Air Products and Chemicals, Inc.

Please stand by. We're about to begin. Good day, everyone, and welcome to Air Products and Chemicals First Quarter Earnings Release Conference. Today's call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products, and all rights are reserved. Beginning today's call is Mr. Simon Moore, Vice President of Investor Relations. Please go ahead.

Thank you, April. Good morning, everyone. Welcome to Air Products' first quarter 2019 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations. I'm pleased to be joined today by Saifi Ghasemi, our Chairman, President, and CEO, Scott Krakow, our Executive Vice President and Chief Financial Officer, and Shawn Major, our Executive Vice President, General Counsel, and Secretary. After our comments, we'll be pleased to take your questions. Our earnings release and the slides for this call are available on our website at airproducts.com. Please refer to the forward-looking statement disclosure that can be found in our earnings release and on slide number two. Now, I'm pleased to turn the call over to Sebi.

Thank you, Simon, and good morning to everyone. Thank you for joining us on our call, and we do appreciate your interest in Air Products. The talented, motivated, and committed team at Air Products delivered another quarter of strong safety and financial results. Our quarterly adjusted earning per share of $1.86 represents the 19th consecutive quarter that we have reported year-on-year quarterly EPS growth. Excluding the impact of a plant sale last year, our EPS was up 9%. We continue to be the safest and most profitable industrial gas company in the world with an EBITDA margin above 35%. We are in a very strong financial position, and our business generates significant cash flows. This allows us to continue to invest capital into value-creating projects to profitably grow the company while also continuing to return cash to our shareholders. Yesterday, we announced our 37th consecutive year of dividend increase. We are proud of our new quarterly dividend of $1.16, and I'd like to stress quarterly dividend of $1.16 per share, which in turn means that we will return about a billion dollars in cash to our shareholders over the next year. At Air Products, we have a great, talented, and committed team who stay focused on serving our customers and creating value for our shareholders every day. Now, please turn to slide number three. All of our 16,000 employees around the world are focused on safety, and as a result, they have improved our last time injury rate by 83% and our recordable injury rate by 33% since 2014. On slide number four, you can see our goal, which is to be the best, safest, most diverse, and most profitable industrial gas company in the world, providing excellent service to our customers. On slide number five, you can see our overall management philosophy that we have shared with you many times before. We have come a long way over the last four years However, we continue to be focused on shareholder value, capital allocation, and an empowered and decentralized organization. Now please turn to slide number six to see our five-point strategic plan. We remain focused on sustaining our lead in safety and financial performance. We continue to see tremendous opportunities to deploy capital in value-creating projects, primarily in our on-site business. Scott will take you through the numbers, but let me provide you a quick overview of our progress. Since the start of fiscal year 2018, we have spent and committed over $8 billion on exciting new growth projects. Both Scott and I remain committed to managing our debt balance to maintain our current targeted AA2 rating. At this rating, we believe we still have about $14 billion remaining to invest. So, we have already spent or committed over half of the $16 billion available over the five-year period of fiscal year 18 to fiscal year 22. We recently announced new projects in California, Minnesota, India, Algeria, and China. We have made great progress so far, and I remain very confident, and I like to stress the word very confident, of our ability to deploy this capital into high-return industrial gas projects that will generate significant value for our shareholders. The fourth point of our plan is to continue to improve our 4S culture, meaning safety, simplicity, speed, and self-confidence, to create a committed and motivated environment where our team brings their positive attitudes and open minds to work every day. And finally, we do have a higher purpose to create an inclusive and enjoyable environment for all of our people so that everybody feels proud to innovate, solve challenges, and contribute to our communities. We remain focused on executing this five-point plan. Our goal is to be the best industrial gas company in the world, not the biggest. Now please turn to slide number seven. Then you can see our dividend history. As I said, we are proud of our 37-year record of increasing the dividend. And we are excited about giving over $1 billion to our shareholders in 2019 via dividend in cash, this direct cash return to our shareholders complements the tremendous investment opportunities that will drive air products growth for many years to come. On slide number eight, you can see our gasification strategy that continues to be a key focus of our investment opportunities. Gasification is just another way to make syngas that can be turned into a wide variety of products, including chemicals, diesel fuel, high-end olefins, polymers, hydrogen, and or power. A key benefit of gasification is that it enables an environmentally friendly way to use lower-value feedstocks. We have successfully supported this market over the last few years with very large air separation units providing oxygen to customers operating their gasifiers in China and Saudi Arabia. We have announced four large projects where air products will own and operate the gasifiers and syngas cleanup and provide syngas and all related products to our customers. The key is that these projects are consistent with our on-site business model where we don't have any raw material or product volume or price risk. The Luan project that we had announced before is fully on the stream thanks to the continued effort of our great team in China and continues to successfully supply syngas to Luan for their chemical production. You see the positive impact of Luan in our Asia and company results this quarter, and we remain confident Luan will deliver over 25 cents of earnings per share in fiscal year 19. And we continue to make good progress on the other gasification projects we have announced. Now please turn to slide number nine. We remain committed to our goal of being the most profitable industrial gas company in the world, as measured by each of these three metrics and they are. Now please go to slide number 10, which is always my favorite slide, showing the over 1,000 basis point improvement in our EBITDA margin. Finally, please turn to slide number 11, The successful execution of our strategy will allow us to deliver 13% compounded annual earning per share growth over the last five years, based on the midpoint of our fiscal year 19 guidance. We will continue to execute our strategy and we believe we will deliver and increase our earning per share by at least 10% per year on average over the coming years. Now, I would like to turn the call over to Mr. Scott Krakow, our Executive Vice President and Chief Financial Officer, to discuss the results in detail. Scott?

Thank you very much, Sefi. Now, please turn to slide 12 for a summary of our Q1 results. As Sefi said, our team delivered another strong quarter. with underlying volumes and pricing up across all three regions. Before I get into the results, as a reminder, we had a planned sale in China in the first quarter of last year, so we will help you understand our results excluding this event. Also, during this quarter, we agreed with our customer in India to restructure our hydrogen supply agreement to exclude natural gas pass-through and turn this into a tonally arrangement. This change has no impact on our profits, but it does reduce company sales as well as sales for our EMEA segment, so we're showing the sales impact in the other line. This change only impacted December, so it will be a larger impact beginning next quarter. Overall reported sales of $2.2 billion were flat but were up 9% excluding the Jisan sale of equipment, the prior year plant sale, and the India contract language change. Excluding Jisan and the plant sale, volumes grew 5%, with positive base volumes up in all three regions and the full-on stream of Luan and Asia. Sequential volumes were down 4%. primarily due to customer-planned maintenance outages and weaker seasonal volumes. Price improved in all three regions for the second consecutive quarter. Merchant pricing rose 3%, which translated to an increase of 1% for the total company. Negative currency was driven by the Chinese RMB, the euro, the India rupee, and the Chilean peso. EBITDA of nearly $800 million improved 8% and was up 12% excluding the prior year plant sale. This improvement was driven by higher volumes, positive pricing, and equity affiliate income partially offset by higher costs and unfavorable currency. EBITDA margin of 35.7% was up 250 basis points compared to prior year. Adjusted earnings per share of $1.86 were up 4% versus prior year and up 9%, excluding the prior year plant sale. ROCE of 12.4% improved 50 basis points versus last year, primarily due to higher profits. Please turn to slide 13. We had non-GAAP items this quarter that totaled 29 cents per share. This included 10 cents for an asset write-off for a government-enforced customer plant shutdown. We continue to negotiate this situation, but do not anticipate additional charges. We also had negative 19 cents from our revised estimates of the Tax Act impact. Our first quarter adjusted continuing operations EPS of $1.86 was up 7 cents per share and up 15 cents excluding the prior year plant sale. Overall, higher volumes increased EPS by 13 cents. Excluding the prior year plant sale, volume contributed 21 cents. Price and raw materials taken together increased EPS by 5 cents. Net cost performance was unfavorable 6 cents as productivity in Asia was offset by higher costs in Americas. Additionally, and as we have said in the past, we continue to see costs associated with our investment in capabilities in our business development, engineering, project execution, and technology areas to drive growth in the future. Currency in foreign exchange was 4 cents unfavorable, primarily due to the Chinese RMB and the euro. Equity affiliate income added $0.03, primarily due to new plants and operational strength in Mexico. The overall tax rate was a $0.03 headwind versus last year, consistent with our expectations. We expect the FY19 tax rate to be in the range of 19% to 20%. Finally, we had other items that combined for a negative $0.01, including higher non-operating income, offset by higher interest expense. Now, please turn to slide 14. We continue to generate strong cash flow. During the last 12 months, we generated almost $11 per share, or $2.3 billion of distributable cash flow, nearly $100 million higher than fiscal year 2018. The $2.3 billion of distributable cash flow allowed us to pay over $900 million, or about 40% as dividends, and still have over $1.4 billion available for high return investments in our core industrial gas business. This strong cash flow enables us to create shareholder value through increasing dividends and capital deployments. Slide number 15 shows our capital deployment progress and is an update of the information we introduced last quarter. Since the start of FY 2018, we have spent about $1.8 billion on M&A and growth projects, excluding maintenance capital. In addition, we have committed but not yet spent almost $6.5 billion on projects in M&A. We continue to focus on managing our debt balance to maintain our current targeted AA2 rating. If we maintain this rating at a debt level of about three times the last 12 months EBITDA, we have over $8.5 billion available to invest today. And based on our last 12 months investable cash flow, we expect to have almost $5.5 billion over the remaining three and three quarter years. Therefore, in total, we have about $14 billion remaining to invest. The almost $2 billion we have spent so far and the $14 billion available gives us a total of almost $16 billion of total available capacity for FY 2018 through FY 2022. You can see we have spent over 10% and committed over half of our total available capacity. Now, to begin the review of our business segment results, I'll turn the call back over to Safie.

Thank you, Scott. Please turn to slide 16, Asia, where we continue to deliver strong sales and profit growth. I was just in Asia last week. and remain very excited about our growth opportunities. We have an excellent and committed team running our business in Asia. At this point, we have not seen any meaningful impact on our business or projects as a result of any trade issues between the United States and China. It will be interesting, however, to see how the Lunar New Year holiday impacts the economy this coming quarter. We remain focused on our business in China and very positive on our long-term growth prospects in China. Sales were 3 percent lower than last year, with 2 percent lower volume and 3 percent unfavorable currency, partially offset by better pricing and higher energy pass-through. Excluding the impact of planned sale last year that Scott mentioned, sales were up 16%. Again, excluding the impact of planned sale last year, volumes were up 17%, with new projects, primarily Luan, driving about 10% of the increase, while the base business and small acquisitions accounted for the rest. Overall for the region, overall pricing for the region was up 1% versus last year, the seventh consecutive quarter of year-on-year price improvement. The merchant business pricing was up 3% with positive pricing across all sub-regions in Asia. The strong volumes and pricing plus favorable productivity increased both profits and margins. EBITDA increased by over 20% and EBITDA margin improved 920 basis points. Excluding prior year plant sale, EBITDA was up more than 30% and margins were up 470 basis points. Sequentially, profits and margins increased due to productivity and the full running rate from Luan. Now I would like to turn the call back over to Scott to discuss our American results.

Thank you, Sefi. Please turn to slide 17 for a review of our America's results. For the quarter, sales grew 9%, with both volume and price up 2%. Higher energy pass-through added 7%, more than offsetting a negative 2% currency effect. Volumes from new plants and North America-based merchant were both positive and overcame weaker Latin America volumes and customer plan maintenance outages negatively impacting hydrogen volumes. Overall, this is the eighth consecutive quarter of volume improvement for the region. The impact of our pricing actions is also gaining momentum as price was up 2%, the best result in three years. Merchant pricing was up 4%. America's EBITDA increased 4% as improved volume and price as well as higher equity affiliate income due to better results in Mexico were partially offset by increased costs. While the team remains focused on driving productivity, we continue to see higher transportation and maintenance costs. EBITDA margin excluding the impact of energy pass-through was up 50 basis points. Sequentially, planned customer maintenance outages negatively impacted both hydrogen volumes and maintenance costs. Excluding the impact of energy pass-through, sequential EBITDA margin was down 130 basis points. Now, I would like to turn the call back over to Simon to discuss our other segments. Simon?

Thank you, Scott. Please turn to slide 18 for a review of our EMEA results. Sales were up 2%, primarily driven by 1% better volumes and 2% higher price. The 6% higher energy pass-through was offset by unfavorable currency and the contract modification in India. As Scott mentioned, this change to a tolling agreement reduces sales and volumes but has no profit impact. Price and volume were both up for the quarter as we continue to see solid demand in the merchant market and positive results from our pricing actions. Merchant price grew 4% for the quarter. We did not see any negative impacts associated with the Brexit uncertainty during this quarter. EBITDA was nearly flat as positive volume and price were offset primarily by negative currency. EBITDA margin was 31.6% down 70 basis points. Excluding the impact of higher energy pass-through, EBITDA margin was up 80 basis points, primarily due to the India plan contract change. Sequentially, volumes were down on seasonality. Price was slightly positive but rounded to flat. The EBITDA decrease was primarily due to currency, and a reduction in equity affiliate income following a seasonally strong fourth quarter in our Italy joint venture. Now, please turn to slide 19 for a brief comment on our global gases segment, which includes our air separation unit sale of equipment business, as well as central industrial gas business costs. Sales and EBITDA declined due to lower project activity as we approached the conclusion of the Giusean ASU sale of equipment project. We continue to expect the GSAN ASU project on stream in phases in fiscal 2019, and as previously communicated, we expect the GSAN ASU overall to be a headwind for FY19 versus FY18. Now, please turn to slide 20 for a brief comment on our corporate segment, which includes our LNG business, our helium container business, and our corporate costs. Sales and profits were about flat compared to prior year, with no significant change in the LNG business. We continue to be optimistic about future prospects for the LNG business, but have not yet seen the industry optimism translate into firm orders. Now, I'm pleased to turn the call back over to Safey for a discussion of our outlook. Thank you, Simon.

As you all know very well, we are living in a very uncertain world today. Air products can't predict or control worldwide political or economic developments. But we do have control over our operational performance and our growth investments. And we are confident we will continue to deliver on the commitments we have made despite the world events. We have not seen any material impact on air products at this point from these global uncertainties, as demonstrated by our results in the first quarter. Our team around the world continues to be very excited about Air Products' future. Our five-point strategic plan provides the framework to drive our success going forward. And our safety, productivity, and operating performance continue to provide the foundation for our continued growth. We have the financial capacity, the opportunities, and the team to successfully win key growth projects. Now, please turn to slide number 21. We are all working hard every day to be the safest, most diverse, and most profitable industrial gas company in the board providing excellent service to our customers. Despite increased economic and political uncertainty, our guidance for the fiscal year 2019 remains unchanged and is in a range of $8.05 to $8.30 per share. And despite currency headwinds, at midpoint, our guidance represents 10% growth over our very strong fiscal year 2018 performance. For quarter two of fiscal year 2019, our earning per share guidance is $1.80 to $1.90, at midpoint, up 8% over last year. We continue to expect our capital expenditure to be in the range of $2.3 to $2.5 billion for fiscal year 2019. And finally, please turn to slide number 22. As always, our real competitive advantage is the commitment and motivation of the great team we have at Air Products. This is what allows us to continue to generate our superior safety and operational performance. I want to thank all of our 16,000 people around the world for their total commitment and hard work and for embracing the opportunities in front of us with energy and a spirit of working together. Now we are delighted to answer your questions.

Thank you. If you would like to ask a question, simply press the star key followed by the digit 1 on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star 1 at this time. We'll pause for a moment. And we'll first hear from Don Carson of CISCO HANA.

Thank you. Good morning, Shafi.

Good morning, Don. How are you doing?

Very well, thank you. You commented that you can't control economic events, obviously, but could you sort of do a walk around the world just in terms of what you're seeing in your base business, given that we're hearing that in many regions industrial production is slowing?

Sure. I start from Asia. We continue to see very good growth in – countries like Korea, Taiwan, Malaysia, Indonesia, all of those countries, India, all of those countries. With respect to China, we have not seen any slowdown yet. The only thing that concerns us, and we are keeping an eye on it, is how is the Lunar New Year in China play out. That means that are people going to take longer shutdowns because of the way that the Chinese New Year is kind of situated calendar-wise, that people will take longer weekends or longer. That is the only thing that we are watching. And quite frankly, that is one of the reasons that, contrary to our usual practice, we have given you a guidance of $0.10 rather than $0.05 spread for this quarter. So that is, as I said, we have not seen any significant slowdown in our business in China, but the Lunar New Year and how it plays can have an effect, and that is why you can say that you're conservative in our guidance for the quarter. The rest of Asia is doing very well, as I said. When we come in Europe, Europe is flat. Again, the concern that we have is what – all of the turmoil with respect to Brexit, what would be the effect in the next few months on the pound exchange rate and also the business in – our business in United Kingdom. As you know, we have a big business there. So that is, again, another reason why we were conservative in our estimate for the second quarter. In the United States, things have not changed since we have talked last time. There is a slowdown of industrial production, but we do not see any material impact on our results, and that is why we are not changing our overall estimate for the year. We do expect a stronger second half than the first half, because of some of the projects and pricing actions that we have taken, and that is why we remain very confident about the guidance that we have given for the year. In addition, I also have to add that things remain very, very negative in Latin America, but that's not a big part of our business.

Okay, and then a quick follow-up. I noticed on slide 13 your price – cost gap narrow considerably. It was only a one cent negative delta versus 14 cents last quarter. So how are you able to narrow that delta specifically on the cost side where it was only a six cent drag this quarter versus 16 cents last quarter?

Well, as you recall in the last call, I was very transparent about my dissatisfaction with our cost performance and So obviously, everybody took that to heart, and we have worked very hard on productivity to improve our cost position. And we hope to see that number improving as we go forward. So we have taken action. Done.

All right. Thank you.

Thank you.

And next, we'll hear from Christopher Parkinson of Credit Suisse.

Thank you. Given the circumstances, your result in Asia was pretty solid. Can you just parse out the key volume drivers outside of Luan, as well as your intermediate term expectations post the New Year? Just that and any quick views on the merchant market, operates, et cetera, would be helpful. Thank you.

Good morning, Chris. Sure. Obviously, Luan was about 10% of the growth. But the rest of the growth, we are reporting Asia results. The rest of the growth is coming from, as I said, China, despite what everybody says, a slowdown, a slowdown, but they are growing at 6.6%. So we see the benefit of that in our merchant business. But in addition, as I said, countries like Korea, Taiwan, Indonesia, Malaysia, they are doing very well, and they contributed to our positive results.

Maybe if I could just add also that this is also an area that we saw good cost improvement, as Safey mentioned earlier, and nice cost performance in the quarter, too.

Thank you. That's helpful. No, perfect. And then also just you mentioned planned refinery outages in North America affecting results, but this was also a theme last year. So regarding the year-on-year comp, can you just comment if the planned downtime was in line with with your initial expectations, and then also just what are your updated views on hydrogen demands intermediate to long-term in the U.S., globally, et cetera? Thank you.

Sure. First of all, the plant outages are totally in line with expectations. These are, you know, as we grow our business and we have more and more hydrogen plants, obviously the turnaround, there are more turnarounds to deal with. But there is nothing out of line. They are all in accordance with our expectation. There is nothing unexpected has happened. With respect to hydrogen demand, obviously a significant driver for our hydrogen demand in the U.S. is how many miles people drive and the gasoline demand. But that continues to remain stable. As for the future, as you know, we have announced – two new hydrogen plants that we are going to build, liquid hydrogen plants. We see significant growth opportunities for liquid hydrogen. And in terms of the so-called gaseous hydrogen, there are projects being discussed in the United States, in the Gulf Coast and other areas that would require significant amount of hydrogen for the production of chemicals, and we will obviously participate on that. So overall, we remain very positive.

Thank you very much.

Thank you.

Next, we'll hear from Robert Cort of Goldman Sachs.

Thanks very much. Good morning.

Good morning, Bob.

How are you doing? I'm doing well, thank you. It strikes me that over the last couple of years, you've moved towards maybe de-risking or improving the stability of the organization by some of the divestitures you've made and then enhancing some of these large gasification projects, and yet your multiple continues to go in the wrong direction. So I'm wondering, can you help frame sort of your competitive advantage and what it means to have such a significant onsite presence and sort of how you see that developing and what it means to the volatility of your business?

Well, Bob, first of all, thank you for your comment. have moved in the direction of stabilizing the business, getting the company focused on the right business, and significantly enhancing our on-site presence because that is a much more stable business. And we have changed our business model to get into syngas production where we see significant opportunity. We do have a lot of cash on hand. We have a very strong balance sheet. and with the acquisition of the technologies from Shell and GE and others, we are in a very strong position to be the leader in gasification, and there are many, many, many, many opportunities. As for the why are multiple, you know, I'm not selling a product stock. I mean, my job is to articulate our strategy and tell our investors what we are doing, and then they will decide I think the market is underestimating our ability to deploy the cash. And I also understand that there is a lot of concern about gasification. It's a new area. There was a lot of concern when we announced Luan about, well, what is this? Do you know how to run gasifiers and all of that? I'm hoping that as we go forward, we demonstrate that we can run these facilities. And as we sign more large deals, which will significantly strengthen our portfolio, that the investors will give us new consideration in time. As I said, my job is not to argue about multiple. My job is to explain and articulate our strategy. And I think in time, the investors will see where we are. as compared to our competitors.

I appreciate that. Can I ask you very briefly on the Shell technology you guys have mentioned, applying that maybe to help solve some of the high sulfur resid streams as companies try to adhere to the IMO 2020 standards? I mean, 2020 is pretty close. Is that something that looks like there's some development there, or is it getting pushed out? Is this a meaningful opportunity or just something maybe on the periphery for that business?

Bob, it is a meaningful opportunity. The best example of that is the $8 billion project that they are doing in Saudi Arabia. That is all about taking the bottom of the refinery and gasifying it and upgrading it because they wouldn't be able to sell that to the market for fueling the ships. So that is the best example. This opportunity is great. There is a great opportunity. The issue is that a lot of people are not taking action because they are hoping that the implementation of IM-020 will be delayed. And as I'm sure you know, there is a lot of lobbying going on by some of the industry in the United States to do that. But in the long term, that is going to be a significant opportunity. Yes.

Great. Thank you.

Thank you, sir.

And next, we'll hear from Jeff Zekalkis of JP Morgan.

Thanks very much. Good morning.

Good morning, Jeff. How are you doing?

Good. In the different slides, you spoke about merchant pricing being up 3% in the Americas, 3% in Asia, 4% in EMEA. But the actual price in the slides for each of the geographic segments is lower. It's 2% in the Americas, 1% in Asia, and 2% in Europe. What accounts for the difference? What's pushing down that price level? And in the overall slide that describes price, it seems that costs are going up faster than price. Is that the right comparison? Or is there a real price benefit and the costs are more internal or having to do with turnarounds or something like that?

I'll have Scott answer the question that you had asked. But on the cost side, The cost side is related to increasing our capabilities. But I'd like, Scott, to answer your first question. Go ahead. Good morning, Jeff.

Thanks for the question. So one of the things we've introduced in the last quarter or so is what we refer to as a merchant-on-merchant price increase and price change. So as you know, Air Products has a large percentage of our portfolio, over 50% in onsites. So when we go through the slides, we'll do price over the entire business. of which two-thirds or so in the U.S. is tonnage. So we felt that's the one for AP and the one for Asian and two for Americas and two for EMA. That's over the total portfolio of those businesses. What we thought would be helpful is to also additionally provide you with a merchant-on-merchant that looks at the price change, in this case increase, total air products at three, Asia three, four, and four for Americas and EMAs, the price increase on the merchant business. So it provides you a little bit more insight as to what's going on on that portion of the business as opposed to spread across the entire company. Hopefully I was clear on that. Is that clear?

Yes, that's clear. And then for my follow-up, is it the case that your pension cost this year will drop about $65 million from $90 to $25 million or so? Yes. When I looked at your income statement, the non-controlling interest was $9.5 million, I think, versus $6.9 last year. And I would have thought the non-controlling interest number would have been larger, given that Luann is now on stream and is quite profitable. Is there something eccentric in the non-controlling interest number?

And what about the pension? Jeff, Scott can address those things. We have talked about that. He has all the details.

Sure. So first on pension, will you expect to have a little bit of a drop this year versus last year on pension, maybe for the year total pension expense? And let me put it that way. Maybe it's like 30 or so from an expense perspective. And by the way, I know, Jeff, you're always interested in the cash flow statement. Our contributions for the pension should be in the same line. So we think non-cash expense versus contribution on the pensions to be about a wash and call it 30 and change. Then in terms of non-controlling interest, you are right that Luann was the biggest part of it, recognizing that we had, I think it was in the third quarter of last year, we had a pure air adjustment. That was a little bit of an anomaly because of the way that that arrangement was canceled. But I think in going forward, we would expect to see – by the way, the other – we also have a venture with a minority position over in Asia as well. So that's going to move around the non-controlling interest. But the biggest item in there is going to be low-end going forward.

Was pension expense $90 million last year?

Bear with me a second. Including a bunch of the non-GAAP stuff that we had in there, I think it was up about that level. So my comments here around kind of the ongoing underlying to be was a little bit lower than that, but an all-in was something in that order.

Okay, great. Thank you so much.

Thank you, Jim.

Next we'll hear from Vincent Andrews of Morgan Stanley.

Thank you, and good morning, everyone. If I could just ask on the price-cost equation, you know, as was mentioned before, you're down to sort of a negative one penny in the fiscal first quarter. Should we anticipate, as we move through the balance of the year, that price is going to exceed cost inflation, or is it going to stay kind of the way things are?

That is our goal, Vincent.

You think you're going to achieve it?

We always want to see the price increase and the cost increase. That is our goal, yes.

Okay. And if I could ask you on the dividend, and I'll preface this by noting that you have almost a 3% yield and you're a dividend aristocrat, but the increase this year was a lot less than the last couple of years, and it's less than sort of the EPS growth that you're anticipating. So I'm just wondering if there's any particular reason the dividend increase wasn't larger.

Yes, we have promised the investors, and we keep our promise, that our dividend will be 2.5% to 3% of the stock price. And we, right now, increase the dividend to be at around 3%. So if next quarter the stock price goes up significantly, which obviously we hope so, then we will increase the dividend. Okay, thank you very much. That is the guiding principle.

Okay, that's very helpful. Thank you.

Thank you.

Steve Byrne of Bank of America.

Yes, thank you. Is it reasonable to assume that the incremental EBITDA margin on Luan is well above 50% and would it have been even better if you had built the gasifier rather than buying it?

Well, Steve, how do you want me to answer that question without... giving a lot of information to our competitors, which is not necessary. Obviously, you are very right. That EBITDA margin on that business is over 50%. Actually, a lot better than 50%.

And safety is what drives the attractiveness of the gasifier, that you have the intellectual property that gives you an edge.

Yes. Absolutely. The fact that we own the technology, we have inherited the people who know what the hell they are doing, and we were able to take over those gadget fires and run them very efficiently, a lot more efficiently than they were otherwise run, and that is why the profitability is higher, because we are creating value for our partners, because we are running that plant very efficiently, and obviously, as a result, we are seeing the good results. Yes, owning the Sheffield technology is by far the biggest competitive advantage that we have, and also the GE technology. That is putting us in two advantages. Number one, we know what we're doing, but number two, owning these technologies is giving us visibility to projects way before everybody knows about it because if somebody is thinking about a project 10 years from now, The first thing they do, as you know, in the feeder study and all of that, they select the technology. Therefore, they talk to us way before they even have a project or announce a project or issue a request for quotation. So we end up having a three-, four-, five-year head start on our competitors.

And this plant that was a forced shutdown in China by the government, Should we assume that was an older plant that didn't have a take-or-pay contract?

That plant that was shut down has nothing to do with gasification, as you know. It's a seed plant. It's a plant that they have been supplying oxygen to since 2005, and that plant was in the middle of a city, so it is not a surprise that in time the city grows, and therefore that plant either has to move or get shut down. So right now, the plant has been shut down. We did have a take-or-pay contract on that, but the take-or-pay contract, obviously, at the end of the day, if the plant is shut down, it's force majeure, and you have to deal with that. But that's not a material part of our business, and in the future, do we have other plants who are in the middle of cities that might be shut down, smaller plants? That can happen, too. Okay, thank you. Sure.

Next, we'll hear from Kevin McCarthy of Vertical Research Partners.

Yes, good morning. Safie, you indicated that you were very confident in your ability to deploy capital into high-return projects. Can you elaborate on that? Is it the case that you've got such a target-rich environment that even if macroeconomics don't cooperate, you've got plenty to choose from on the menu? And then second, can you – Give us an update on the Yongquan gasification project and what the timing of that looks like these days.

Good morning, Kevin. Thank you very much for your good questions. Number one, with respect to opportunities, the opportunities that we are working on, these gasification projects, they are not driven by the economy. They are driven by the strategic decisions. by countries like China, India, Indonesia, Uzbekistan, and all of these other places to become independent of oil. They have the core resources, and they want to convert that to chemicals. So as a result, the reason I'm very confident is because currently we are working on more than 52 of these projects. So if they all materialize, it would require $70 billion of investment. So we are... We have positioned ourselves properly. We have chosen the technology. We have the people, and we are well positioned, and we have the cash to invest. And therefore, that is what makes me confident. And whatever happens to the economy, I think these countries will need to do these projects in order to become independent strategically from oil. So that... With respect to the Yanquan project, that project is a huge project. It's about a $12 billion project. And we are working on that with Yanquan in trying to develop that. There are obviously environmental issues, investment issues, and all of that. And we expect that project to be on a stream somewhere in around 2022. And we will give you an update as we go forward.

And secondly, if I may, Can you talk about the modification of your contract in India? I imagine if you're moving to a tolling arrangement, we should expect your sales to decline and your margins to rise so that there's no net profit impact to your EMEA segment. I guess, A, is that correct? And B, if possible, maybe you can comment on some of those effects in terms of magnitude.

Well, first of all, you are analyzing it absolutely correctly that when it becomes a tolling thing, then the price of natural gas is not put into our sales, and therefore it will reduce our sales but improve our margin with no effect on the bottom line. The reason that that has happened is that our partner in India had found a way that if they do it that way, it is beneficial to them from a tax point of view. And obviously, from our point of view, they still get the same BFC. It doesn't change. But in terms of the optics for the results, you are right. It decreases sales and increases their margins. Is that okay?

Yes, thank you so much.

Thank you.

PJ Juvikar of Citi has our next question.

Yes, hi, good morning.

Good morning, PJ. How are you?

Good. So, Citi, you got good merchant on merchant pricing. Can you just review merchant utilization rates around the world? I think last year you had mentioned that China utilization was close to 90%. Is that still the case? And this good pricing that you saw, Which end markets or which industries were you able to raise prices to?

First of all, if I may just go around the world, China, if you take all of China, the utilization rate is only about 56, 57%. But China is a very big country. There are pockets everywhere. in China, where our utilization is about 90%, 92%, and that is what is giving us the pricing power. Utilization rates in Europe are still at around 75%, 76%, and the same thing is in the United States. But again, even in Europe or in the U.S., there are pockets, as you know, industrial gases, the merchant business is very, very low cost. So we can have a lot of capacity in California, but no capacity in Pennsylvania. So we obviously analyze these things in detail and take action as appropriate. With respect to the end markets, there is no specific end market that is driving this. It is just the utilization of the plant in the specific geography that you are located in.

Okay, thank you. And then secondly, Sethi, you haven't been buying back stock. And I know the preference is to invest in high-return projects. But why not buy back some stock which gives you flexibility to take advantage of any market dislocation?

We are not buying a stock and we don't plan to buy a stock because we think if you do the math that you can do better than I do. If you have projects like Luan to invest, the return for the investors is a lot higher than us going and wasting that cash on giving money to a bunch of people who are going to go away and will not be a longer-term shareholder. So it is a very economic decision. I think people who buy stock are people who have run out of steam in terms of growth, and therefore the only way that they can make shareholders happy is to announce, big stock buyback programs. We have the opportunity to invest our money in projects that in the long term will generate a hell of a lot more value for our shareholders than buying back stock. And as you know, I'm a big shareholder, and I'm very passionate about this because I want to make more money in the long term, not to get cash this afternoon and then disappear.

Very interesting. Thank you.

Thank you.

Next, we'll hear from Duffy Fisher of Barclays.

Yes, good morning, fellas. Good morning, Duffy. Question just on the WAN. Now that it's up and running for three months, how is it running, you know, number one? You know, what lessons learned have you had from that? And then second one is just have you closed the GE deal yet? No.

Your first question, I don't want to jinx ourselves, so I'm going to be knocking on wood a little bit. The Luan project operation is going very well. All four gasifiers are running at capacity. Our customer has the need for the product. Their business is doing very well. They are taking all of the same gas and converting it to chemicals and selling it and making money. So up to now, it has been very positive. I am very, very, very proud of our team down there. We have something like 400 people working on this gasifier and running it every day. And we have, as I have always been telling investors, we know how to run process plants. If you run a hydrogen plant, you should be able to run a gasifier. But I have to say that the acquisition of the Shell technology is And having those people on our team has significantly helped us to be able to do that. So from that point of view, we are doing very well. With respect to the GE, we have closed the GE, yes. Thank you very much.

Thank you, guys.

Thank you.

Next, we'll hear from Jim Sheehan of SunTrust.

Thank you. Good morning. What is your outlook for the LNG business in the second half of the year, please?

Well, Jim, as you know, our LNG business is the kind of business that you either get a big contract or you don't get a big contract. So I don't want to make too much of a prediction here. But the signs are positive. That means that it is possible that we would be awarded some additional contracts. And that is one of the reasons that maybe we are a little bit more optimistic about confirming our results. But these things are not done until they are done. There are a lot of projects on the drawing board, as you know. And if anything happens, we will obviously make appropriate announcements. But I have to say that I'm more optimistic today than I was six months ago.

Great. And in your full year guidance, what are you guys assuming for the corporate segment, please?

In terms of what, Jim?

In terms of your incremental change from fiscal 2018 to 2019, You know, just trying to get some color on how to model the corporate segment.

Well, I think that the corporate segment, in terms of the cost of running the company on a day-to-day basis, our finance department, legal department, IT department, and all of that, you know how we operate. You shouldn't expect much of a change there. I mean, that is going to be a steady with no significant increases. As far as any kind of plant sale that we might have that would show up in that sector, or our LNG business and all of that, I think for your model, assume flat, and then anything that happens would be good news.

Thank you, Sebi.

Thank you.

Our next question comes from John Roberts of UBS.

Thank you. Scott, for the $6.3 billion in commitments on page 15 or the approximate $7 billion on on page 21, whichever one you want. Could you remind us roughly of the pace at which the cash will go out the door against the commitment?

It's going to come in – hi, John. Good morning. It's going to be coming in different methods, so to speak, right? So if it's in – if it's an asset buyback, and then it's going to come in a big check. If it's an organic project, you know, these are large, particularly with the gasification projects, the Spending with curve can be three, four years. And so it will be lumpy, so to speak, driven by the nature of the project itself, whether it's an asset purchase or an organic.

But as a rule of thumb, I think you should assume, you know, this year you're saying we're going to spend about $2.5 billion. I think you should assume that in the next few years that number will go to about $3.5 every year.

Thank you. That's helpful. And then On slide 13, the $0.06 unfavorable cost, Scott talked about a lot of things like technology, engineering, business development. Is that primarily in the Americas gases segment or is a significant part of that over in global gases as well?

It is cost increases related to when we buy shell technology, when we buy – the technology, GE, we get a lot of people. We are pursuing, as I told you, more than 50 gasification projects. So that's another almost 100 people that you have to put in there in order to develop these projects. Those are the costs. In terms of the section where you see that

Scott, that will be in corporate and spread around depending on the nature of these costs that we're building our capability. But, John, the other item is the maintenance, the planned customers outages. So that's in that number as well, and that's largely an America's comment with the planned HICO turns.

Okay. Thank you.

Okay. Thank you.

Next, we'll hear from John McNulty of BMO Capital Markets.

Yeah, good morning. Thanks for taking my question. Sophie, you highlight a big backlog, or at least potential backlog, on gasification projects. And I know in the past you've targeted 10% returns on capital. As you become more evidently the kind of partner of choice, you've got greater experience doing this, you've built up the technology, Do you see risk to the upside in terms of how to think about the returns on capital for future projects, and how should we be thinking about that?

Well, John, we have said that our minimum requirement is 10%. But if we can get a project at 25%, we will do that. So I think your analysis is exactly correct, that as we become the partner of choice, we should be able to command a higher price And obviously, there is other dynamic is that if our competitors are announcing $6 billion share buyback, then I assume they don't have the money to compete in this project, which would put us in a better position.

Great. Thanks very much for the caller.

Thank you.

David Begleiter of Deutsche Bank.

Thank you. Good morning. Good morning, David.

How are you?

Well, thank you. Sebi, just on the merchant pricing in the Americas, the plus 4%, are you seeing competitor support for the pricing? And has there been any impact from the Lindy merger on pricing dynamics in the industry?

Well, first of all, the Lindy merger is not closed, David, as you know. So there is certainly no impact from that. But as you know, in general, competitors, pricing, and so on, I have my lawyer looking at me and saying, don't say anything, considering the nature of the industry. So I apologize for not being able to comment on that. I shouldn't comment on that.

Understood. And just on the guidance for the year of safety, what do you need to do or see happen to get to the upper half of the guidance range for this year?

I think what would help us is, Lunar New Year shutdown in China, which is normal rather than being longer. Stabilization of the discussions on Brexit and making sure that our business in UK doesn't suffer. And a better, hopefully a few orders for the LNG. That would help too.

Thank you very much.

Thank you.

Next, we'll hear from Mike Sassone of KeyBank.

Hey, guys. Nice quarter.

Thank you very much, Mike.

You had mentioned that you feel confident, you know, air products can continue to grow at 10% annually for some time. And you've talked, you know, positively about gasification. Is there a way to help us understand what, of that 10%, how much gasification can support in terms of growth over the next couple of years?

Well, if all of the projects that we are talking about, gasification, actually materialize and we deploy the capital that we are talking about, we will grow a lot better than 10%. If we look at the conventional industrial gas business worldwide and consider that that business will grow with the GDP worldwide, Therefore, you can't expect much more than 3% to 4% growth every year. So when we say 10%, we expect at least 6% from gasification and larger projects. But as I said, if we can actually implement and deploy the capital and have 10 more projects like Luan, then we will grow a lot better than 10%.

Got it. And then as a quick follow-up, if you had your choice, which you probably do when you think about the capital deployment, is it preferable to spend all the capital in gasification versus historical ASUs and maybe talk about that concept going forward.

I'm glad you asked the question. We remain totally committed to our core business. We are going to invest as much as we possibly can in our merchant business, in our standard gas generators, our hydrogen business and all of that. If the gasification is not taking anything away from that, we will be as aggressive and as, you know, enthusiastic in investing in our core business. Gasification is on top of that. But gasification is not going to take away from our focus on our normal business. We are not going to concede any market share anywhere in the world in our log, sling, lor business, our helium business, our hydrogen business, and we will invest in those businesses as appropriate. All we are saying is that those businesses fundamentally are not going to grow much better than GDP, and therefore you need to have another vehicle in order to meet our ambitious goal of delivering more than 10%, and we have found that vehicle to be gasification and very large projects.

Got it. Thank you.

Thank you very much.

Next, we'll hear from Mike Harrison of Seaport Global Securities.

Hi, good morning.

Good morning, Mike. How are you doing?

Doing well, thank you. Safey, we've talked a little bit about the merchant business and you talked a little bit about utilization. I was wondering if you can talk about your approach to merchant capacity in North America. We've seen you announce some merchant ASUs in Ohio, New York, Minnesota. Any details on which end markets or customer dynamics are driving the need for more capacity? And what kind of utilization rates would you expect on those plants once they get up and running?

Well, Mike, that's a very good question. We remain committed, as we have always been, to make sure that our customers have access to competitive products. So the way we approach this thing is that I mean, this is our business every day. When we look at an area and we see that we are operating at 90% and the market is growing, we obviously go and build a merchant plan in order to make sure we can supply the market. And then when we see an area like in Minnesota where there is really very few competitors competing in there, and the market is growing, then it is appropriate for us to go and build a plant. So our approach is focused on meeting the demands of our customers and making sure they have access to product.

All right. And then I was also hoping to get an update on the helium market. I know that you recently announced an agreement with Sonatrack in Algeria. Any comments on the growth or pricing dynamics you're seeing in helium?

Helium is obviously a very rare commodity. There are not that many places where you can produce it. And we are the largest helium producer in the world, so we are very committed, again, to meet the demands of our customers. And therefore, we develop helium opportunities anywhere in the world that we can possibly do. We have been operating in Algeria for many years, and we saw an opportunity to be able to expand on our operation there and to make helium available to our customers. We are very proud that right now, as we speak, we are the only helium producer in the world who has not declared force majeure. I think we are very committed on that to always make sure that we have supply for our customers. So the helium business is growing. There is significant amount of rocket launches that require helium. There is significant amount of growth in medical use for MRI machines. and all of that. And Air Products, as the leader of the helium business worldwide, is committed to make sure that we have product for our customers.

All right. Thanks very much.

Thank you.

Lawrence Alexander of Jefferies has our next question.

Good morning. Just a quick one. Can you give a sense for how much your backlog has gone up, excluding the gasification projects? given the number of announcements that were made during the quarter?

During the quarter, it hasn't gone up that much because we haven't announced too many projects. But overall, the backlog for our standard business is somewhere in the order of about $1.5 billion, and that hasn't changed significantly.

Okay. And for the commitments on the gasification side, Are those at this point basically fixed, or will you have some wiggle room in terms of project financing and other ways to maybe reduce the capital investment or the capital outlay by your products for the sake?

We look at that issue on a project-by-project basis in terms of verities and all of that. So as you know, when we announced the big project in Saudi Arabia, we said that that project is going to be order of magnitude, more than $8 billion. And on that one, we are going to use 40% equity and 60% project financing. So it's very much driven by the specific project and the nature of the project. But when it comes to a project like Juitai in China, where the capital requirement is $700 million, we do that 100% corporate finance. It's very project-driven.

Thank you.

Thank you. We have time for another question. We have significantly run over time, so can we have one other question, please?

Absolutely. Our final question for today will come from Jonas Oxtard of Bernstein.

Morning, guys.

Hi. How are you?

Oh, living the dream every day.

That's great. That's great. That's a good positive attitude.

Thank you. So to go from that positive attitude to a less positive question, perhaps, if we can return to that plant in China that you closed down. And you said the take-or-pay was voided by a force majeure. In the past, when you talked about the gasification plants and the potential risk of China closing down gasification because of coal usage, The answer has always been the take or pays are there to protect us. Was there something unique about this particular one, or how should I think about this in the grander context?

I think the two are not comparable. I mean, the reason that the plant in the Kufang plant was shut down was because it was in the middle of the city. The city is growing, and obviously the steel plant is an old steel plant, and it is not equipped with all of the latest technology. and they didn't have the money to do that, so the government shut them down. The gasification plants that they are building are not in populated areas. They are significant projects which are related to significant $10 billion, $12 billion investment for chemical production and the possibility of those things being shut down. They are actually being built because they are environmentally friendly, so there is really kind of no comparison between the two.

Okay, but if they were to be shut down, then the take-or-pays would be voided.

Well, my friend, it's just like saying that if there is war in Venezuela, they come and take over your plants like it has happened to Exxon before. So those are the kind of things that force majeure works both ways because we want to be protected that in case the government, we have a plant supplying a steel plant and something goes wrong with our plant and they come and say you can't operate, we can't be liable to the customer to kind of supply them oxygen because we are under a force majeure situation. Or when an air compressor blows up in a plant, which we have had situations like that, we declare force majeure so that we don't get sued by the customer for not supplying them oxygen to run their, you know, or hydrogen to run their refinery. So that works both ways. That's kind of a standard in the contracts.

Okay, thank you.

Thank you. Okay, with that, I would like to thank everybody for being on the call. Thanks for taking time from your very busy schedule. And we appreciate your interest in our company. Thank you for the very good questions that allows us to kind of articulate our results. And we look forward to talking to you next quarter with hopefully better results. Thank you very much.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.