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Praxair, Inc. (NYSE:LIN)
Q4 2017 Earnings Conference Call
Jan. 25, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2017 Praxair Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require operator assistance, please press "*" and "0" on your touchtone telephone. As a reminder, this conference call is being recorded.

I would now like to introduce you to your host for today's conference, Juan Palaez, Director of Investor Relations. Mr. Palaez, you may begin.

Juan Palaez -- Director of Investor Relations

Thank you, Sarah. Good morning and thank you for attending our Fourth Quarter Earnings Call and Webcast. I am joined this morning by Steve Angel, Chairman and Chief Executive Officer, Matt White, Senior Vice President and Chief Financial Officer, and Kelcey Hoyt, Vice President and Controller.

Today's presentation materials are available on our website at www.praxair.com in the Investors section. Please read the forward-looking statement disclosure on Page 2 of the slides and note that it applies to all statements made during this teleconference. In addition, please note that year-over-year and sequential comparisons excludes charges related to U.S. tax reform and the proposed merger. The reconciliations to the U.S. GAAP reported numbers are in the appendix to this presentation and the press release.

Now let me turn the call over to Steve.

Steve Angel -- Chairman and Chief Executive Officer

Thanks, Juan. Good morning, everyone. 2017 ended on a strong note with growth across every major end-market as the industrial economy steadily recovered. The discipline and focus of our entire employee base enabled us to capitalize on these trends while simultaneously making progress toward the merger with Linde. In fact, on Slide 4 you will find some specific examples of successful execution of our strategy.

We presented this strategy approximately three years ago as commodity prices, emerging markets, and industrial activity were collectively in decline. Our goal was to optimize the base business, capture quality growth opportunities, and position the company for strong recovery when industrial markets improved. And I'm proud to say that the Praxair team has delivered. Over the last several years, we have taken actions to optimize the base business, which have culminated to records for both operating and free cash flow in 2017. Matt will discuss the numbers in more detail, but all of our employees contributed toward creating shareholder value and making our organization more efficient.

While optimizing the base, we never took our eye of growing the business. In light of the market conditions of the last few years, we focused our efforts on those sectors that were less cyclical or had fundamental cost advantages where our customers were making capital investments. Our resilient market exposure has grown double digits from roughly 25% to 28% of the global portfolio. Furthermore, we have taken additional efforts to diversify and enhance the business portfolio through adding other non-industrial projects to our backlog. These efforts are supported by recent announcements of contract wins for onsite customers, including nitrogen supply and process gases to EverDisplay's AMOLED manufacturing facility in Shanghai. In fact, as of now, electronic customers comprise roughly 10% of our project backlog versus just 2% last year. And that number will grow in light of new wins we expect in the coming months.

In addition to portfolio management, we invested in strategic markets through acquisitions and joint ventures. Leveraging our extensive supply network and process gas expertise in the U.S. Gulf Coast enables us to secure $1.1 billion worth of new projects and we're not done yet. I fully expect more key wins in the coming quarters as we continue to see strong investments around the low-cost hydrocarbons. All of these efforts support future growth independent of the macroeconomic environment. But as macro conditions improve, we fully expect to leverage any cyclical recovery, as shown at the bottom of this page. And based on what we've seen over the last several months, I believe we are in the midst of an industrial recovery, especially in the U.S. and parts of Asia and Europe.

We have positioned the business well to participate in this rebound while maintaining focus to run a high-quality business. This is evidenced by recent growth trends from the business segments. Well, we also want to see margins expanding with this recovery. While sequentially our margins have improved, we're lagging a bit from prior year. However, I fully expect margin expansion in 2018, which we are already experiencing in the first quarter.

While executing this strategy, we also made significant progress toward the merger with Linde. I wasn't planning to cover what has already been completed, but suffice to say it was a tremendous amount of work that our employees successfully managed while we continued to run the business at a high level. That being said, I would like to provide an update on key milestones, which you will find on Slide 5. The takeaway of this entire slide is that we're on track. Regulatory filings are being completed as expected, including the recently filed Form CO with the European Commission. In parallel, we're making good progress on the divestiture process. I expect bid packages to be distributed over the next few weeks, after which we will narrow the potential buyer pool. We will also take advantage of this time to accomplish as much integration planning work as we can to ensure a smooth transition post-close.

So overall we've made good progress. While we can't control the final outcome, we've had very constructive dialogues with the regulators and milestones are being achieved according to the plan. I'm sure many of you will have questions about the merger, but realize there isn't much more I can say about the process or timeline other than these points.

Before I hand it over to Matt, I'd like to provide a brief update of business trends on Slide 6. North America, at 52% of sales, has seen growth across all end-markets, but more specifically, strong recovery in the industrial sectors. In the last few months, U.S. industrial production growth for manufacturing has exceeded 2% and key subsectors of metal fabrication and machinery have grown mid-single digits. This has led to robust growth in our onsite customers for metals, downstream energy, and chemicals, as well as manufacturing for our packaged gas business. Same store sales, hard goods, grew in the high-teens and gas in the mid-single digits for the fourth quarter. We also saw a substantial amount of capital equipment sales in the U.S., which may bode well for future industrial and infrastructure activity.

Additionally, the chemicals market is growing double digits, while our metals customers continue to perform well as reductions in global steel capacity and improved trade balances have improved domestic production. Our confidence remains high in adding new projects to the backlog from the U.S. Gulf Coast, as we are finalizing contract negotiations on a few large projects. Energy markets are also growing double digit in North America but mostly driven by downstream refining. Our customers ran quite hard in the fourth quarter as they rebounded quickly from the hurricanes, but we anticipate a significant turnaround season in this first quarter as several customer outages were deferred in 2017.

While oil pricing has rebounded, there hasn't been a meaningful uptick in our upstream business. Mexico has bounced off the low rates and we are seeing slow improvement in the U.S., but most customers are still operating in the lowest cost regions using slick water techniques that don't require very much nitrogen. If oil prices are viewed to be stable at these higher levels, it is possible we may see a return to formations that would require more industrial gases, but we just aren't seeing much of that yet.

South America, at 13% of our sales, has been stable, but the 2018 election season in Brazil will likely provide some volatility during the year. Industrial activity still remains at multi-year lows but the recent trend has improved with low- to mid-single digit IP growth over the last few months. Most end-markets have been flat to up, although manufacturing and metals have grown more than other sectors, which may signal some thawing of industrial investments. I wish I could say I'm bullish for recovery but the uncertainty around the political situation in Brazil will likely result in a continued hold on investments. So at this point, I'm not expecting much from Brazil for the first half of 2018. On the bright side, Argentina continues to be a good growth story and the commodity rebound should help countries like Chile and Peru, but time will tell on the pace of the Brazilian recovery.

Similar to the other regions, Europe has grown in all end-markets, but most in the industrial areas of metals and manufacturing. Germany, Italy, and Spain have all contributed nicely to the growth in segment sales and profits. However, the Nordics and Russia are still lagging on performance, just given their local economies. But overall Europe continues to be a positive story.

Asia, at 16% of sales, has been our strongest growth story for the year, both organically and for new onsite contracts for the project backlog. Double digit volume growth in chemicals, electronics, manufacturing, and metals have contributed to the results. As the Chinese economy rationalizes excess production capacity in key markets, like steel, we have benefited from a combination of being partnered with the right onsite customers and improved supply and-demand balance in the merchant liquid market. Pricing has improved several quarters in a row as pent-up inflation is working through the supply chain. In China and more specifically Korea, we continue to see significant onsite opportunities around electronics, primarily high purity nitrogen but also other processed gases used in fabs.

In 2017, we announced three new projects serving the electronics industry and there are more to come. In fact, we were recently awarded a very large project, which I expect will be announced shortly. The opportunity set for new projects in Asia, especially electronics, has been quite strong, but we continue to maintain our discipline to only partner with the right customers and terms that fit our risk-reward criteria.

I'll now turn it over to Matt to walk through the numbers.

Matthew J. White -- Senior Vice President and Chief Financial Officer

Thanks, Steve. Please turn to Slide 8 for our fourth quarter results. Sales of just under $3 billion were 12% higher than last year and 1% higher than the third quarter of this year. The table in the upper right breaks down the drivers to this sales variance and you can see that volume is the largest contributor, with 7% and 1% growth from last year and third quarter, respectively. When comparing to prior year, every major end-market expanded, led by electronics, chemicals, and energy. From a segment perspective, Asia and North America had the greatest growth from a combination of recovery in industrial markets and project contribution. Globally, about 2/3 came from organic volume with the rest supported by project start-ups.

The 1% sequential growth was also supported by U.S. and Asia, as the U.S. Gulf Coast recovered from the third quarter hurricanes, and we saw general improvement in manufacturing activity in both regions. South America was seasonally weak, as expected, due to the holidays and summer break. And market trends were also consistent with expectations, as the energy market rebounded from the U.S. Gulf Coast was partially offset by seasonally weaker beverage sales in the Northern Hemisphere.

The price mix improvement of 1% was achieved from focused pricing actions, partially offset by some unfavorable mix impacts in specific regions, especially in South America and Europe. Asian merchant liquid had the strongest performance of the segments, while pricing action in North America were partially offset by the effect of higher capital equipment sales in our packaged gas business. Currency translation is favorable 3%, primarily from strengthening of the Euro, Canadian dollar, Chinese Renminbi, and Korean won.

Operating profit of $653 million is $54 million, or 9%, better than last year and $11 million, or 2%, better than the third quarter. This is the third consecutive quarter in a row where we have expanded operating margins. However, it is lower by 60 basis points from the fourth quarter of 2016. About 20 basis points relates to the impact of higher cost pass-through. So the underlying margin declined from Q4 2016 is about 40 basis points.

There are three main drivers negatively affecting this. First is the unfavorable mix issues we discussed, including capital equipment sales and overall South America. Second relates to restructuring charges embedded in the results, which you can see in the other income trends. And third relates to the fact that fourth quarter of 2016 had a lower run rate SGNA, as we had to reverse some of the incentive compensation accruals last year due to weaker results.

But that is one quarter comparison in time and several of these items will not repeat. As Steve mentioned, we are quite confident that we will be expanding margins in 2018, including in the first quarter. More importantly, our operating cash flow margins have increased for three straight years to a record 27% in 2017, which I'll speak to on the next slide.

Our balance sheet continues to improve with strong capital management and cash generation. Return on capital has steadily risen each quarter, reaching 12.5% by year-end. I expect that number to continue to improve throughout 2018. Our available operating cash flow, which represents operating cash flow minus non-backlog, or what we call Base Capex, has grown to almost $600 million for the quarter, as we've managed Base Capex and also increased operating cash flow.

Please turn to Slide 9 for more details on our cash flow performance. The left part of this slide provides a multi-year trend for our operating and free cash flow. A few things that I'd like to point out. First, you can see that 2017 represented a record for both metrics. This result is a culmination of many efforts from our employees around the world. Second, free cash flow has steadily increased over the period, as the organization managed capital spending in line with the underlying growth prospects. Finally, the quality of the business has also steadily increased, as operating cash flow margins have improved from 19% to 27%. Said differently, in 2017, for every dollar of sales, we generated $0.27 of operating cash flow that we could either return to shareholders or invest for future growth. This is a very compelling story of both the resiliency of our business as well as the ability to leverage a recovery like we've seen over the last several quarters.

The right part of this slide shows how we used the $3 billion of operating cash flow in 2017, resulting in a balance of growth investments, shareholder returns, and debt reduction. We are currently pausing stock repurchases during the proposed merger so I anticipate further declines in that debt leading up to close.

Please turn to Slide 10 for tax and guidance update. In the fourth quarter, we booked a tax reform charge of $394 million, or $1.46 of EPS. This charge is comprised of three pieces: a $467 million charge for the deemed repatriation of accumulated foreign earnings; a $260 million charge for foreign withholding taxes related to anticipated repatriated foreign earnings; and a $333 million benefit associated with the reevaluation of a deferred tax liability from 35% to 21%. There is no immediate cash impact from this charge, but cash will be impacted over several years as the liabilities are settled. This charge represents our best estimate of the current tax reform but it is subject to change as new information becomes available. Looking forward, I anticipate the new tax reform will lower our current effective tax rate down to a range of 23% to 25%, depending upon how specific aspects of the reform are ultimately clarified by the U.S. Treasury Department.

For purposes of guidance, we are assuming a tax rate near the middle of that range, which provides a quarterly benefit of approximately $0.05 when compared to our run rate. As far as guidance, the EPS estimate for the first quarter is in the range of $1.53 to $1.58, which includes the $0.05 for tax reform. First quarter is seasonally slower due to Lunar New Year and Carnival. Furthermore, U.S. Gulf Coast customers are undergoing a significant amount of turnarounds, as several slated for 2017 were deferred into this quarter. Despite these known headwinds, we are expecting continued contribution from underlying price and volume which will improve operating leverage.

We did not provide a full-year guidance range in light of the anticipated merger close date. As such, we do not expect Praxair will finish 2018 as a stand-alone, publicly traded company. Our focus is to continue operating at a high level of performance while supporting the merger integration planning efforts for a successful start to Linde PLC. We believe it is more appropriate to provide quarterly guidance for Praxair as the focus shifts to the new combined company in the second half of the year.

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

Questions and Answers:

Operator

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

Our first question comes from Mike Sison with KeyBanc. Your line is now open.

Michael Sison -- KeyBanc -- Analyst

Hey, good morning. Nice quarter there. Steve, when you think about Brazil, and I understand that you're not willing to think there's a recovery yet, but in the event that there is potential, where do you think margins or the potential for the Brazil segment is down the road?

Steve Angel -- Chairman and Chief Executive Officer

Well, our goal is to get it back to 20%. And everybody understands that's the objective. I think for that to happen, we need to get more lift from the core manufacturing sector. I mean, you heard some positives that people have reported. Automotives is up a bit. I think metal exports are up a little bit. Pulp and paper is up some. Agriculture is always fairly strong. But really the base manufacturing, core manufacturing sector has not seen that yet. And, again, I think we heard some, what I'll call good news, that the past president's conviction was upheld a couple days ago. So he won't be a factor in the elections and he had a lot of popular support. But there's still going to be some volatility in the political climate. But to get back and answer your question, we've run as high as 22%, 23% in years past. So our objective, again, is to get it back to 20%.

Michael Sison -- KeyBanc -- Analyst

Great. And then a follow-up in Asia. Pricing. I think it's the third quarter in a row you've had positive pricing. Can you maybe talk about some of the dynamics in China that's supporting that and then -- I mean, could this be kind of a multi-year, upside potential in terms of pricing for Asia?

Steve Angel -- Chairman and Chief Executive Officer

Well, it should be. And most of what's driving that number is China, just to be specific. So you've heard me talk about China in the past where we were really unhappy with the level of pricing and there were several factors at play. There was excess supply in the merchant liquid market. You had captive steel companies and so forth putting byproduct market into the supply. So what has changed, there's really a couple things. One of which is, if you look at the merchant liquid capacity utilization today, and that's usually a question I get somewhere along the line, I mean, we're in the 90s in terms of capacity utilization. And we're not alone in terms of the fact that, given the growth, and there hasn't been the pace of merchant liquid capacity adds that we used to see in the past, that that market has tightened up. That's a good thing.

And then the second thing was in my comments, was China is very serious about managing the environment. They realize they had over capacity in many sectors, one of which was metals. Again, that's where we saw a lot of excess product come into the market. So as those Tier 2, Tier 3 metals customers are rationalized, then that product doesn't find its way into the market, which is a good thing. So those are some factors that are at play. And, yes, I do expect this to continue.

Michael Sison -- KeyBanc -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Vincent Andrews with Morgan Stanley. Your line is now open.

Vincent Andrews -- Morgan Stanley -- Analyst

Thanks. You know, Steve, you talked a bit on the energy side of things, in terms of the upstream customers and not really seeing it yet and maybe we'll see it. Is it just a question of oil price staying around here at a long enough level that it builds confidence or are there other gaining events that we need to see? And what do you think the overall, maybe over the next year or two, how much recovery, in terms of dollars do you think we could see?

Steve Angel -- Chairman and Chief Executive Officer

Well, it was -- at its peak, it was about 4% of our sales. And high margin as you heard us discuss. Today as I look at it, it's sub-2%. So, yes, you would need prices at a high level. You would need confidence that those prices are going to be sustainable. And I think with that, we would see more energized gases like nitrogen used in more formations. And I'll give you an example of a formation that we would see lift in would be the San Juan Basin, for example, in New Mexico. So I would expect some improvement. Would we get all the way back to 4%? I'm not sure about that. It would certainly be a nice bonus for us going forward, in terms of an earnings boost.

You've got to keep in mind, we sold a lot of nitrogen for oil pressurization for maintenance to Pemex and they still have a lot of problems. And like I said, they bounced off of their bottom but they're nowhere near their peak. And, again, energy prices have moved up quite a bit. So they have issues managing the budget, but they also need to maintain the wells and they're constantly trying to balance that. So, yes, it would be nice to see. Will we get back to the 4% level? I'm not counting on that but it's possible.

Vincent Andrews -- Morgan Stanley -- Analyst

Okay. And just a follow-up on the backlog and sort of your Capex expectations. And I recognize this is a stand-alone question that may no longer be relevant in a little bit. But with the industrial recovery, and I keep seeing press releases about large scale Capex projects all over the world, Middle East, Asia, and so forth, do you anticipate over the next few years that the investment opportunity is going to become more robust and that you guys will go after it? Or are you still a bit on the more cautious side as it relates to the backlog?

Steve Angel -- Chairman and Chief Executive Officer

I think that the backlog number that we have today is a pretty sustainable level, even as we start up projects, and it's just a function of the confidence that we have looking at the projects that we're working on. I made some comments about that. A lot of them are in the U.S. Gulf Coast, but there's also a significant number of electronics projects that I'm very optimistic that we'll be adding to the backlog in the not too distant future. So I think the outlook with respect to projects is trending positively, mainly driven by those two areas. And of course with respect to the merger, I think that's a question that's better left for Linde to opine on. But if you look at what they've been talking about with respect to their engineering business, the fact that the backlog is strong, they've been adding projects to it, I think that speaks for itself. And if we're seeing opportunities like I described, you would have to assume that certainly in one of those key markets, they would be seeing similar kinds of opportunities as well, given where they are geographically positioned. So I'm optimistic in that regard.

Vincent Andrews -- Morgan Stanley -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from Peter Clark with Société Générale. Your line is now open.

Peter Clark -- Société Générale -- Analyst

Yes. Good morning, everyone. Yeah, Steve, one for you on the merger update slide. I know you can't talk too much on this but with the Q3, you made it quite clear you didn't see anything that would threaten the threshold. I'm just wondering, I presume that's still applicable given what you put on that slide.

And the second comment, I heard what you said on Brazil with the sort of crawling back to the 20% margin, but of course this business was doing 500 basis points higher than where you are today. That would be about 300 basis points. I realize there's some mix change here. There's more resilient business. But against that, obviously you've ripped out cost, you've got more onsite actually, accepting the threshold issue there. I'm just wondering if you're being understandably cautious given the experience you had. Thank you.

Steve Angel -- Chairman and Chief Executive Officer

Well, so I'll take the last question. Possibly. But then again, the economy has to recover the markets that we make a lot of margin in, which is the merchant liquid market, it's the liquid argon, it's the packaged gases. Those markets, those segments have to start growing at a much faster pace. Obviously 20% is not a cap that I put on South America but I think, given where we are today, that's a reasonable objective I'll say in the near- to medium-term. And that's all I really have to say about Brazil at the time. You are correct in the sense that we have been working on the costs. We've also been working on our go-to-market structure and making some changes around that that we think will be helpful in the long-term. So we continue to work that equation.

But, yes, back to your original question, we do not believe that the threshold is going to be threatened and we still maintain our view of that.

Peter Clark -- Société Générale -- Analyst

Thank you.

Operator

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

Duffy Fisher -- Barclays -- Analyst

Yes, good morning. Both Matt and Steve, you've referenced you think that margins are going to expand throughout this year. Can you talk a little bit about what the drivers of that expansion are and then proffer some kind of a bogey? Is 0.5%? 1%? How much could those margins expand throughout the year?

Steve Angel -- Chairman and Chief Executive Officer

Well, I'll speak in terms of this and, again, we didn't deliberately give guidance too far out. But as I'm looking at -- we talked about the first quarter. So kind of the algorithm on the top line is we said large projects contribute about 2% to the top line and 3% to the bottom line. So that obviously helps with margin leverage in and of itself. Call currency 0%, pass-through 0%, then what's left is price and mix. But let's say price and volume. We think price is going to be in the 1%, trending to 2% kind of level. That's our objective.

And then in terms of volume, we had some good growth obviously in Q4. We think that trend is going to continue. Of course, you have some seasonal effects that Matt talked about which don't change. And the heavy turnarounds in HyCO, but year-over-year we're going to see some volume growth so we believe that top line's going to be in the mid-single digit range, maybe in the upper end of the mid-single digit range. And then we'll be able to leverage the margins up from that into the high-single digits and perhaps push into double digits.

Duffy Fisher -- Barclays -- Analyst

Great. And then just to shift to electronics, it seems with the three wins you had last year, you were talking about a couple more wins, maybe now like you're punching above your weight in electronics. If you would agree with that, that you're kind of taking market share there, what's changed in that dynamic that has allowed you to do that?

Matthew J. White -- Senior Vice President and Chief Financial Officer

Well, I had to laugh at that punching above our weight. So a lot of electronics activity is, "Tell me who the end customer is that's doing the buying or that's doing the major investments for growth." And I don't think there's any secret that Samsung is the 800lb gorilla in terms of the investments they're making in semiconductor and also in display. I think I saw a statistic, or I'm pretty sure I did, that said that in 2017, no corporation globally invested more in Capex than Samsung. And the plans for '18 are the same. So they're making massive investments. We've always been very well-positioned with Samsung. We have a great relationship, long track record of reliability in meeting their needs, and that's why we're so confident in the electronics picture going forward. There are other projects obviously that we won in China. There was one or two in the U.S. as well. But, again, Samsung is the 800lb gorilla in the electronics space.

Duffy Fisher -- Barclays -- Analyst

Great. Thank you, guys.

Operator

Thank you. Our next question comes from Laurence Alexander with Jefferies. Your line is now open.

Laurence Alexander -- Jefferies -- Analyst

Good morning. Two quick questions. It looks as if, with the timing of the new onsites, your chemical business will be growing mid-teens, probably through 2019 or even 2020. Is that right? Or are there any offsets to that?

Steve Angel -- Chairman and Chief Executive Officer

I think that's about right but chemicals in the U.S. for sure because of the project start-ups. I'm pretty sure the math would work out that way. And then, of course, in places like China, there's chemicals activity as well but that's more of a function of really just economic growth in China.

Laurence Alexander -- Jefferies -- Analyst

And secondly, is there any sense in which your run rate productivity has been delayed or distracted ahead of the merger or should we just use the usual algorithm on that side?

Steve Angel -- Chairman and Chief Executive Officer

Nothing has changed. In fact, we have made it a point across the business to make sure that we continue to execute on all the programs, initiatives, base business that we normally would. And fortunately as we work through this merger process, we only involve people in the merger process, the integration planning that need to be involved at that time. And we've been able to manage that quite well. But to your more specific question, the productivity programs look very solid to me. We continue to evolve that productivity pipeline with new initiatives around things like more predictive diagnostic capability and so forth. But the productivity pipeline, the execution of the pipeline, I still think is in good shape. And that's what I would say about that.

Laurence Alexander -- Jefferies -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Jeff Zekauskas with JPMorgan. Your line is now open.

Jeff Zekauskas -- JPMorgan -- Analyst

Thanks very much. I think earlier in the call, Steve, you talked about prices for 2018 perhaps edging up from 1% to 2%. And you also said that your own utilization rates were very high. Is your optimism about pricing a reflection of your views on capacity utilization in the industry or industrial gas capacity utilization rates rising meaningfully? Or is there something else behind the possible price increase?

Steve Angel -- Chairman and Chief Executive Officer

Well, it really is region by region. Of course, these are local businesses so you have to look at it that way. The comment I made, Jeff, was really around China. That we have very high capacity utilization as does the industry generally speaking. So that is always helpful in terms of our ability to raise prices. If I look around at other parts of the world, you still have some regions that are in the 70s, some that are mid-70s, and so that situation really hasn't corrected itself yet.

I would say, generally speaking, though we talk about Brazil going the other direction where they've historically been high inflation and now they're low inflation, sub-3%, most parts of the world are seeing some inflation. I can look at Mexico, I can see some inflation. I can look at other parts where inflation is starting to become more of a factor. And so for us coming into the year, this is something we talked about at our leadership conference that we want to make sure we get out ahead of that inflation curve. We want to make sure that, given we're seeing some good volume growth in certain regions, we also make sure that we're taking advantage of the pricing opportunities that exist there. And that's what I've seen one month into the first quarter.

Jeff Zekauskas -- JPMorgan -- Analyst

Thanks for that. Maybe a question for Matt. Your SGNA was up a lot in the quarter, maybe by about 11%. And you talked about some of the factors that were behind that. What kind of SGNA growth do you expect for 2018, exclusive of the Linde merger?

Matthew J. White -- Senior Vice President and Chief Financial Officer

Yeah, Jeff, so maybe just a comment on, call it 2016 to '17. I think looking at the year, full-year, is probably a little bit better, just given some of the timing movements. As you know, there's a variable component of incentives which get trued up. So when I look at full-year '16 to '17, SGNA is up about 5%. Roughly 1% of that is FX and the remainder is 4% and probably half of that does relate to some of the incentive impact. As I mentioned in the prepared remarks, in '16 we really reduced that number down quite low given the weaker performance and that we did not reach a lot of our targets. So you're looking at kind of a couple of percent, I think, natural growth, which is in line, I think, with inflation, in line with what you'd expect merit impact. And I see no reason why, looking into '18, why that would be any different. So when I remove that variable component, which can go up and down, I think just kind of a low-single digit inflation-like number is what we tend to see in normal years.

Jeff Zekauskas -- JPMorgan -- Analyst

Great. Thank you so much.

Operator

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

Ian Bennett -- Bank of America Merrill Lynch -- Analyst

This is Ian Bennett on for Steve. Steve, you mentioned earlier about positive pricing expectation in China and part of that was the environmental initiatives having an effect on the supply from these Tier 2 and 3 providers. Are you seeing any beginning signs of increased demand for gases as a potential to solve some of their environmental needs?

Steve Angel -- Chairman and Chief Executive Officer

Well, as a matter of fact, yes. I mean, that's part of the growth profile that we're seeing in China. Water treatment has been really quite strong for the past year. But we're also seeing some of our major steel customers start to utilize more oxygen in their steel making process and this is for environmental reasons. And so, yes, the answer is yes. We are seeing the focus on the environment create business opportunities for us and we're capitalizing on that.

Ian Bennett -- Bank of America Merrill Lynch -- Analyst

Thanks. And then I just wanted to follow up on the merger. Is there any possibility to close meaningfully before the long-stop date in October?

Steve Angel -- Chairman and Chief Executive Officer

Well, that's going to be a function of the timing of the regulatory approvals. All of them and negotiation of the remedies that are required. And that is something we spent a lot of time working on, planning. I think it's possible that we could -- well, we'll certainly close before October 24th, but as far as how earlier, it's really just a function of the things that I said. So we've said that, in all likelihood, it'll be in the second half. And the long-stop date is October 24th. So somewhere between the beginning of the third quarter and the long-stop date is when we anticipate closing.

Ian Bennett -- Bank of America Merrill Lynch -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from P.J. Juvekar with Citi. Your line is now open.

P.J. Juvekar -- Citigroup Global Markets -- Analyst

Yes, hi, good morning.

Steve Angel -- Chairman and Chief Executive Officer

Morning.

P.J. Juvekar -- Citigroup Global Markets -- Analyst

Steve, you walked us through your growth and margin analysis but if I look at your quarter, your sales were up just under 12% and your operating profits were up 9%. So at this point, shouldn't you see more leverage, especially with high incremental margins from the merchant business? What's causing this?

Steve Angel -- Chairman and Chief Executive Officer

Well, that's really what Matt walked through, I think, in his comments. And keep in mind, we had -- South America is part of that equation. We have a very strong packaged gas, hard goods flow in Q4, up close to 20%. Matt talked about the year-over-year differential and compensation and how that effected that. You do have some pass-through that's part of that. You had some restructuring charges that we took that were greater than what we had taken in the prior year. That's part of that equation. But I think more importantly is, yes, we should see leverage. We are seeing leverage going forward. We're one month into the quarter and we feel good about what we're seeing now. But there were some -- there was a group of things that created that phenomena in Q4.

P.J. Juvekar -- Citigroup Global Markets -- Analyst

Okay. And then secondly, you haven't gone as aggressively after Chinese projects in cold gasification or steam gas. Can you flesh out your concerns either about risks to these projects or potential low returns?

Steve Angel -- Chairman and Chief Executive Officer

Well, we have a very successful strategy that we outlined. And so our strategy, I won't go back through it, but our strategy is very clear in terms of where we're focused and the success that we're seeing. And we also have this little thing called a merger with Linde that's quite important. But every project goes through a risk-return analysis. And as we look at some of the projects that we're talking about, our view of risk and return is it's not that attractive to us, and especially given the other opportunities that we have, which in our view offer a better risk-return situation.

P.J. Juvekar -- Citigroup Global Markets -- Analyst

Thank you.

Operator

Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is now open.

David Begleiter -- Deutsche Bank -- Analyst

Thank you. Good morning. Steve, manufacturing end-markets rose 8% in the quarter. Can you give a little more color as to why those markets did accelerate versus the prior year or even Q3?

Steve Angel -- Chairman and Chief Executive Officer

Well, obviously there is some increase versus Q3 but if you look at the U.S. packaged gas business, what we call PDI, it had a very strong quarter from a top line standpoint. Again, you're approaching 20% on hard goods, which was driven by a lot of capital equipment purchases during the quarter. And gas was still strong, too, kind of in the mid-single digit range. That's a piece of that. But Mexico is doing quite well from a manufacturing standpoint. Canada had a very good quarter, year-over-year, from a manufacturing standpoint. And there really isn't any weakness as you look around the globe other than I keep coming back to Brazil and South America. But everywhere else. Europe is showing some growth in manufacturing. China obviously is doing very well in manufacturing. So those are the big drivers and that's how we got an 8% number.

David Begleiter -- Deutsche Bank -- Analyst

And, Steve, just on your backlog, are you at all capacity constrained in bidding for new projects? And also how is activity in the Middle East and India?

Steve Angel -- Chairman and Chief Executive Officer

Well, we are not capacity constrained. We feel very confident in our ability to win projects and execute those projects. In fact, we always look at our project execution track record and it's been quite good. So we're pleased with that. With respect to, you asked about Middle East and India, when you look at India, quite frankly, they haven't utilized a lot of the capacity that they put in place some years ago. So the growth has not been dynamic enough in India to create the demand for new projects. Not yet. So obviously we feel we're well-positioned there when that takes place but when you're kind of growing at a 4% or 5% kind of number, you're not going to drive a lot of additional projects. Not yet. And then with respect to the Mid-East, we haven't been doing much in the Mid-East. That's largely a sale of equipment market so we don't -- haven't historically focused on sale of equipment. And therefore we just haven't been doing anything in that spot of the world.

David Begleiter -- Deutsche Bank -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Mike Harrison with Seaport Global Securities. Your line is now open.

Michael Harrison -- Seaport Global Securities -- Analyst

Hi, good morning. Steve, just to follow up on the last question there about the Mid-East being mostly a sale of equipment market. Does that mean that maybe it becomes a little more of a focus as you guys join forces with Linde?

Steve Angel -- Chairman and Chief Executive Officer

Well, I think clearly Linde has done well in the Mid-East and by large -- and a large reason for that is the fact that they can build olefins plants, they can build ethane crackers, they can build a lot of the upstream plants that are in demand in places like the Mid-East. So they have more of a presence there than we have clearly. And as I've talked about before, they have a very good sale of equipment business. And you've got to break that down. Half of it is things like natural gas plants, olefins plants, and the like. The other half is really hydrogen plants, CO plants, syn gas plants, ASUs, things that, obviously, we're very interested in today and would benefit in terms of what they're able to do.

So they run a very good business. The engineering business performing at a pretty high level. They are arguably one of the best at the sale of equipment side of the fence. So I think that's something that we will look at and evaluate as the merger is consummated. But certainly as an entity going forward, you can anticipate that we'll be more involved in sale of equipment than Praxair stand-alone today.

Michael Harrison -- Seaport Global Securities -- Analyst

Got it. And then just going back to the comments on U.S. packaged gases, I believe you said that the growth there was in the mid-single digits. Can you break out what was volume and what was pricing and what your expectations might be going forward for volume and pricing in packaged gas in the U.S.?

Steve Angel -- Chairman and Chief Executive Officer

Yeah. So my comment really is around -- give me one second here. So essentially at a high single-digit number in sales, PDI. I said hard goods is in the high-teens, pushing 20%. And the gas only piece would be mid-single digits, 4% or 5%. That's the sales line number. And if you kind of pull that back, they had a decent performance in pricing, kind of in the 1% to 2% range and they're one of the businesses that I feel optimistic about with respect to pricing going forward. And then the rest of that's volume.

Michael Harrison -- Seaport Global Securities -- Analyst

Alright. Thanks very much.

Operator

Thank you. Our next question comes from Tim Iordanov. Your line is now open.

Tim Iordanov -- Raymond James -- Analyst

Hi, guys. This is Sam Iordanov for Patrick Lambert. A question regarding taxes, specifically regarding tax reform. What do you think that's going to do to cash tax rates going into this year and into the coming quarters? Thanks.

Matthew J. White -- Senior Vice President and Chief Financial Officer

Sure. So this is Matt answering that question. When you look at an average run rate, I would expect the cash benefit to probably be somewhere in the $50 million to $60 million per year range. But you have to take that with a grain of salt. Obviously that's based on our current interpretation of the tax reform. Obviously it could be very subject to change as clarifications come out. But right now, I would estimate it in that range of $50 million to $60 million. Obviously that is slightly less than the earnings and that's due to the fact that, with the upfront charge on the deemed repatriation, that won't be a factor in the ongoing earnings but clearly it'll be an effect on the cash.

That all being said, for 2018 I don't expect any net impact because we are fully going to do some repatriation in this year and the withholding tax payments we will make on a cash basis I anticipate to completely offset any of the benefit, primarily due to the rate differential in the U.S. So 2018, no net cash impact. Average annual run rate, probably $50 million to $60 million based on current interpretation. But as you probably know, on the deemed repatriation, that is a step-up formula for the cash. The first five years are at 8% of the obligation and then Years 6, 7, and 8 step up to 15%, 20%, 25%. So after that five year run rate, the cash cost may go up a little higher and the benefit a little lower. But hopefully that kind of gives you at least an understanding and then as things change, if we need to update, we'll relook at that.

Tim Iordanov -- Raymond James -- Analyst

Okay, thanks. That was very helpful.

Operator

Thank you. Our next question comes from Kevin McCarthy with Vertical. Your line is now open.

Kevin McCarthy -- Vertical Research -- Analyst

Yes, good morning. On Slide 18, you reference substantial improvement in your chemicals end-use market, including a 5% jump sequentially. I'm wondering what's driving that, how much might have been storm-related versus other factors.

Steve Angel -- Chairman and Chief Executive Officer

Well, I think some of it could have easily been storm-related, given the storms in Q3 which would effect it more sequentially. Demand in, say in China, has been quite strong on the chemical side, keeping pace with the growth of the economy. As I look at the chemicals number year-over-year, I think we had some project start-ups as well that contributed somewhat to that number. But really demand is quite strong in the U.S., as many of you on the call would know. Chemicals volumes will be driven by just a growth in the U.S. economy, industrial production, resi production, and, of course, they're advantaged from a natural gas standpoint. It looks like that will be a situation that will be sustained going forward. They'll have a natural gas feedstock advantage and they're exporting now more than they used to. And that all drives demand for the chemicals, particularly in the U.S. Gulf Coast, and volume for us.

Kevin McCarthy -- Vertical Research -- Analyst

And, Steve, as a follow-up, does the change in the U.S. tax regime make the potential separation of any non-gas businesses more palatable or more likely from the standpoint of tax efficiency and the diminished tax bite on any future divestitures that you might contemplate?

Steve Angel -- Chairman and Chief Executive Officer

Well, in terms of divestitures, they're going to be driven by strategic factors more so than tax factors. We'll obviously -- that will obviously be something that we take a look at any time that we're evaluating a divestiture, what the tax bite may or may not be, but I think the overriding factors will continue to be more strategic, particularly going forward. Anything you add to that, Matt?

Matthew J. White -- Senior Vice President and Chief Financial Officer

Yeah, I would just say, Kevin, I mean, any U.S.-based asset, if required to be divested, holding us constant, should have a better net cash profile and earnings profile just given the tax reform in the U.S. So from that perspective, I think it would bode positive on any potential U.S. divestitures. Outside of the U.S., I wouldn't expect, to Steve's point, any material impact effect as people look at this.

Kevin McCarthy -- Vertical Research -- Analyst

Okay. Thank you very much.

Steve Angel -- Chairman and Chief Executive Officer

We get one more question.

Operator

Thank you. Our last question comes from Don Carson with Susquehanna. Your line is now open.

Emily Wagner -- Susquehanna Financial -- Analyst

Good morning. This is Emily Wagner on for Don. We were wondering about the Asian volume growth of 11%. Could you break out that base business versus new projects and how should we think about that mix in 2018 for Asia, as well as the stand-alone Praxair entity, given the strong backlog?

Steve Angel -- Chairman and Chief Executive Officer

I would say that volume growth is about half large projects, half base volume. And of course the large projects are driven by economic conditions. And then your question -- I missed your question going forward.

Emily Wagner -- Susquehanna Financial -- Analyst

When you think about the backlog for looking into 2018 and your expectations for volume growth, if we're to break it out between new projects and base business on the consolidated Praxair. Will that be sustainable?

Steve Angel -- Chairman and Chief Executive Officer

Yeah. So we do believe the contributions to the backlog are sustainable going forward. And again this is based really on the strength of the projects that we're going to be adding to the backlog as their contracts are signed and they're announced. I think the right number is a 2% top line, 3% bottom line contribution from the projects really over the next several years. That's what we've said before and we feel very confident in that going forward. A lot of that contribution will come out of the U.S. Gulf Coast but increasingly we're going to see some contributions driven largely by electronics that will show up in the Asia segment.

Emily Wagner -- Susquehanna Financial -- Analyst

Thank you.

Juan Palaez -- Director of Investor Relations 

So thank you for participating in our Fourth Quarter Earnings. If you have any further questions, please feel free to reach out to me directly. Thank you.

Operator

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

Duration: 58 minutes

Call participants:

Juan Palaez -- Director of Investor Relations 

Steve Angel -- Chairman and Chief Executive Officer

Matthew J. White -- Senior Vice President and Chief Financial Officer

Michael Sison -- KeyBanc -- Analyst

Vincent Andrews -- Morgan Stanley -- Analyst

Peter Clark -- Société Générale -- Analyst

Duffy Fisher -- Barclays -- Analyst

Laurence Alexander -- Jefferies -- Analyst

Jeff Zekauskas -- JPMorgan -- Analyst

P.J. Juvekar -- Citigroup Global Markets -- Analyst

Ian Bennett -- Bank of America Merrill Lynch -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Michael Harrison -- Seaport Global Securities -- Analyst

Tim Iordanov -- Raymond James -- Analyst

Kevin McCarthy -- Vertical Research -- Analyst

Emily Wagner -- Susquehanna Financial -- Analyst

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