, is you know contract, the nature of the contract can play a big part as well, whether you opt to pass-thru power or elect tolling arrangements. Most of our contracts across Asia are passing-thru power. It's just from an IRR perspective, from a return from a cashflow, they're similar, but the margin profile may be a little bit different. So, those are things, I think, to also consider when comparing.

David I. Begleiter -- Deutsche Bank Securities, Inc. -- Analyst

And Matt, just on the synergies from Q1 to Q2, the ramp, how should we think about that from maybe a dollar perspective?

Stephen F. Angel -- Chief Executive Officer & Director

I'll take that. This is Steve. As we look at synergies for the year and I'm sure you all remember last call I gave you a number of about $225 million of cost synergies for the year. About 70% of that, I'd say, is going to be in the back half and even a little more weighted toward Q4, so really kind of minimal synergies in Q1 because of limited time we had to work on it. It starts to ramp in Q2, but you know again, 70% or so back out.

Operator

Thank you. And our next question comes from the line of Duffy Fischer with Barclays. Your line is now open.

Duffy Fischer -- Barclays Capital, Inc. -- Analyst

Yes, good morning guys. First question is now with what seems official, the tariffs on China business, I'm sure you've done a lot of wargaming. You know walk us through kind of how you've thought about that, how that may impact your business if those tariffs end up kind of being long-lived.

Stephen F. Angel -- Chief Executive Officer & Director

Well, Duffy, I would say that unlike companies who have global supply chains and depend on China for exports from the United States. So, global supply chain is coming, exports going the other way, or even vice-versa. As you know, our business is very local, so the product is produced and sold locally. So, the direct effect is minimal, but there is the potential for indirect effect as our customers start to see the effects on their business. So, I don't have a number to put on this. I'll say it's something that we'll continue to observe, to work, to make sure that we position ourselves as well as possible.

But it also kind of leads me to not the point you were making, but another point, which is we have a very stable business model. And, again, produce is produced locally, it's sold locally, that's the focus of our organizational structure. We generate high cashflow pretty much throughout the cycle. When the CapEx opportunities start to limit themselves, we have more free cashflow to redeploy to share buybacks and potentially increasing dividends. So, we view ourselves as a very safe port in the storm. And you can see in my earlier comments that I said I want to make sure that we're increasing our operating margins, the quality of our operating businesses, regardless of what the economic environment may be.

Duffy Fischer -- Barclays Capital, Inc. -- Analyst

Great, thanks. And then just a second one on the engineering business because that's a business I would say we're all less familiar with. Now that you've had a chance to kind of come in and look at that, is that run as you would want it or when you look back some of the business they've been on isn't right? Just, I guess, structurally, how could that business look different three years from now?

Stephen F. Angel -- Chief Executive Officer & Director

Well, the way it can look different three years from now, we have all agreed internally that we want to shift the balance of Linde Engineering's business more toward over the fence projects, versus third party sales. We think that's a healthier place for that business to be over time. You know but even beyond that, we all know that the sweet spot of our industry is the over the fence business model and we want to make sure that we are as competitive as we can possibly be in driving sale of gas business opportunities, so that really is the focus going forward.

So, if you were to say that maybe historically Linde Engineering would be 20% internal over the fence and 80% external, if we can get that more balanced, you know something closer to 50/50, I think that's a much better place to be.

If I look at this Singapore project, which Linde Engineering will be executing, you know I take a lot of comfort in the fact that they really have all the capabilities, the experiences, the disciplines, the knowhow to execute very complex projects like that. And if they couldn't, believe me, ExxonMobil would not have selected us. So, that's something I'm beginning to appreciate more and more as I get into this.

Operator

Thank you. And our next question comes from Nicola Tang with Exane. Your line is now open.

Nicola Tang -- Exane Ltd. -- Analyst

Hi, everyone. Thanks for taking my questions. Thank you for the helpful comments on net debt and what's happened since Q1. Could you just give us a reminder of the bridge from year to year end in terms of all the disposals on-track or perhaps better than you originally thought? Is a buyback going as per what you expected?

And then I had a second question. On Europe, which seems to be the weakest area, are there any specific end markets which underperform versus others? And when you talk about your outlook for the year, were they assuming that actually micro-conditions get worse, are there any specific geographies or end-markets that you would point to?

Matthew J. White -- Chief Financial Officer

Hey, Nicole, so this is Matt. I'll answer the first one and Steve will answer the second. So, on net debt, yes, as stated, we ended the quarter at just about $8.1 billion and what we're doing is adjusting out. It's about $230, $240 million of PPA step-up. As you can imagine, it's not cash, it's not what we repay. It was just a mark-to-market. So, look, excluding that, we're about $8.1 billion. As discussed in April, we had the $3.2 billion out on the squeeze-out and the $1.2 billion in on the proceeds. So, that would raise net-debt, holding all else equal, to a little bit over $10 billion.

Going forward, clearly, as you've probably seen, we're on a path of buybacks. We continue to work on that path. When the $6 billion was approved, you may recall that had a two-year limit on it, so we're working within those confines. So, I would see net debt rising throughout the year as we continue to execute the buyback throughout or program.

So, end of year remains to be seen. It should be something definitely higher than $10 billion, but we're always working to stay within our A2 rating, which I think we have a lot of room right now, so I would expect net debt to keep rising throughout this year and then into next year to get closer to the A/A2 rating for our final capital structure.

So, regarding your question with respect to Europe, you know as we look at results and really look at the forecast, I would say within those results, Western Europe is weaker, UK, as you would imagine, is fairly weak. Eastern Europe would be the bright spot, I would say, on the continent. The growth there is more positive.

Going forward, we're really preparing for, I would say, overall weakness. I'm looking at some statistics here that say that at the beginning of the year the forecast for industrial production growth in Germany was 1.6% and now they're saying -1.2% for the year. And Western Europe looks to be flat in terms of industrial production growth. So, that is the largest peak in the environment that we have to work inside of. Clearly, we're going to be focused on the things we can control, as I alluded to earlier, which is making sure our pricing is commensurate with the cost of inflation that we're seeing, the synergies that we can attain, and really a focus on continuous improvement going forward.

Nicola Tang -- Exane Ltd. -- Analyst

Thanks. Can I just follow-up? So, the expectations for the weaker second half, is it fair to say that it's pretty much all driven by Europe as opposed to other regions?

Stephen F. Angel -- Chief Executive Officer & Director

So, that's, I would say, Europe is the largest driver. But if you permit me if I could just make a couple comments arounds the world. You know Latin America, I don't expect anything positive going forward. Everyone, you all know the story, even though South America is much less of an impact on the new company versus legacy Praxair. There's still nothing positive that's going to come out of South America.

If I look at Asia, you know I made a comment about Australia, so I think based on my comment you wouldn't expect anything positive to take place in the second half. Everybody wants to know about China, you know you can include me on that. I don't really have a crystal ball into what's going to happen. I mean just based on what's happened in the last 24 hours, you have to be, I think, cautious with any kind of optimistic forecast in China. I do believe the Chinese government will do whatever they can to try to mitigate the effect of tariffs, but that's pretty much going to be just trying to hold, stay in place.

If I come back to the Americas, if I look at the US, I think March was a stronger month than what we had perhaps anticipated, which was a positive sign. However, when I look within the numbers, liquid volume seemed to be, I think, at a fairly decent level. We're growing in March, look OK coming into April. But, then again, I look at our cylinder gas business, what we call PDI, and those volumes are flattened year-over-year. In fact, look at the month of March, year-over-year hard goods was slightly negative. So, I look at that as indicative of what's going on in the overall manufacturing space in the US and I can't look at that and say it's a positive sign.

Having said all of that, if the economy performs better, we'll certainly participate in that and we'll be in good shape, as Matt said earlier, but I think there are enough signs out there, primarily in May, but there are other signs that say we shouldn't be overly optimistic.

Operator

Thank you. And our next question comes from the line of Jeff Zekauskas with JP Morgan. Your line is now open.

Jeffrey J. Zekauskas -- JPMorgan Securities LLC -- Analyst

Thanks very much. I have a question on the ExxonMobil project. Was that project originally a sale of equipment that was renegotiated into a sale of syngas or was the contractual structure always the same or roughly the same? And when will that project begin to benefit your income statement?

Stephen F. Angel -- Chief Executive Officer & Director

Well, I think you can imagine that this project, it was going to take a long time to execute. It's coordinated and integral to Exxon's project, so I wouldn't expect to see anything until 2023. Now, the good news is I'm in pretty good shape starting in 2023 just based on the size of this project. And we have a lot of good projects rolling out of the backlog, really starting more toward the end of this year rolling forward into 2023.

But, my understanding of this project has always been an over the fence project. It goes back many years in terms of the negotiation. And again, it's very integrated into their process, so it took a long time for something like this to come to fruition.

Jeffrey J. Zekauskas -- JPMorgan Securities LLC -- Analyst

Okay. And then do you think gasification is a major growth opportunity for Linde and the industrial gas industry, generally, or do you think it's a minor opportunity?

Stephen F. Angel -- Chief Executive Officer & Director

I'd like to be able to say that there's a project like this around every corner, but it's not. Just looking at how long it took for this project to come to fruition, I think there may be a few of these like this over the next five years, potentially, but it's not going to be a major part of our investments or a major part of our opportunity slate.

Now, clearly, when they happen, they're very large and they're very impactful, but I do not expect a steady diet of this. And it really comes back to -- I think the question a lot of people ask about, this IMO 2020. You know what's going to be the effect? And you know quite frankly as we have looked at this and studied this, most of the major companies, and for those who are not familiar with IMO 2020, this is the marine diesel requirement to reduce sulfur particulates to, I believe, it's .5%.

Most of the major oil companies are going to be investing in cokers. And that's what they did in the US. There's a lot of coker capacity. That's what ExxonMobil announced in Antwerp. So, I think most of IMO 2020 will be addressed by coker capacity. It's the type of asset they're very familiar with, they're comfortable operating. You'll also see certain refiners look to bring in more lighter crude. Feed stocks, that's a way that they can address IMO 2020. You'll have some refiners who won't do anything. They'll kind of wait and see, expecting ships to put on scrubbers and so forth, and they'll wait until the end. I think in a few cases probably in Southeast Asia is where you're going to see the type of solution that we just described with ExxonMobil in Singapore.

Operator

Thank you. And our next question comes from the line of Peter Clark with Société Générale. Your line is now open.

Peter Clark -- Société Générale SA (UK) -- Analyst

Yes, thank you. Hi, everyone. Two questions. First of all on the price management, a lot of emphasis there. Just wondering what sort of things you're emphasizing to the Linde side of -- the old Linde side of the business. You've got the 2% across the group, obviously a more emergent -- I mean air products obviously came up with a pretty strong merchant numbers the other day. I'm just wondering what sort of thing is going on there.

Then drilling down into the regional margin performance. I'm just wondering if there's -- what the impact of mix is in there. APAC, because obviously on my numbers Australia is down double-digit again, which certainly in Linde used to be a high-margin market. Maybe not so much for you. And then also in EMEA, where I suspect the cylinders being weak are probably an element on the margin drag there. Thank you.

Stephen F. Angel -- Chief Executive Officer & Director

Okay, so with respect to pricing/price management. You know we do things like we just had a workshop where we brought in everybody responsible for price management all over the world. We want to make sure that we're exchanging best practices in terms of how we structure contracts, how we think about getting ahead of cost-inflation, how we do pricing increases, all kinds of things that are very important and really are just part of good overall product management.

Some of you may have heard I did a video, I did a price management video that was 14 minutes, so that's something that I did, and it's something that we track monthly. You know when we go through our monthly business reviews, we look at price realizations sliced and diced many different ways.

With respect to Australia, I would say that it is a business that's of significant size. Part of the problem too is also currency. The Aussie dollar was very weak versus the dollar. But inside of that, there's some things going on, again, more of a secular decline with respect to the industrial side. I think the margins of the business are not bad at all, but we have to look at what we can do to get in front of that.

With respect to EMEA, Peter, I apologize, I didn't quite catch your question on EMEA.

Peter Clark -- Société Générale SA (UK) -- Analyst

Yeah, just in terms of the mix. It's the mix obviously. In Asia-Pac you were up 140 basis points year-on-year, despite Australia being very weak. So, I'm just wondering what was behind that. And then in Europe I presume it's the high-margin cylinders versus sluggish and weighing a little bit on the margin there.

Stephen F. Angel -- Chief Executive Officer & Director

It's more tied to industrial production. The cylinder business is more tied to manufacturing and that would be certainly a factor in those numbers.

Matthew J. White -- Chief Financial Officer

Yeah, and also, Peter, you may have seen, last year there was a gain in EMEA of about $10 million, roughly, on the legacy of Linde. Going forward, as you can imagine giving the purchase price accounting step-ups to fair market value, we're not anticipating many gains of any kind of asset actions, so that also had an influence on the number.

Operator

Thank you. And our next question comes from the line of Laurence Alexander with Jefferies. Your line is now open.

Daniel Binder -- Jefferies -- Analyst

Hi, this is Dan on for Laurence. How are you? You mentioned a lot of the synergies will be at the end of the year. I was wondering if there's going to be -- if you've quantified in what those dis-synergies will, if any, will be in the second quarter here and I guess into the third quarter as well.

Matthew J. White -- Chief Financial Officer

And dis-synergies, I mean we obviously have costs to achieve the synergies. Those, mostly for now, those are restructuring costs. We are, as you probably saw, we had about $89 million total in the first quarter of which roughly 55 or so actually were just merger expenses that carried over, but the remaining 33, 34 we're actually restructuring cost. So, we do expect to incur. That was part of the $700 million that we laid out last quarter that we would need to spend to achieve the synergies. So, we'll continue to highlight those costs, attract those costs, and explain them.

Other than those, I wouldn't say that there were any dis-synergies that we've identified at this stage.

Daniel Binder -- Jefferies -- Analyst

Okay, thanks. And --

Stephen F. Angel -- Chief Executive Officer & Director

Excuse me, this is Steve. We have the RemainCo cost in the US that we are addressing. I kind of think of that as a cost synergy opportunity, but you may think of it as a dis-synergy, but those are -- that's something we need to address and it's also part of why the leverage in the Americas isn't what you would historically expect to see in Q1.

Daniel Binder -- Jefferies -- Analyst

Thank you for the clarification. And then just one other question. You mentioned if things would get a little better you could definitely pass the high-end of projects, but I was wondering to a certain extent if things were to substantially weaken particularly in the US and I guess in Asia, based upon what you can achieve with synergies and with your current contracts, could you still hit the low end of your 2019 projections?

Matthew J. White -- Chief Financial Officer

Yes.

Operator

Thank you. And our next question comes from the line of Marcus Mayer with Baader Helvea. Your line is now open.

Markus Mayer -- Baader Helvea -- Analyst

Good morning. Markus, Baader Helvea. Three questions from my set. First one is, again, on new guidance. This slight guidance increase, maybe you can shed some light from what kind of aspect was this triggered? Was this more a synergy aspect or more a better demand? Yeah, that would be helpful.

Second question is on the free cashflow. Maybe you can help us to understand how the cash inflow from prepayments at engineering was versus a pro forma number of last year? And then the last question would be on your tonnage business update on where you stand in terms of plant utilization would be very helpful, as you can understand where you are in terms of your utilization versus take or pay contact level. Thank you.

Matthew J. White -- Chief Financial Officer

Yeah, I can take the first two. This is Matt, Markus. So, on the guidance, as mentioned, Steve had mentioned we have a rhythm assumed on what we're going to achieve and how we'll achieve the synergies, so we feel pretty confident about that. And then on top of that, you know we are assuming some either slowing growth rates or even reductions, especially in EMEA. As you know today, you are seeing some negative industrial production rates across a lot of key geographies.

So, the combination of those two are assuming slowing demand, but with a rising improvement in our cost management in the self-help. And so at that stage, that has led to this outlook. As Steve mentioned, we feel pretty confident that on the bottom end and almost any type of scenario at this point, but we also have to be cognizant. FX rates can shift and they have been getting worse, so the combination of all this is why we laid it out, but we feel very good about this range. Obviously if levels maintain, we could be at the upper end or better, as mentioned. And if we see any improvement, that could be highly accretive. So, that's how we look at the guidance.

On the free cashflow, just on a high level first, maybe. So, as you probably saw on the operating cashflow number about $1.068 billion, that's something that we're working on. We expect to do better than this. I think when you think about operating cashflow, on average both predecessor companies in a full-year basis had operating cashflow to EBITDA ratios of around mid to high 70s. That's as both companies have consistently demonstrated.

And when you look at the first quarter, so that's full-year, mid to high 70s. First quarter, the average has been about mid-60s. We've had some up and downs, but over the last four or five years both companies averaged about mid-60s being operating cash flow divided by the adjusted EBITDA.

This quarter were mid-50s. Now, you may have noticed in the notes that we had about $256 million of merger-related cashflow. About $100 million is the one-time payment on the acceleration that we talked about last quarter for the retirement benefits. That is a change in control one-time item. Another $100 million were cost-incurred to divest the assets, again, to carry over. The benefit is in investing, which are the proceeds. Unfortunately, the way the accounting worked, we had to put the $100 million in operating. And then the other $56 million relates mostly to either some merger costs and a little bit of restructuring. So, that number, when added back, we're about mid-60s.

So, right now I feel good about the track, but we do have a lot of one-time costs. And to your specific question on engineering, the line called contract asset and liabilities, that was a hurt of about $84 million. That isolates what the prepayment trend has been in engineering, so obviously prepayments are down. There was a lot last year, so that was a bit of a headwind related to the cashflow there. But this is something that we're working on a lot and I expect to get these numbers back to the historical levels. But we will have over this first six months of this year, a lot of one-time cash merger costs that are still carrying over, especially in the second quarter we'll have some large tax outpayments. As you may recall, it'll be several hundred million dollars of cash taxes we have to pay for the European divestiture. And Steve can handle, I think, the tonnage update on --

Stephen F. Angel -- Chief Executive Officer & Director

So, I don't have, I would say, information today that I have a lot of confidence in terms of sharing, with respect to the reporting. Because keep in mind we just started migrating our systems and some of this takes a little time. But let me just kind of give you my view. If you talk about -- like with capacity, I would say we have capacity in Europe because we haven't been growing at a pace that would absorb that capacity, so that's not in tight supply. Same thing would be true in South America. I think if you look at the US, you know it's been around 80, 82%, kind of merculate with the past utilization that locks in Linde. And Argon has been much tighter and of course helium is in hot demand all over the world. There are shortages of helium.

If I look at pipeline demands, I would say that hydrogen, if I look at just the base business in the US Gulf Coast was a little lighter. In the first quarter, we didn't see the amount of spot hydrogen that we saw last year. That's really driven by Venezuela crude. And the shores of Venezuela crude drives up cost, shrinks refinery margins. They didn't run as hard. But I think that will probably sort itself out and get a little stronger as they sort out the crude feedstock issues.

With respect to metals pipelines, we operate a lot of our onsite business is very strong in the steel pipeline area. And those volumes seem to be doing fine, but it's not in market demand driven. It seems to be more based on import substitution, based on the tariffs, and on the fact that inventory levels, which were quite low, so that needed to be replenished. So, that's that story.

If I go to Asia, I'm just going to really make a comment about China. You know the last numbers I looked at said that capacity utilization for merchant liquid was tightening up, which was a good thing. Obviously, a lot of capacity has come on over the years, so that's a positive. And I think the fact that the pricing, you're hearing a lot more positive regarding price realization in China. And it has historically been some of the lowest prices in the world. I think would also support the fact that capacity utilization was fairly high there.

Operator

Thank you. Our next question comes from the line of Stephen Byrne with Bank of America. Your line is now open.

Stephen Byrne -- Bank of America -- Analyst

Yes, thank you. Steve, you had mentioned that roughly 80% of the engineering backlog is external sale of equipment. Can you provide a little more disclosure on what are the types of projects those are, how much of it is gasses versus non-gasses?

Stephen F. Angel -- Chief Executive Officer & Director

I don't have that breakdown in front of me. I'd say it would be in the current backlog more skewed toward large natural gas plants and olefins, ethane-crackers. There are obviously some A issues and some hydrogen content in there, but I think it's more skewed or I know it's more skewed toward natural gas and ethane-crackers at this point.

And, of course, if you look at our gas backlog at $3.5 billion, that has two large projects in there today where Linde Engineering is building the hydrogen plants for our operations on the US Gulf Coast with two major refineries. So, that's part of the internal backlog today. And then if you go back to this Singapore project that I mentioned that's $1.4 billion, that will be additive to the sell the gas backlog, but Linde Engineering would be building that.

Stephen Byrne -- Bank of America -- Analyst

And just to follow-up on that Singapore project, you made a comment that you didn't think there were likely to be too many more like that or just scattered about over the years. Was that comment specifically about gasifying pitch and wondering whether you see this as an entrée into gasifying coal and whether you see any change in your outlook for that type of gasification opportunity for Linde?

Stephen F. Angel -- Chief Executive Officer & Director

I was really referring more toward the pitch or a vacuum resids kind of gasification approach to address in part what IMO 2020 regulates. That's what I was really referring to. And I was not referring to coal gasification to produce intermedia chemicals or whatever in other places of the world, usually in China.

Stephen Byrne -- Bank of America -- Analyst

And your outlook on that opportunity, the change?

Stephen F. Angel -- Chief Executive Officer & Director

For the goal gasification?

Stephen Byrne -- Bank of America -- Analyst

Coal gasification. Yes, sir.

Stephen F. Angel -- Chief Executive Officer & Director

I don't really -- you know we talked about this before. We have supplied air separation units in China for coal gasification operations along the coast. And that's been part of our density strategy. We take merchant liquids off of those projects and their customers that we feel very comfortable with going forward. So, that has been the bulk of what we have done. It has not been in what they refer to as the Coal Triangle in China. That just was never part of our strategy.

We've also supplied air separation units for PECO gasification for CNOOC. And they were taking hydrogen and integrating it back into the refineries. So, those are the kind of projects that we have done in China and I expect we'll see more of those going forward in the future. But, anyway, that's my answer.

Operator

Thank you. And our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Your line is now open.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Yes, good morning. I found the adjusted pro forma disclosures in pages 11 to 13 of your release to be very helpful. Was wondering if you intend to provide those results each quarter as we go or if there's a way to understand how 2Q versus 4Q '18 would have trended in a future SEC filing, #1.

And then #2, Praxair in the past provided specific quarterly guidance. You've elected not to do that today, but you know, Matt, I think you indicated you're expecting moderate improvement. Just curious as to why the change. Is it a function of many moving parts on the merger or indicative of how you intend to communicate as a combined company going forward?

Matthew J. White -- Chief Financial Officer

Hi, Kevin. Yeah, this Matt. I'll respond to those. I think to your first question, yeah, absolutely, we intend to continue to include these. They're necessary. We need to have the ability to explain the walks from the GAAP to the pro forma and then to the adjusted, so we will continue to add those.

I think on the quarterly guidance, that's something we're evaluating and we are looking toward that. As you can imagine, we really had one month in the quarter together. We're just closing the second month, so things like the monthly rhythm we're getting better and better forecasting is a big part of that and we want to improve the forecasting to a more monthly type of rhythm. As we get better at that and we get more confidence in what I'll call short-term outlooks, those are things that we'll incorporate at the top of the house and then make decisions how we communicate those.

So, I think hopefully just be patient. Each quarter we expect to get better. I mean, obviously, we have more information here than we had in March 1st. Sequentials will be an area we'll add next quarter. We'll start doing sequentials within '19 and so that is something that will become another element of this. So, with each step I expect to get better and better, more transparency. Obviously, we added the new segments, but as you can imagine the first few quarters, we've just got to get the system down of the combined company, get the rhythm to a point that we're more comfortable to continue to disclose these more and more information externally.

Operator

Thank you. And our next question comes from the line of Jim Sheehan with SunTrust. Your line is now open.

James Sheehan -- SunTrust -- Analyst

Good morning, thank you. How does your EPS guidance translate into an adjusted EBITDA outlook for the year and specifically what do you expect for D & A in 2019?

Matthew J. White -- Chief Financial Officer

Hey, James, this is Matt. So, we're not giving an EBITDA outlook, so I think as you saw, if you look below the EBIT line starting there, I mean we feel pretty good about our level of interest right now. We still have a lot of a moving capital around the world with the proceeds with some of the things like the squeeze-out, but we'll see, but we're not giving an EBITDA outlook.

I think as far as the adjusted D & A, I don't expect a lot of changes in that number, other than normal assets coming on and assets coming off. So, if we look at CapEx, you know maybe $3 to $3.5 billion in that zone as projects come onstream. Obviously, you'll see CapEx start to step up and we always have assets coming off. So, I would expect a normal depreciation kind of on adjusted basis that you would expect, but we're not -- at this point, we're not giving an EBITDA outlook.

James Sheehan -- SunTrust -- Analyst

And under the new segmentation, how should we think about how the cost-savings are distributed between these segments?

Stephen F. Angel -- Chief Executive Officer & Director

Well, I mean it's -- this is Steve. We have -- I'll go back to what I said our last call. When you look at the $900 million of cost synergies, we said about a third of that is from organizational decentralization and corporate functions and 2/3s of that would be from the regions, both from a standpoint of overlap and in terms of operational efficiencies, procurement, productivity, et cetera. And so we have those numbers broken down both by corporate and by regions, by functions, and each segment, each geography, including Linde Engineering, understands what their target is and they all, again, have developed or are developing very detailed costs and restructuring initiatives to address that.

But all the regions are participating, clearly there's a lot of overlap in Asia, as I mentioned earlier, but we also have overlap in the Americas, South America is a great example. We have US RemainCo that we have to integrate in the US, we have some operations in Mexico we have to integrate. And in Europe, where there's less integration clearly from on the continent we do have integration in the Mideast in Russia that we're work on and then we have other initiatives around cost that we're working as well.

Operator

Thank you. And our next question comes from the line of Neil Tyler with Redburn. Your line is now open.

Neil Tyler -- Redburn -- Analyst

Yeah, good morning. I'd like to go back to the comments you made on pricing and to link that with the margin development in the America's region year-on-year, please. You mentioned that price was able to cover inflation globally. Was that also the case in every region? And the second part of the pricing question is really to follow-up on the comments you made about specialty gasses or helium in particular and whether that was a meaningful contributor to the overall 2% in any particular region, or more broadly, and when we think about looking at the pricing numbers that you've disclosed? Thanks.

Stephen F. Angel -- Chief Executive Officer & Director

Well, let me -- obviously, I'll just start with the last comment. And I can't say exactly with respects to specialty gas, as I haven't seen that number, but clearly helium, the prices are higher in helium. I mentioned earlier it's in very tight supply around the world, so it is a piece of the 2%. I can't tell you exactly how many basis points, but price increases in helium are higher, certainly higher than 2%, and need to be just based on the cost inflation as a result of a shortage of helium and the fact that all sourcing contracts have moved up in terms of cost around the world.

But, you know we want to make sure -- you know you're asking me did we cover inflation in every parts of the world and the answer is, no. I mean there are going to be parts of the world, certain products, markets that pricing just like helium that's higher than 2%. There are some areas that it's lower and we need to work on that.

So, generally speaking, you want to, at a minimum, as a company, make sure that you're covering your cost of inflation. And that's a target that we have always had. There's certainly not a limitation on what the price realization could be. And in terms of driving up operating margins or let's just say variable margins, you really have two ways to do that. It's increasing pricing and it's driving productivity and we work both of those levers quite hard. But it's going to be something that it's going to take some time as we -- obviously, it's something we've spent a lot of time on and Praxair have for many, many years. And it's going to take a little bit more time to get everyone accustomed to what we are trying to do, the initiatives that we're rolling out. I think cylinder gas business is something that can be addressed sooner because these are shorter term contracts. Then you have merchant liquid, where we have various abilities to address cost pressure. And also as those contracts renew and then of course on-site is a longer-term situation.

Matthew J. White -- Chief Financial Officer

And Neil, this is Matt. Just to add two things to Steve. I think, one, just in the Americas, remember that Steve had mentioned this, that we did have a bunch of stranded costs from Divestco in the first quarter, so those obviously are something we have the ability and time, now we're addressing them second quarter, so that will have an effect on the margin, but that's something that we're working on.

Secondly, on helium, you know the helium pricing will appear really across all segments because in the other we have the bulk helium or the wholesale helium. So, it sells intercompany and it also sells to large, global distributors from that other category. So, any intercompany transfer pricing increases would show up in other and then end market price increases would show up in the segments.

So, the way our segments are laid out, helium price increases would be across kind of multiple segments, including other.

Neil Tyler -- Redburn -- Analyst

That's very helpful. Thank you.

Matthew J. White -- Chief Financial Officer

Okay. And I think we have one last question remaining.

Operator

Yes, thank you. And our last question comes from the line of PJ Juvekar with Citi. Your line is now open.

Scott Goldstein -- Citi -- Analyst

Hi, this is Scott Goldstein on for PJ. Thanks for taking my question. I just wanted to ask on some of the on-site projects coming online in like Exxon in possibly 2023. Is there any way that you can help us think about the future earnings contribution from these projects going forward? Thank you.

Stephen F. Angel -- Chief Executive Officer & Director

Well, you know this year, as I've stated before, based on the timing of the projects, a lot of it's at the end of the year. You know in terms of sales and EPS contributions, kind of like a percent, in 2019. 2020, as I look at the numbers, and 2021, looks to be more like certainly 2% on the sales, maybe 2 to 3% from an EPS contribution standpoint in '20 and '21. And I don't have 2022 in front of me, but I would expect at least a 2% and a 2% kind of relationship as well. Then as you go forward at 2023, obviously a project like Singapore puts a big dent in those numbers, so I would expect that to be very solid when that project starts up, in terms of the overall contribution in sales and EPS.

Operator

Thank you. And that does conclude today's question and answer session. I would now like to turn the call back to Mr. Juan Pelaez for any further remarks.

Juan Pelaez -- Director of Investor of Investor Relations

Chris, thank you, again, and thank you everyone for participating in today's call. If you have any further questions, feel free to reach out to me directly. Thanks.

...

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

Duration: 60 minutes

Call participants:

Juan Pelaez -- Director of Investor of Investor Relations

Stephen F. Angel -- Chief Executive Officer & Director

Matthew J. White -- Chief Financial Officer

Michael J. Sison -- KeyBanc Capital Markets, Inc. -- Analyst

David I. Begleiter -- Deutsche Bank Securities, Inc. -- Analyst

Duffy Fischer -- Barclays Capital, Inc. -- Analyst

Nicola Tang -- Exane Ltd. -- Analyst

Jeffrey J. Zekauskas -- JPMorgan Securities LLC -- Analyst

Peter Clark -- Société Générale SA (UK) -- Analyst

Daniel Binder -- Jefferies -- Analyst

Markus Mayer -- Baader Helvea -- Analyst

Stephen Byrne -- Bank of America -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

James Sheehan -- SunTrust -- Analyst

Neil Tyler -- Redburn -- Analyst

Scott Goldstein -- Citi -- Analyst

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