Air Products and Chemicals, Inc.

Good morning, everyone. Welcome to Air Products and Chemicals' second quarter earnings release conference call. 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, sir.

Thank you, Alan. Good morning, everyone. Welcome to Air Products' second quarter 2019 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations. I'm pleased to be joined today by Stacey Gassemi, our Chairman, President, and CEO, Scott Krakow, our Executive Vice President and Chief Financial Officer, and Sean 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 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 Sethi.

Thank you, Simon, and good morning to everyone. We appreciate your interest in Air Products and thank you for joining us on our call today. At Air Products, We have a talented, committed, and motivated team who stays focused on serving our customers and creating value for our shareholders every day of the year. This team delivered yet another quarter of very strong safety and financial results. I want to thank all of our 16,000 employees for their hard work, dedication, and contributions. Our quarterly adjusted earnings per share of $1.92 is up 12% and represents the 20th consecutive quarter. I'd like to stress that the 20th consecutive quarter that we have reported year-on-year quarterly EPS growth. This strong result overcame a negative 8 cents currency impact. Our EPS is up 17% on a constant currency basis. We continue to be the safest and most profitable industrial gas company in the world with a record quarterly EBITDA margin above 37%. We remain in a very strong financial and technological position with a business that generates significant cash flow. I remain extremely confident of our ability to deploy this capital into high-return industrial gas projects that will generate significant value for our shareholders while also continuing to return cash to our dividend. Now, please turn to slide number three. All our employees around the world are focused on safety, and as a result, we have improved our lost time injury rate by 83% and our recordable injury rate by 45% since 2014. Slide number four states our long-standing goal. Five years ago, we set the goal to be the safest and most profitable industrial gas company in the world, providing excellent service to our customers. I am very happy and proud to say that we have achieved this goal and are committed to maintaining our position in the years to come. We expanded the goal to include being the most diverse, and that is part of our continuing journey to create a work environment where everyone can achieve their true potential. Slide number five is my management philosophy that I have followed throughout my business career. And we have talked about this many times before, so I don't want to dwell on it. Slide number six shows our five-point plan for air products as we move forward. We are committed to have best-in-class performance to maintain our current leadership position, grow the company by expanding our offering related to our core competencies, continue to change the culture of the company, and most important, to achieve our higher purpose. That higher purpose is to create a company where people feel they belong and their contributions are recognized and valued. A company that is committed to sustainability and supportive of the communities in which we operate. a company that our people want to work for, where they are proud to be part of an innovative process to solve the energy and environmental challenges facing the human race. That is our higher purpose, and we are committed to it. Please turn to slide number seven, which shows the key milestones in our gasification strategy. Let me take the opportunity to provide an update on a few of these exciting projects. As I said last quarter, the Luan project continues to run very well and is contributing to our results as we expected. The Jazan ASU, the main air separation units, were built on budget and on time and they are in the process of being commissioned as we speak. The definitive contract for the Jazan gasifier and power plants, which are very complex contracts, and many of them are being negotiated with Saudi Aramco. And we expect the conclusion of those discussions by the end of calendar 2019. We are continuing our discussion with YK Group for the very large coal to syngas project. This project is still underway, and There are some issues related to the allocation of coal, which is very important for us, but the project has the support of the central government, and we are optimistic that we will have more definitive announcements about the project as we move forward. And for the Juitai project, that project is under construction, with expected on a stream in 2022. In addition to these announced projects, As we have said before, we continue to work on a significant number of very large new gasification opportunities around the world. Now, please go to slide number eight, where you can see the results of our key profitability metrics. We remain committed to our goal of continuing to be the most profitable industrial gas company in the world as measured by each of these metrics. Now, please go to slide number nine, which is always my favorite slide, and particularly this quarter. You can see our record quarterly EBITDA margin of 37.7%, which is up over 1,200 basis points from five years ago. This is a great achievement by the people of Air Products, and all of us are very proud of it. 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, Safey. Now, please turn to slide 10 for a summary of our Q2 results. As Safey said, our team delivered another impressive quarter. Volume added 3%, demonstrating the success of our growth strategies. Price was also up 3%, which is our best performance in over four years. Sales of $2.2 billion were up 1%, as the better volume and price was roughly offset by 4% negative currency and 2% due to a contract change in India. As a reminder, we agreed with a customer in India to convert our hydrogen supply agreement into a tolling arrangement. This change has no impact on our profits, but reduces sales for the company and for our EMEA segment. So we are showing the sales impact in the other line. This change began in December, so the second quarter includes the full quarterly effect. We saw lower sales as we near the end of our successful Jezan sale of equipment project. Excluding this impact, volumes grew 5% due to positive base volumes and additional new plant on-streams, including Luan in Asia. Price was particularly strong across all three regions and across our merchant product lines. Great job by our team as we stay focused on pricing. Currency was again a headwind as the dollar strengthened against all major currencies. EBITDA of $825 million and adjusted earnings per share of $1.92 both improved 12%, driven by the higher volumes and positive pricing, partially offset by unfavorable currency and higher costs. EBITDA margin reached a record 37.7%, up 340 basis points compared to prior year, as a result of higher volume and price, as well as the India contract modification. ROCE of 12.6% improved 80 basis points versus last year, primarily due to higher profits. Sequentially, EBITDA increased 4%. As better results in Americas and EMEA, more than offset reduced Gizan sale of equipment, and lower volumes due to the Lunar New Year holidays in Asia. Please turn to slide 11. Our second quarter GAAP EPS was $1.90 and includes a $5 million one-time pension settlement cost. Our second quarter adjusted EPS of $1.92 was up 12% or 21 cents per share, driven by strong operating performance. Volume, price, and cost together contributed 30 cents. As you see on this slide, the impact of price increases is shown net of the impact of variable cost rate increases, primarily variable production costs such as power and distribution costs in our merchant business. The other cost line refers to fixed cost increases such as personnel and plant maintenance costs. The other cost increase this quarter was driven in part by labor inflation and higher maintenance. And, as we have said previously, we continue to see costs associated with investment in our capabilities to successfully win and execute our growth strategy. Currency and foreign exchange was $0.08 unfavorable, primarily due to the Chinese RMB and the euro. Excluding the unfavorable currency, EPS increased 29 cents, or 17%, over last year. Non-operating items, including interest expense, non-controlling interest, and non-operating income, combined for a negative 1 cent. Our effective tax rate for the quarter was 19.9%, roughly flat compared to prior year. For FY19, we expect an effective tax rate of approximately 20%. Now please turn to slide 12. We continue to generate strong cash flow. During the last 12 months, we generated almost $11 per share, or over $2.4 billion of distributable cash flow. This distributable cash flow allowed us to pay almost $1 billion, or about 40% as dividends to our shareholders, and still have nearly a billion and a half dollars 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 deployment. Slide number 13 updates our capital deployment progress, and we have reformatted the information to hopefully make it more clear for you. As you can see, we now show just over $16 billion of investment capacity available over the five-year period from FY 2018 through FY 2022. This is made up of three components. First is additional debt available today. We will continue to focus on managing our debt balance to maintain our current targeted AA2 ratings. If we maintain this rating at a debt level of about three times the last 12 months EBITDA, we have about $8.7 billion available today. Second, based on LPM investable cash flow, we expect to have over $5 billion between now and the end of FY 2022. Third, we have already deployed almost $2.5 billion on M&A and growth projects. This excludes maintenance cap banks. Today, we have a total of about $7.5 billion of project and M&A commitments with about $6.8 billion remaining to spend on them. So, you can see we have already spent 15% and already committed well 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 Safey.

Thank you, Scott. Please turn to our Asia results on slide number 14. There you can see that our great team in Asia delivered yet another strong set of results. Our China-based business recovered well from the Lunar New Year holiday and continues to show positive growth, and our other strong positions throughout Asia continue to contribute. We remain very focused on our current business and are also very positive about our long-term growth potential in this region. For the quarter, sales were up 12% from last year as a result of positive volume and price more than offsetting negative currency. Volumes increased 12%, primarily driven by new projects. mostly Luan. Overall pricing for the region was up 5% versus last year, the eighth consecutive quarter of year-over-year price improvement. The strong volume and price also favorably impacted both profits and margins. EBITDA increased by 32%, and EBITDA margin improved 700 basis points to a record 47.7%, making Asia our most profitable region. I am very proud of the performance of our team in this region. Now, I would like to turn the call back over to Scott to discuss our America's result. Scott?

Thank you, Sefi. Please turn to slide 15 for a review of our America's results. For the quarter, sales increased 9%, primarily driven by 5% higher volume and 3% higher price. Demand for hydrogen was robust in both the Gulf Coast, which is supported by the new Baytown facility, and Canada. Our base merchant business also continued to grow in North America, while Latin America remains weak. Overall, this is the ninth consecutive quarter of volume improvement for the region. Price contributed a positive 3%, the best performance in over four years. America's EBITDA of almost $400 million increased 10%, and reported EBITDA margins of over 40% were up 60 basis points, primarily driven by higher volumes and pricing. EBITDA margin was up 150 basis points, excluding the impact of higher energy cost pass-through. Earlier this week, we announced a new project for our second ASU for Big River Steel in Arkansas. This new ASU will support Big River Steel's expansion and the local merchant market. And it builds on the success of our first ASU that came on stream a few years ago. 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 16 for our review of our EMEA results. Our EMEA business produced positive operational results this quarter despite limited economic growth as strong pricing offset negative currency. Compared to last year, price improved 3% while volume held firm. We saw a 7% sales impact from unfavorable currency and a 9% sales reduction due to the India contract change. Price improved across all major merchant products and across all sub-regions. The 3% price increase marked the fifth consecutive quarter of year-on-year improvement. Reported EBITDA of $182 million was up 2%, and EBITDA was up 9% on a constant currency basis. Reported EBITDA margin improved 500 basis points. Excluding the India contract change, EBITDA margin was up about 200 basis points. And although we continue to see Brexit as a potential risk to our future results, at this point, we have not seen any significant negative impacts. Now, please turn to slide 17, global gases, 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 our very successful Jezzan ASU sale of equipment project. Please turn to slide 18, corporate segment, which includes LNG and other businesses, as well as our corporate costs. Although this quarter's sales and profit have yet to show improvement, we anticipate a turnaround in the LNG business. We recently announced a major project win to supply our proprietary technology and equipment to the Golden Pass LNG export project in the Gulf Coast. Since this is sale of equipment, where the revenue and profit are booked based on percentage of completion, we expect this project to contribute to our earnings later in calendar 2019. Now, I'm pleased to turn the call back over to Safey for a discussion of our outlook.

Thank you, Simon. Please turn to slide number 19. Almost five years ago, in July of 2014, during my first conference call with the investment community, I promised to grow the company's earning per share by at least 10% annually. As you can see, we have done better than that and achieved 13% cumulative average growth rate over the last five years. We have delivered what we promised and more, thanks to the great team at Air Products. Our goal continues to be to achieving a cumulative average growth rate of at least 10% in the coming years. Now that we are talking about the coming years, we do understand that we live in an uncertain world and we at Air Products cannot influence the war's economic or political developments. But we do have control over what air products can and should do as a company to react to the changing world. We have a strong, capable, and flexible organization which remains focused on productivity and creating our own growth opportunities, which will allow us to continue to deliver on our promises to investors as we go forward. So now, for what we promised this year, please turn to slide number 20. We are increasing our EPS guidance for fiscal year 2019 to a range of $8.15 to $8.30. Despite currency headwinds at the midpoints our guidance represents 10% growth over our very strong fiscal year 2018 performance. For quarter three of fiscal year 2019, our earning per share guidance is $2.10 to $2.15, up 8% to 10% over last year. We have also slightly increased our CapEx forecast to a range of 2.4 to 2.5 billion for fiscal year 2019. Our team around the world continue to be 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 of our continued growth. We have the financial capacity, the technological know-how, and the talent to successfully pursue the exciting opportunities that we see ahead. And finally, please turn to slide number 21. 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 again thank all of our 16,000 employees around the world for their commitment and hard work and for embracing the opportunities in front of us with energy and a spirit of winning together. I am very proud to be part of this winning team. Now, we will be delighted to answer your questions.

Thank you, sir. If you'd like to ask a question, please signal at this time by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question.

We'll pause for just a moment to allow everyone a chance to signal. We'll take our first question from John McNulty with BMO Capital.

Yeah, good morning. Thanks for taking my question. It seems like there's a lot of opportunities in the coal gasification arena. You're certainly highlighting it sounds like a lot of projects that you're at least considering. Can you help us to understand how you prioritize or what some of the bigger priorities are when you're picking a partner for these projects as we think about kind of the future investment for them going forward?

First of all, good morning, John. Very good question. John, we have always said that when we look at these projects, and there are many of them, as you said, the very first thing that we do is make an assessment whether the project is economically viable. That means that if they are making diesel fuel or if they are making olefins, or whatever it is that the end product is going to come out of this project. How is the market for that product? Where is it going to be sold? What are the expected prices? And does the full project make economic sense? That's number one. Once we have satisfied ourselves that that is the case, then the second thing that we focus is on the customer that we are dealing with. Who is actually doing this project? what is their financial strength, what is their status, what is their market position, and all of that. Then, if we have passed the economic test and passed the market test, then, quite honestly, we do the projects unless it is in a very, very, very difficult part of the world, and there are not that many of them. So, the basic message that I have is that we don't look at the projects like, oh, this project is in China, we don't want to do it, or this project is in India. We don't look at that. We look at what is the project and whom is it for. I have said many times, if you give me a project that makes economical sense and it is for Saudi Aramco, we'll do it no matter where it is in the world. So those are the criterias that we follow.

Is that okay, John? Absolutely, no. Thanks for the color. And then I guess... When you look at the projects out there, I think last quarter you'd highlighted there were 50-plus projects out there that you were at least evaluating. What portion of those are projects that are already up and running where the actual producer is saying, you know what, we'd rather outsource this, similar to what we saw with the refining industry back, I don't know, 20, 30 years ago as they started kind of outsourcing the business? So how should we be thinking about that and the opportunities there?

Probably 10% to 20% of them are in that category.

Great. Thanks very much for the caller. Thank you, John.

Next question comes from Christopher Parkinson with Credit Suisse.

Good morning. This is Kieran for Chris. Congratulations on the good quarter. I was wondering if you can discuss the trends that you're seeing in APAC, particularly in China. I mean, are there any key end markets that you're seeing slower accelerate? And then also just regarding this quarter, you know, any impacts you saw from the Lunar New Year and how we should think about, you know, volumes in a sequential kind of basis. Thank you.

Thank you very much. With respect in China, I have said this many times, we don't see any particular weakening in anything. At least, you know, we have exposure to a lot of their businesses. And one of the interesting things about our business that you know very well is that we don't have any in into it. So our performance is instantaneous. Whatever the economy is doing, you see that in our numbers. China is going very well. And the Lunar New Year, China this year, we were very concerned about that. And, you know, that's why we were conservative in our guidance for the quarter. The Chinese New Year, although it fell in between weeks, it went down and came back exactly like every other year. And the economy is doing very well, and we continue to be very optimistic. We are very bullish on China.

Great. Thank you. And then just when I look at your full-year guidance, you know, it implies a very strong fourth quarter, a little bit stronger, I think, than, like, the third quarter. Maybe you can just discuss the key elements that are driving that positive outlook for the fourth quarter and then, you know, for the back half of the year. I'd appreciate it. Thank you.

Sure. First of all, we expect that the pricing momentum that we have seen would continue and actually might become even better than what we have seen before. So that is one thing that keeps us optimistic. The other thing is that Brexit is delayed until October, so we don't expect any significant negative effect on that. The other thing is that our LNG project business, as you notice, it's not contributing anything. But we did win a very big project, Golden Pass in Texas. And since with that project, we start getting paid as soon as we start working on it. We expect some contribution from that. And the fourth thing is that we expect that the effect of negative currency to be a little bit better. So, and... you put all of that together, that is what makes us optimistic that we would be able to meet the higher end of, or at least our goal is to meet the higher end of our forecast, which is 8.3.

Great. Thank you very much. Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank. Thank you.

Thank you. Good morning, Casey.

Hi, how are you?

Good. Good, thank you. Just on the merchant pricing, can you go through the merchant price gains you realized in each of the three major regions?

Well, David, you know our business better than anybody. You know that half of our business is on-site and there is not a lot of price increase in that. So as a rule of thumb, you can take the numbers that we have given you for each region and multiply it by two. and you end up with what we achieved in the merchant business. And you see that it is strong. It's 7%, 8%, 11% in the different regions.

Excellent. And just on the YK project, Sethi, any concerns on your part given the elongated timeline to finalize the details here?

No, I don't have any concern. That project is a project that has a strong support of the Central government, the central government wants that to happen. The issue is the allocation of coal to that project. That is a very important issue for us because we don't want to do any big classification project when the source of coal is not 100% guaranteed. I mean, YK is a big coal company, but they need to get allocation of the coal. So the negotiations with that is taking longer than what we expected, but I fully expect that project to go forward. The timing might be a little bit different than what we expect today, but I think that that is a good project. It makes a lot of sense, and it will eventually happen.

Thank you very much.

Thank you, David.

Next we'll go to Duffy Fisher with Barclays.

Morning, guys. This is actually Mike Leathead on for Duffy this morning. I guess to follow up on the pricing dynamics, a nice acceleration this quarter. I was hoping you could maybe give a sense of where you think merchant operating rates are today, particularly in North America and Asia.

Sure. North America operating rates are in about mid-70s. The operating rates in Europe are around in low 80s. And the operating rate in the areas that do operate in Asia is about in mid-80s.

Great. And then on the LNG market, it seems like activity and optimism is starting to pick up in that area. I was hoping you could maybe characterize, outside of the project you just signed, whether you think overall market dynamics will start to be a tailwind as we get to the back half of this year, or maybe that's closer to a 2020 event.

Well, in 2019, our fiscal year ends at the end of September. So we will have a positive impact from the Golden Pass project, but that's not going to be huge. But as we go forward, we are very optimistic about that business. As you know, that business used to make us $150 million of EBITDA a year, and today it's making nothing. So we think that in time, we will get to that $150 million rate in the next three, four years. We are very optimistic about the LNG business. That's why we never considered divesting of it. We have a huge technological advantage. Almost 75% of all the large LNG projects use our technology, and we see many of them happening in the U.S. and around the world. So we expect a very positive future for that business.

Great. Thank you. Thank you. Our next question comes from the line of Jeff Sikowskis with J.P. Morgan.

Hi. Good morning, Sandy. How are you today?

Good morning, Jeff. I'm very fine. Thank you very much.

Good. The EBITDA margin in Asia is now roughly 48%, and maybe a year ago it was 38%. Is the difference in the margin the Luan project, essentially?

No. The effect is a significant amount of that is also Luan is obviously affecting it, but there is obviously the fact that they have gotten significant pricing. I mean, our merchant pricing in the last quarter was 11% ahead of last year. So that is a very positive contributor. And besides that, our people there are doing a good job in productivity and keeping their costs under control. So overall, as I said, I'm very proud of what they have done and that I'm optimistic that we will be able to maintain that kind of a margin as we go forward.

For the Josanne gasifier in the PowerJV, I think you said earlier in the call that you're trying to negotiate the final terms by the end of the year. If you successfully negotiate those terms, when would that project begin to affect your income statement?

If we successfully complete the negotiations by the end of the year and financially close, that project will contribute in 2019, and then obviously 2020, and then the big impact will be 2021. But it will definitely impact 2019. If it's completed by the end of fiscal year this year.

Yes. Okay, good. Thank you so much. Now we'll go to John Roberts with UBS.

Thank you. Pricing was largely offset by foreign exchange. I guess in one sense you could say that pricing in dollar terms was roughly flat year over year. Do you think pricing and currency are completely unrelated, or do you think the exchange rates are giving you a little bit more ability to price in local currency?

The currency has nothing to do with it. Our business is absolutely local, and whether the dollar is up or down, it has no effect on our ability to increase or lower prices in different parts of the world. This is not like crude oil or anything like that. So it is totally independent, John.

Okay. Okay. And then I know it's too early to have a CapEx budget for 2020, but since we're halfway through fiscal 19, at this point, do you know whether 2020 will be up or stable with the 2019 CapEx budget?

No, I expect our 2020 CapEx will be probably north of $3 billion.

Got it. Thank you.

Thank you.

Let's go to Jim Sheehan with SunTrust. Good morning, Sethi.

Can you comment on the ACP Europe acquisition, about how much should you pay for that, and how much earnings contribution will it represent?

Good morning, Jim. The amount that we paid for that, I think we have disclosed that it's more than $100 million. And obviously, the rule of thumb that we always tell you, if you spend $100 million, that should give us an operating income of $10 million.

Thank you, Safey. Thank you. Now we'll go to Robert Court with Goldman Sachs. Thank you. Good morning. Good morning, Tom. How are you?

I'm well, thanks. Safey, you mentioned I want to talk about gasification a bit, about how you prioritize your project load there. And I guess if we look at break-even levels for gasification, maybe making glycol or olefins or fertilizer, you know, we're easily there. When Brent starts to get up in the $75 range, then maybe coal to fuels or coal to synthetic natural gas comes in play. In that project portfolio that you're pursuing, are you seeing greater interest in those maybe higher break-even type applications of gasification?

Yes.

And are those exclusively in China or are they more broad globally? Yeah.

As the price of oil goes up, the number of projects that become viable obviously becomes bigger. Sure, you're right on that.

Can I ask you on the decap side, I think there's been, you know, over the last couple of years, there's been some shareholder frustration expressed about deploying that capital, and now you're starting to do that more aggressively. Is there a decap opportunity here in gasification? I know Shell, when they own the business, certainly advertised the process improvements they've made over time, the history and portfolio of gas fires they have in operation gave them an advantage. Is there an ability to go speak to existing gasifiers and suggest you can operate them better with improvements in technology, or what would be the selling points that you'd make to an existing gasification customer to maybe let you take that off their hands and operate it?

Well, Bob, I mean, you are exactly accurate in terms of the kind of argument we will use, and quite frankly, the very best example of what you just said is the IGCC project in Saudi Arabia, the Jazan project that you're talking about. We went to Saudi Aramco and said that we have improvements in the shell technology, and they are using the shell technology for gasifying the bottom of the refinery, and that is a you know, asset buyback. So that is an ideal example of what you're talking about. And there are others like that that obviously we are pursuing.

Terrific. Thank you, Sagi. Thank you. Now we'll go to Vincent Andrews with Morgan Stanley.

Hi, this is Andrew Casillo on for Vincent. Thanks for taking my call on my question. Can you guys hear me?

Yes, we can hear you. Thank you.

Good morning. So just a quick question around the gasification projects. So with the explosion that happened in the fertilizer plant in China, I was wondering, has anything changed in terms of the number of projects that you're seeing? Obviously, you're very bullish on that, but maybe you can give us an update on that 50-plus project number that you mentioned earlier and just how that explosion is impacting that number.

Well, first of all, that explosion has nothing to do with what we are doing. It has no impact.

I guess I mean just more from a regulatory perspective in terms of, you know, I guess new projects, whether it's an oil defense or anything else, just I guess you're not seeing any impact from that is what you're saying? That's correct, sir. Okay. And then maybe just a quick follow-up just on the CAPEX. I was wondering if you could give us some color as to, like, what drove that increase in the CAPEX for 2019? Okay.

In 2019, I think, Scott, can I answer that? Sure. I think you're referring to taking up the bottom of the range from $2 billion to $2 billion. It's just as we're halfway through the year, better estimates of the spending and some other smaller projects that we're spending on.

That's all. Great. And then if I may, just one quick follow-up as well on your abundance. Obviously, you had a tough concert last year. But as I look at the next couple quarters, just curious as to your performance, What will you view volume there going for the next couple quarters?

I'm not sure quite how to answer the question.

Just what your expectations in volume are for Europe, essentially, for the coming quarters.

For just Europe or for everywhere else? For Europe. For Europe, we expect the run rate to continue. We are not, as I said, with the Brexit delay, we are not concerned about volumes in Europe, and we remain positive about pricing in Europe.

Okay. Thank you.

Next question comes from the line of Don Carson with Susquehanna Financial. Good morning, Saifi.

Hi, Don.

How are you doing this day?

Very good. Thank you. I want to go to your favorite slide, slide number nine, new record on EBITDA margin 37.7. How much of that was due to – what's the impact of that India conversion to tolling on that? And I assume that most of your upward momentum in EBITDA margin is due to price. So are we at an inflection point in pricing here? Traditionally, you didn't get pricing in this industry until you were well into the 80s, but you seem to be getting pricing earlier. So I guess the final question is, you used to think 35% EBITDA margin was kind of a normalized level. So is 37, 38 the new normal?

Okay. Thanks for your question. The number one is that the effect of the – it's about 80 basis points. Okay. In terms of the – that's number one. The second thing is that with respect to – Where would the EBITDA margin be? I've always told people from way back that when you are modeling your products, model an EBITDA margin of 35 to 36%. And I would still suggest that. You know, we did do very well this quarter. We'll see what the next quarter brings. But I don't want to start kind of predicting that we will hit 37.7% every quarter. But I think it is safe to assume that we will be around 35% on average.

And on pricing, do you think we're at an inflection point here where the kind of improvement you've seen in merchant pricing is sustainable? Again, you seem to be getting the pricing at lower rates than you historically needed to get pricing.

Don, I heard your question and I was trying to get it, maybe not answering it. You know that we don't like to make any comments on pricing considering the nature of our industry. So you need to let me off the hook on that one.

All right. Will do.

Okay. Thank you.

Thank you.

Now we'll go to Steve Byrne with Bank of America.

Yes, thank you. For these large coal gasification projects that are now in your backlog, what fraction of that total installed equipment would you say is going to be fabricated at one of your locations versus field fabrication? And do you expect that shift to change over time as you get more and more of these projects under your belt and be able to develop more of a capability to fabricate at a central location and lower your capital costs, time to erect, and competitiveness?

Let me answer them one at a time. With respect to these coal gasifications, the part that we make ourselves is the air separation unit, the main coal boxes. Those coal boxes are manufactured right now exclusively, mostly in China. So as we expand, we have expanded our operation in China, in Kaohsiung, south of Shanghai. As we expand, we continue to expand that facility, and if we get to a stage that we need additional capacity, we know where to go. So that is, with the rest of these coal gasification facilities, we do not manufacture them ourselves. A lot of them are engineered and designed and built at the drop sites. and they are prefabricated at different locations and brought together and assembled together like an erector set. So there is no kind of constraint on our ability to manufacture these things.

Well, just like some furnaces are fabricated and then shipped to a job site, could you anticipate the gasifier units being moved in that direction and ultimately reducing the the total capital cost for these projects?

Well, the capital cost for these projects, depending on where they are, can significantly be reduced if you break down the projects like we did in Jazan and prefabricate them at the most cost-effective area. When you look at Jazan, and hopefully we can show you a movie of it one time, you see that it was like an erector set. We had a 450-ton unit of all of the piping manufactured actually in China, which was the lowest cost, and then it was shipped and then put together with the rest of the plant. So we did not do a lot of the cutting and building and all of that in Jazan, which would have been very expensive. So that is what you do in terms of trying to reduce the cost. The air separation part, which is about usually on these big projects, the air separation part is about 10% of the cost. That one, we manufacture it in several pieces in Kaohsiung and then ship it to the job site and put it together.

Okay, and just lastly, out of your 16,000 employees, what fraction would you say are involved in engineering and construction?

About more than 20%.

Thank you.

On engineering, the construction, the actual construction, when we are building a plant like Jazan, we have construction supervision people. And just to give you a number, for Jazan, when we were building it, we had about 200 of our people supervising it. But the number of people who are actually building the plant, there's 6,000. Those people, we hire locally for the project. They are not permanent employees.

Understood. Thank you.

Out of the 16,000, about 20% are dedicated engineering and project management people that we have, and they are long-term employees of Air Products, and we are very proud of them.

Very good. Thank you.

Thank you.

Next, we'll go to Kevin McCarthy with Vertical Research Partners.

Good morning.

Good morning, Kevin.

Stacey, I was wondering if you could comment on the nature and level of competitive intensity in the gasification arena specifically. Anecdotally, it would seem that some of your competitors have a different strategy in terms of their focus. I'm curious, if you survey your 50-plus projects there, How often are you running into the other global majors, and to what degree is the customer a source of competition in a sense for you?

Well, you know, you're asking me a very difficult question. I don't know how to answer that because I obviously am in no position to speak for our competitors.

If their strategy is that they are not competitive,

optimistic about these projects, I hope they continue to follow that strategy. But I really cannot comment on behalf of our customers that when they are dealing with us, how many other people they are talking and all of that. We always behave as if we have competition. And we try to give the very best offer that we can to our customers. So, I mean, that's the extent that I want to comment on this.

Okay, thank you very much.

Thank you, Jack.

Next we'll go to P.J. Juvicar with Didi. Yes, hi, good morning.

Morning, P.J., how are you doing?

I'm doing well, Shafiq. You know, a question on crude chemicals projects that are being discussed around the world. Do you have any technology there similar to your gasification technology? And if not, they will still consume a lot of gases. So what are you seeing or hearing about, you know, requests of bids for ASUs for those projects?

Well, I think on all of those projects, people would be looking for bids for ASUs. We are trying to differentiate ourselves by making an offer to the customer that we provide you not only the ASU but also the gasification. and therefore a different package rather than just competing for the ASU, which most of the time, if the customer wants to buy the ASUs by themselves, they usually do its sale of equipment rather than sale of gas. And as you see, most of the current existing gasifiers in China, which there are many, have all been sale of equipment. So we are trying to differentiate ourselves by – giving a bigger package. But if the customer insists that, no, I just want the bid for the air suppression unit, we usually, depending on who the customer is, we usually give them a bid because, yeah, we'd be happy to build the air suppression unit. But we are trying to differentiate ourselves by giving a bigger package to the customer.

Okay, thank you. And a question on Europe. You know, your pricing has lagged there in the past. Now you're getting some solid 6% merchant pricing. And I know in the past you walked away from some low margin businesses in Europe. What are you seeing from new players that were created recently in merchant business in Europe? And there's also a new merchant player in the US. What kind of behavior are you seeing from them?

It's too soon for us to comment on that, quite honestly. We usually don't comment on that anyway. But These people have been in business for a few months, so it's very difficult to make an assessment on that. But you said the key thing, PJ, and I said this publicly in February at a conference. The reason we are getting the pricing is because we are willing to walk away from volume. That is the key thing, that we are saying that our costs have gone up and all of that. This is the price of our product. If the customer wants to go buy it from somebody else, they can. And the willingness... To walk away from low-margin business is what is giving us the ability to increase the prices. Otherwise, we will never increase prices.

So that is a different strategy for us. That's exactly right. Great. Thank you. Thank you. All right. We'll next go to Mike Sisson with KeyBank.

Hey, guys. Nice quarter.

Thank you.

Thank you very much.

Thank you, Winnie. When you think about your 10% growth, EPS growth goal, you've got, you know, Gazan, Gasifier coming on next year and looks like four projects on that one slide. Could 2020 be, you know, given those projects coming on, could 2020 be a year where you maybe outpace that goal?

Well, we always say that we always promise what we can deliver and usually deliver more than what we promise. So, I don't want to get ahead of myself, but I hope what you're saying would turn out to be true.

Got it. And then just one quick one on Asia. Again, margins, very good. Actually, pretty sweet. Then if you think about the second half of the year, do you think you can sustain that level? And then what kind of impacts that margin going forward, given 48% is a pretty impressive level?

Well, thank you for saying that, by the way. I expect our EBITDA margins in Asia to continue to be at around those numbers.

Okay, great. Thank you. Thank you. He's not screwing around this morning.

And once again, that's Star 1 if you'd like to ask a question. We'll next go to Mike Harrison with Seaport Global Source Securities.

Hi, good morning.

Good morning.

I wanted to go at the pricing question a little bit differently. I wanted to ask specifically about China. Can you comment on what you're seeing in Loxlin supply and demand dynamics in the areas that you play in China? I'm just trying to get a sense of how sustainable the pricing momentum could be there.

As I mentioned before, the operating rates in the regions that we operate in China is getting to around mid-80s. And when you get to mid-80s, then you do have pricing power. So our lock-sling pricing has been going up. And if the economy stays the way it is and the operating rate stays the way it is, which I think it will because nobody is building a brand new plant right away, so I expect that we would continue to have good momentum.

All right, and then I was also wondering about you, in your appendix there, you have a number of projects that were listed as starting up during the first quarter of fiscal 19, two of them in Korea, two of them in the U.S. I was just wondering, did we see a full contribution from all four of those projects during the fiscal second quarter, or are some of them still ramping up?

Yes, we did. Okay, thank you very much. Thank you. My next question comes from the line of Jonas Oxgaard with Bernstein.

Good morning, guys. Good morning. I was wondering, you had some pretty hefty currency headwinds there, but do you get any currency tailwinds on the CapEx side from this?

Well, you are very right. Yes, to some extent we do. I mean, the the dollar content of a lot of the projects that we make is not that huge, but we do get a tailwind from that. You're right.

Yes. And is that reflected in your guidance? Can you help me size the impact and how that's reflected in your guidance? Sorry, I should rephrase that.

You see, the fact that the capital cost of the project will go down a little bit, that is minute, it's not material to our numbers. As we go forward, we expect the headwind on the currency to subside a little bit, then you go quarter by quarter. So, as Scott was just telling me before the call, we expect that for next quarter, the headwind will be less than the eight cents, and hopefully for the quarter after that, less than that. Obviously, none of us can predict what will happen to the currencies and all of that. But if the currency rates stay about the same, we should have not as much of a headwind in the third quarter. But Scott can amplify on that.

Sure. Thanks, Dave. You just want to build on it. As we've said, we've got $0.08 unfavorable here in this quarter. For the year, our projection is maybe it's $0.15 to $0.20 headwind. And just as a reminder, the way that we look at this is when we come out of the quarter, we don't try to project where rates are going to go. We just hold them steady to where they are. And when you compare, then, the third quarter versus prior year third quarter, and the fourth quarter versus prior year fourth quarter, we don't see, as Sepi just mentioned, we don't see the third quarter to be as much as $0.08, down a little bit, and then even less in the fourth quarter. Not because we're projecting a change in the exchange rate, but rather just where were rates last year. Okay, so I just want to get grounded. And again, as was mentioned earlier in the call, we're talking all translations. There's no economic impact. It's just math bringing it back. So I just figured I'd take it through. And lastly, since I'm on the subject, we've given sensitivities in the past around swings in currencies of 10%. For the RMB, on an annual basis, a swing of 10% would be about $0.12. For the euro, a swing of 10% would be about $0.09. And then there's a basket of other currencies, like the pound, Korean won. Taiwanese dollar and the Canadian dollar, each, if you move them by 10%, it's about 3 to 4 cents each. And what I've just given you there is roughly, when you throw in the U.S. dollar sales, approach at 85, 90% of the company. So I just figured I'd take you through some of those numbers.

Oh, I appreciate that. As a follow-up, though, the take-or-pays that you're signing, do you usually sign them in dollars or local currency?

It depends where it is. In some countries, it's in local currency. In some countries, it's in dollar terms, depending on the country and how we feel about the customer and expectations of currency.

Okay. And if you take China coal as the biggest one that swings the future?

In China, the contracts that we have are in Renminbi, in local China. Okay.

Okay, thank you very much. Thank you. Our next question comes from the line of Lawrence Alexander with Jefferies.

Hi, guys. This is Dan Lozon for Lawrence. I'm sorry if I missed this, but did you quantify the backlog and how it has changed this quarter?

Simon, since you've prepared this slide, do you want to make any comments?

Sure. As we said, our total project Our total project commitments are about $7.5 billion. I think that's up from around $7 billion last time. And, again, just to be clear on that, that's the total value of the commitments we have. What we have remaining to spend on those is about $6.8 billion.

Okay. Sorry, I missed that. And then just one other question. Could the gasification business evolve to where we see a large take of pay arrangers rather than the JVs in some regions?

Well, yes. Right now, the gasification projects, some of them is JVs, and some of them is 100% ourselves, like Judah. Is that the question?

If I could just add, they're all take or pay. Yeah, yes. So just to be clear about that.

Yeah, whether it's JV or not, it's all take or pay. All right. Thank you, guys. Thank you. And one last time, that is star one, if you'd like to ask a question. Okay.

Well, we have run over the time, and since there are no other questions, I would like to thank everybody for being on our call. Thanks for taking time from your busy schedule to listen to our presentation. We appreciate your interest, and we look forward to discussing our results with you again next quarter. Have a very nice day, and all the very best. Thank you again.

And that does conclude today's call. We thank everyone again for their participation.