Air Products and Chemicals Inc (APD) 2017 Q3 法說會逐字稿

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, Kathy.

Good morning, everyone.

Welcome to Air Products' Third Quarter 2017 Earnings Results Teleconference.

This is Simon Moore, Vice President of Investor Relations.

I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Scott Crocco, our Executive Vice President and Chief Financial Officer; and Corning Painter, Air Products' Executive Vice President responsible for Industrial Gases.

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 on Page 2 of the slides and in today's earnings release.

Now I'm pleased to turn the call over to Seifi.

Thank you, Simon, and good morning to everyone.

Thank you for taking time from your very busy schedule to be on our call today.

We do appreciate your interest in Air Products.

I am very pleased to report that due to the hard work and commitment of our people at Air Products, we delivered another quarter of very strong performance with EPS growth of 15% over last year.

This is the 13th consecutive quarter that we have reported year-over-year EPS growth.

We also delivered excellent safety results and generated over $500 million of distributable cash flow this quarter.

Our volumes are up 8%, the highest in more than 2 years, and we continue to win and execute successfully on major industrial gas projects for customers around the world.

Now please turn to Slide #3, where I would like to take a few minutes to remind everyone of the progress we have made.

Specifically, I want to talk about the promises we made 3 years ago and the results we have delivered.

In 2014, we made several commitments to ourselves and to our shareholders.

And as I recall, there may have been skepticism in the investment community at the time about our ability to deliver.

So let us update you on where we are today.

Three years ago, we said that Air Products will be the safest industrial gas company in the world, we will be the most profitable industrial gas company in the world, we will divest our non-core assets, we will have the best balance sheet in the industry, and we will deliver 10% per year EPS growth every year.

I am proud of our team for delivering on every one of these promises.

On Slide #4, you can see the results of the first 2 commitments.

We are today the safest and most profitable industrial gas company in the world.

We have delivered significant improvement in our employee lost-time injury rate, and we have an EBITDA margin of 34%, which is up 900 basis points versus 3 years ago.

On Slide #5, you can see our success in divesting non-core assets.

We sold our chemical business to Evonik for almost 16x EBITDA, and I'm confident this business and the people involved will thrive in Evonik.

We spun-off our Electronic Materials business as an independent company called Versum Materials.

The Versum team is 100% focused on the electronic market as a leading materials supplier.

They have delivered strong results, and the Versum stock is currently trading at over 13x EBITDA in fact, a higher multiple than Air Products right now.

And as you saw this morning, the great management team there delivered very strong results also.

Slide #6 shows the results of our improved business performance and the successful transactions.

Air Products has the strongest balance sheet in the industry.

So we are well-positioned to take advantage of the tremendous growth opportunities in Industrial Gases.

That is our future.

And we can see -- and as you can see, we have delivered EPS growth of 10% in 2015, 16% in fiscal year '16, and at the midpoint of our '17 guidance, we will be up another 10%.

To summarize, on Slide 7, the hard-working and committed team at Air Products has delivered on what we promised.

And what is most exciting to me right now is that we are very well positioned to grow Air Products and create significant further value for our shareholders.

We now have the balance sheet to do it.

Let me review the investment opportunities we see for this growth that I'm talking about.

First, acquisitions of small and medium-sized industrial gas companies or assets or businesses from other industrial gas companies.

Second area of opportunity is to purchase existing industrial gas facilities from our customers to create long-term contracts where we own and operate the plant and sell industrial gases to the customer based on a fixed fee.

We see opportunities for oxygen and hydrogen plants around the world in this category.

We also see the opportunity to expand our scope of supply to include the operation of existing gasification units and sale of syngas to customers under long-term agreement.

Essentially, these opportunities are the same as the traditional on-site business model that we have, something that we do every day, but with existing rather than new production assets.

And the third area of opportunity is the very large industrial gas projects around the world driven by demand for more energy, cleaner energy and emerging markets.

The Jazan project in Saudi Arabia is a great example of how big these projects can be.

The plants we are building in Jazan is the largest project in the history of industrial gas industry, with close to $2 billion of capital investment.

Some of these new large projects that I'm talking about could also include gasification and syngas supply and could be as big or even bigger than Jazan.

Scott will take you through the details, but like last quarter, we estimate that we will have at least $8 billion of capacity to invest over the next 3 years.

And I truly believe that Air Products will be successful in utilizing our balance sheet to invest in our core industrial gases business to create significant shareholder value.

But as I have always said, if we can't find enough good projects, we will stay disciplined and return the cash to our shareholders.

After all, it is your money.

And I know everybody continues to be interested in the timeline for deploying the cash.

But as I have said, we are not in a hurry, and we will take our time to make sure that we are investing in value-generating projects.

Now please turn to Slide #8, where you can see examples of the success that Air Products has had with major projects around the world.

Just in the past quarter, we announced new electronic wins in China, a new HyCO facility in Louisiana and a new air separation unit in New York.

These new wins will drive growth for Air Products and create value for our shareholders.

As importantly, our team are executing well on our projects in the backlog.

We successfully brought onstream a major hydrogen plant in India and another major oxygen plant in China.

Now please turn to Slide #9 that shows another quarter of very strong safety performance.

These results do not happen without every one of our team around the world being focused on safety every single day.

I also believe these results also reflect an empowered and focused culture that also creates good financial results.

Slide #10 is our goal for the company.

As I explained at the beginning of this call, we have made great progress and are determined to continue to be the safest and most [profitable] industrial gas company in the world, providing excellent service to our customers.

Now please turn to Slide #11, our overall management philosophy that we have talked to you [about] many times.

We continue to be focused on shareholder value, cash generation, capital allocation and an empowered and decentralized organization.

And Slide #12 that you have seen many times before is our Five-Point Plan, which is the road map for our success.

Slide #13 shows you the results of our 3 key metrics.

We remain committed to our goal to be the most profitable industrial gas company in the world, as measured by each of these 3 metrics.

And today, we are the most profitable industrial gas company in the world, as measured by each one of these metrics.

We remain focused on driving further improvement as we move forward.

Now please go to my favorite slide, Slide #14.

It's obviously great to see that the margins improved versus last quarter.

Also, as you know, the natural gas prices are higher.

We report higher sales with no profit since the costs are passed through to our customers.

Excluding this impact from natural gas, actually, EBITDA margins were 30- basis points higher versus last year.

Now I would like to turn the call over to Mr. Scott Crocco, our Executive Vice President and Chief Financial Officer, to discuss our results in detail.

Then I will come back after comments from Corning and Simon to make some closing remarks, and then we will be more than happy to answer your questions.

Scott?

Thank you very much, Seifi.

Now please turn to Slide 15 for a more detailed review of our Q3 results.

Sales of $2.1 billion increased 11% versus last year on 8% higher volumes.

This was our best volume performance in at least 2 years.

Higher energy cost pass-through added 5%, while the currency impact was 2% unfavorable.

Volumes were higher across all 3 regions.

And taken together, the regions increased overall volumes by 8%.

In our sale of equipment businesses, continued progress on our Jazan project was largely offset by the continued weakness in LNG.

Overall, pricing remains unchanged, with increases in Asia being offset by weakness in Europe.

EBITDA of $722 million improved by 7%, and operating income of $463 million improved by 11%.

EBITDA margin of 34% decreased by 120- basis points and was negatively impacted by 150- basis points from higher energy cost pass-through.

Excluding this impact, EBITDA margin was up 30- basis points.

Operating margin of 21.8% was unchanged versus prior year as unfavorable energy pass-through of 90 basis points was offset by favorable volumes.

Sequential margins improved by more than 100- basis points, driven by higher volumes.

Versus prior-year, net income increased by 16%, and adjusted earnings per share increased by 15%.

ROCE of 12.2% improved by 10- basis points versus last year and was down 10- basis points sequentially.

To provide you with some context, sequentially, ROCE is down slightly while profits are up because the denominator of the ROCE calculation has increased.

The denominator is based on a 5-quarter average, and this now includes 2 quarters that contain the significantly higher denominator as a result of the PMD gain.

Now please turn to Slide 16.

As you know, Air Products continues to be very focused on cash flow.

Our distributable cash flow was over $500 million this quarter, while our free cash flow was $139 million.

Free cash flow was up $47 million versus last year due to higher EBITDA.

Year-to-date, distributable cash flow is $1.3 billion while our free cash flow is approximately $200 million.

Please turn to Slide 17.

Before I discuss our underlying results, I want to spend a moment on non-GAAP items.

In continuing operations, we had non-GAAP charges that totaled $1.18 per share.

In Latin America, during the first 9 months of fiscal year 2017, volumes declined.

And overall revenue growth was below our previous forecast due to weak Latin American economic conditions and a lack of recovery in mining-related demand.

Our current outlook is now below the previous forecast used to establish the carrying value of the business.

As a result, our goodwill review resulted in a noncash goodwill impairment charge of $162 million or $0.70 per share.

We also completed a review of the business plan and resulting outlook associated with Abdullah Hashim Industrial Gases or AHG, a 25% owned equity affiliate.

We determined there was a decline in the value and recognized a noncash impairment charge of $80 million or $0.36 per share that reduces the carrying value of our investment.

The decline in value results from expectations for lower future cash flows to be generated by AHG, primarily due to weaker economic conditions in Saudi Arabia.

The team is working hard to implement a profit improvement plan.

Let me add that while no one can predict the future, at this time, we do not believe we will have similar impacts resulting from other acquisitions we have made in the past.

And with our focus on capital allocation, we are highly confident that future M&A transactions will create value for our shareholders.

Finally, cost reduction and asset actions continue through the year as we take further actions as part of the second $300 million of operational improvements and to offset stranded costs from our decision to divest Materials Technologies.

The charge of $43 million or $0.14 per share includes the planned sale of a Latin American hardgoods business and closure of an LNG heat exchanger manufacturing facility.

Further details on all non-GAAP items can be found in an appendix slide and the footnotes to our earnings release.

Turning to Slide 18, you can see an overview of this quarter's performance in terms of earnings per share.

Excluding non-GAAP items, our Q3 continuing operations EPS of $1.65 increased $0.21 per share or 15% versus last year.

Higher volumes broadly increased EPS by $0.19 per share.

Pricing and power costs taken together decreased EPS by $0.01.

This was driven in part by higher power costs in our Europe business.

On a positive note, we saw significant pricing improvement this quarter in China.

Net cost performance was unfavorable $0.02 as our productivity actions in the TSA income were more than offset by other costs, including maintenance and inflation.

We remain committed to delivering our $100 million of cost savings this year.

As a reminder, included in the cost major factor is the other income and expense line on our consolidated P&L.

As I shared last quarter, we are providing services via transition service agreements or TSAs to both Versum and Evonik.

The cost to provide these services are primarily in SG&A.

The payment we received for these services was about $10 million this quarter and is shown in the other income and expense line.

We expect these TSAs to wind down in 2018 and are committed to taking actions to reduce the resulting stranded costs.

For the quarter, currency and foreign exchange gains and losses net to a $0.01 unfavorable.

We added a new line to our income statement last quarter called Other Non-operating Income and Expense.

This is where we are reporting the interest income from our more than $3 billion of cash and short-term investments.

The interest income was about $0.03 this quarter.

Since this is non-operating, it is not included in our EBITDA or operating income results.

Interest expense was $0.02 lower due to our lower debt balance, partially offset by higher rates.

Our effective tax rate this quarter was 24%, about 1% lower than last year.

We still expect our FY '17 tax rate to be approximately 23%.

Turning to Slide 19, I would like to update you on our capital deployment capacity.

We have about $3.3 billion of cash and short-term investments as of June 30.

After we pay the remaining taxes due on the PMD gain and maintain a modest operating cash balance, we have about $2.9 billion of cash available to invest.

Our debt balance as of June 30 is about $3.9 billion.

As you know, we are committed to managing our debt balance to maintain our current targeted A/A2 rating.

We expect this would enable a debt level in the range of approximately 2.0 to 2.5x EBITDA.

Based on the trailing 12-month EBITDA of $2.7 billion, this would support a debt level in the range of about $5.5 billion to $7 billion.

So in total, between available cash and additional debt capacity, we have about $5 billion we can deploy today while maintaining our A/A2 rating.

As we have mentioned, we also expect to generate over $1 billion per year of investable cash; that is after paying taxes, interest, maintenance CapEx and dividends.

So as Seifi mentioned, over the next 3 years, we expect to have a total of at least $8 billion available to invest.

Now to begin the review of our business segment results, I'll turn the call over to Corning.

Thanks, Scott.

This was our best quarter for both safety and volumes, since we began reporting on a regional basis in FY '15.

Our teams have worked hard to safely bring onstream large, new projects and win merchant customers around the world.

While this performance is very good, we have more work to do on productivity.

We generated significant savings from our Taking the Lead productivity actions, but these were impacted by a number of offsetting cost items.

The good news is that we continue to see productivity opportunities.

I would like to again thank our people around the world for staying focused on our goals, especially safety, excellent customer service and our Taking the Lead productivity projects.

As an example of Taking the Lead, improving compressor efficiency is an opportunity for us.

Compressors consume most of the power at an air separation plant.

We have many of them, and we have many plants.

So you can't have an engineer sitting next to every compressor.

So we continue to develop remote diagnostic tools to identify opportunities and take actions across our global fleet of compressors.

These actions drive both productivity and enhanced reliability.

Before I discuss the regions, I'm going to address helium.

Industrial gases is primarily a local business, but helium has a global supply chain.

The recent events in Qatar disrupted that global supply chain.

Clearly, this is not over yet and the situation remains volatile, but we are confident that we can take good care of our customers through this.

Air Products is a geographically diversified supply base.

Our wholesale commitments take a big step down at the end of this month, and we have a new tranche of helium supply coming on in January.

Beyond that, we bought over 75% of the helium at offer at the BLM auction 2 weeks ago.

So we are confident that we can continue to provide excellent service to our customers whatever happens in the Gulf region.

Now please turn to Slide 20 for a review of our Gases Americas results.

Volumes were up 3%, the best volume performance in over 2 years.

The pass-through of higher energy prices with the Houston Ship Channel natural gas prices up almost 70% significantly diluted our margins again this quarter.

Sales of $930 million were up 12% versus last year with volumes up 3% and higher energy cost pass-through up 9%.

North American volumes were up on modest merchant growth across most of our product lines and strong hydrogen volumes as our refinery customers continue to operate at a high level.

Hydrogen volumes were also stronger sequentially, following customer planned outages in Q2.

Latin American volumes were up slightly this quarter versus prior year, led by the liquid/bulk business.

However, economic activity remains weak.

Results improved sequentially, as expected on seasonality.

EBITDA of $367 million was up 1% as the contribution from higher volumes and our Taking the Lead cost reduction programs were partially offset by planned maintenance-related costs.

EBITDA margin of 39.5% was down 400- basis points with higher energy cost pass-through accounting for about 330- basis points.

Excluding this impact, the margin was down about 70- basis points.

As I mentioned last quarter, we will be shedding about $70 million in annual wholesale volumes in North America beginning next month with the end of our supply contract for liquid/bulk products to Airgas.

I am encouraged to see our sales efforts paying off and volumes building as we're working hard to replace this volume with retail sales.

We had 2 significant project announcements since our last earnings call.

First, in June, we announced Air Products will retire our 1970s air plant and build a new highly-efficient air separation unit in Glenmont, New York, providing additional liquid oxygen, nitrogen and argon to the merchant market.

Ours is a long-term business, and this is an example of investing for the future.

And just recently, we announced the award of a carbon monoxide and hydrogen supply contract from Huntsman to supply their world-scale MDI production facility in Geismar, Louisiana.

We will be building a new steam-methane reformer to supply Huntsman and be connecting it to our 600-mile hydrogen pipeline system.

Now please turn to Slide 21.

In our Europe, Middle East and Africa business, the volume growth was driven primarily by our new hydrogen plant in India.

Versus last year, sales of $452 million were up 5% with volumes up 6%, price down 1%, higher energy cost pass-through up 4% and currency down 4%.

The currency impact was primarily the British pound.

And other than the continued currency impact, we don't believe the Brexit discussions have had much impact on our business this quarter.

Our new hydrogen and ASU project for BPCL in India was fully onstream as of the end of Q3.

As a reminder, this 100% Air Products-owned facility will be reported in EMEA segment while the rest of our India business continues to be reported in the Asia equity affiliate income.

Excluding the impact of our new hydrogen plant, our underlying volumes were positive on strength in tonnage and packaged gases.

These gains were partially offset by lower equipment sales and a project closeout.

Reported price was down 1% as a mix effect, both in terms of customer mix and product mix, offset slightly higher underlying real pricing.

So when we say "price", we mean exclusively merchant pricing.

And when we say "real price", I mean the same gas sold to the same customer.

Although underlying real price is positive, we were not able to recover as much of the higher power costs as we had hoped to in this quarter, and I can assure you our team continues to be very focused on pricing.

EBITDA of $155 million was down 3%, but would have been slightly up on a constant-currency basis.

Positive cost performance and higher equity affiliate income were offset by equipment and the negative mix and cost impacts.

EBITDA margin of 34.3% was down 310 basis points with the higher energy pass-through accounting for about 140 basis points.

Excluding this impact, the margin was down 170 basis points, about evenly impacted by equipment and mix cost.

Please turn to Slide 22.

Gases Asia, where we showed very strong volume and profit growth.

Sales of $538 million were up 20% driven by volume growth of the same amount.

About half of the volume growth was due to equipment sale projects, which we would not expect to reoccur in Q4.

The remaining 10% of the growth was approximately evenly split between new project onstreams and base business growth.

Our ongoing drive for retail sales and pricing aided by the consolidation in the steel industry is paying off.

The Asia merchant gas business continues to improve in terms of both measures: retail sales and pricing.

For example, LOX/LIN volumes were up high- single digits and the retail business was up low- double digits.

And in China, this was even more dramatic with mid-teen retail growth that was about 2x our total LOX/LIN growth rate.

At the same time, LOX/LIN prices were up nearly 4%.

Our gains in argon were even more dramatic with total volume, retail volume and pricing, all 3, up double digits.

We need to keep in mind that there's still significant overcapacity in China and a recovery in this market may be bumpy, but our efforts clearly delivered.

EBITDA of $211 million was up 15%, with strong contributions from higher volumes, including the equipment sales and on higher pricing.

We had Taking the Lead cost savings, but this was somewhat offset by a positive cost reimbursement in Q3 last year.

We expect to receive this in Q4 this year.

Equity affiliate income was down due to a one-time benefit last year.

This impacts EBITDA, but not operating income.

EBITDA margin of 39.2% was down 160- basis points on the items just referenced.

We continue to win and successfully execute projects throughout Asia.

In the electronics area, we were pleased to be awarded the industrial gas supply for Fujian Jinhua's new memory fab in Fujian Province and SMIC's foundry capacity expansion in Tianjin.

And we successfully brought on another very large air separation complex to supply oxygen, nitrogen and air to Yitai Chemical's fine chemical gold gasification project in Inner Mongolia.

These plants have a combined capacity of over 9,000 tons a day and will join our other successful oxygen for coal gasification projects in China, including Weihe Clean Energy, Pucheng Clean Energy, Shaanxi Future Energy and Shanxi Lu'an Mining.

Finally, please turn to Slide 23 for a brief comment on our global gases segment, which includes our air separation unit sales equipment business as well as central industrial gas business costs.

Sales and profits were up versus prior year, driven by progress on the Jazan ASU sale of equipment project.

We continue to make good progress on the Jazan project.

And just as a reminder, we began booking profits on the sale of equipment in the fourth quarter of FY '16.

Now I'll turn the call back over to Simon for a comment on our Corporate segment.

Thank you, Corning.

Please turn to Slide 24.

Our Corporate segment includes our LNG business, our helium container business and our Corporate costs.

Sales and profits were down versus last year, as expected, on continued significantly lower LNG project activity.

We were pleased to announce earlier this week, a new project with TP JGC Coral France to provide our technology and heat exchanger equipment for the Coral South floating LNG project to be located in the Indian Ocean, offshore Mozambique.

However, we had anticipated this win, so still expect about a $0.30 headwind in LNG for FY '17 versus FY '16.

We still have not yet seen other LNG customers moving forward with their investment decisions.

We did see a positive impact from the TSAs with Evonik and Versum.

Now please turn to Slide 25, and I'll turn the call back over to Seifi for a discussion of our outlook.

Thank you again, Simon.

Before we take your questions, I would like to make a few comments about our outlook.

Having delivered on our promises from 3 years ago, we can now build on our success.

We have significant opportunities to invest our cash to grow Air Products and create value for our shareholders.

Our safety and operating performance continues to be strong.

We continue to take action to deliver our $100 million of operational improvements this year and are focused on additional actions to offset the stranded costs from the separation of MT business.

We remain committed and confident on our ability to deliver on our cost savings and our commitment to grow EPS by 10% each year.

Our portfolio actions and the strong cash flow generation of our company provide us with almost $8 billion of capacity to invest over the next 3 years.

We are committed to staying disciplined and won't invest our money unless we are confident the risk/return profile will create significant value for our shareholders.

And as I said, I am now more than ever very confident that we will have the opportunity to fully utilize our balance sheet by investing in exciting opportunities in M&A, asset buybacks and large industrial projects.

Now please turn to Slide #25.

With confidence in our ability to perform, we are raising our guidance for fiscal 2017.

Our increased guidance of $6.20 to $6.25 is up $0.10 from last quarter at midpoint, and it represents 10% EPS growth over 2016.

And our guidance for the fourth quarter fiscal year EPS is $1.65 to $1.75 per share, which at midpoint, is 12% up versus last year.

I want to thank once again the great team of hard working, dedicated, talented and motivated employees that remains focused on being the safest and most profitable industrial gas company in the world, providing excellent service to our customers.

I am very proud to be a member of this winning team.

Now we are delighted to answer your questions.

(Operator Instructions) And we will take our first question from Don Carson with Susquehanna.

This is Emily Wagner on for Don.

I just wanted to dial into the Jazan earnings this quarter a little bit.

How much of the guidance raise was due to the timing of Jazan?

And I know the earnings stream there is a little lumpy.

Is there any way to give more clarity on the timing or outlook on these earnings?

Emily, first of all, good morning.

The increase in our guidance is due to our confidence in the performance of our business in terms of volumes, especially in China.

As Corning mentioned, we had a very good performance in Asia, better than we expected, and that is why we are -- that's the principal reason we are increasing our guidance.

Okay?

Okay.

Yes.

And then in terms of the consolidated volume growth of 8%, is there a way to break that down between the equipment sales and the new project start-ups?

It is possible, but we don't plan to do it.

We'll take our next question from Robert Koort from Goldman Sachs.

Seifi, I wanted to ask -- you're quite emphatic that you're more confident now deploying your capital.

Can you give us the reason for that increased confidence?

Bob, obviously, if I say that, that means that we are seeing more projects that we can work on.

And as time goes by, we see more projects that we can work on.

So I'm sure you bear with me to kind of stay general, but we have always said that we see a lot of opportunities.

But as we engage with customers and prospective customers, we are becoming more confident that we can actually do these things.

And Seifi, could I ask is it conscientious on your part, in the last quarter, you sounded much more cautious.

You know the concerns about economic policy in the U.S., Brexit, geopolitical tension.

And now this quarter, it seems like the volumes have popped nicely.

The tone just sounds more upbeat.

Is there something that's changed from your perspective that gives you that greater confidence?

Or is this sort of in the macros?

Or is this still all idiosyncratic to your own business?

Bob, that's an excellent question.

I have always been very optimistic about the performance of Air Products.

The other comments that I made about the general concerns in the economy, I don't need to make any comments about that because now you see that as the headline of the papers.

So I don't want to be stating the obvious about what is going on in the U.S. with different policies and the geopolitical conditions.

So we didn't feel it was necessary for us to stress that, as I said, you see that in the news.

And we'll take our next question from Jim Sheehan with SunTrust.

On your price and mix performance in Europe, it looks like you are basically doing okay in gaining the underlying price, but you're having some issues with recovering electric power costs.

And I'm just wondering is that something that typically has a lag historically?

Or how would you expect that issue to progress going forward?

Well, I'd like to refer that to Corning to answer because -- Corning?

Yes, so I'd just like to stress that on a real pricing basis, we see positive pricing.

So the mix impact is fairly powerful for us right now.

And there's 2 things behind that.

So on a product basis, we're selling a lot of CO2 right now.

A year ago, we had some production issues.

It's the summer season.

There's a lot of this going.

CO2 is just a lower priced product, and it's going to bring down that number.

But the fact that I'm able to sell more is really a good thing for us.

The other thing that's playing out in the mix effect is just larger customers taking more product.

We can deliver the product to large customers more efficiently.

They command and get a better pricing.

So that hits it as well.

In terms of overcoming all that and still hitting the power I'd say we're about 50% through recovering what we were aiming for and remain confident that we're going to plow on, on this, and we will get that back.

Great.

And on -- I realize, Seifi, it's a little bit early to talk about 2018.

But given your sentiments on the global macro environment and geopolitical issues, do you see any reason to doubt that you could hit the 10% long-term EPS growth target in 2018?

Well, I said several times during the call that we promised everybody 4 years ago that we will hit 10% profit EBITDA growth over the long-term.

We are still committed to that.

And if the geopolitical conditions and the economic conditions become tougher, then we need to take actions in order to deliver the number.

The 10% is nonnegotiable.

We are very committed to that.

And we'll take our next question from Jeff Zekauskas with JPMorgan.

I'd like to go back to the price issue.

Your pricing on a global basis was flat, and I think some of your competitors had prices up 1%, 2%.

Is that difficult using comparability?

Or does it turn out you're not executing as well as you might in getting your prices up right now?

Jeff, when we report numbers for overall Air Products, there is significant amount of noise related to mix in terms of which part of the world and then the pricing that we include includes our whole company.

It's not just the merchant gain.

Corning mentioned about different areas.

We usually don't like to talk too much about pricing and all of that, but we are -- I don't want to characterize it as if we are having difficulty in increasing prices.

The prices in the market very much depends on the supply-demand situation, and we are part of that.

So I don't -- I wouldn't want to characterize it the way you said that we would have any difficulty on that.

But Corning, do you want to make any additional comments on that?

Yes.

I think also going to where Seifi was just saying, I think the aggregation, when you do that, you lose a lot of color of what's really happening, especially on a business that is so local.

So maybe just to peel back the onion one step further, we showed [flat] pricing in the Americas.

In truth, underlying that, we had actually positive pricing in North America, negative pricing in Latin America and that kind of offset, just to give you a sense of -- a little more color.

Okay.

If I may follow up, in terms of the Jazan project as the base case, does the equipment piece conclude by mid-2019?

Something like that.

And we'll take our next question from P.J. Juvekar with Citi.

So you had 2 write-downs in the quarter.

Can you explain those?

The first one was in Latin America, probably in Indura assets, and then second one was in Saudi Arabia.

And I know that you're trying to acquire more assets in the Middle East.

But you mentioned current challenging conditions in Saudi Arabia.

Does that change your strategy towards Middle Eastern acquisitions?

Well, P.J., thank you very much for asking the question, but there's a famous saying that the best time to buy is when things are not going well.

So actually, the conditions are actually very favorable in buying things in the Middle East right now because of the oil prices being down.

So I kind of actually see that as a favorable sign rather than a negative sign.

That, okay?

Okay, do you think this is opportunity to buy in Middle East?

Yes, that is correct.

Okay, okay.

And the second question on the backlog.

Can you discuss the outlook for hydrogen or HyCO projects?

Again, we go back to oil price and volatility there.

Refining margins are weak.

What are you hearing in the HyCO projects?

Well, the thing is that the HyCO projects that we are focused on are -- a significant part of that is related to coal gasification, and the outlook for that is very positive.

In terms of HyCO projects for other projects, there are not that many new projects, but as you know, we are focused on asset buybacks, and we see opportunities there.

And lastly, can you just talk about the chemical opportunity on the U.S. Gulf Coast?

Well, in the U.S. Gulf Coast, there has been -- there was a lot of excitement about a lot of new projects.

But when the oil prices came down, although gas prices are down, a lot of those projects were put on hold.

And you know that better than anybody else that -- I mean, you are very knowledgeable about what everybody was trying to do.

So we are in the Gulf Coast.

We did participate.

Obviously, you saw the project that we just announced in Geismar.

And there are other projects that we are working on, but I'm not as optimistic there as I am in other parts of the world.

And we'll take our next question from John Roberts with UBS.

On Slide 16, on maintenance capital versus growth CapEx, Praxair this quarter started reporting something related to this.

CapEx towards secured contracts versus non-contracted CapEx.

So congrats in the first place on driving this change.

I was skeptical at first.

But my question is, how comparable are the 2 presentations?

They indicated merchant tanks and cylinders were a large part of their growth CapEx.

But since you do larger projects and you don't have a U.S. cylinder businesses, is the majority of your growth -- the vast majority of growth CapEx your large projects?

Look, John, first of all, thank you for your comment.

I do appreciate that.

We have always thought very strongly that looking at the distributable cash is the right way to look at the valuation of industrial gases, and we are very pleased to see that others are following that.

In terms of how they present their numbers and we present, I'm -- quite honestly don't want to be making comments about what our competitors' financials are.

I don't think that would be appropriate.

We are very committed to the way we present the numbers, and our numbers are very clear, detailed analysis and reflective of what we need to do to maintain our current EBITDA.

That is the definition of maintenance CapEx that we have.

That if everything stops, how much money do we need to invest in order to replace the assets that we have in order to maintain our current EBITDA.

And that is our definition of maintenance CapEx.

And we'll take our next question from David Begleiter with Deutsche Bank.

Seifi, very good volumes -- so very good volumes in North America.

You mentioned refining, but overall, is there any acceleration in your business that you're seeing?

Or just, again, refining plus others is driving that very good volume growth in your business?

Well, I don't want to characterize it as a significant acceleration of the business, but I think that we have our act together, and we are trying to provide the service that our customers need in order to make sure that we get our fair share of -- Corning, do you have any other comments?

Sorry, is your question mainly on North America or globally?

North America.

Yes, are you seeing any acceleration in North American activities?

Yes, I would say North America was broad-based for us, and by definition, being broad-based, not like one particular thing or another.

I'd say just hard work and sales activity across the board.

Very good.

And Corning, also on the maintenance costs in Q3, could you quantify the impact and what that tailwind might be heading into Q4?

Yes, so I think we're not going for specific details on it.

I'd say maybe just give a little bit of color for what we experienced in this quarter.

It was a little bit more around some large air separation units that we worked on and they tend to have in some ways a broader impact because there's product dislocation and making up the argon and that sort of thing.

But that was the nature of what we -- a certain amount of the cost for North America this quarter.

And we'll take our next question from Chris Parkinson with Credit Suisse.

As a large shareholder yourself, how do you believe the Air Products story will continue to evolve from here, outside of the solid op execution?

Just in terms of where we stand right here, right now, can you just talk about the various views on project backlog growth versus a year ago?

What you're seeing in the merchant business and then the capital deployment opportunities?

Just any color on what you believe the key 2 to 3 drivers of your story are right now?

Chris, that's an excellent question, and I -- thanks for asking the question to give me the opportunity to talk about that.

We have delivered on what we promised 3 years ago.

So one, obviously, the question from the investors is okay, what are you -- I've enjoyed the past, what are you going to do for me in the future?

The key thing is that now Air Products has margins of about 33% to 35%, the best in the industry.

We have our act together.

Therefore, we will benefit as much as anybody else on any kind of economic activity and so on going forward.

But then in addition to that, the key thing is that we do have $8 billion to $10 billion of firing capacity, and we do see opportunities to deploy that.

Therefore, the story of Air Products for the future is deploying that capital.

And if we do that, we would generate significant value for our shareholders.

That is -- so that is what we are promising the investors and that is 3 years from now, hopefully, we will look back and say, yes, we said we have $10 billion to deploy, and we did deploy that at good returns, and that $10 billion will generate $1 billion of operating profit.

That is our story going forward, and we have a lot of confidence in our ability to deploy that and deliver that.

And that's the key thing, while maintaining a first-class operation, getting the pricing, getting the volumes as anybody else will do, the differentiating thing for us versus other people is the fact that we have the balance sheet to go do these things.

Okay.

And just a quick follow-up.

Can you just walk us through the Asian business a little bit more, parsing out a little more detail on the volume front, just anything you see in key end-market trends, et cetera.

And then also, is there anything on the pricing front you'd be willing to discuss whether its regional nature, slightly favorable bulk operating rates, et cetera?

Well, I would like to make some comments and turn it over to Corning.

When you look at Asia, I mean, we reported 20% increase in sales.

About half of that was related to some specific equipment sales that we had.

The other half is genuine growth in our business.

That -- some of that is coming up from the new plants, we are bringing onstream, but a lot of that, as Corning mentioned before, is because we do -- Chinese economy is growing and, most important, the utilization is going up.

I think Corning will mention, and I turn it over to him that right now, if you take Asia, the utilization of industrial gas business on the merchant side is getting close to 80%.

That is a very good sign, and that is usually an indication that the prices will strengthen.

Corning?

Thank you, Seifi.

Yes, so for sure right now, China is the strongest economy for us in Asia.

That's where I think you see most of the positive momentum in terms of strong volume growth, pricing and so forth.

Within China, as Seifi mentioned, we've broken the line to north of 80%, just north of 80% on our loading.

I'd like to point out that is our loading.

That is not industry loading, and I would put industry loading, my estimate, more in, let's say, the 60% sort of range.

I would say a key thing about understanding our loading.

Not only is it now hitting the 80%.

It is 80% with much higher retail sales than we had before.

Year-on-year, up like 5%, 500 basis points in terms of the proportion of the business that's retail.

That helps us with pricing.

That helps us with just the quality of the underlying basis.

I think the other thing just to keep in mind in China, we know a sort of tailwind we have for us right now is the government getting serious about reform in the steel industry, and that has the potential to take captive capacity off the market.

And to be honest with you that's a positive for us as well right now.

We'll take a next question from Stephen Byrne from Bank of America.

Wanted to ask you about your sale of equipment business.

Is that as a fraction of your project backlog likely to remain relatively stable?

Or could you see it going up as you pursue projects in regions that are more geopolitically challenged?

Or could it possibly go down over time if you're -- if there's a little less aggressive offering of this -- of these services by your competitor in Germany?

How do you see the outlook for that?

Yes.

Steve, our sale of equipment is not included in our backlog.

We do not put that in our backlog.

Our backlog is only sale of gas that would generate revenues for the longer term.

Sale of equipment is a one-time thing.

We don't consider that backlog.

So those things are not included in our backlog.

Okay.

I'm sorry, I didn't mean to imply the roster of projects.

I meant as a business opportunity to pursue an opportunity where you sell the equipment versus build-to-own, that option that you have, is that driven primarily by customer demand, your preference or customer preference?

Our preference, for sure, 100% is sale of gas.

We are not an equipment company to make money on sale of equipment.

But considering the capabilities that we have, in order to maintain a relationship with the customer, if they insist on a sale of equipment, we do, once in a while, do that.

But our focus and our preference has always been sale of gas because that is our business.

And if there was less bidding activity on sale of equipment down the road, would that -- would you view that as constructive, maybe a greater opportunity for build-to-own?

That is correct.

That would be the case, yes.

And then just lastly on the Glenmont, New York facility, is that region in your merchant business tightening up that would justify building a bigger liquid plant in that region?

And why pursue that as a JV with Linde instead of go it alone?

Well, there was a tightening of the market, and there is additional capacity required.

And what it made sense was that rather than us building another 300- or 400-ton a day plant to meet the requirements, it made sense to build a 1,200-ton a day plant which is a lot more efficient, and at the end of the day, it's good for the customers because our cost-base for both companies is lower and, therefore, the customers benefit.

So that is actually a good thing for our customers, and it also creates opportunity to produce the gas at the lower cost.

(Operator Instructions) We'll take our next question from Kevin McCarthy with Vertical Research Partners.

This is Matt DeYoe on for Kevin.

I don't want to kind of beat the equipment sales dead horse here, but kind of just trying to track down a little bit.

Would it be fair to say the equipment sales in Asia were about $45 million year-over-year?

And kind of what is the EBIT margin look like on that business?

I'm guessing it'd be higher than the segment average.

And then maybe touched on this a little bit, but what should we expect in 4Q 2018 as far as new equipment sale order book?

As I told you, we are not focused on equipment sales.

We don't consider that to be a significant part of our business, and I don't think you should expect too much on that.

That is not what drives our business.

That's not what we are focused.

We are not like some other industrial gases business where half of their business is equipment sale.

That is not -- that has never been our focus, and it will not be.

We are -- that's not a big deal for us.

I get that.

I'm just trying to kind of effectively strip that out of the numbers to maybe to get a better sense of what ongoing profitability would look like in the Asia segment, just trying to make apples-to-apples basically.

But we do -- but we have tried to make sure that we do give you that visibility because the report Gases Americas or Gases Europe or Gases Asia doesn't have equipment sales in it because that is -- it's all in Global Gases.

Sorry, maybe just one clarification of that.

We have, in this case, some gas handling equipment that is the Asia segment.

I don't think we're going to go into the exact quantification because it's a small group of customers and so forth.

I will say, it was a positive impact on our margins.

But the nature of this was not something that we're going to repeat every day.

As Seifi says, I wouldn't be expecting that going forward.

But there is a difference that we need to kind of make sure that the investors understand.

One thing is sale of equipment in terms of selling an air separation unit.

The other thing is that when we deal with, specifically, with our electronic customers.

The electronic customer sometimes requires equipment, which is related to the delivery of gas and purifying of the gas.

That we do, do for our customers.

We do that for our electronic customers.

And that specific area did contribute some to our Asian results.

But your question about equipment sales on the major air separation units, and I said we're not focused on that.

But for some of our electronic customers, as a matter of necessity, when we built them a nitrogen generator - high-purity nitrogen generator, there are equipment related to the delivery of that to the customer, we do provide those equipment, and those are considered -- those are in the category of equipment sale, but they are not air separation units.

We'll take our next question from Vincent Andrews from Morgan Stanley.

I just wanted to ask on the LNG weakness.

You said $0.30 for '17 and despite the -- I guess the new plants that was in-line.

Should we be done with his headwind moving into '18?

Or do you think there's still a little bit of a drag from it?

Well, obviously, in that business, such a lumpy business, it's difficult to predict.

But right now, to be -- if you wanted to be pessimistic, there might be another $0.04 or $0.05 hit to us in 2018 because of LNG.

Okay, and was there any way we can get you to break out the organic volume versus the new projects and everything else?

For?

Well, regionally or globally, however, you're willing to do it.

Well, organic volumes, most of the volume we reported was organic, except in Asia, where we said that half of the 20% was equipment.

Corning?

Yes, I think we said...

Yes, I guess I'm trying to break out just sort of base business versus new project start-ups versus equipment sales, just the base business.

Understood, understood.

So I think the main energy is around Asia.

That's where we had the biggest impact on it.

And if you're looking at that 20%, we had -- about half of that was the equipment, the other half was on our gas side.

And I'd say roughly 50-50 on that in terms of volume between new projects and just organic merchant growth.

I mentioned that in my opening remarks and the other questions that, that Corning said about 10% is the equipment that we do for electronic customers.

The other 10%, half of it is new projects start-ups and half of it is organic growth.

So we had 5% organic growth.

We'll take our next question from Laurence Alexander from Jefferies.

Just 2 quick ones.

First, do you expect over the next 2, 3 years, to get back to the pattern of EBITDA growth in each region outpacing organic growth?

And I think you've been pretty clear about the dynamics that have caused this quarter to have its characteristics.

I just want to see if you expect those trends to reverse.

And secondly, just eyeballing the backlog, is it fair to put roughly $1 billion to $1.2 billion worth of gases start-ups in terms of capital that's going to be ramping up in 2018 and a tailwind into 2019?

Is that roughly a good bogey?

First of all, with respect to the growth thing, I think we have always said that when you're looking at different regions of the world in mature economies, our EBITDA will grow with economic development.

And our volumes will grow with GDP.

In emerging markets, it is -- if industrial production is 2%, usually gases grow more than that, about 1.2x, 1.3x that.

So I expect our EBITDA in the growth markets like China and India would be better than that.

With respect to the other question that you have, do you want to -- Simon, do you want to make some comments on that?

Sure.

I think, Laurence, was asking about the amount of the backlog we expect to come on in 2018.

I think Laurence, as usual, it's hard to know exactly when these projects are going to come onstream.

So I think we'll give you more clarity on '18 when we get to October.

Then we do our forecast for the year.

Okay, at this time, then, I would like to, since there are no other questions, I would like to thank everybody for being on the call.

Thank you 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 those of you who are in the northern hemisphere, have a great summer.

Take care.

Thank you.

Ladies and gentlemen, this does conclude today's call.

Thank you for your participation, and you may now disconnect.