Linde plc

Good day, ladies and gentlemen, and welcome to the Q1 2019 Lindy 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 shall require operator assistance, please press star and the zero key on your touchtone telephone. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Juan Velez. Please go ahead.

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 lindy.com in the investor section. Please read the forward-looking statement disclosure on page two of the slides and note that it applies to all statements made during this teleconference. The reconsiderations of the adjusted pro forma numbers are in the appendix of this presentation. Steve and Matt will now review Linda's first quarter results and provide a full year outlook. We will then be available to answer questions. Let me now turn the call over to Steve.

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 net of issuances. 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 Exxon Mobil 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 CRISP. We are building four gasifiers to tie into two existing gasifiers that Lindy operates today. We will be taking PITCH, from ExxonMobil and returning hydrogen, oxo 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 Lindy 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 lending 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.

Thanks, Steve, and good morning, everyone. On slide three, you'll find the first quarter adjusted pro forma results. As a reminder, these figures are modified from U.S. 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 indicative 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 negative 5% foreign currency headwind. Virtually every foreign currency has devalued against the U.S. dollar, with most losing 5% to 10%. You may recall that the first half of 2018 had a weaker U.S. 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%. 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 actively working to further increase 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 operating 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 $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 9.5 million shares and will continue to buy more throughout the year. At the end of March, net debt was $8.1 billion when excluding purchase price accounting effects. This does not include the Linda 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 gas project backlog remains at $3.5 billion as a startup 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 four, 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 negative 3% is primarily front-end loaded, with a negative 4% to negative 5% occurring in the first half of this year, and negative 1% to negative 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&A.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star on the one key on your touchtone telephone. If your question has been answered, or you wish to move yourself from the queue, please press the pound key. To prevent any background noise, please press your line on mute once your question has been stated. And our first question comes from the line of Mike Sisson with KeyBank. Your line is now open.

Hey, guys. Nice to talk to the air. 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, you know, project growth. What's sort of the underlying, like, your current growth rate that you're seeing that would sort of get you to the upper end if it stays at this level?

Yeah, I think, Mike, as discussed, if you assume things were flat, that's kind of flat to declining is how we view 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.

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, you know, move yourself to the upper end, where do you think that will come from and, And is it more just your ability to execute on the synergies, growth, pricing? Give us some thoughts there.

Mike, this is Steve. 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 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 any more about that. But those are the controllables, and that's where we're focused.

Great. Thank you.

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

Good morning. Steve, your Asia 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?

We all have different geographical profiles when you look across Asia. In our case, the new Lindy case, China is a prominent player, but also Australia is a prominent player. And, you know, 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's sales, if we had take out Australia and take out the effective divestitures, the rest of it's plus 10%. So those numbers are pretty good, and that's without the benefit of really much in 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, you know, 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, you know, the objective is to steadily increase the quality of our business there as measured by operating margins.

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

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

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 towards Q4. So really kind of minimal synergies in Q1 because of limited time we had to work on it. Starts to ramp in Q2, but, you know, again, 70% or so back half.

Thank you very much.

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

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 war gaming. 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.

Well, I would say that Unlike companies who have global supply chains and depend on China for exports from the United States, so global supply chains 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 a 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, you know, we have a very stable business model. And, again, product is produced locally. It's sold locally. That's the focus of our organizational structure. We generate high cash flow pretty much throughout the cycle. When the CapEx opportunities start to limit themselves, we have more free cash flow to redeploy. to share buybacks and potentially increasing dividends. So, you know, we view ourselves as a very safe port in the storm. And you can see 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.

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, you know, as you would want it? Or when you look back, you know, 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?

Well, the way it can look different three years from now, we have all agreed internally that we want to shift the balance of Linden Engineering's business more towards over-the-fence projects versus third-party sales. We think that's a healthier place for that business to be over time. 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 cellar 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 know-how to execute very complex projects like that. And if they couldn't, believe me, ExxonMobil would not have selected us. So, you know, that's something I'm beginning to appreciate more and more, you know, as I get into this.

Great. Thank you, guys.

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

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 here to year end in terms of other disposals on track or perhaps better than you originally thought? Is the 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, assuming that actually macro conditions get worse, are there any specific geographies or end markets that you would point to?

Hey, Nicole. So this is Matt. I'll answer the first one, and then 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 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 our 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 AA2 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 AA2 rating for our final capital structure.

So regarding your question, you know, with respect to Europe, you know, as we look at the results and really look at the forecast, I would say within those results, Western Europe is weaker. The U.K., 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%. Now they're saying negative 1.2%. for the year. And Western Europe looks to be flat in terms of industrial production growth. So that is the, largely speaking, 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 inflation that we're seeing, the synergies that we can attain, and really a focus on continuous and

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

So that's – I would say Europe is the largest driver. But if I – if you permit me, if I could just make a couple of comments around 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, you know, stay in place. If I, you know, come back to the Americas, if I look at the U.S., I think March was a stronger month than what we had perhaps anticipated, which was a positive sign. However, you know, when I look within the numbers, merchant liquid volume seemed to be I think at a fairly decent level, we're growing in March, look okay coming into April. But then again, I look at our cylinder gas business, what we call PDI, and those volumes have 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 U.S., 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 Maine, but there are other signs that say we shouldn't be overly optimistic.

That's very helpful. Thank you.

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

Thanks very much. It's 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?

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. You know, 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 towards the end of this year and 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.

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

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, 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 at least half a percent. Most of the major oil companies are going to be investing in cokers. That's what they did in the U.S. There's a lot of coker capacity. That's what Exxon Mobil 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 feedstocks. 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 chips to put on scrubbers and so forth, and they'll wait till 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.

Okay, great. Thank you so much, Steve.

Thank you. And our next question comes from the line of Peter Clark with the Society General. The line is now open.

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 lender side of, or the old Lynda side of the business. You've got the 2% across the group, obviously more in merchant. I mean, Air Products obviously came up with some pretty strong merchant numbers the other day. I'm just wondering the sort of things going on there. Then drilling down into the regional margin performance and just wondering if there's what the impact of mix is in APAC, because obviously on my numbers, Australia is down double digit again, which certainly in Lynda 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.

Okay. So, you know, with respect to pricing, price management. We have a – 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 we're exchanging best practices in terms of how we structure contracts, how we think about getting ahead of cost inflation, how we do price increases, all kinds of things that are very important in – 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 realization 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 are some things going on. Again, more of a secular decline with respect to the industrial side. I think, you know, the margins of the business are not bad at all. But, you know, we have to look at what we can do to get in front of that. With respect to EMEA here, I apologize. I didn't quite catch your question on EMEA. Back is dropping.

Yeah, just in terms of the mix, it's the mix, obviously. In Asia, 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 that are sluggish and weighing a little bit on the margin there.

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

Yeah, and also, Peter, you may have seen last year there was a gain in EMEA. It was about $10 million roughly on the legacy Lend-A-G side. Going forward, as you can imagine, given 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.

Got it. Thank you.

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

Hi, this is Dan Rizzo, Honorable Lawrence. How are you? You mentioned a lot of the synergies will be at the end of the year. I was wondering if you've quantified and what the dis-synergies will, if any, will be in the second quarter here and I guess into the third quarter as well.

And disenergies, I mean, we obviously have costs to achieve disenergies. 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 were actually restructuring costs. 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.

Okay.

Thanks. This is Steve. We have the Romainco cost in the U.S. that – 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 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. End to one.

Thank you for the clarification. And then just one other question. You mentioned that if things were to get a little bit better, you could definitely pass the high end of projections, but I was wondering... To a certain extent, if things were to substantially weaken, particularly in the U.S. and I guess 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?

Yes.

Okay. Thank you.

Thank you. And our next question comes from the line of Marcus Mayer with Bataar. Helvey, your line is now open.

Good morning, Marcus Meyer, Bart Helvey. Three questions from my side. First one is again on your guidance. This slight guidance increase, maybe you can shed some light from what kind of aspect was this triggered? Was this more this synergy aspect or more than a better demand or, yeah, that would be helpful. Second question is on the free cash flow. Maybe you can help us to understand how the cash inflow from prepayments at engineering was versus a performer number of last year. And then the last question would be on your tonnage business update on where we stand in terms of plant utilization. It would be very helpful that you can understand where you are in terms of your utilization versus the take-or-pay contract level. Thank you.

Yeah, I can take the first two. This is Matt Marcus. So on the guidance, as mentioned, as Stephen 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, 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 and the self-help. And so at that stage, that has led to this outlook. As Steve mentioned, we feel pretty confident on the bottom end in almost any such 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 cash flow, just on a high level first maybe. So as you probably saw in the operating cash flow number, about $1.68 billion, that's something we are working on. We expect to do better than this. I think when you think about operating cash flow, on average, both predecessor companies on a full year basis had operating cash flow to EBITDA ratios of around mid to high 70s. That's what 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. You've had some ups 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, we're mid-50s. Now, you may have noticed in the notes that we had about $256 million of merger-related cash flow. About $100 million is the one-time payment on the acceleration that we talked about last quarter for the retirement. Benefits, that's a change in control one-time item. Another $100 million were costs incurred to divest the assets. Again, a carryover. 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, that prepayments are down. There was a lot last year. So that was a bit of a headwind related to the cash flow there. 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... 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 virtual liquor 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 U.S., You know, it's been around 80, 82% kind of mercantilization. That's LOX and LIN. 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 U.S. 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 shortage of Venezuela crude drives up costs, 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 issue. With respect to metals pipelines, we operate a lot of our on-site 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 for steel 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 had 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 realization is fairly high there.

Okay, very helpful. Thank you so much.

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

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 gases versus non-gases?

I don't have that breakdown in front of me. I'd say it would be in the current backlog more skewed towards large natural gas plants. And olefins, ethane crackers, there are some large, there are obviously some ASUs and some hydrogen content in there, but I think it's more skewed or I know it's more skewed towards 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 U.S. Gulf Coast with two major refineries. So that's part of the internal backlog today. And then if you go back to the Singapore project that I mentioned that's $1.4 billion, that will be added to the solar gas backlog, but Linde Engineering will be building that.

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 entree into gasifying coal and whether you see any change in your outlook for that type of a gasification opportunity for Lindy?

I was really referring more towards a pitch or a vacuum resists 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 intermediate chemicals or whatever in other places of the world, usually in China.

And your outlook on that opportunity? Has that changed?

for the coal gasification. I don't really, we've 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 Petco gasification for CNUC. And they were taking hydrogen and integrating it back into the refinery. So those are the kind of projects that we have done in China and, you know, I expect we'll see more of those going forward in the future. But anyway, that's my answer.

Thank you.

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

Yes, good morning. I found the adjusted pro forma disclosures in pages 11 to 13 of your release to be very helpful I 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 4Q18 would have trended in a future SEC filing, number one. And then two, Praxair in the past provided specific quarterly guidance. You've elected not to do that today, but 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?

Hi, Kevin. Yeah, this is Matt. I'll respond to those. I think first, 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 gap 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 towards that. As you can imagine, we've 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 you 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 at the combined company, get the rhythm to a point that we're more comfortable to continue to disclose these more and more information externally. Okay.

Thank you very much.

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

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 DNA in 2019?

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 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 DA, I don't expect a lot of changes in that number, you know, 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 on stream, 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 an adjusted basis that you would expect. But we're not, at this point, we're not giving an EBITDA outlook.

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

Well, I mean, 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 two-thirds of that would be from the regions, both from a standpoint of overlap and in terms of operational efficiency, procurement, productivity, et cetera. And so, you know, we have those numbers broken down both by corporate and by regions, by functions, and each segment, each geography, including Lindy Engineering, understands what their target is, and they all, again, have developed or are developing very detailed cost and restructuring initiatives to address that. But, you know, 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 the U.S. Romaine Co. that we have to integrate in the U.S. We have some operations in Mexico we have to integrate. And in Europe where there's less integration, clearly on the continent we do have integration in the Middle East and Russia that we're working on. And then we have other initiatives around cost that we're working as well.

Thank you.

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

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 Americas 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 gases or helium in particular. and whether that was a meaningful contributor to the overall 2% in any particular region or more broadly when we think about looking at the pricing numbers that you've disclosed. Thanks.

Well, let me... Obviously, I'll just start with the last comment. And I can't say exactly with respect to specialty gases. I haven't seen that number. But clearly, helium, the prices are higher. Helium, I mentioned earlier, is 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 the shortage of helium and the fact that all sourcing contracts have moved up in terms of cost around the world. But We want to make sure. You're asking me, did we cover inflation in every part of the world? The answer is no. I mean, there are going to be parts of the world, certain products, markets that are pricing just like helium. It'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 spent a lot of time on and practice area 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.

And, Neil, this is Matt. Just to add two things to Steve. I think, one, just in the Americas, remember, and Steve had mentioned this, that we did have a bunch of stranded costs from Devesco in the first quarter. So those obviously are something we had the ability in time. Now we're addressing in the 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 segment. So the way our segments are laid out, helium price increases would be across kind of multiple segments including others.

That's very helpful. Thank you.

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

Yes. Thank you. And our last question comes from the line of PJ Juvker with Citi. Your line is now open.

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

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, it's kind of like a percent in 2019. 2020, as I look at the numbers in 2021, looks to be more like certainly 2% on the sales, maybe 2% to 3% from an EPS contribution standpoint in 2020 and 2021. And I don't have 2022 in front of me, but I would expect at least a two and a two kind of relationship as well. And then as you go forward in 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.

Okay, thank you.

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

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.

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