Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2020 Linde Earnings Conference Call. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Mr. Juan Pelaez, Head of Investor Relations. Sir, you may begin.

Chrystal, thank you. And good morning, everyone. I appreciate you attending our 2020 fourth quarter earnings call and webcast. I am Juan Pelaez, Head of Investor Relations, and I'm joined this morning by Steve Angel, Chief Executive Officer; Matt White, Chief Financial Officer; and Sanjiv Lamba, Chief Operating Officer. Today's presentation materials are available on our website at linde.com in the Investors section. Please read the forward-looking statement disclosure on page two of the slides and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are in the appendix of this presentation. Steve and Matt will now give an update on Linde's fourth quarter performance, and we'll then be available to answer questions. Steve?

Thank you, Juan. The entire team responded exceptionally well in a year dominated by COVID. Our frontline workers, in particular, deserve special recognition for what they accomplished and what they continue to do for our customers, our patients, and our communities. Despite the challenges of COVID, our key safety metrics continue to trend positively. We always say safety first here at Linde, and our people certainly walk the talk in 2020. We ramped up our health care capabilities around the world. We developed new protocols to treat COVID patients at their homes, freeing our needed capacity in overburdened hospitals. Since March, we have treated 90,000 COVID homecare patients, and unfortunately, that number continues to grow. We did that while caring for our existing base of some 1.6 million homecare patients. We kept our plants running reliably and maintained service to our customers. We started up new plants in challenging circumstances with minimal delays. With the help of virtual tools, we transitioned from central to distributed operations almost flawlessly. In light of the inequalities in our society exposed by COVID-19, we contributed an additional $1.5 million to our communities beyond our normal level of giving. We demonstrated the resiliency of our business model. We quickly adjusted cost structures in line with local market conditions. We utilized our strong commercial terms and conditions to shield us from volume disruptions. We capitalized on more resilient growth opportunities in healthcare, electronics, and food freezing. We delivered strong financial performance for the full year. Matt will provide more detail on the financials, but let me share a few highlights. Excluding foreign exchange, we delivered 13% earnings per share growth on a 2% decrease in sales. Our EBIT percent rose 260 basis points to 21.3%. Gross operating cash flow grew 21% to $7.4 billion. The single most important metric for me is return on capital, which grew 180 basis points to 13.4%. We run significant projects serving new semiconductor fabs, the largest of which has yet to be announced and is not yet included in the $3.6 billion Sale of Gas backlog number you see in the presentation. We won 36 on-site projects in growing markets such as pulp and paper, lithium-ion batteries, and precious metals. We advanced our sustainability initiative. We are the only chemical company in the world to be recognized in the Dow Jones Sustainability Index for 18 consecutive years. MSCI recently upgraded our ESG rating to an A rating. This time last year, we announced a new greenhouse gas emission intensity reduction goal of 35% by 2028. At this point, we are nearly halfway to achieving this goal. We continue to develop applications that enable our customers to address their environmental challenges. We're currently working on several carbon capture utilization and sequestration projects that we expect to come to fruition in the coming months. We made progress on our clean hydrogen initiative. We wrapped up our joint venture with ITM to build PEM, Proton Exchange Membrane electrolysis plants. We formed a dozen partnerships with fuel cell electric vehicle manufacturers, energy companies, and renewable power producers. We closed several important projects in China, South Korea, and Germany. We made significant progress on our diversity goals for women globally and minorities in the US. We conducted our second employee engagement survey, and the results were very positive and improved year-over-year. We maintain a strong compliance program. Establishing a strong culture of compliance is a fundamental responsibility of every leader in our company. We didn't ring a bell or anything, but the merger integration is over, thanks to the outstanding work of many people from both legacy companies. In short, we accomplished a great deal in 2020 and performed at an exceptional level, especially considering the environment. Now I've just made a lot of 'we' statements. And now I have one more. We are well positioned for another outstanding year in 2021. Now I'll turn it over to Sanjiv to provide more details on the business trends and outlook.

Thank you, Steve, and good morning, everyone. As Steve mentioned, we had a strong finish to a challenging year. However, not all end markets have recovered, and growth rates have been quite varied. Given the current uncertainty around the shape and speed of the economic recovery, I'd like to walk through the current business conditions. The key trends by end market, which you can find on slide 4. This slide represents our global end market sales, excluding engineering sources for the last quarter. The first point I'd like to make is that our sales are well balanced, about 40% in resilient markets, like healthcare, electronics, food and beverage, and the other 60% in cyclical end markets, such as metals, manufacturing, chemicals, and refining. Clearly, the resilient end markets provided both stability and earnings accretion throughout the year. These growth rates align more with demographic and consumer trends, and of course, incremental application technology. This is especially true for merchant and packaged supply modes. In fact, our strategic focus towards developing an integrated supply network across all three supply modes of on-site, merchants, and package enables us to efficiently serve all these customers. In healthcare, which is about 20% of our sales, we continue to make considerable investments around the world to serve patients in both hospitals and homes. We have expanded our medical-grade oxygen capacity. We've introduced inhaled nitric oxide alternatives in the United States and Canada, provided specialty gases for research and drug discovery, and, of course, increased CO2 supply for dry ice production for the storage and transportation of the vaccine. Furthermore, we've better prepared our homecare organization to safely and reliably care for millions of high-risk patients throughout this pandemic. It is, of course, difficult to say how much longer we'll face these challenges. But I can say with some confidence that we will continue to do our part to support and care for our customers. Moving on to food and beverage, which comprises 10% of global sales. This end market includes production and distribution for both our products and retail. Growth trends have been more prominent in both food freezing, dry ice for transport, and specific trends like oxygen for aquaculture and CO2 for greenhouses. I anticipate these trends will continue based on the rise of food delivery services, concentration of food production facilities, and, of course, a growing demand for high-quality ready-to-eat meals. Although the beverage market has been negatively impacted, particularly by the closure of restaurants, especially in North America and the UK, that business has partially recovered through diner takeout trends that we see, along with increased bottler demand. Overall, we see this as a stable market, with some upside when there is a return to restaurant dining. Moving on to electronics, which is 10% of our sales. We also consider this a resilient market since it tracks closely to consumer trends rather than the industrial cycle. And also because we supply critical products, such as high purity nitrogen, specialty gases, and complex mixtures. These products enable our customers to create smaller and increasingly more powerful electronic devices, irrespective of their technology platform. This is one of our fastest-growing markets, both in the Americas and Asia Pacific, as more investments are made into integrated circuitry, memory, display, and solar panels. Some recent examples of onsite project wins include the recently announced Samsung win in South Korea and other tier one fabs in Taiwan, China, and Singapore. This is a market where I expect most project backlog opportunities in 2021, and as we are actively pursuing a large number of projects that should result in additional wins announced this year itself. Overall, resilient end markets provide a healthy foundation for future growth while offering downside protection, as evidenced by our financial performance during 2020. Let me move on to the bottom half of slide 4 that shows the cyclical markets. Some of these are denoted in yellow, since they were negatively affected by the economic downturn, especially in the Americas and EMEA. However, many of these markets are underpinned by fixed fee payments such as onsite contracts in metals and chemicals, cylinder rental payments, and manufacturing. Gas volumes are exposed to industrial growth trends. Of course, this is also the part of our portfolio that will see the most leverage from the recovery in the economy. Metal and glass represent about 13% of our sales. Carbon steel production has been increasing in China, but has been much more volatile in developed markets like Europe and the US, especially when those mills are linked to auto production. Q4 saw some of the highest numbers in 2020 due to catch-up demand after pandemic production shutdowns and depletion of inventory and steel mills, as well as end customers. We're also seeing recent trends in the space including efforts to decarbonize steel production, such as using oxy-fuel combustion to reduce emissions and improve energy efficiency. We see recovery in flat steel from a rebound in auto production. If we see any significant infrastructure stimulus spending, the metals industry will definitely benefit. We continue to have confidence in our portfolio of high-quality customer assets, which have navigated economic headwinds for many decades. Moving on to chemicals and refining, which represents 19% of our sales globally and is well balanced across different segments. Like metals, we have focused efforts on partnering with high-quality assets, meaning our customers are some of the lowest-cost producers in the world. Production activity for 2020 ended below pre-pandemic levels. However, we have seen refining capacity utilization trend up to low 80 percent in the US this year. The Gulf Coast refining system is well-integrated and still has some of the lowest cost feedstock in the world. Our current chemicals and refining backlog of projects includes leading global companies, protected with strong contractual terms. We recently signed a new project with Wanhuain Hungary and continue to explore new opportunities as our customers work to reduce their carbon footprint. A good example is the increasing trends in biofuel production, requiring additional hydrogen for hydrotreating and hydroprocessing. While 2020 represented a challenging year for these customers, we see upside potential heading into 2021. Manufacturing, which accounts for 19%, contains a variety of markets including aviation, automotive, falcon paper, and general manufacturing, but also some growth markets like commercial spaceflight. Overall trends have decreased due to weaker general manufacturing. As many small to medium-sized manufacturing customers had to shut down operations for extended periods. While aviation has decreased with the overall travel industry, we continue to see strong growth in commercial spaceflight, albeit from a very small base. Additionally, we've seen falcon paper customers add more capacity to serve consumer retail demand, which has enabled more small onsite oxygen plant wins, especially in Latin America and Northern Europe. For the most part, manufacturing end markets correlate with industrial production, and thus would be expected to move up or down with those trends. For the overall gases business, we have a good balance of both resilient and cyclical end markets. 2020 demonstrated the downside protection and stability in our business. While we remain somewhat cautious in our outlook, we are well-positioned to leverage any recovery in 2021. Let me move on to engineering. Our engineering segment represents approximately 10% of our consolidated sales. It's a longer cycle business; thus, quarterly trends don't quite provide the full story. Last year was a culmination of a multiyear growth trend for order intake, primarily related to gas processing and petrochemical expansions. For 2021, we estimate a net decrease in the sale of equipment backlog from a lower capital cycle spend. However, as clean energy projects continue to develop, I expect these to steadily become a larger part of the engineering portfolio. Irrespective of the near-term outlook, we have a high degree of confidence in the sustainability of long-term margins and cash generation in this business, driven by captive sales opportunities, an unrivaled technology portfolio, and a focus on higher quality engineering and services. So let me wrap up by sharing some of my priorities for 2021. On safety and compliance, which is always first at Linde, we must maintain best-in-class performance and a culture with continuous improvement across all our KPIs. For sustainability, we must further progress in the goals we set last year. In particular, our focus will be on the reduction of greenhouse gas emissions intensity, and of course, increasing gender diversity. Price and cost management is a hallmark of Linde; we will build upon the current best practices on pricing and productivity, while also remaining laser-focused on cash management. We will also remain quite nimble, adjusting each local business to its environment for optimal results, yet always remaining prepared to capture any growth opportunities that meet our investment criteria. I'm sure you've heard us say in the past, ROC is a truth serum for any capital-intensive industry. I truly believe that. We've instilled a culture at Linde where capital isn't free, and we have to be good stewards of shareholder capital. To do so, we need to continuously optimize our base CapEx while also pursuing good investment opportunities. That means projects, acquisitions, and decaps as well. Our approach to growth remains disciplined. We'll pursue all growth opportunities that meet our investment criteria, double-digit unlevered after-tax IRR with reputable customers who have competitive assets and in regions where we have confidence we can enforce our contracts. For such opportunities that we target, I'm confident we will win more than our fair share, thus we continue to improve after-tax operating profit and maintain a long-term and disciplined approach to investing. I expect to see our ROC continue to grow.

Thanks, Sanjiv. Please turn to slide 5 for an overview of fourth quarter results. Sales of $7.3 billion were 3% above last year and 6% higher sequentially. Year-over-year gas volume trends have started to stabilize, with an increase of 1% from 2019. This is driven by contributions from the project backlog as most of our customers have started up as anticipated. Organic volumes were stable compared to the prior year, as increases from electronics and healthcare were mostly offset by slight declines in manufacturing and refining. Sequentially, volumes increased across all geographic segments and most end markets. The engineering business drove a 1% decrease in sales from the prior year. As this is a longer cycle business, quarterly trends are less indicative of overall conditions. Currently, projects are being completed faster than order intake, resulting in a slightly lower backlog of $4.7 billion, which is about 1.5x to 2x annualized sales. Despite the lower fourth-quarter sales, the team improved EBIT margin by 110 basis points and ended the full year with margins above 15%. Looking ahead, we expect engineering EBIT margins to average low double-digit percentages throughout the cycle. Pricing remains healthy at 2%, as most business units are keeping up with local inflation. Proper contract management is integral to our operating model and provides long-term confidence in maintaining positive pricing in any environment. Foreign currency had a 2% tailwind as the US dollar weakened against most currencies in APAC and EMEA; however, the Americas still faces a headwind due to weaker Latin American currencies. The combination of stable volumes, higher pricing, and strong productivity and cost management resulted in operating profit of $1.6 billion, which is 20% above last year. The 22.2% margin is 320 basis points above 2019 and represents our sixth consecutive quarter of expanding operating margins by more than 200 basis points. Earnings per share of $2.30 increased 22% from the prior year and 7% sequentially. The incremental growth rate versus operating profit is primarily due to the lower share count. Operating cash flow of $2.4 billion was our highest quarter yet, ending at 12% above last year and 29% above the third quarter. In fact, it represents another quarter where the operating cash flow to EBITDA ratio exceeded 100%. We had a strong finish in working capital, especially in the engineering segment, but I'll speak more to that on the next slide. CapEx of $1 billion was 1% above last year and 30% higher sequentially. As a reminder, project CapEx represents opportunities over $5 million in spend with returns supported by long-term contracts. These projects often take three or more years to build, so spending patterns fluctuate based on construction and delivery timing. Therefore, a better indicator is the sales of gas project backlog, which stands at $3.6 billion, similar to the third quarter. Base CapEx has increased from both periods, primarily due to quality growth investments that meet our return criteria, but do not all qualify for inclusion in the project backlog. Example investments include small onsite specialty gas plants, hydrogen mobility, and expanding medical gas capacity. Ultimately, all capital decisions roll up to ROC, which continues to trend in the right direction, with Q4 ending at 13.4%. You can see continual improvement from substantial earnings growth on a stable capital base. As Sanjiv mentioned, as management, we are stewards of shareholder capital. This metric is the best way to define long-term success in deploying that capital. To build off that, I'd like to spend some time reviewing the full year 2020 capital management on slide 6. As you can see on the left side, full year operating cash increased by 21%. This was driven by a combination of higher earnings, lower merger costs, and better working capital management. Cash from operations grew steadily over the two-year period despite the challenges related to the pandemic, including the second and third quarters of 2020. The right side represents how that capital was deployed. Linde has a stable and predictable cash allocation approach, irrespective of any short-term disruptions around the world. The underlying mandate is a credit rating with a growing dividend each year. In fact, just two weeks ago, we announced a 10% dividend increase for 2021 to mark our 28th consecutive year of increasing dividends. Our capital priority is to invest back into the business; this can be for projects, Decaps, or acquisitions, which we view equally under our consistent investment criteria. All growth must meet a proper risk-reward balance, as mistakes in this industry can result in long-term losses that exceed the initial investment. During 2020, $3.5 billion met our investment standards, and I expect this number to increase over time. Finally, any excess cash leftover after dividends and investments is used for stock repurchases, amounting to $2.4 billion for 2020. We recently approved a new $5 billion stock repurchase program, which further validates our confidence in generating significant excess cash flow. The path to long-term compound value generation requires annual growth of earnings and cash flow, with a consistent, disciplined capital deployment model for both good and challenging years. Furthermore, building local density in diverse end markets provides Linde downside protection with significant leverage to growth cycles. 2020 validated the resilience of this model in a tough year, and we look forward to demonstrating how we can perform in a recovery. I'll now wrap up with guidance, which you can find on slide 7. Initial EPS outlook for full year 2021 is $9.10 to $9.30. This represents an 11% to 13% growth rate with an estimated 1% FX tailwind. Excluding FX, the 10% to 12% range assumes minimal economic benefit at the bottom end and low single-digit economic growth at the top end. In other words, consistent with prior statements, we have confidence we can grow EPS in double-digit percentages with minimal help from the economy. While we don't provide revenue guidance, I want to mention for modeling purposes that effective January 1, we have deconsolidated a 50% joint venture in the APAC segment. Our ownership and economic interest remained the same. However, we had some incremental shareholder rights that expired in December that both parties agreed not to renew. The effect of this deconsolidation will be shown as a divestiture and will reduce annualized sales by approximately $600 million at average operating margins. Note this change will not affect EPS due to the proportional increase in equity income. Stated simply, this is merely an accounting change that will not impact our economic benefits. Turning to the first quarter, we are providing EPS guidance of $2.20 to $2.25, or a 16% to 19% growth rate, including an assumed 2% FX tailwind. This range assumes a normal seasonal decline from the fourth quarter, including Chinese New Year and Brazilian carnival. At this point, we are not assuming any meaningful improvement in sequential volumes from Q4. While we started 2021 with a stronger January than anticipated, we're not in a position to update guidance at this time. Consistent with prior quarters, we believe it's prudent to remain cautious on the outlook as the pandemic evolves. Rest assured that if there is any economic upside, we will capture more than our fair share, as demonstrated by the second half of 2020. If the economy does improve more than our baseline assumptions, we will likely be at the upper end or above this guidance range. I'd like to turn the call over to Q&A.

Our first question comes from Bob Koort from Goldman Sachs.

Thank you very much. Good morning. I wanted to ask a bit about the forward-looking context of 2021. Obviously, you did a tremendous job in 2020 on a cost basis. I think your operating profits climbed over $500 million, and your sales are actually down almost a $1 billion. You broke the calculator on the incremental margins. How should we think about it going into 2021? What might underlie that earnings output you guided us towards in terms of sales evolution relative to EBIT evolution? And do you see some of the expenses that might have been diminished in 2020 rolling back in 2021, as the world moves towards a more normal business operating condition?

Okay, thanks, Bob. This is Steve. Thanks for the question. First, I need to give a shoutout to my daughter today. It's her 30th birthday, so Happy Birthday, Logan. She only cares about the share price, by the way; she won't be listening in. So, Bob, as we think about continuing to expand margins, obviously that's in our sights and is built into our plans. We're given clear guidance on double-digit earnings growth. As Matt described, even at the low end, there's no real volume expectation and at the higher end, there's a low single-digit volume expectation. So, obviously, we’re going to leverage up the EBIT quite a bit off a pretty small volume assumption, and then we’ll leverage that further through share buybacks; and I didn't really go back and calculate the number, but clearly, it's going to be another significant move. That's the plan in terms of EBIT margin expansion, and I think, as Matt probably said a couple of times, we don't really know what's going to happen this year. I mean, we are looking at January, and obviously, the results are pretty encouraging. One month doesn't make a quarter, and one month certainly doesn't make a year, so we certainly have to be a little more cautious in terms of what could happen in the second half of the year.

And Bob, this is Matt. I'll just add one thing to that as well. Long-range, we look at the equation of price, productivity, and cost inflation to be an accretive component to how we think about our earnings and our margins on a go-forward basis. This is beyond the merger. We don't anticipate temporary cost savings rolling back or anything to that extent, as we've discussed in prior calls. So we see this as a compound value opportunity, as Steve mentioned, which doesn't assume much volume help at all at this stage, obviously, we will have our backlog volume. We will have to see what happens to the economy. We will take it quarter-by-quarter and will keep giving updates as they occur. But January was better than we expected, and we'll just have to see how it plays out in the next two months. We'll give you another update come our next call.

And can I ask a hydrogen question? You're building the PEM electrolyzer in Luna. I assume some of that gets integrated into your pipeline network. How do you distinguish sales prices for green versus mingled hydrogen through that pipeline to your customers?

Well, I mean, we obviously think, coming off the electrolyzer, that volume that we're selling through the pipeline system to some existing chemical customers. We can identify those molecules; that's not a problem. It's clearly at a premium—a substantial premium. While you're on that point, talking about this project, this is kind of the quintessential industrial gas supply project where we have multiple modes of supply in one targeted geography, which is in Luna. We have gas molecules going down the pipeline as we just discussed, some will go into tube trailers, we will supply train stations to supply buses. We're liquefying some of those molecules to distribute to trucking and general industry. It really is a typical integrated supply system. It just happens to be around green hydrogen this time, and it's in a location where we already have a strong presence.

Our next question comes from Nicola Tang from Exane BNP Paribas.

Hi, everyone. And thanks for taking my questions. I want to ask a little bit about the backlog. I think back in Q3, you were flagging that the backlog might decline in 2021, just related to capital cycle corrections, but you actually sound quite upbeat today thinking about the opportunities. If I looked at your CapEx guide for 2021, it looks flat versus 2020. So I was wondering if you've seen better project activity than you initially expected? Or are you setting up the base CapEx perhaps? And then, within the double-digit EPS guidance, could you give us a steer on how much is driven by new project startups? And then could I squeeze in another question on electronics? It sounds like you're pretty upbeat there in terms of opportunities. Can I ask whether the current situation with the semiconductor bottlenecks is impacting you in any way with a plus 8% growth in the quarter, and whether you think this could drive acceleration in new investments going forward? Thanks.

Okay. So backlog contribution, 2% is kind of, I think, the right number you should use, about 2% on the top, 2% on the bottom; that's really kind of been our ongoing rate. We have a fairly strong CapEx startup lineup for 2021. Of course, they're during different times of the year, so you don't get all the contributions in 2021; they tend to roll over. It's always difficult to talk about what you think a year-end backlog number is going to be because it's really a function of what you've got in front of you that you're going to book. I certainly alluded to a very large project that we're looking forward to announcing in the not too distant future. What happens during the remainder of the year is kind of a function of the pace of clean energy projects, maybe the pace of electronics projects. If demand comes back, that generally provides projects for we see more project activity, more of our traditional industries like petrochemical and metals, but we have to wait and see. There's not much going on, obviously, in that latter category at this point; it’s more around electronics and clean energy. The CapEx spend is pretty consistent. Again, it doesn't move that much unless the backlog really starts to drop year-over-year-over-year, then you'd see that large project spend continued to drop. The base CapEx is more consistent. There are lots of little growth opportunities inside of that; I said 33 or 36 on-site that we booked in 2020. We have a very strong focus on that, and we like those projects. There are good opportunities in some of these markets that Sanjiv alluded to that we'll spend some CapEx against to capitalize on that growth. So yes, I do think semiconductors will continue to be a very strong opportunity. Sanjiv talked about that in his comments as well. It's how we work today virtually; it's the Internet of Things; it's chips that are going to go on everything, especially in automobiles. So the semiconductor opportunity is going to be very strong. We've been talking about this for two years; we're well-positioned in places like South Korea, Taiwan, and China, which is really the axis of where all the semiconductor fabs have been built. There is some new activity; obviously, the US is trying to go more prime in terms of having domestic semiconductor fabrication.

Our next question comes from David Begleiter from Deutsche Bank.

Thank you. Good morning, Steve. Can you discuss how your refining and helium businesses have improved since the pandemic?

Well, I think with respect to helium, it's down year-over-year, but we did see some sequential improvement from Q3 to Q4. We'll have to wait and see what happens this time in coming out of January and during the quarter, but if you look at some of the elements of that, there's a significant piece tied to electronics, obviously, that's going to do well. I think the industrial volumes will move as the industry recovers. Balloons are clearly down; they have been down and will continue to be down, and I don't have to explain why. There's also a piece tied to MRI that looks kind of stable to maybe slightly up, so it appears there’s going to be sequential improvement, but not at a rapid pace, but certainly sequential improvement on volumes going forward. In terms of refinery volumes, what I look at is hydrogen. Clearly, in Q4, we're down something like 7% year-over-year, so we are up a little bit from Q3. Starting off in January, I'm looking at numbers like plus 8% compared to December, so they are starting to improve. The drivers behind their end markets are clearly jet fuel being very weak, diesel a bit strong, gasoline is weaker. What one would expect is as you get deeper into the year and COVID gets behind us, particularly in places like the US, that you would see hydrogen volumes improve significantly.

Very good. And just lastly on share buybacks, you announced a new $5 billion program last month. How should we think about the level of buybacks in 2021?

David, yes, this is Matt. I can answer that. As you saw, we did $2.4 billion net in 2020. We will continue to sweep the excess cash that we have and will be buying back. Our expectation is that we'll be in the market every day. When we see opportunities, we may go heavier. That's kind of how we normally play that out. The $5 billion program, we had to put an expiration date on it, as required for Europe. So we just put something out there around July 2023. We'll continue to execute and use our excess cash, and we'll be in the market daily.

Our next question comes from Peter Clark from Societe Generale.

Yes, good afternoon, everyone. Hey, time's up. Well done. Just a quick question for you Steve to begin with. You mentioned that return on capital is obviously the most important metric; you are up, I think over 300 basis points now at 13.4%. If I go back about 10 years ago, Praxair hit the peak of 14.7%. Any reason with the platform you have now with Linde PLC why we can't see that continue to grow up to that level? Following on from that, there's a very interesting announcement with Afrox where obviously you've delisted; you're talking about opportunities. I know it's relatively small in the context of Linde PLC, but the operating margin looks sort of mid-teens level for a clear leader in the market. Just wondering your thoughts within the context of what you do on efficiency and productivity for what sort of example of what you can do in a business like that.

Yes, sure, Peter. Thanks for the questions. Yes, you're correct; I remember those numbers as well as you do. I didn't have to go look at them to know what we and Praxair once operated, which was pushing 15%. I don't see the reason why this business can't do that as well. We can continue to grow earnings in the double-digit range. That obviously does a lot to drive the top line by being very efficient in terms of how we allocate capital below the line. We continue to get better at that all the time, continuing to invest in good return projects. I see no reason; I’m not going to call it. Somebody told me a long time ago, 'Give them a number or a date, but don't give them a number and a date.' So it goes back to my GE days. But I don't know when or what year that's going to be, but it's certainly in our sights. 30% of our long-term incentive is tied to return on capital, so we have the highest weighting in our long-term incentives. I'm not the only one that thinks that's an important metric; there are thousands of us who consider it so. Afrox is just is an example of our view on portfolio optimization. I don't typically favor joint ventures, especially for traditional industrial gas businesses. This was a case where this company had a public float. So you can imagine the distractions that come with having a small business in a country like that with a public float. By essentially eliminating that public float and buying all those shares, we're now able to run that country like any other country that we operate around the globe.

Our next question comes from Jeff Zekauskas from JPMorgan.

Thanks very much. Your cost of goods sold was down year-over-year in the fourth quarter, and your revenues were up a couple hundred million. Can you explain that? And when you look across your divisions, which is the division that has the most margin opportunity going forward?

All of them. I think Asia certainly has some opportunities; I know Sanjiv would agree with that; he's made a lot of progress in a very short period of time, and he would see more going forward. In EMEA, certainly at 25% EBIT, you probably surprised some people with the quality of that performance. We have more work to do there. We’ve really just been getting into running EMEA the way we know an industrial gas company should be run. They've made excellent strides, and I'm very proud of everything they've done there on price management and efficiencies, but there's more continuous improvement that can take place there. So maybe Asia and EMEA have a little more opportunity than the Americas, but no one gets a pass; no one gets a clear victory. We think there's opportunity everywhere, and just like I said, Afrox, there are a bunch of those scattered around that we can continue to improve.

Jeff, this is Matt. I can try and help on the COGS. I mean, it’s going to be a couple of things as you can imagine. Clearly, with the synergies, while fixed costs we were able to get at early in most regions, variable costs tend to take a little more program; sometimes they take some capital. As we've been evolving on that, we've got a better stride there. Furthermore, as you know, the engineering business runs most things through COGS, and they had margin expansion—they were running better through some of their absorption as they executed and completed projects more efficiently, which would also affect that given run through inventory and COGS on a percent completion. So there’s a little bit of mix, but also a lot of the effort across the world to just improve efficiencies across our cost stack—not just fixed costs but variable costs as well. This is an area that we are going to continue to focus on as part of our productivity programs, which is part of our DNA.

Our next question comes from Duffy Fischer from Barclays.

Yes, good morning, guys, and congrats on a good quarter. First question is just around the healthcare business. Obviously, last year was very volatile within healthcare; a lot of COVID stuff, but a lot of other things that didn't happen in hospitals. So I was wondering if you could walk us through what was the impact of healthcare on the volume price numbers for the Americas and Europe where it's sizable, and then just to follow on when COVID finally gets put back in the bottle. Is there going to be a speed bump where things are going to decline for a little bit before they can start growing again?

Well, while looking at that number, I'll give some—. He has it, but I'll just give some commentary on that. Clearly, we had to ramp up a lot of healthcare capabilities around the world to fight COVID. Unfortunately, that's not going to be behind us for a while. I think we can see—you can look at the pace of vaccinations and the advance of these new variants. I think it's very possible that these variants are going to outpace the world's ability to vaccinate the population, and therefore they're going to be consuming a lot of oxygen well into 2021. We might be talking about this again this time in 2022. So I don't think this is going away anytime soon. You correctly pointed out that while we're providing more oxygen to fight COVID, there are people that are not having elective surgeries; they didn't go into hospitals, and hospitals are focused, obviously, on fighting this primary virus. So there's not as much oxygen that's being sold for more of the elective type or more traditional types of activities. I think post-COVID, obviously, the latter will come back. I do think that businesses like Linde Care have clearly demonstrated to the government and large managed care operators how important it is to have a very strong capable with a wide breadth of capabilities, services, nurses, clinicians, the whole works, that can step in and be a very strong second line of defense for hospitals. I think in terms of pandemic preparedness going forward, I think we're in a new world now with respect to our relationship with the government. I feel very confident about that, and so I think that's going to be a positive. So that’s a silver lining, if you will; this COVID gave us a chance to demonstrate what we could do on a homecare basis, not just a broad hospital basis. But it might be this time next year before really talking about a world after COVID. Of course, as oxygen sub subsides to specifically fight COVID, then the manufacturing side of the business, the industrial side of business will have more volumes. I mean, I can talk about oxygen being up quite a bit. I can also look at our gases still being down quite a bit because manufacturing has not come back yet, and there are trade-offs, obviously.

Great, thanks. And then maybe just one on cash flow. So Matt, you hit on a lot of it, but even with EBITDA up $500 million roughly in the year, op cash of $1.3 billion, how should we think about the ratio of op cash to EBITDA going forward?

Duffy, yes, I can answer that. We've said low 80s; obviously, we've been doing better than that. We finished in the mid-80s this year. We still did have in 2020 roughly a quarter of a billion dollars of cash related to merger outflows. As you recall about a year ago, we said we expect that number to decline down to about $200 million - $250 million. I think we were pretty close on that. Looking into 2021, maybe it will be $100 to $200 million, and they'll start to phase out by the end of next year or end of this year 2021. So I still am gunning for low 80s. We obviously want to do better than that, and we'd like to try to maintain the mid-80s where we can. But in the 80 percentiles is where we want to be, and obviously, there are seasonality patterns, as you know, to our cash, so Q4s are higher, Q1s tend to be lower. This is something we look to grind higher and improve on year on year out.

Our next question comes from Vincent Andrews from Morgan Stanley.

Thank you and good morning, everyone. Maybe just to start off with you mentioned, Sanjiv mentioned the renewable diesel opportunity. I think that's what you're speaking to when you talk about biofuels. How do you think about that? I presume that's more of a merchant opportunity than an onsite opportunity. But I'm just thinking about that business being very reliant on government subsidies. How do you think about servicing that industry and customer base?

Thanks, Vince. Let me elaborate on that point I made earlier. We see developing opportunities around biofuels. We perceive some regulatory pressure driving the demand. Therefore we see interest in kind of growing that piece. Now, we don’t see that as a merchant opportunity; we see that as an onsite opportunity. The hydrogen requirements are reasonably substantial. We're looking at several projects at the moment where we are working with those looking to develop that further. We see interest in the market, we see demand coming through, and we see interest driven by a couple of governments who are providing some sponsorship for that, particularly in the US. We see that as an area where more hydrogen is needed, because the process itself requires greater hydroprocessing and hydrotreating. In terms of the trends in hard goods versus packaged gas sales in the US, I'll take that. If we look at the fourth quarter, it’s flat to probably slightly up year-over-year on packaged gases in the US. Gas looks pretty strong, and hard goods are still slightly negative at this point, but gas looks stronger than what I saw in Q4. As I look at January, coming out of the blocks, the trend is stronger. So gases look in pretty good shape.

Our next question comes from Steve Byrne from Bank of America.

Yes, thank you. I got to believe that you're among the largest electricity consumers in the regions that you operate in. I suspect that gives you significant negotiating power for rates. In one of your slides, you mentioned more than a third of the energy is low carbon. Can you comment on the pricing that you’re getting on that versus carbon-based energy sources? More broadly, do you see this as giving you an advantage in green hydrogen? Like, for example, this 24 megawatt electrolyzer that you're going to build in Luna, Germany; I can only imagine that the contract that you're going to get on the power or the electricity to drive that electrolyzer has to be significantly different than what ITM was bidding on that job on their own.

Yes. I think that's a good point. For that project specifically, there are two ways to buy power: you can buy it off the grid using your green certificates as part of—it’s all part of the renewable energy directive. We can negotiate directly with utilities, which we have been doing; I feel very confident with where we’re going to come out. The way we think about renewable energy, obviously, we are a large user, which gives us some advantages. By being able to combine that to make green hydrogen or produce green hydrogen using renewable power sources in terms of just what you get off the grid through electrolysis, it's important for being able to produce and sell 100% carbon-free hydrogen. The pricing we see has been on par with what we would normally get. We're not looking to sacrifice economics to claim we have a higher percent renewable; we want to achieve both. I think we're up to 37% renewable now; I think we were at 34 or 33 a couple of years ago. We are making progress; the goal was to double the original number. If I remember right, the figures show going from $1 billion to about $2 billion on renewable power purchases. It is something that we focus on. If the ultimate goal is to be carbon neutral by some date, then obviously either proactively contracting renewable power or countries naturally green their grids, that's going to be an important part of how we ultimately get there.

Steve, you're a couple of years into this merger. You mentioned productivity as a margin driver in all three segments. Where would you say you are? What inning are you in, in this vision that you had about where this merger could get in terms of structure and improve the productivity of the merged entity? Where would you say you are in that process?

Hey, Steve, I'm going to jump in here. This is Sanjiv. Just to give you a quick flavor. I think, Steve and I spend a lot of time talking about this. I see productivity deeply embedded in our businesses; I've described before on earnings calls. Productivity is entrenched in the business at a level where we have generated hundreds of projects to make sure they are delivering on a continuous basis. We look at our businesses every day, and we're figuring out how to be better than we were yesterday. So it is a continuous program; it's something that is in the DNA of people who work in our business, and we look at it every day. It isn't a program that we run; it's something we live and breathe.

Just one more point to add to that, Sanjiv covered it beautifully. If you go back to Praxair’s history, we grew earnings per share in double digits over that 25-year timespan, and that was successful even in recessions, weak growth periods, energy crises, or commodity busts. It's known. You don’t want to lose sight of your strengths, and we won't do that. But certainly, any opportunity that’s developing—that we think lends itself to an industrial gas approach model will definitely be pursued. We all like growth here.

Yes, thank you. Steve, on these calls, you said before that green hydrogen costs are high and need to come down by 50% to be competitive. Your 24-megawatt sort of green hydrogen project in Lavena: what is the sensitivity of that project to price of green hydrogen, which is likely to fall in the coming years? How do you plan for that in a project like that?

Well, obviously, this project has met our return criteria. The costs are higher because renewable power costs are still relatively high around the world; they need to come down as we scale up. This is a relatively large PEM, as I said; it’s the largest one announced—24 megawatts. This is not where it’s going to be 10 years from now in terms of cost; it’s kind of the early days in producing projects of this size. The CapEx costs are higher; the OpEx costs are higher. We know the costs need to come down through electrolysis, but also in renewable power. Renewable power is a major factor in that. We receive subsidies for this project; most of these projects receive subsidies, which obviously helps with these projects, and that's probably important until costs come down so that green hydrogen can be competitive. It’s probably more of a blend; dropping blue hydrogen, which I think would be a good solution for them—even green, if you look at Texas, there are lots of renewable power and lots of natural gas; you also have depleted oil reservoirs, so substituting blue or green for gray would be very helpful to refineries if costs come down. I think it’ll happen; I think longer term, it's probably other industries that have faced better growth days.

Yes, thanks for taking my question. Steve, you mentioned in your opening remarks that you had a couple of projects that it sounded like you were close to closing on carbon capture. Can you help us to understand if with all the green talk, we've actually reached a tipping point when it comes to carbon capture? If so, how are you thinking about sizing the opportunity over the next three to five years?

There are several projects we have in our sights that will yield close, where we need the CO2 for commercial purposes. The customer has an incentive with the cost of CO2 emissions increasing, they have an incentive to capture carbon. We have a use board in terms of commercial purposes, whether it's for greenhouses, dry ice for beverages, etc. So we have projects that I think significantly help with economics, where you have a market for CO2. We have others where we have projects, working on coal-fired utilities looking at carbon capture. We have multiple solutions around carbon capture; it can be post-combustion or pre-combustion. For some of those to move forward, particularly in the US, you need a defined cost of carbon and CO2, but I think when that happens, and this administration is very determined to make that happen, you'll see some of these projects move forward. I don't think it’ll be as large as I look at today; I could be wrong, as perhaps the straight hydrogen opportunities, but they can be significant too.

Got it. Thanks for the color on that. And just one question on pricing: when we look at the trends regionally, it seems like, at least in the ones you're reporting, Asia doesn't have quite as robust of pricing dynamics. Is that a function of the business mix you have, where you have some of these huge electronics applications where there’s not much merchant or packaged product? Or was it really just a more competitive dynamic in those regions? How should we be thinking about that?

Let me jump into this. The market in Asia Pacific, as you might imagine, is quite varied. The largest market there for us is obviously China. The dynamic around pricing we see is twofold. One, we have many large on-site projects; from a portfolio perspective, the opportunity around merchant pricing impact that we can fully bring to bear is a little limited compared to some other segments. More importantly, in China, where we have significant end-user customers, we focus our efforts and energy on. At times, we would use the distributor model as well to ensure that our plants are running at optimal levels. In 2020, in particular, that became quite important. We wanted to ensure that channel was fully utilized. When you do that, pricing gets moderated a little bit. You've seen that happen in 2020: it's an area of focus. Just as I talked about productivity, pricing is an area of focus every day. The guys in China in particular know that we are watching that very carefully, and I'm hopeful that will reflect in the quarters ahead.

And our last question comes from Laurence Alexander from Jefferies.

Good morning, two questions. One is what you see is a reasonable timeline for blending of hydrogen into natural gas pipelines for heating applications becoming material for Linde in Europe or the US. The second with respect to acquisitions; how do you think about the boundaries for the business model? If we think about like forays into adjacent cities, specialty gases for healthcare, electronic chemicals, etc.—where do you see logical extensions for the business model, such as remote monitoring of industrial boilers? Would you ever engage in vertical integration for total production of ammonia or methanol? Just how do you see the boundaries for what you would look at in terms of acquisitions or flexing the business model a bit?

I believe you are referring to our partnership with Snam in Italy, the largest natural gas operator in Europe, which aims to incorporate hydrogen into their natural gas supply. While I need to check for the exact percentage, I estimate it's around 10%. Even this level, applied globally, represents a significant volume. However, there are challenges, such as the need to modify burner equipment and possibly compressors, depending on the hydrogen content, and metallurgy considerations must also be evaluated. Utilizing hydrogen offers potential in the US Gulf Coast, where robust, large-scale, efficient refineries can work with heavier feedstocks. These complex facilities can produce a comprehensive range of transportation fuels and are closely linked to the petrochemical industry in that region. If anyone believes these refineries will become obsolete, they are likely to remain the last of their kind in the US Gulf Coast.

Chrystal, thank you, and thanks everyone for participating. Have a great rest of your day. If you need anything else, feel free to reach out. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.