Good day, ladies and gentlemen. Welcome to the Q1 2019 Linde Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Instructions will follow at that time. If any of you require operator assistance, please press star and the zero key on your touch-tone telephone. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Juan Pelaez. Please go ahead.
Thanks, Chris. Good morning, everyone. Thank you for attending our first quarter earnings call and webcast. This is Juan Pelaez, Head of Investor Relations. I am joined this morning by Steve Angel, Chief Executive Officer, and Matthew 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. Note that it applies to all statements made during this teleconference. The reconciliations of the adjusted pro forma numbers are in the appendix to this presentation. Steve and Matt will now review Linde's first quarter results and provide a full-year outlook. We will 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 hold separate order was lifted on March 1st. 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 ExxonMobil in Singapore, that's value to us will be about $1.4 billion of capital investment. Jurong Island in Singapore is ExxonMobil's largest integrated manufacturing complex. 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 Linde operates today. We will be taking pitch from ExxonMobil and returning hydrogen, OXXO Gas, and nitrogen to ExxonMobil, as well as hydrogen and carbon monoxide to multiple customers via our pipeline system. You can see our project is very much integrated into ExxonMobil's new project. This project will be executed by Linde Engineering. We see a solid return anchored by a base facility fee structure. We expect contract signing to be in the next 30 to 60 days. Regarding key milestones. We completed the squeeze-out of our minority Linde AG shareholders on April 8th.
We announced the divestiture of our South Korea assets on April 30th, which represents about 75% of the expected value from our required divestitures in Asia. All our employees are excited about the merger. We see a strong pull for application technologies as we begin to appreciate each other's capabilities. A strong pull for plant capabilities, and best practices in every aspect of our business. We are currently working through a very detailed cost and restructuring initiatives. We held our first zero-based budgeting review for all corporate functions a few weeks ago. 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. Now 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 US GAAP in two ways. First, they're pro forma, which means all periods are recast to reflect the merger, including removal of the regulatory mandated divestitures. Second, figures have been adjusted to exclude items not 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 US dollar, with most losing 5%-10%. You may recall that the first half of 2018 had a weaker US dollar than the second half.
So I expect this trend to continue for the second quarter. Excluding foreign currency, underlying sales grew 5%, comprised of 3% volume and 2%. 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 to 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. 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 nine and a half 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 Linde AG squeeze-out cash payment of $3.2 billion or the Korean divestiture proceeds of $1.2 billion, both of which occurred in April of this year. The sale of gas project backlog remains at $3.5 billion as a 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%-13%, or 12%-16%, excluding anticipated currency headwinds. We expect positive contribution from cost synergies to continue to ramp each quarter as integration efforts are implemented. Furthermore, the projected FX headwind of -3% is primarily front-end loaded, with a -4% to -5% occurring in the first half of this year and -1% to -2% headwind for the second half. Although we are not providing second quarter EPS guidance at this time, we anticipate moderate Q1 to Q2 sequential improvement from ramping synergies.
We expect further improvement into the third quarter. 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 and the 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, please place your line on mute once your question has been stated. Our first question comes from the line of Michael Sison with KeyBanc. Your line is now open.
Hey, guys. Nice start up to the year. [Man I-], just in terms of your outlook regarding softening of industrial production, you did 3% volume growth in the first quarter total. Some of that has project growth in it. 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. 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. 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. As discussed, if sequentially this kind of trends hold, we would definitely believe we'd be at the upper end. We'll have to see, but we absolutely feel quite confident on our synergies and what we can deliver in the self-help, it's just a matter of where foreign currency rates go, where underlying volumes go.
Okay. As a quick follow-up, it does sound to some degree that there could be some conservatism here. When you think about what you can control to help move yourself to the upper end, where do you think that'll come from? Is it more just your ability to execute on the synergies, growth, pricing? Give us some of your thoughts there.
Mike, this is Steve. Obviously currency is something that's difficult to control and volumes, 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 focused on today, and we want to deliver that as soon as we can. I'll also add price management. We have to make sure that in every corner of the world, that we're doing everything we can to offset cost inflation, both prior cost inflation and the current cost inflation that we're seeing. Those are things that we can control. Matt talked about net interest benefits, I won't say any more about that. Those are the controllables, and that's where we're focused.
Great. Thank you.
Thank you. 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 U.S. peer. Can you discuss the reasons why and the opportunity to raise those margins over the medium to longer term?
Well, we all have different geographical profiles when you look across Asia. For example, in our case, the new Linde case, China is a prominent player, Australia is a prominent player. Australia unfortunately has had a long period of, I'll call it de-industrialization, more of a secular trend. That's something that we have to address. You can see in the comments that Asia sales, if we take out Australia and take out the effect of divestitures, the rest of it's plus 10%. Those numbers are pretty good, and that's without the benefit of really much in the way of large project contribution. Clearly we have some opportunities here. We had more integration from a regional business standpoint. There's more integration in Asia than anywhere else. We have some cost synergy opportunities there.
Clearly inflation has been something that's been very apparent in that region for many years. We need to make sure that we focus on that. Clearly, the objective is to steadily increase the quality of our business there as measured by operating margins.
I would just add, David, as you know, 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. Those are things I think to also consider when comparing.
Very helpful. 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, 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 gonna be in the back half and even a little more weighted towards Q4. Really kind of minimal synergies in Q1 because of limited time we had to work on it. Starts to ramp in Q2, but again, 70% or so back half.
Thank you very much.
Thank you. Our next question comes from the line of Duffy Fischer 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, Duffy, I would say that unlike companies who have global supply chains and depend on China for exports from the U.S., global supply chains coming, exports going the other way or even vice versa. As you know, our business is very local, the product is produced and sold locally. The direct effect is minimal. There is a potential for indirect effect as our customers start to see the effects on their business. 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. It also kind of leads me to, not the point you were making, but another point, which is, we have a very stable business model. 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. We view ourselves as a very safe port in the storm. As you can see in my earlier comments that I said I want to make sure that we're increasing our operating margins, the quality of our operating businesses, regardless of what the economic environment may be.
Great. Thanks. Then just a second one on the Linde Engineering business, because that's a business I would say we're all less familiar with. Now that you've had a chance to kind of come in and look at that, is that run as you would want it? Or when you look back, some of the business they've been on isn't right. Just I guess structurally, how could that business look different three years from now?
Well, to the way it can look different three years from now, we have all agreed internally that we want to shift the balance of Linde Engineering's business more towards over-the-fence projects versus third-party sales. We think that's a healthier place for that business to be over time. 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 sell gas business opportunities. That really is the focus going forward. 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, 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, 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. If they couldn't, believe me, ExxonMobil would not have selected us. That's something I'm beginning to appreciate more and more, as I get into this.
Great. Thank you, guys.
Thank you. Our next question comes from Nicola Tang with Exane. 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 are disposals on track or perhaps better than you originally thought? Is the buyback going as per what you expected? 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? 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, Nicola. This is Matt. I'll answer the first one. Then Steve will answer the second. On net debt, yes, as stated, we ended the quarter at just about $8.1 billion. What we're doing is adjusting out. It's about $230 million, $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. Look, excluding that, we're about $8.1 billion. As discussed in April, we had the $3.2 billion out on the squeeze-out and the $1.2 billion in on the proceeds. That would raise net debt, holding all else equal, to a little bit over $10 billion. Going forward, clearly, as you're probably seeing, 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. We're working within those confines. I would see net debt rising throughout the year as we continue to execute the buyback throughout our program. End of year remains to be seen. It should be something definitely higher than $10 billion. We're always working to stay within our Aa2 rating, which I think we have a lot of room right now. 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.
Regarding your question with respect to Europe. As we look at results and really look at the forecast, I would say within those results, Western Europe is weaker. 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 -1.2% for the year. Western Europe looks to be flat in terms of industrial production growth.
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 improvement going forward.
Thanks. Can I just follow up? 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?
I would say Europe is the largest driver. If you permit me, if I could just make a couple of comments around the world. 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, I made a comment about Australia, 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 can include me on that. I don't really have a crystal ball into what's going to happen. 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 stay in place. If I 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, when I look within the numbers, merchant liquid volumes seem to be, I think, at a fairly decent level. We're growing in March, look okay coming into April. 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, hardgoods was slightly negative.
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 participate in that and we'll be in good shape, as Matt said earlier. I think there are enough signs out there, primarily in May, but there are other signs that say we shouldn't be overly optimistic.
That's very helpful. Thank you.
Thank you. Our next question comes from the line of Jeff Zekauskas with J.P. Morgan. Your line is now open.
Thanks very much. I have a question on the ExxonMobil project. Was that project originally a sale of equipment that was renegotiated into a sale of syngas, or was the contractual structure always the same or roughly the same? 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. I wouldn't expect to see anything until 2023. Now, the good news is I'm in pretty good shape starting in 2023, just based on the size of this project. We have a lot of good projects rolling out of backlog, really starting more towards the end of this year, rolling forward into 2023. 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. It took a long time for something like this to come to fruition.
Okay. Do you think gasification is a major growth opportunity for Linde and the industrial gas industry generally, or do you think it's a minor opportunity?
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. It really comes back to, I think, the question a lot of people ask about this IMO 2020, what's going to be the effect?
Quite frankly, as we have looked at this and studied this, most of the major companies, and for those who are not familiar with IMO 2020, this is the marine diesel requirement to reduce sulfur particulates to, I believe it's 0.5%. 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 ExxonMobil announced in Antwerp. 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 ships 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. Our next question comes from the line of Peter Clark with Societe Generale. Your 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 Linde side of the business or the old Linde side of the business. You've got the 2% across the group, obviously more in merchant. Air Products obviously came up with some pretty strong merchant numbers the other day. Just wondering the sort of things going on there. Drilling down into the regional margin performance and just wondering what the impact of mix is in APAC. Obviously on my numbers, Australia is down double digits again, which certainly in Linde used to be a high-margin market, maybe not so much for you. Also in EMEA, where I suspect the cylinders being weaker, probably an element on the margin drag there. Thank you.
Okay. With respect to pricing, price management, 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 and really are just part of good overall product management. Some of you may have heard, I did a video. I did a price management video that was 14 minutes. That's something that I did, and it's something that we track monthly. 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. Inside of that, there are some things going on, again, more of a secular decline with respect to the industrial side. I think the margins of the business are not bad at all. We have to look at what we can do to get in front of that. With respect to EMEA, Peter, I apologize, I didn't quite catch your question on EMEA.
Packaged. He said the pack is dropping on you.
Just in terms of the mix. It's the mix, obviously, in Asia Pac, you were up 140 basis points year-on-year, despite Australia being very weak. I'm just wondering what was behind that. In Europe, I presume it's the high-margin cylinders versus sluggish and weighing a little bit on the margin there.
It's more tied to industrial production, the cylinder business is more tied to manufacturing, that would be certainly a factor in those numbers.
Also, Peter, you may have seen. Last year, there was a gain in EMEA of about $10 million roughly, on the legacy Linde AG 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. That also had an influence on the number.
Got it. Thank you.
Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Your line is now open.
Hi, this is Dan Rizzo on for Laurence. How are you?
Hello.
You mentioned a lot of the synergies will be at the end of the year. I was wondering if you've quantified what those dis-synergies, if any, will be in the second quarter here and I guess into the third quarter as well.
Dis-synergies, we obviously have costs to achieve the synergies. Those mostly for now, those are restructuring costs. 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. 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. We'll continue to highlight those costs and track 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.
Excuse me. This is Steve. We have the RemainCo cost in the U.S. 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. That's something we need to address, and it's also part of why the leverage in Americas isn't what you would historically expect to see in Q1.
Thank you for the clarification. 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. 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 what your current contracts, could you still hit the low end of your 2019 projections?
Yes.
Okay. Thanks.
Thank you. Our next question comes from the line of Markus Mayer with Baader Helvea. Your line is now open.
Good morning, Markus Mayer, Baader Helvea here. 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 pro forma number of last year. Then the last question would be on your tonnage business, update on where we stand in terms of plant utilization would be very helpful that we can understand where you are in terms of your utilization versus the take-or-pay contract level. Thank you.
Okay. You want to take this?
Yeah, I can take the first two. This is Matt, Markus. On the guidance, as Steve had mentioned, we have a rhythm assumed on what we're going to achieve and how we'll achieve the synergies. We feel pretty confident about that. 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. The combination of those two are assuming slowing demand, but with a rising improvement in our cost management and the self-help. At that stage, that has led to this outlook. As Steve mentioned, we feel pretty confident that on the bottom end in almost any type scenario at this point.
We also have to be cognizant FX rates can shift, and they have been getting worse. 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. If we see any improvement, that could be highly accretive. That's how we look at the guidance. On the free cash flow, just on a high level first, maybe. As you probably saw in the operating cash flow number, about $1.068 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.
When you look at the first quarter, that's full year, mid- to high 70s. First quarter, the average has been about mid-60s. We'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, to carry over, the benefit is in investing, which are the proceeds. Unfortunately, the way the accounting worked, we had to put the $100 million in operating.
The other $56 million relates mostly to either some merger costs and a little bit of restructuring. That number, when added back, we're about mid-60s. Right now, I feel good about the track, but we do have a lot of one-time costs. 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. Obviously that prepayments are down. There was a lot last year, 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. 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 out payments. As you may recall, it'll be $several hundred million of cash taxes we have to pay for the European divestiture. Steve can handle, I think, the tonnage update.
Yeah, I'll handle the tonnage. 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. Keep in mind, we just started migrating our systems, and some of this takes a little time. Let me just give you my view. If you talk about merchant liquid 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., it's been around 80%-82% merchant liquid capacity utilization. That's LOX and LIN. Argon has been much tighter. Of course, helium is in hot demand all over the world. There's 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. The shortage of Venezuela crude drives up costs, shrinks refinery margins. They didn't run as hard. 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. Those volumes seem to be doing fine, but it's not end 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 had been quite low, so that needed to be replenished. That's that story. If I go to Asia, I'm just going to really make a comment about China. 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. I think the fact that the pricing, you're hearing a lot more positive regarding price realization in China, and it has historically been some of the lowest prices in the world, I think would also support the fact that capacity utilization 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, olefins, ethane crackers. There are obviously some ASU issues 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. Of course, if you look at our gas backlog, that $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. That's part of the internal backlog today. Then if you go back to this Singapore project that I mentioned, that's $1.4 billion. That will be additive to the seller gas backlog. That Linde Engineering will be building that.
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? 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 Linde.
I was really referring more towards a pitch or a vacuum residue kind of gasification approach to address, in part, what IMO 2020 regulates. That's what I was really referring to. I was not referring to coal gasification to produce intermediate chemicals or whatever in other places in the world, usually in China.
Your outlook on that opportunity, has that changed?
For the coal gasification?
Coal gasification. Yes, sir.
We've talked about this before. We have supplied air separation units in China for coal gasification operations along the coast. That's been part of our density strategy. We take merchant liquids off of those projects, and they're customers that we feel very comfortable with going forward. 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 petcoke gasification for CNOOC. They were taking hydrogen and integrating it back into the refinery. Those are the kind of projects that we have done in China, and I expect we'll see more of those going forward in the future. Anyway, that's my answer.
Thank you.
Thank you. 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. Was wondering if you intend to provide those results each quarter as we go, or if there's a way to understand how 2Q versus 4Q 2018 would've trended in a future SEC filing, number one. Then two, Praxair in the past provided specific quarterly guidance. You've elected not to do that today. 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. This is Matt. I'll respond to those. I think to your first question. Absolutely. We intend to continue to include these. They're necessary. We need to have the ability to explain the walks from the GAAP to the pro forma and then to the adjusted. We will continue to add those.
I think on the quarterly guidance, that's something we're evaluating. 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. Things like the monthly rhythm, we're getting better and better. Forecasting is a big part of that. 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. I think hopefully just be patient each quarter. We expect to get better. 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 2019.
That is something that will become another element of this. With each step, I expect to get better and better, more transparency. Obviously, we added the new segments. As you can imagine, the first few quarters, we've just got to get the system down of the combined company, get the rhythm to a point that we're more comfortable to continue to disclose these more and more information externally.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of James Sheehan with SunTrust. Your line is now open.
Good morning. Thank you. How does your EPS guidance translate into an adjusted EBITDA outlook for the year? Specifically, what do you expect for D&A in 2019?
Hey, Jim. This is Matt. We're not giving an EBITDA outlook. I think as you saw, if you look below the EBIT line starting there, 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. We'll see. We're not giving an EBITDA outlook. I think as far as the adjusted D&A, I don't expect a lot of changes in that number other than normal assets coming on and assets coming off. If we look at CapEx, maybe $3 billion-$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. I would expect a normal depreciation kind of on adjusted basis that you would expect.
At this point, we're not giving an EBITDA outlook.
Under the new segmentation, how should we think about how the cost savings are distributed between these segments?
Well, this is Steve. 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 efficiencies, procurement, productivity, et cetera. We have those numbers broken down both by corporate and by regions, by functions. Each segment, each geography, including Linde Engineering, understands what their target is. They all, again, have developed or are developing very detailed cost and restructuring initiatives to address that. 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's a great example.
We have the U.S. RemainCo that we have to integrate in the U.S. We have some operations in Mexico we have to integrate. In Europe, where there's less integration, clearly from on the continent, we do have integration in the Middle East and Russia that we're working on. We have other initiatives around cost that we're working as well.
Thank you.
Thank you. 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? 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, obviously, I'll just start with the last comment. I can't say exactly with respect to specialty gases, I haven't seen that number. Clearly helium, the prices are higher. Helium, I mentioned earlier, is in very tight supply around the world. It is a piece of the 2%. I can't tell you exactly how many basis points. Price increases in helium are 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. We want to make sure. You're asking me, did we cover inflation in every parts of the world? The answer is no. There are going to be parts of the world, certain products, markets that are pricing, just like helium, is higher than 2%.
There are some areas that it's lower, and we need to work on that. Generally speaking, you want to, at a minimum, as a company, make sure that you're covering your cost of inflation. That's a target that we have always had. There's certainly not a limitation on what the price realization could be. 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. We work both of those levers quite hard. It's going to be something that is going to take some time. Obviously, it's something we spent a lot of time on in Praxair, have for 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. You have merchant liquid, where we have various abilities to address cost pressure, and also as those contracts renew. Of course, onsite is a longer-term situation.
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 Divestco in the first quarter. Those obviously are something we have the ability and time now we're addressing in the second quarter. That will have an effect on the margin, but that's something that we're working on. Secondly, on helium. The helium pricing will appear really across all segments because in the other, we have the bulk helium or the wholesale helium. It sells intercompany, and it also sells to large global distributors from that other category. Any intercompany transfer pricing increases would show up in other, and then end market price increases would show up in the segment.
The way our segments are laid out, helium price increases would be across kind of multiple segments, including other.
That's very helpful. Thank you.
Okay, I think we have one last question remaining.
Yes. Thank you. Our last question comes from the line of P.J. Juvekar with Citi. Your line is now open.
Hi, this is Seth Goldstein on for P.J. Thanks for taking my question. I just wanted to ask on some of the on-site projects coming online in 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, 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. In terms of sales and EPS contribution, it's kind of like 1% in 2019. 2020, as I look at the numbers, and 2021, looks to be more like certainly 2% on the sales, maybe 2%-3% from an EPS contribution standpoint in 2020 and 2021. I don't have 2022 in front of me, but I would expect at least a 2% and a 2% kind of relationship as well. Then as you go forward in 2023, obviously, a project like Singapore puts a big dent in those numbers. 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. That does conclude today's question and answer session. I would now like to turn the call back to Mr. Juan Pelaez for any further remarks.
Chris, thank you again. 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. Everyone have a great day.