Good day, ladies and gentlemen, and welcome to the Linde PLC Investor Update Call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to turn the call over to Head of Investor Relations, Juan Pelaez. You may begin.
Thanks, Tiffany. Good morning, everyone, and thank you for attending our first investor call as Linde plc. Once again, 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 Investors 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 reconciliations of the pro forma numbers are in the appendix to this presentation. Steve and Matt will now give us an update on Linde plc. Let me now turn the call over to Steve.
Thank you, Juan. Page four. You can see key metrics of our new company on the left. I don't think they need any explanation. Obviously, market cap is a number that tends to move around. These numbers are adjusted for all divestitures. On the right-hand side, you can see the competitive playing field, and I think it's quite obvious that in terms of size and scale, it's pretty much a two-horse race. Next page talks about our portfolio, which is well-diversified and we think very resilient going forward in the future. On the left-hand side, you can see that we're very balanced geographically across the major regions: Asia, Americas, and EMEA. Obviously, Americas continues to be the largest region, and that's because the U.S. is still a significant percent of our overall sales with a solid 30%.
Based on the growth rates that we expect going forward in Asia and Americas, they will grow steadily as a percent of the total. Again, EMEA, we're not expecting growth of the magnitude of Asia and Americas. On the right-hand side, you can see that $24 billion out of $28 billion are gas. The largest segment is manufacturing, which is to be expected. It's a broad category, very much tied to industrial production. This is where a lot of our cylinder gases, but also merchant liquids go into this segment. Then if you look at the top of the chart, between electronics and chemicals and energy, close to 40%, 39%.
If you were to turn to our backlog page in the back of your deck under the appendix, you would note that though it's 30% of our sales today, 80% of our backlog goes into electronics and chemicals and energy. As I look at this portfolio, another reason I think it's more resilient going forward is at least a third of the markets we serve would be deemed more defensive markets. If we turn to the next page six. What we're trying to do as a new company is to build a high-performance culture and to get 80,000 people aligned around that objective. The first question is, where are we going? That's our vision statement. That's our mission statement. You'll see that on the next page. Then the strategic direction is the how we will get there. That is the road map.
The what we stand for are our values. Fortunately, coming into this merger, both Linde and Praxair had very similar core values, which makes the cultural integration that much easier. We think of values as that which knits us together as an organization. It's that which provides a strong foundation going forward from which pretty much everything else is possible. Then on the right-hand side, you see, well, how do we do this? How do we do all of this? I've listed four bullets. The last three, merger value, the aligned leadership team, the pay-for-performance compensation structure I'm going to discuss later. The operating rhythm or the operating system is something that I'm very familiar with, having practiced this for many years.
The only difference is rather than review 10 businesses monthly in terms of financial performance, cash flow, safety, et cetera, we're going to be reviewing 20 businesses. You turn to page seven in your deck. This is the vision, the mission, and values. I'm only going to talk about the vision statement today, and I'll read it to you. To be the best performing global industrial gases and engineering company where our people deliver innovative and sustainable solutions for our customers in a connected world. There's a lot of words there that have a lot of meaning. What I really want to focus on for the sake of this discussion is best performing. When we think of best performing, we do think of financial performance. It means to have the best operating margins. It means to have the strongest cash flow.
It means to have the best return on capital. It means to have the best top-line growth. Those are the objectives. It also includes being the best in class with respect to safety, compliance, diversity, sustainability, productivity, working capital management, price management, project execution. It really pertains to being the best performing in every aspect of being an industrial gas and engineering company. If you'll now turn to page eight, this is the strategic direction. You can see four bullets on this page leveraging individual strengths of both companies across a larger global footprint, build network density in core geographies, capture the full value of the merger, and execute our robust backlog. If I go to the top and think about in terms of leveraging our world-class engineering and technology capabilities. With this merger, we have the full spectrum of plant technology and engineering capabilities.
The objective is how to turn all that capability into more sell of gas opportunities. It is turning more of that capability into ensuring that we have a competitive advantage when it comes to sell of gas offerings. We have some early wins. You saw our announcement that came out yesterday with respect to our second large hydrogen project serving a major refinery in the U.S. Gulf Coast. This is indicative of what we want to do going forward, which is combining the unique strengths of Linde Engineering, their technology, and engineering capabilities with our strong on-site business in places like the U.S. Gulf Coast. Currently, we're working on other large over-the-fence projects. There's one that we're working on today that I have reviewed that will be orders of magnitude larger than anything either Linde AG or Praxair has worked on in the past.
Best practice sharing, or better said, best practice identification and adoption, is a major opportunity in our company. If you look at our individual organizations pre-merger, we evolved in different environments. We had different challenges to meet. What happened is each has developed unique skills and capabilities and competencies that we can leverage across a much broader organization and a much broader footprint. It really is this best practice identification opportunity that has thousands of people excited today with respect to what each has developed and how to take that and utilize it in their respective areas. Build network density in core industrial gas geographies.
When we think of network density, we think about the integrated supply chain, which is the on-site to merchant to packaged gas, and how we take advantage of the co-product economics across that integrated supply system and build density across each mode of supply. Capture the full value of the merger. I'm going to talk about cost, CapEx, and growth synergies later. Obviously, having a very successful integration is key to doing this. Now, I've already talked about the opportunity with respect to best practices. We have had 25 work teams, co-led from each organization, that have spent the last two years pretty much developing integration plans across those 25 work streams. They had a day one objective, day one launch objective, a day 100 objective, and many other milestones beyond that.
I'm pleased to say that today is the first day, and you probably have seen the announcement, that our hold separate order has been lifted, and we are now free to operationally integrate our two companies across the globe without restriction. We're very confident in our integration plans and our ability to execute coming out of the gates. The last comment you can see speaks to our robust backlog. Linde Engineering today has $5.5 billion of orders for third parties in their backlog. So that obviously bodes well for future sales, cash flow, and profitability for Linde Engineering. We also have $3.5 billion of over-the-fence projects. You can see that breakdown on page 19 in the appendix. You can see that the backlog is very much geared towards electronics in Asia and refinery and chemical projects in the U.S. Gulf Coast.
If you can turn to the next page where we talk about our value capture. We've identified $1.1 billion of synergies that we expect to capture over the next three years. $900 million of that is cost synergies. We arrived at this number as we concluded 2018. We saw where each organization was, and as a team, we determined that we believe we had $900 million of cost opportunity going forward as it pertains to the merger. One third of that number is in the first two comments, which pertain to a decentralized structure, which we have adopted across the board, and corporate rightsizing. The remaining two thirds of that number would be delivered through regional overlap and operational efficiencies as they pertain to things like procurement and productivity.
That $900 million figure has been broken down and allocated across the segments and down through the business units and across the functions as well. We expect to deliver about one-fourth of that number this year. The reason it's not a number closer to a third, given I said that $900 million of synergies over three years, is because today was the first day that we've been able to operationally integrate our two companies, as I just mentioned, and that says that we pretty much lost the first quarter in terms of the ability to deliver synergies this year. We do expect to deliver about one-fourth of that number this year, and the remaining three-fourths, of course, will be delivered over 2020 and 2021. CapEx synergies, we're still targeting about $200 million. You see the sources of the CapEx synergies.
I would add to that, we're going to have a very tight CapEx spend process, as you would expect. With respect to additional synergies, again, the HSO was just lifted today, and what that means is we've been precluded until today in terms of looking at our individual commercial capabilities, our individual customers, pricing, applications, technology. We have not been able to examine that and to evaluate the synergy that we think would lie therein. Again, today, the curtain has been lifted, and that work will start as we speak. With respect to, again, the synergies, $1.1 billion delivered over the next three years, we believe that the cost to implement those synergies will be about $700 million. Next page is the leadership team. The management committee is comprised of three individuals from Linde AG and three individuals from Praxair. It's a very experienced team.
The only other comment that I will make on this page is that we made the decision to switch Eduardo Menezes and Bernd Eulitz. Bernd Eulitz today runs the Americas pole. Before that, he was head of Europe, head of EMEA for Linde AG. Likewise, Eduardo Menezes was located out of Danbury running the Americas and other businesses. Today, he is located in Munich running our new EMEA region. Of course, Bernd Eulitz is located in Danbury running the Americas. The reason for doing this should be obvious, but I will just state it. This allows us to promote integration at a faster pace. It promotes the sharing of best practices and will also allow each individual who knew talent within their legacy organizations to now be able to learn the talent that we're going to have across a much broader organization.
If we can turn to the next page, where we're talking about management compensation. To build a high-performance culture, we have to have a pay-for-performance compensation system with appropriate pay at risk. This is a system that I'm very familiar with. If you look at the short-term cash bonus, the key metrics will be sales growth, net income, and operating cash flow. 75% of the weighting is tied to net income and cash flow. With respect to long-term equity, the mix will include stock options and performance shares. These will be three-year performance shares tied to total shareholder return versus the appropriate benchmark like the S&P 500. Also, the performance shares performance will be tied to return on capital. Again, that is a three-year goal.
We are going to have stock ownership requirements that are representative of what we would expect management to hold in terms of the company shares, and this will ensure that everyone in the company thinks like a shareholder. I think it's also important to note that the top 1,200 people in the company will all be on this same compensation design. If I could turn to the next page and talk about key milestones. Merger closed on October 31st. In mid-December, we announced our initial share buyback program and dividend. In January, right after our January board meeting, we announced our second share buyback program, which Matt will talk more about. At the end of January, we held our first global leadership conference. We had the top 120 people from our new company present.
At that conference, we talked about expectations. We talk about what good businesses look like, what we should expect from each other. In February, coming out of our board meeting earlier this week, we announced our dividend increase. Again, the hold separate order was lifted as of today, March 1st. We intend on completing the Linde AG squeeze-out of minority shareholders sometime in the second quarter of this year, and we anticipate completing our divestitures in Asia, which are principally in South Korea and India, sometime during Q2, and maybe spills over into Q3. With that concludes my remarks. Now I'll turn it over to Matt White.
Thanks, Steve, and good morning, everyone. I'd like to start on slide 14, which shows a summary of the 2017 and 2018 income statements. As most of you know, it's a fairly complex transaction that combines two global companies. The different accounting standards and significant divestiture requirements have made analysis and comparability more difficult. To assist in understanding the financial performance, this slide provides adjusted pro forma statements. The adjustments remove items not indicative of ongoing business trends, which are primarily merger-related costs and the purchase price accounting impact. A reconciliation of those adjustments to the preliminary U.S. GAAP figures can be found in the appendix. In addition, these are pro forma statements which have restated both periods as if the merger occurred prior to January 1st, 2017. We believe these modified statements are useful to investors and provide a more appropriate baseline comparison against future financial performance.
Turning to the numbers. You can see 2018 sales of just over $28 billion, which increased 5% from 2017. Approximately 1% relates to positive foreign currency translation and energy pass-through. The remaining 4% of growth comes from a combination of price and volume. Each legacy company grew mid-single digits during 2018, which aligns with this figure. Note that our intention is to continually add more meaningful variance data with each quarterly investor call until we can lap a full year as one company. I appreciate your patience as we integrate and standardize internal practices. Gross profit is up 6%, resulting in a 40-basis-point margin increase. Pricing improvements are the primary driver, with positive contribution from organic volume growth. Operating profit of $4.8 billion rose 7%, with an operating margin improvement of about 30 basis points.
Both depreciation and SG&A expenses grew mid-single digits, as Steve mentioned, this will be an area of intense focus to achieve the cost synergies. Diluted earnings per share rose up to $6.19, which is 8% higher than 2017. EPS and net income are growing faster than operating profit, due primarily to lower net interest expense from the combination of lower debt and higher-yielding cash balances. Over the next few years, we will continue to optimize the capital structure to identify future savings. These are the most up-to-date baseline figures we have for 2017 and 2018 on this basis. Over time, we will provide more information on key operating metrics as well as pertinent balance sheet and cash flow information. Until then, we plan to file our 10-K in 2 weeks, as we are utilizing the allowable time extension.
We believe it's wise to maximize the preparation time, especially in light of the significant purchase price accounting requirements. We expect future income statements to remain adjusted pro forma until we finalize the Asian divestitures. While it's possible that historical pro forma information could be updated again, we aren't anticipating anything material at this time. I'd now like to discuss capital allocation priorities that you can find on slide 15. First and foremost, we want to maintain an A, A2 credit rating while consistently growing the dividend every year. A large part of our ownership base appreciates the value of long-term compound dividend growth, which we've been doing for over 25 years and have no intention of changing. The A, A2 credit rating is consistent with industry standards and provides access to low-cost capital, including Tier 1 commercial paper.
Low cost and dependable liquidity is an important element of success for the long-term sale of gas model. With the capital structure and dividend policy established, our next priority is to invest in the business where we can consistently achieve double-digit returns. However, we must also maintain discipline because these investments carry the highest risk to the company. A prudent approach to achieving healthy returns well above cost of capital while mitigating risk is a path to significant value creation. As Steve mentioned, return on capital is a critical metric and an important part of our compensation, which plays a large role in evaluating investment performance. After dividends and investments, we still anticipate excess capital left over while maintaining the target credit rating. We intend to return this surplus cash to shareholders in the form of stock repurchases.
This is the most flexible use of capital and has tax benefits to the investor while reducing the dividend obligation to the company. Furthermore, the industrial gas industry has counter-cyclical trends where our free cash flow is greatest when the capital cycles are at their lowest point, enabling attractive entry points to repurchase stock. Since the combination of our two strong companies was a cashless merger, we have significant excess capital available to deploy. Slide 16 summarizes some of the recent actions we've taken to share that surplus with our owners. On December 10th, 2018, the board approved a $1 billion share repurchase program. We repurchased 6 million or 1% of outstanding shares and completed the program on February 15th. On January 22nd, the board authorized a second $6 billion share repurchase program, which we are currently executing in the market.
On top of this, we fully expect to complete the Linde AG squeeze-out by June of this year, which is essentially equivalent to a one-time $3 billion share repurchase at a predetermined fixed price. In total, we have $10 billion of share repurchases anticipated over a two-year timeframe, which represents approximately 11% of the current market cap. This week, we announced a 6% increase to the annual dividend, which would result in almost $4 billion of dividends paid over the same two-year time period. Overall, we expect to distribute back to shareholders approximately $14 billion or $25 per share over two years, while still investing heavily in our industry-leading project backlog. I'd like to wrap up with a very brief outlook of 2019, which is on slide 17.
As I mentioned earlier, we still have a lot of work ahead of us to dig into the details of both companies. The restrictions of the FTC hold separate order were removed today, which will enable global coordination and cooperation towards these efforts. We will continue to refine and tighten our outlook as more information becomes available across the organization. At this point, we anticipate 2019 sales growth to be lower than the 5% we experienced in 2018. The primary driver is from a 2% foreign currency headwind in 2019 versus a slight tailwind in 2018. In addition, global industrial production is projected to be lower in 2019. That view has been supported by first quarter indications of softer conditions in parts of Europe, Americas, and specific markets like automotive and metals. However, we fully expect positive contribution from the project backlog as well as pricing.
All in these assumptions would imply a low single-digit sales growth rate. Despite the top-line outlook, we are expecting strong leverage down the income statement with adjusted pro forma EPS growth rates in the range of 8%-12% or 10%-14%, excluding FX translation. Cost and capital structure synergies, combined with a lower share count, will all contribute to the improvement, and profit margins should steadily increase through the year as we execute synergies. In summary, we expect to deliver on our commitment to create value irrespective of the uncertainty around the macroeconomic climate. Now I'd like to turn the call over to Q&A.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place yourself on mute once your question has been stated. Our first question comes from Duffy Fischer with Barclays. Please proceed.
Yes, good morning. First, just want to say congrats on an excellent deal for you guys. First question is just around the EPS guide. If you take the midpoint, how should we think about tax and share count impacting that, say, 10% at the midpoint growth?
Hey, Duffy, it's Matt. I think we could first start just a baseline on share count. On the historical numbers we showed for 2017 and 2018, we included in that share count the full effect of the squeeze out. That will have no effect anticipated on a go-forward 2019 basis. That being said, we clearly are in the market repurchasing shares, and I do anticipate that will help the EPS. A little bit is baked in that guidance right now. I do think there's a little more upside. That being said, we may have some risk on more currency, negative currency translation. We may have risk on the macroeconomic front. I think right now, there is a little bit of the lower share count baked in. There probably could be a little more upside on top of what's there now.
As far as taxes right now, I think on an ETR basis, the best estimate is that should be flat to about 25%. How we showed 2018 pretty much has the full effect of U.S. tax reform. We're not anticipating any significant changes in that. Cash taxes will be very different. We will have a large cash tax payment in 2019 related to the divestitures. That's just the timing. On accounting ETR, I'm not expecting much change.
Okay. Just because you brought it up, the cash side of it, can you give us a broad walk of what the cash calls are going to be this year, kind of from that EPS, if we can convert it into a net income number? Like roughly what the cash flow statement might look like?
Well, I would say this, Duffy. There'll probably be 3 large merger-related cash items that'll be sort of one-off in nature. You'll have a fairly large cash tax effect, as I mentioned, on the divestiture. That could be about a half billion dollars. Usually those tend to be about a one-year payback, so you could argue what's in the P&L probably will be in the cash as a hurt. We have some change in control, IRS-triggered retirement obligations. That could be another, say, $100 million expense on that. Other than that, those one-off merger cash items, I expect things should flow down. The synergies obviously will offset the cash costs, given how we view that, the remaining P&L should flow through fairly standard.
Working capital, we're still getting our arms around, that's something we'll have to determine. I know that the Linde Engineering business had some significant customer prepays in 2018, given a very strong order intake. Whether that repeats or not in 2019, we'll have to see. I think the rest of it should flow pretty much as you would anticipate.
Just base CapEx for this year?
It's a little over $3 billion. I'd say very similar to what the spend was in the combined companies last year, obviously large project has increased that number a bit.
Great. Thank you, guys.
Thank you. Our next question comes from David Begleiter with Deutsche Bank. Please proceed.
Thank you. Matt and Steve, just on the long-term margin potential of business, look at the 2018 margin of roughly 17%. If you look out three to four years, can that be above 20%, either of you?
Well, David, from the very beginning, when we looked at this merger, when we pulled out the pieces that were not core gases, so to speak, we believed that the operating margins could get to the point of where Praxair was at that time. That doesn't mean that Praxair was static or whatever, could not improve upon that level of operating margin quality. That is what we believed. When we looked at the original synergies, it would equate to a number like that. We'll see where we get to, but clearly the synergies are going to increase the operating margins. Just as we work as an organization, continuing to focus on productivity and efficiencies and price management, and bringing good large projects online, that will all contribute to better leverage down the income statement.
Very good. Steve, just one more thing. On Lincare, is that a core asset long term?
Well, I think it's important to look at the healthcare market holistically to begin with. 17% of our sales are healthcare. We do business with hospitals all over the world. That's very good business, very similar to what we do in the industrial space. The remainder is home care. Home care can be very good businesses. It really depends on the regulatory environment in a given country. It depends on the payer structure, et cetera. We have to evaluate all our home care businesses really on that basis. What I'll say about Lincare is that 2018 was better than 2017. As I look at the 2019 plan, it's going to be a better performance than 2018. I think they've got a good two years with respect to 2019 and 2020 because there will be no competitive bidding in that space
We'll continue to evaluate the business as we go forward, like we would any other business. It is a best-in-class U.S. home care company. There are a lot of positives that are taking place with respect to what they're doing in that business, and some other opportunities that they have in front of them.
Thank you very much.
Thank you. Our next question comes from Joshua Spector with UBS. Please proceed.
Good morning, gentlemen. Thanks for the presentation. I've just got a few questions. I was wondering if you could help us with the phasing of the costs for the cost savings over the next three years. That $700 million you mentioned. I also just want to check, the organic number you mentioned of, I think, was 4% for the group. Certainly, in the third quarter before you merged, both businesses were growing, I think, quicker than that. Does that imply there was a fairly marked slowdown in the fourth quarter in organic growth from gases? Finally, I just wonder if I could ask if you could talk a little bit about surface technology and where that fits in. I noticed that wasn't in the mission statement in terms of engineering and gases.
Okay. Phasing in the cost of $700 million you're talking about, some of that is merger and integration related costs. Some of that are severance costs. I would say close to half of that will probably be spent in 2019. Your question with respect to organic sales growth, was it slowing or is it slowing in the fourth quarter and so forth. Fourth quarter's always a little weaker than the third quarter. Coming into the first quarter, you have things like holidays, Carnival, the Chinese New Year. It so happened that, if I look at the U.S., for example, you always have weather, but we had very intense cold during the first quarter of this year. We also had a government shutdown. With respect to the intense cold, we had some customers that had operational issues that continue to have operational issues.
As I look at the first quarter coming out of the gates, it's kind of choppy. It remains to be seen what the underlying demand will look like. Most people think that the U.S. will continue to grow, but not at the pace it has been growing. Matt already commented about Europe. I don't think that's any surprise that growth has been slowing. That has been the public reports. You have the prospects of Brexit. What does that mean? Certainly not a positive. If you look at Latin America and Brazil, a lot of optimism, nothing really has changed structurally on the ground yet. All that it is optimism at this point. It is stable, which is a good thing. If I turn to Asia, certainly, manufacturing growth has slowed in China. Still growing. That's not a surprise.
You know the numbers on automotive production. That has a downstream effect on products like steel products, which we would be affected by. Again, general slowing in the manufacturing economy in China. If you look at the new year, in times past when the economy was rip-roaring, sometimes they'd work through the new year, or certainly not take the full time during the new year. This year, a lot of time was taken out. They took the full time for the new year. I think that's all just indicative. You add to that what's going on with the trade discussions and tariffs. All that really is kind of indicative of an economy that's not growing at the pace that it has been. I think long term, the Asian economy certainly should be expected to grow, as I do the Americas, especially with respect to the U.S.
Our outlook, to the extent that you might think it's conservative, would be affected certainly by what we are seeing coming out of the gates in the first quarter. Clearly, if the economy performs better, we will see the benefits of that will be leveraged down the income statement because we're quite confident in our ability to leverage any volume growth that we see. Your last question is with respect to PST. PST is a business that has been in the family for a long time. It is principally inorganic coatings. We have a joint venture underway with GE, where we are providing EB PVD coatings primarily to aircraft engines and to the hot sections of the engines. We're in the middle of a ramp. The business is doing quite well. It certainly is best in class with respect to inorganic material coatings.
Right now, we certainly don't have any plans to do anything with that business.
Okay. Thank you.
Thank you. Our next question comes from Nicola Tang with Exane. Please proceed.
Hi, everyone, thank you for taking my questions. Hi there. Firstly, in your introductory remarks, you highlighted your ambition to be a sort of best performing company and apply best in class or share best practices. Now that you can start operational integration, could you give some examples of where Praxair was doing something that was particularly best in class, which you can now share at Linde and also vice versa? The second one would be, you signaled that you want to leverage your gases offering with the Linde Engineering side. We've seen that demonstrated with some of the contracts that have been awarded so far. Can you talk about how this fits into your assumptions on the CapEx, on the synergies, and also on your sort of CapEx guidance? Thank you.
Well, clearly, with respect to the last question, being able to utilize an internal supplier is lower cost than going outside and buying a plant from somebody who's passing on their overhead and their markup. It is a part of the CapEx synergies, absolutely, and certainly gives us the ability to be more competitive, and you've already seen some examples of that. With respect to best practices that each is bringing or competencies that each is bringing to the equation, Praxair clearly is known for operational excellence. We have had a very robust productivity program for many years. It's very much ingrained in our culture, in our operating model. Linde has productivity tools as well that we're certainly going to learn from going forward. Praxair's put a lot of emphasis on pricing tools and pricing systems. We'll learn what Linde has with respect to that.
If you look at applications, Praxair is very strong at oxygen combustion. We have people that we say have grown up in steel mills. Linde has very good portfolio of clean fuels technology. They're very strong in healthcare. I'd say we're both strong in food and beverage. We both have worked on different ends of a digitalization spectrum, but together we should have a very compelling offering as we look at that more closely. I think with respect to production practices, again, we've worked very hard at that in Praxair. It's been a big source of our productivity as we've learned how to optimize our plants based on time of day power costs and things like that. I'm sure I'll find similar practices that Linde has on the distribution side.
Linde was one of the first companies to implement cylinder tracking, which is very important with respect to asset utilization around cylinders. Linde has done very well with respect to shared services. It's a long list of capabilities that we each bring to the equation. What I just described is kind of like what Linde AG legacy brought. Really, this day going forward, I'm really only interested in talking about the collective practices and capabilities of one Linde plc, going forward. That gives you an idea of what's out there.
Thank you. Yes, that was very comprehensive.
Thank you.
Okay.
Our next question comes from Jeffrey Zekauskas with J.P. Morgan. Please proceed.
Thanks very much. What do you expect your D&A expenses to be in 2019? Can you describe your balance sheet in terms of your cash and your debt and your pension expense and proceeds you expect to come in from asset sales?
Jeff, this is Matt White. You basically want me to tell you the 10-K over the phone.
You can give me the abbreviated version.
I think, on the D&A, obviously, we're going to be adjusting out the PPA step up.
Right.
We'll give more clarity on that number. It's a number that's going to be in the $2.5 billion range, ±. We'll give a little more granularity on these pro forma P&Ls with each successive call. As you can imagine, the work we've done to date, while we feel pretty good about this, it's a lot of work. You're essentially restating the past to put it on a comparable basis. We have to take two different systems and put them on a like-for-like U.S. GAAP basis. We may have some line swapping and things like that, hence why we haven't given a full, I'll call detailed line item. I would say at this point, you're in that range, and that's something we'll look to give more clarity. As far as the balance sheet.
Right now we don't have what I'll call an updated, adjusted pro forma balance sheet. As you know, there really is no such thing as a cash flow adjusted pro forma. Just you can't really go back in time and say what you would've done with your cash. You'll see the 10-K when it's filed in 2 weeks on the balance sheet. What you'll see is that on the Americas assets for Linde AG, they are considered disc ops for purposes of how we've done it, given that the purchase agreement was already in place. We will have the Asia Pac assets, and the Linde AG assets will be shown as assets held for sale on the balance sheet.
What I'll tell you is when you see this, it's a pretty good indicator of what the balance sheet will look like on the combined company once you isolate out assets held for sale. The cash flow statement obviously will only reflect essentially 11 months of total Praxair, one month of Praxair without Europe, and then two months of Linde AG. That's going to be a little more complicating on the cash flow. Like I said, with each call, we want to try and bring more information, and we'll try to bring more details to help you with that. At this point, I'd say start with the balance sheet you'll see in a couple of weeks, and we'll build it from there.
When you answered Duffy's question at the beginning, I think you said you had to pay out $500 million in taxes. What are the proceeds that reflect that $500 million in taxes?
That's the Europe proceeds that we already got in December. The proceeds obviously were wired on the transaction closing, just the timing that we're paying them will actually occur in calendar year 2019. That will show up in operating cash flow, as you know. Obviously, it was related to proceeds that came earlier, just the way the structure of the deal was.
Lastly, I think Steve started off by saying that it may be you're working on a deal that's much larger than any of the deals you've done before. Should we assume that that's a Syngas deal?
You shouldn't assume anything. Other than it's a large project, it's something that we have a lot of interest in. I think, again, the unique capabilities that the two companies bring is what is creating this opportunity. Obviously, we'll talk more about it as the time draws closer.
Thanks very much.
Thank you. Our next question comes from Peter Clark with Societe Generale French Banking. Please proceed.
Yes, thank you. Well done for getting to this stage anyway. Can I focus on the backlog? Three quick questions about that, I hope. We're well aware of the quality of your backlog, particularly on the Gulf Coast and I'm sure they got the one anyway. Have you got any feel at all, I know it's early days, on the Linde one? I know 70% was coming from Asia, and I presume that was pretty intact, but the quality you feel about the backlog there. Secondly, the Gulf Coast assumption that you had, you were aiming to grow the footprint there, I think 50% 2016 to 2020. Obviously, on my numbers anyway, you've won over $2 billion of contracts. You're ahead of that. Obviously now you've got Linde as well. Clearly, a lot of these projects, or the projects won't come on before 2020.
Just your thoughts on the Gulf Coast and looking ahead now with Linde. The third point allied to that, you won obviously this Sweeny contract. Very rare to see a brownfield contract won off the competitors. Just wondering the thoughts on that sort of offering you have with Linde and the potential for that sort of contract win as well. Thank you.
Thank you for that three-part question, Peter. With respect to the quality of the backlog, I've had a chance to look at that very recently, obviously, because we just had the whole separate lifted, and I only was really looking at it at a high level. Based on my conversations with all the Linde people, they go through a very similar evaluation of project quality as we do with respect to risk and return. That's a good sign. As I look at what the expected returns would be on the backlog, the numbers look, again, similar to what we have experienced. With respect to your 2016-2020 50% increase in capacity, I've actually kind of rolled forward the objective.
As I look at where we are today, it looks like from 2018-2021, and again, the 2021 number is just a function of starting up the contracts, the contracted projects that we have announced and are currently in the backlog, that we'll grow our hydrogen capacity from $1.2 billion-$1.7 billion. Again, I'm just talking about hydrogen capacity today. You can do the math, but that's another 40%. We continue to do well. Obviously, in the U.S. Gulf Coast, we have five projects today that we're working on and over $1 billion of CapEx. With respect to winning projects, I'd say in the U.S. Gulf Coast in general, a key determining factor is the reliability of supply. These are very large customers down there, very large chemical customers, very large refineries.
Obviously, having a reliable supply of hydrogen is very important to them. We've been able to achieve very high levels of reliability. It's something that we continue to work on. Largely by making significant investments, significant capital investments, so that we have the right balance of on-purpose hydrogen and byproduct hydrogen. Building a hydrogen storage cavern to ensure that we have the reliability at various points in time during the cycle. Working very hard from an operational excellence standpoint. Some of our best people in the company with respect to operational excellence are located in the Houston area. When we are asked to provide a proposal or to work with a refinery, usually these things take years before they come to fruition.
Clearly our ability, our demonstrated ability to provide reliable supply to them is very important along with our commitment to sustain that going forward.
Okay. Can I just follow up on the first point on the backlog? Your backlog to sales growth, you're pointing at 2%, I think getting closer to 3 on the bottom line. Linde was nearer to 1%. Obviously, the remedies didn't take much backlog. Would it be right in thinking you feel this backlog in gases as a proportion of gases sales could grow nearer your 2% than their 1%?
Yeah. I would say in 2019 it's closer to 1%. The reason is that the timing of the startups. We have some projects, the large projects are starting up towards the end of 2019, beginning of 2021. Clearly we're going to get the benefit of that. Linde's profile was somewhat similar to that. We're going to certainly get the benefit of that in 2020, and beyond. It looks more like a 1% contribution in 2019, but a 2% plus contribution going forward in 2020 and 2021.
Thanks very much. Very clear.
Thank you. Our next question comes from Steve Byrne with Bank of America, Merrill Lynch. Please proceed.
Hi. Thanks. This is Ian on for Steve. Could you help us give some indication of what the net debt of the company will be either once the divestitures are complete or at year-end?
Ian, this is Matt. I could tell you this. What you'll see on the balance sheet that we'll put out here for the 10-K is a net debt number of about $10.8 billion. Now, about half a billion dollars of that, for the most part, relates to various step-ups that we had to do on the purchase price accounting, the number will be $10.8 billion. We'll definitely have some obviously additional proceeds coming in here into calendar year 2019, of which the Americas proceeds, which we just closed on today. They actually, part of the hold separate order was lifted because those were wired. Those are in-house. And then we'll have Asian proceeds. And you may recall from the last filing we did, the combination of those two are in the neighborhood of close to $5 billion-ish, or more on a gross basis.
That's how that number would look, we'll have obviously to pay taxes on that. We'll have buybacks we continue to be in, as you saw the approvals, dividends and our CapEx. You could probably do the math from that point, our starting point will be $10.8 net debt for January 1st of this year, you can get an idea of some of the moving parts.
Thank you. That's very helpful. On the outlook for perhaps pursuing some of these larger projects, is that something that is contemplated in the current backlog today, or it would be additional as we move forward?
No, it would be additional. The only thing that's in the backlog today are contracted projects. If we don't have them signed, sealed, and delivered, we don't put them in the backlog. They just remain a very promising opportunity, which we don't include in any backlog descriptions. Okay.
Okay. Thank you. Our next question comes from P.J. Juvekar with Citi. Please proceed.
Hi, this is Scott on for PJ. Thanks for taking my question. I think your total share of cylinder and bulk distribution is close to two-thirds of your revenues. I think on a pro forma basis, including Lincare, that's just a bit higher than where legacy Praxair stood. Longer term, how do you envision that mix of supply by distribution changing? If you don't, why does it make sense to keep it that way?
The real question is with respect to on-site, to merchant, to a cylinder gas type business. If you look at the strength of the backlog that I'm describing and what I believe will be the opportunity slate going forward, it would say that the on-site will grow at a pace greater than the rest of the portfolio. Does not mean that the rest of the portfolio is not going to grow. We certainly believe it will, and we have every intention to try to make that happen. It's just a fact that the on-site opportunity slate is going to drive the on-site to grow at a faster pace. I would say that on-site will increase percentage wise, probably 1%-2% per year over the coming years.
Got it. That's helpful. Just on the cash to achieve synergies, I think, in your $700 million estimate, if I remember correctly, it's about 30% less than what you guided to when the merger was first announced and the cost synergy target is maybe just a bit less than what you first thought. Understanding that a lot has changed since then, but can you help us understand why that number seems a lot lower than when you first announced the merger?
Yeah, Scott, it's not. It's because lawyers and bankers aren't free, right? We had to pay them, right? Part of it was already incurred in 2018. When we guided those numbers initially, obviously dependent upon where you are in time, it was always a forward-looking. Payments have been made throughout. If you go back to the S-4, you'll see it's a combination of not just costs to effectuate the synergies, but it also included costs to complete the merger. Merger completion costs, a lot of them have been expended. Then going forward, this is more of true costs to get synergy. It was kind of a combination in that billion-dollar number that you're thinking about. That was kind of a holistic kind of cash cost for merger.
Okay, got it. Just to make sure, the cost, that cash to achieve synergies, does that include the $300, I think, cash to achieve legacy Linde's lift savings program?
The $1 billion was kind of all in, but on a forward-looking basis, including cost to complete the merger. Really, I think it was excluding any existing program cash costs that anyone had in their legacy business, and it was more of a combined company look other than what I'd call merger completion costs. Banker success fees, lawyer cash fees to actually execute the merger.
Okay, that makes sense. Thank you.
Yep.
Thank you. Ladies and gentlemen, we have time for one more question. Our next question comes from Michael Sison with KeyBanc. Please proceed.
Hey, guys. Thanks for fitting me in, and congrats on getting the deal done here. In terms of the first $250 million in synergy, I know nothing's easy, but is it pretty well planned out that should be smooth sailing in achieving that this year? Is there any upside near-term in that?
Well, it's certainly planned. As I said earlier, we've been working on this for quite some time. We have targets that have been broken down and pushed through the organization. I feel quite good about that. With respect to can the number be higher, remains to be seen. We're going to have to build from here. We've got essentially three quarters, perhaps 10 months to do that. I would certainly expect that we'll have more momentum on the synergy front as we leave the year going into next year.
Okay. A quick follow-up. You talked about EPS growth of 8%-12%. Could you give us any thoughts? I know there's some FX headwinds and a lot of moving parts. Does adjusted operating profit grow in line with that? The first half of everybody's year seems to be more challenging. Do you have a little bit more of a first half, second half type of outlook?
Well, I think you could probably tell from my comments that I expect a choppier first quarter. First quarter is always weaker in any year because of some of the factors that I mentioned. I think the first quarter could be a bit choppy. I think certainly with respect to operating margin growth, Matt White mentioned earlier with respect to the share count and the leverage that you get from net income to EPS on that, interest expense will probably be a bit lower. That would kind of tell you about where the midpoint should be with respect to EBIT growth.
Great. Thank you.
Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.