Air Products and Chemicals, Inc.

Good morning and welcome to the Air Products and Chemicals Third 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.

Thank you, Eduardo. Good morning, everyone. Welcome to Air Products Third Quarter 2019 Earnings Results Teleconference. This is Simon Moore, Vice President of Investor Relations. I'm pleased to be joined today by Sefi Ghasemi, 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 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 Safie.

Thank you, Simon, and good morning to everyone. We certainly do appreciate your interest in air products, and we thank you for taking time from your busy schedule to join us on this call. At Air Products, we have a great team of talented, committed, and motivated people who will stay focused on serving our customers and creating value for our shareholders every single day. This team delivered yet another quarter of very strong results. I want to thank all of our 16,000 employees for their hard work and dedication. Our quarterly adjusted earning per share is a record $2.17 per share, 11% higher than the last year, and 14% higher at constant exchange rates. This is the 21st, I'd like to repeat, the 21st consecutive quarter that we have reported higher results compared to the previous year. We continue to maintain our position as the safest and most profitable industrial gas company in the world. Our EBITDA margin this quarter was a record 40%, which is 1,500 basis points higher than five years ago. We remain in an extremely strong financial and technology position with a business that generates significant cash flow. Each quarter, my confidence increases in 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 shareholders through our dividends. Now please turn to slide number three. In terms of safety, our goal has always been zero accidents and zero incidents. We are pleased that we have improved our Rothstein injury rate by 72% and our recordable injury rate by 31% since 2014. But none of us can be satisfied until and unless we reach zero accidents. Even one accident is too many. Now please turn to slide number four that states our long-term 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. We are very proud of achieving this goal and are committed to maintaining our leadership position in the years to come. Our goal has also been extended to include being the most diverse. That means we are an inclusive company where we welcome the contribution of all people. Now turn to slide number five which is my management philosophy that has guided me throughout my business career. That is, focus on cash generation and responsible capital allocation. Now please turn to slide number six, which is our five-point plan for moving forward. We have shared this with you many times before. In summary, we are focused on cost and productivity to maintain our industry-leading margins. We are poised for growth by expanding on our core competencies and financial strength, and we are very focused on promoting a higher purpose for the company in addition to creating value for the shareholders. We are committed to create a company where all of the people feel they belong. A company where people's contributions are recognized and rewarded. A company that is committed to sustainability and the environment. A company that is supportive of the communities in which we operate. A company that people want to work for, where they are proud to be part of the innovative process to solve the world's energy and environmental challenges. That is our higher purpose, and we are committed to that. Now please turn to slide number seven, which shows the key milestones in our gasification strategy. Let's take the opportunity to provide an update on a few of these exciting projects. As expected, the Luan project continues to run very well and contribute to our results. The Jazan air separation units were built on budget and on time with excellent safety performance. We continue to work toward financial closing of the Jazan gasifier and power project by the end of this calendar year. We are continuing our discussion with the YK Group for the very large coal-to-sink gas project, and the Juitai project is going well with expected on-streaming Building on this momentum, we just announced the completion of an asset buyback arrangement with Jinmai, a leading coal chemical company in China. We purchased two ASUs previously owned by Jinmai and entered into a long-term contract to supply oxygen and nitrogen for the customer's coal-to-clean fuel project in Shanxi Province. This project is another great example of the customers' increased confidence in outsourcing their industrial gases. In addition to these announced projects, we continue to work on a number of existing 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. And now, please go to slide number nine, which is always my favorite slide, and even more so this quarter. You can see our record quarterly EBITDA margin of 40.1%. up 1,500 basis points from five years ago. This is a tremendous achievement by the people of our 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 our results in detail. Scott?

Thank you very much, Seyfi. Now, please turn to slide 10 for a summary of our third quarter results. As Sepi said, our business continues to perform very well. Price was up 4%, with strong performance across the regions and products, continuing the positive trend we saw last quarter. Volume added another 2%, primarily driven by new plants, including Luan. Sales of $2.2 billion were down 2%, as the positive volume and price were more than offset by 4% negative currency and a 3% impact from a contract modification. As I mentioned on past calls, this India contract modification reduces sales but has no impact on our profits. Our underlying volume was positive, but was partially offset by lower sales from the Jezan sale of equipment project, as that project nears completion, and from a prior year contract termination for an old flue gas desulphurization plant. Excluding Jezan, volumes grew 4% due to new plants, base business growth, and acquisitions. We continue to see strong pricing in all three regions and across our merchant product lines. Our team has worked very hard to realize the value we provide to our customers, and I want to thank the team for a job well done. Although unfavorable currency persisted, both EBITDA and adjusted earnings per share reached new highs. EBITDA of $892 million improved 9%, and adjusted earnings per share of $2.17 was 11% higher. EBITDA margin of over 40% is another record high, up almost 400 basis points compared to prior year, primarily from the higher price and the India contract modification. ROCE of 12.7% improved 50 basis points versus last year, primarily due to higher profits. Sequentially, EBITDA increased 8% as all three regions improved, particularly Asia following Lunar New Year in Q2. Please turn to slide 11. Our third quarter GAAP EPS was $2.20 and includes three one-time items which totaled a positive $0.03 per share impact. You can find more details in our press release and appendix slides. Our third quarter adjusted EPS of $2.17 was up 11%, or 22 cents per share. Volume, price, and cost together contributed 24 cents, repeating the strong operating performance from last quarter. As a reminder, the impact of price increases is shown net of the impact of variable costs. primarily variable production costs, such as power and distribution costs, in our merchant business. The other cost line refers to fixed costs, such as personnel and plant maintenance costs. It increased slightly this quarter versus prior year, but is less of a headwind than in recent quarters. Currency and foreign exchange was five cents unfavorable, primarily due to the Chinese RMB and the euro. Excluding the unfavorable currency, EPS increased 27 cents, or 14% over last year. Non-operating items, including tax rate and non-operating income combined, added 3 cents. Our effective tax rate for the quarter was 18.6%. For the full fiscal year, 2019, we expect an effective tax rate of between 19 and 20%. Now, please turn to slide 12. We continued to generate strong cash flow. During the last 12 months, we generated about $11.50 per share, or over $2.5 billion of distributable cash flow. From this distributable cash flow, we paid almost $1 billion, or about 40% as dividends, to our shareholders, and still have nearly $1.6 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 deployment. Slide number 13 provides an update on our capital deployment progress. As you can see, we now show almost $17 billion of investment capacity available over the five-year period from FY18 through FY22. As expected, the total capacity continues to grow as we increase EBITDA. The almost $17 billion includes about $9 billion of additional debt capacity available today, over $5 billion of investable cash flow between now and the end of FY22, and almost $3 billion already spent. We will continue to focus on managing our debt balance to maintain our current targeted AA2 rating. Today we have a total of about $7.7 billion of project and M&A commitments with about $6.7 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 Safie.

Thank you, Scott. Please turn to our Asia results on slide number 14. There you can see that our business has recovered strongly following the Lunar New Year holiday, and our great team in Asia delivered yet another strong set of results. We remain very positive, and I like to stress very positive about our long-term growth potential as we continue to invest in this region. While there has been some modest reduction in the reported growth rate of Chinese economy, we have not seen, as I said, we have not seen any significant impact on our business. And most importantly, we have not seen any change in behavior towards air products from our customers or the government of China. we continue to be very optimistic about our operations in China. For the quarter, sales were up 9% from last year, with volume and price together up 15%. Volumes increased 10%, primarily driven by new projects, mostly Luan. As a reminder, Luan started up late in quarter three of last year and continues to perform very well. Overall, pricing for the region was up 5% versus last year, the ninth consecutive quarter of year-over-year price improvement. Price was positive across all major product lines and key countries. The strong volume and price combined with productivity drove higher profits and margin. EBITDA increased 24%, and EBITDA margin expanded nearly 600 basis points to more than 49%, which is another record level. Sequentially, volume and EBITDA improved 8% and 12% respectively, benefiting from a strong recovery from the Lunar New Year holidays and new planned startups. In addition to the asset buyback I mentioned earlier, We have recently announced two contract awards in Korea, one from MEMC to provide industrial gases for its new 300-millimeter wafer fab, and the other from POSCO Chemical to supply oxygen and nitrogen for its new cathode material manufacturing complex. Great examples of our team earning the confidence of important customers. Now I would like to turn the call back over to Scott to discuss our America's results. Scott? Thank you, Sethi.

Please turn to slide 15 for a review of America's results. America's pricing success continued. The 4% improvement represents our best performance in at least four years. Overall sales were up 1% as higher price was partially offset by 1% lower energy pass-through and 2% unfavorable currency impact. Underlying volumes grew 1%, but were offset by the prior year contract termination I mentioned previously. Record EBITDA of $410 million increased 7%, and EBITDA margin of 43% was up 270 basis points, primarily driven by higher pricing. Sequentially, EBITDA margin improved 270 basis points, or 100 basis points, excluding the impact of lower energy pass-through. Now, I'd like to turn the call back over to Simon to discuss our other segments. Simon? Thank you, Scott.

Please turn to slide 16 for a review of our EMEA results. We continue to show positive operational results despite limited economic growth. Price increased 4% with improvement across all major products and subregions. The EMEA team has now delivered six consecutive quarters of year-on-year price improvement. Volume was up 2%, primarily driven by the acquisition of a CO2 producer, while base business volume remained stable as positive retail volumes were offset by lower wholesale volumes. Sales were negatively impacted by 2% lower energy pass-through, 5% unfavorable currency, and an 11% sales reduction due to the India contract change that Scott mentioned. Reported EBITDA of $190 million was up 2% and was up 7% on a constant currency basis. Reported EBITDA margin improved 520 basis points to reach a new high of over 38%. Excluding the India contract change, EBITDA margin was up about 100 basis points. Sequentially, volumes were higher on better merchant volume, including the acquisition. 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 successful conclusion of our Jezan ASU sale of equipment project. Please turn to slide 18, corporate segment, which includes LNG and our other businesses, as well as our corporate costs. Although modest, it is great to finally see improvement in this segment with the best sales and profits in almost three years. The Golden Pass LNG project in the U.S. Gulf Coast began to contribute this quarter, and we are optimistic about additional LNG orders. It is important to note that our LNG technology has been selected for several North America and international projects that are awaiting final investment decisions by our customers. Now, I'm pleased to turn the call back over to Safie for a discussion of our outlook.

Thank you, Simon. Please turn to slide number 19. As I said on our last call, Five years ago, I promised we would grow the company's earnings per share by at least 10% annually. As you can see, we have done better than that over the last four years and expect to exceed 10% again this year. Thanks to the great team at Air Products, we have delivered on our commitments. Our goal continues to be achieving a cumulative average growth rate of at least 10% in the coming years. As you all know, we continue to live in an uncertain world that we at Air Products cannot control. But we definitely do have control over the actions Air Products can take to succeed in a dynamic world. We have a strong, capable, and flexible organization that remains focused on productivity and creating our own growth opportunities, which will allow us to continue to deliver on our promise to investors to increase earnings per share by 10% per year as we move forward. Now please turn to slide number 20. Our updated EPS guidance for fiscal year 2019 is in the range of $8.20 to $8.25. Despite currency headwinds, this guidance represents 10% growth over our very strong fiscal year 2018 performance. For quarter four of fiscal year 2019, our earning per share guidance is 226 to 231, up 13 to 16 percent over last year. Our team around the world continues to be very optimistic about the future of our products. Our five-point strategic plan will differentiate us and drive our success going forward. Our safety productivity, and operating performance continue to provide the foundation of our continued growth. We have the financial capacity, the technical position, and the talent to take full advantage of our existing opportunities. 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 people around the world for their commitment and hard work and for embracing the opportunities in front of us with energy and a spirit of working together. I certainly am proud to be part of this winning team. Now, we are delighted to answer your questions.

Of course. Thank you. If you'd like to ask a question, please signal 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, press star 1 to ask a question. Pause for just a moment to allow everyone an opportunity to signal for questions. We'll now take our next question from P.J. Jukibar from Citi. Please go ahead.

Yes. Sefi, good pricing in the quarter. I think this was by far one of your best pricing quarters ever. You know, your on-site pricing is kind of set contractually. So I assume that merchant prices are up a lot more than what you reported here. Can you talk about what's going on there? Is it driven by utilization? And what are you seeing from competitors? Are you seeing more disciplined behavior from competitors? Thank you.

Good morning, TJ. You are very right. When we report our results, we report over the whole sector, including the on-site business. Obviously, the on-site business prices are not going up, and that's half of our business. So when we report 4% price increase, it really is about 8% or 9%. What is driving the pricing is our decision to increase prices because it's about almost eight years that we haven't really increased prices. Our costs are going up. I made a very, very public statement in February of this year that we at Air Products have decided to increase our prices to recover our costs, and we are willing to lose volume if people want to buy from somebody else. And obviously that's a free choice they have. We consciously have decided that we need to maintain our margins and we are increasing the prices. I certainly cannot and will not comment on the behavior of the other people. I mean, that's up to them to comment when you ask them the question. But we certainly have made a conscious decision, despite utilization rate or anything like that, that we need higher prices to maintain our margins. We can't let our margins go down.

Thank you. And then just quickly, there is U.S.-China trade war going, and I know you're not directly impacted, but your customers are. And so can you talk about what end markets where you're seeing that impact of the trade war and which markets are strong for you?

Well, PJ, quite frankly, we do not see that. Now, maybe it is because in China, for example, more than 60% of our business is on-site business. And therefore, as a result, you know, we have a lot of protection there. But overall, I mean, I know the headline says that China is slowing. But then the next line, it says China grew 6.32%. I mean, if that was the case in the U.S., we would all be doing cartwheels. So the Chinese economy is growing, and we are seeing the benefit of that.

Okay, thank you.

Thank you very much, Vijay.

If you find that your question has been answered, you may remove yourself from the queue by pressing Start 2. We'll now take our next question from John Roberts from UBS. Please go ahead.

Thank you very much. Do you think the Yima oxygen explosion in China will affect project activity at all in China?

No, I don't think so, because I think once people investigate, they find out what the cause is. I don't want to speculate, but I don't think that is an indication of any fundamental issue with respect to processes and so on from what we understand. The explosion was at the ASU, not at the gasification unit. No, I don't expect any impact, not at all, John.

Then how much was volume up in the U.S.? Because I assume it was probably down in Latin America at least a little, and I don't really know what Mexico did. Actually, that's equity income, so that probably didn't show up in your numbers.

Our volumes in America was up about 4% in total. 4%. Am I quoting the right number?

So I think what we said on the call was our underlying volumes were up 1% in the Americas, offset by the prior year contract termination.

Right. Now, I was asking U.S. versus Latin America or North versus South.

We don't usually break that down, but the U.S. is not – the economy in the U.S. is not growing that much. It's flat.

Thank you.

Thank you.

We'll now take our next question from Bob Cort from Goldman Sachs. Please go ahead.

Thanks. Good morning. Good morning, Bob. So if you wanted to explore your Gen May project, is that just the fruition of something? I think you guys had worked a couple of years ago on buying back those ASUs and supplying the gasifiers. Is that the same project? Now it's just getting formalized and completed?

That is correct. You are absolutely right. We have been working on this project for a while and It finally came to fruition, and we are announcing it.

So I noticed you say you're going to supply by pipeline, and I think there's, I guess, a conventional view that these coal projects must be out in the middle of nowhere. So if you're supplying by pipeline, does that mean you're utilizing other assets in the area to supply?

No, John. By pipeline, our plant is next to the plant. It is delivered within a pipe. That means we are not delivering liquids.

Gin Mai is massive. Does this pretend future opportunities there? Could you do as you've done with Gizan and others and eventually convert this into some potential gasification opportunity as well from an investment standpoint?

Obviously, that would be our ambition, yes.

And if I might sneak the last one in, Gizan, have you guys finalized your ownership structure there? The percentages?

In Jazan, I think they have said that we will end up owning about 51%. But we are finalizing the contract. The numbers might change 1% up and down, but nothing massive, no. We will end up owning the majority there.

Great. Thank you, Saifi.

Thank you.

All right. We'll take our next question from Stephan Byrne from Bank of America. Please go ahead, sir.

Yes, thank you. Sefi, you've certainly affected a significant culture change at Air Products, and just wanted to get your view on where you are at right now with respect to that process. Is there more to go on a structural change, or is it primarily at this point that you've incentivized employees to come forward with new opportunities for improvement?

Well, thank you for your question. You know, obviously, I'm very proud of what we have achieved, but at the same time, you know, with the culture change, you are never done. We can always, always, always do better. But I am very, very satisfied with the progress we have made. Our results show that. And in terms of the future, I think our people are very excited about the growth opportunities that we have. And as a result, you know, we are a lot more productive. People are excited about coming to work. People are excited about working on very exciting new projects. And we are hiring people, and so that always creates a positive mood within the company. We always work on productivity, but we are hiring people for our new projects and all of that. So I'm, you know, I feel very good about the organization. We have a great team of people, but At the same time, we can always do better.

And on gasification, you mentioned, Sefi, that you're still working on numerous opportunities. Just curious as to whether or not you're seeing the bidding activity increase or get more competitive, particularly since your margins in Asia have really escalated with Luan.

We are seeing very good opportunities. We are working on new projects. And in terms of the bidding activity, quite honestly, we are not in a good position to answer because our customers don't necessarily tell us whom we are competing with and how many other bidders and all of that. But overall, you know who our competitors are. There are really three competitors. people who can participate on these big projects. There are not 20. So out of the three of us, we are all focused on different parts of the world. And whether all the other two are in every project that we are in, I don't know. But when we approach a customer, we try to do the best we can for them and for their products. And fortunately, we are fortunate. We see a lot of opportunities. and I expect us to get additional orders as we move forward.

Thank you.

Thank you.

Well, I'll take our next question from Duffy Fisher from Barclays. Please go ahead.

Yes, good morning. Safie, if we could go to your favorite slide 9. You know, you were in that band of 34 to 36% for, you know, basically 16, 17, and 18. Now in the last two quarters, you've kind of broken out of that band to a much higher range. Is the last two quarters indicative of where you think the new range will be over the next several years, or are the last two quarters more of an anomaly and will trend back towards that, you know, 34 to 36% over time?

Well, good morning, Duffy. You always ask me difficult questions, but that's fair. We have been guiding you that the margins are going to be around 33% to 35%. Right now, we have delivered around 40%, 37%, 40%. So right now, if I was going to make a prediction for the future, we are going to be in a higher band. We are going to be somewhere between 38% to 40%. That is correct, Delphi.

Great, thanks. And as long as we're predicting the future, could you give us an early peak, what 2020 looks like for you guys, and maybe not business conditions because they can change, but just when you look at the projects that you've got feathered in for 2020, is that supportive of the 10% plus growth rate you're trying to get in EPS?

Well, no. You know, I said in the call twice that our goal is to improve our profitability by 10%, so I think that kind of answers your question, right? That is what the answer is.

All right. Perfect.

Thank you, guys. Sure.

All right. We'll now take our next question from Jeff Tsoukalskas from J.P. Morgan. Please go ahead.

Thanks very much. What was your Asia volume growth ex-Luanne?

Good morning, Jeff. Hi, good morning. Excluding Luan, it was about maybe 4%.

About 4%, okay. And prices in the United States or prices in North America and in Europe have been very good year over year, but pricing in Europe and in the Americas was flat sequentially. And capacity utilization rates in North America and Europe have flattened out and come off. So generally speaking, has pricing in industrial gases as a base case plateaued at the current levels that we're at?

I wouldn't want to say that. I expect continued price improvement at least in the next two quarters. And then after that, we'll see how it works out. But I think the momentum that we have, it will continue in the next two quarters, Jeff.

Okay. Thank you very much.

Thank you.

We'll now take our next question from Don Carson from Susquehanna Financial. Please go ahead, sir.

Yes, thank you. Good morning, Sefi. You've been delivering strong earnings growth despite the drag from LNG. So can you remind us, you know, what has that drag on earnings been in the last few years? And as your project backlog starts to improve, what sort of contribution could you see sale of LNG equipment making over the next few years?

Don, that's an excellent question. We, in 2015, our LNG business delivered us about 50 cents earning per share. about $150 million of EBITDA. Last year and this year, it almost contributed nothing. So the drag has been about 50 cents. So I'm hoping that in time, we will recover that and hopefully even improve on that.

And then a follow-up on your EPS contribution. You had 4% volume growth, if you exclude Gizan. But you show that as a 4 cent drag on EPS year over year. So I'm trying to reconcile why volume improvement would be an EPS drag.

I think Scott's in the best position to answer this.

Scott, please. Sure. Hi, Don. Thanks for the question. I think I mentioned this in my prepared remarks. So importantly, when we look at the underlying volumes up modestly and the contribution from those volumes were good, there were a couple things in there that I'll refer to as kind of a negative mix impact, which is The timing for the Gizan project, which is recalled as a sale of equipment. So the timing on revenues versus profit year on year is throwing that off a little bit, as well as the prior year contract termination that I mentioned in Americas. So that's why you see the difference between the EPS contribution versus the sales. But again, importantly, when you peel those kind of one-off things out, the underlying volumes were up and the contribution from those volumes were positive.

Thank you.

Now we take our next question from David Begleiter from Dutch Bank. Please go ahead.

Thank you. Good morning, Safey. Good morning, David.

How are you?

Well, thank you. Just on Jezanne, as we get closer to 2020, can you talk about the cadence of the earnings ramp from that JV into 2020 and 2021 earnings, either pre-tax basis or an EPS basis?

Well, David, you know, first of all, we are working on that thing, and we are hoping that everything will work out and we do the financing and science. So I just want to say it is not a done deal yet. But if it is done, what we have said publicly is that considering what we are investing, we will see a contribution about more than 75 cents from that project when it comes on the stream. Once we actually get the contract signed, put all of the numbers together and all of that, and we make the final announcement that this has been done, hopefully before the end of this calendar year, then we will give you better guidance in terms of the impact on 2020 and 2021 and moving forward.

Very good. And just on merchant pricing safety, what was the merchant price gain by region that you realized in the quarter?

I'd like to read the numbers. Merchant pricing was 9%, 6%, 14%, and 9% total.

That was Americas, Europe, and Asia in that order.

Thank you very much.

Thank you.

All right. We'll now take our next question from Christopher Parkinson from Credit Suisse. Please go ahead.

Great. Thank you. So just when you're looking at the setup overall for fiscal year 20, there are obviously a few base moving parts, business growth, which obviously can go with the macro, your projects in Saudi Arabia, various ramps to smaller backlog projects, and the initial ramp of some LNG wins. I understand if you can't quantify these buckets, but can you just comment on your confidence in terms of the line of sight that you see into these and just your general level of enthusiasm pertaining to each? Thank you.

Chris, I can say that I'm very optimistic that we will deliver a 10% improvement over 2019. Now, if the number is going to be any better, we will talk to you about that in October. But right now, sitting here, looking at what is happening in the world, we think that we should be able to improve our EPS next year by 10% versus this year. And the way we look at it is that, you know, our job, you know, I get paid $15 million a year to come and deliver results rather than come and explain why I didn't deliver results. We are committed to improve our EPS 10% in the years to come. We have done that. We'll find different levers to pull in order to make that happen, whether it is cost reduction, price increases, new projects, and all of that. So that is our commitment to the investor that has been our commitment to the investors since five years ago, and we hope to continue to deliver that, Chris.

Cool. Fair enough. In your materials, you've been consistently referencing an additional $6.7 billion remaining capital to deploy, and you've made it very clear that you only explore projects in excess of 10% returns. When you just look at the remaining backlog opportunities, which it's my understanding they're still ample, Can you just comment, are the returns mostly close to that 10% level, or is it fair to say that there's still plenty in there that would be more similar to the implied return of Luan? Thank you.

Well, you know, it's very difficult to predict that, but we have said that we would be very hesitant to take any project at less than 10% return. So hopefully all of these projects will be 10% or higher.

Thank you.

Thank you, Chris.

All right. We'll take our next question from Jonas Oxgaard from Bernstein. Please go ahead.

Good morning, guys.

Hi.

You talked about expanding your onsite as a percentage of your total. But considering the success in your merchant business now, are you revisiting that strategy at all?

No, because we are, you see, our merchant business, we are going to grow it as fast as we can. We are not downsizing that. But we think that our onsite will grow faster than that. So our ratio will change not because we are slowing down on the merchant business, but because we think the onsite business has the potential of growing faster than the merchant

But you don't see an opportunity to double down on the merchant either.

Well, the merchant business, we are going to double down based on economic growth. I mean, in China, it's growing 6%. They did build new merchant plants. But if you have a situation in Europe or in the U.S. where the market is not growing, then obviously you're not going to add capacity. But... We are committed to our merchant business. We will grow it as fast as we can grow it, which is basically GDP. Nobody can grow their merchant business faster than GDP. I don't care what they say. Because if they say, oh, we are going to grow faster than the other guy, that means they're going to take market share away from the other guy, and that doesn't happen. Nobody can take away market share from us, and vice versa. So the merchant business is going to grow with the GDP of each region, and as it grows, it invests in that. We are committed to that. We have the know-how. We have the people. But my point is that that growth is in emerging markets. It is not in the U.S., and it is not in Europe.

Okay, that makes sense. Thank you.

And once again, if you'd like to ask a question, please. Press star one. We'll now take our next question.

We have time for one more question, please.

This is our last question. Please go ahead.

Well, it doesn't seem that there is any other questions. So with that, 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 do appreciate your interest and good questions and look forward to discussing another set of good results with you again next quarter. Have a nice summer holiday and all the best. Take care.