Air Products and Chemicals Inc (APD) 2017 Q4 法說會逐字稿

Good morning, and welcome to Air Products and Chemicals' fourth 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, John.

Good morning, everyone.

Welcome to Air Products' Fourth Quarter 2017 Earnings Release 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.

The talented, committed and dedicated team of Air Products, our people, delivered an excellent set of results.

For the fourth quarter of fiscal year 2017, our earnings per share was up 18% versus last year and for all of fiscal year 2017, earnings per share was up 12%.

This is the 14th consecutive quarter that we have reported year-on-year EPS growth.

This is also the third consecutive year that we have delivered earning per share growth of more than 10%.

We generated strong cash flow and returned about $800 million of that to our shareholders through dividends.

We continue to be the safest and most profitable industrial gas company in the world with EBITDA margins of over 34%.

We have a great team that is totally focused on delivering strong performance day in and day out.

Ultimately, our success is built on providing excellent service to our customers.

We are committed to providing them with the right innovations and solutions to make their processes better.

Now please turn to Slide #3.

You can see the significant progress we have made on improving our safety results: a reduction of 75% in our lost time injury rate.

This result is a clear indication that all of our 15,000 employees around the world are totally focused on safety and operational excellence.

This focus is also a significant driving force for our strong financial performance.

Now please turn to Slide #4, which was 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.

At the end of this call, I will talk about a modification that we have made to our goal to include diversity and inclusion as a significant part of our goal as we go forward.

Now please turn to Slide #5, 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.

Now please turn to Slide #6, where you can see -- the one that you have seen many times before, our Five-Point Plan, which is the foundation of our success.

Please turn to Slide #7, where I would like to take a few minutes to remind everybody of the progress we have made in the last 3 years.

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

In 2014, we made several commitments to ourselves and to our shareholders, and as I recall, there may have been some skepticism in the investment community at the time about our ability to deliver these results.

So, let's update you on where we are today.

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

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

On the Slide 8, you can see the result 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 #9, you can see our success in divesting our noncore assets.

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

We have spun off our Electronics Material business as an independent company called Versum Materials.

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

They have delivered strong results, and the Versum stock is currently trading at almost 14x EBITDA, in fact, a higher multiple than Air Products right now.

Now please turn to Slide #10, which shows the result of our improved business performance and the successful transactions that we have made.

Air Products has the strongest balance sheet in the industry, so we are well positioned to take advantage of the tremendous growth opportunities that we see in Industrial Gases.

This is our future: growth.

And as you can see, we've delivered EPS growth of 10% in 2015, 16% in 2016 and 12% in 2017.

Now please turn to Slide #11 to summarize.

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.

Now please turn to Slide #12 for a summary of our fiscal year 2017 accomplishments.

I previously mentioned the Versum spin and PMD sales.

I want to thank the very hard-working teams we have at Air Products.

They have successfully executed our major projects.

We brought onstream a very large hydrogen project in India, a large air separation plant in Korea and our seventh large plant in China providing oxygen to coal gasification.

We continue to make great progress on the Jazan project and currently expect onstream in phases starting in fiscal 2019.

The picture at the bottom of the slide shows the 6 air separation unit trains already erected at the site.

And to try to bring a sense of scale of these huge air separation units, the top picture shows just one of the cold boxes before it was shipped from China to the site.

And each one of those small dots that make up the sign, CG, for our cogen facility, is actually one of our people.

In terms of safety, in September, we mark one of the most significant safety accomplishments in Air Products' history when the Jazan project achieved 19 million man hours of work without any lost time injuries, a great example from one of the very large complicated and challenging projects being executed safely by our teams around the world.

We also established a world-class technology center in the Dhahran Techno Valley Science Park to serve Saudi Arabia and the Middle East region.

And finally, we continue to win new projects around the world for key customers in the electronics, manufacturing and chemical markets that will drive growth for Air Products and create value for shareholders.

I would like to also take a minute to highlight our clear focus on excellence in technology, engineering, manufacturing, procurement and construction, which are all essential to our ability to deliver long-term shareholder value.

We are very pleased that Dr. Samir Serhan joined Air Products last year, bringing deep knowledge and experience in the leadership of these critical functions.

In alignment with our Five-Point Plan, Dr. Serhan recently led our teams through a thorough review of strengths and opportunities in each one of the areas I mentioned above.

We are now executing on clear improvements in our plant design, organizational design, work processes, footprint and talent development, while maintaining and leveraging our existing strengths.

I am confident that the actions that Samir has taken will sharpen our product line focus, improve our competitiveness, and subsequently enable us to deliver on our growth objectives.

Now please turn to Slide #13, which summarizes the very exciting project expansion with Lu'An Clear Energy in Shaanxi, China.

As we announced this in September, we will form a $1.3 billion joint venture with Lu'An that will own and operate the air separation units, gasifiers and syngas cleanup system to provide syngas to Lu'An under a long-term agreement.

This is a great example of Air Products expanding our scope of supply consistent with our business model.

We continue to make good progress on the necessary approvals and are hopeful we can close on the joint venture at some point during fiscal year 2018.

However, due to some uncertainty in the timing of the necessary government approvals, we have not -- and I would like to stress, we have not included any contribution from Lu'An project in our EPS or CapEx guidance for fiscal year '18.

Now please turn to Slide #14, which shows you the results of our 3 key metrics for the quarter and year.

These are the financial metrics that we use.

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

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

Now please turn to Slide #15, my favorite slide.

It's great to see our margins improve again this quarter and up slightly versus last year.

It also illustrates the 900 basis point improvement versus 3.5 years ago.

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 pleased to answer your questions.

Scott?

Thank you very much, Seifi.

Now I would like to make a few additional comments on our fiscal 2017 results before discussing our fourth quarter results.

Please turn to Slide 16.

In summary for the year, higher volumes and productivity drove significant profit growth and delivered record EPS.

Total sales increased 9% with underlying sales up 7%.

Volumes were broadly higher, up 6%, with pricing up 1%.

Unfavorable currency reduced sales by 1%, while higher energy pass-through increased sales by 3%.

EBITDA of $2.8 billion increased 7%, while our EBITDA margin of 34.1% declined 80 basis points.

Excluding the impact of higher energy pass-through, EBITDA margin was up 10 basis points versus prior year.

Operating income of $1.8 billion increased 9% and our operating margin of 21.6% was unchanged.

Record earnings per share increased by 12%, and our ROCE came in at 12.1%.

Slide #17 shows our distributable cash flow of more than $8 per share.

We believe this measure, more than EPS, is the true measure of the value we are creating for our shareholders.

Our distributable cash flow increased as a result of our strong performance in FY '17 with EBITDA growth more than offsetting higher maintenance CapEx.

Free cash flow of $450 million was modestly lower as a result of higher dividend payments, which were up 9%.

Now please turn to Slide 18 to review our full year EPS.

Year-on-year, EPS growth of $0.67, or 12%, was driven primarily by higher volumes and lower costs driven by our productivity actions.

Higher volumes added $0.29, as growth across our gases segments more than offset weakness in LNG.

Price of raw materials taken together was favorable $0.03, primarily from Gases Asia.

And cost contributed $0.24, as our focus productivity actions in all our segments more than offset inflation.

Currency was a negative $0.03 impact.

Other non-operating income added $0.10 from interest income.

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

All other items totaled $0.04 favorable.

Now please turn to Slide 19 for a more detailed review of our Q4 results.

For the quarter, we also delivered record EPS.

Sales of $2.2 billion increased 13% versus last year, with underlying sales up 11% on 9% higher volumes and 2% better pricing.

Higher energy cost pass-through and favorable currency each added 1%.

Volumes were higher across all 3 gases regions, and taken together, the regions had a positive impact on overall volumes of 11%.

From a volumes standpoint, continued progress on our Jazan project was more than offset by the continued weakness in LNG.

Overall pricing improved, mainly due to Gases Asia.

EBITDA of $769 million improved by 13%, and operating income of $493 million improved by 16% driven by overall higher volumes, productivity as well as Asia pricing.

EBITDA margin of 34.9% increased by 10 basis points and was negatively impacted by 30 basis points from higher energy cost pass-through.

Excluding this impact, EBITDA margin was up 40 basis points.

Operating margin of 22.4% improved by 50 basis points versus prior year.

Net income increased by 19%, and adjusted earnings per share increased by 18% versus prior year.

ROCE of 12.1% declined by 30 basis points versus last year and 10 basis points sequentially.

To provide you with some context, sequentially, ROCE was lower, although profits were higher.

This is because the denominator of the ROCE calculation has increased.

The denominator is based on a 5-quarter average, and this now includes 3 quarters with the significantly higher denominator as a result of the gain from the PMD sale.

Now please turn to Slide 20.

Looking at our Q4 cash flows, we had a strong finish to fiscal 2017.

Q4 distributable cash flow was over $600 million, while our free cash flow was $250 million.

Free cash flow was up $100 million versus last year due to higher EBITDA.

Now please turn to Slide 21.

Before I discuss our underlying results, I want to spend a moment on several non-GAAP items that totaled a positive $0.39 per share.

First, we made a tax election that allowed us to recognize a tax loss on our Latin American Indura business.

This resulted in a $111 million tax benefit, or $0.50 per share.

To be clear, this is not reflective of a new loss or charge for this business, but rather the opportunity to recognize tax benefits from previous losses.

A $12 million gain on a land sale was $0.03 per share.

And finally, $48 million or $0.14 per share of cost reduction and asset actions that include Dr. Serhan's work to restructure our engineering, manufacturing and technology organizations.

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

Excluding non-GAAP items, our Q4 continuing operations EPS of $1.76 increased $0.27 per share or 18% versus last year.

Higher volumes broadly increased EPS by $0.09 per share.

Pricing and raw materials taken together increased EPS by $0.07.

China pricing strengthened again this quarter.

Net cost performance was favorable $0.06 as our productivity actions and the TSA income more than offset inflation.

We are pleased that we delivered on our $100 million productivity commitment this year.

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

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

The costs 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 the first half of 2018 and are committed to taking actions to reduce the costs associated with providing these services.

Depending on the exact timing, we may see a brief gap between the end of the revenue from the TSAs and the cost savings.

For the quarter, currency and foreign exchange gains and losses net to $0.02 favorable as we experienced a weaker dollar, particularly versus the euro, as the trend from earlier this year reversed.

Equity affiliate income added $0.02 due to the underlying strength across a number of our joint ventures.

Other nonoperating income added $0.03 due to interest income.

Interest expense was $0.01 favorable as our lower debt balance more than offset higher rates.

Tax, noncontrolling interest, and shares outstanding were each $0.01 unfavorable.

Turning to Slide 22, I would like to update you on our capital deployment capacity.

We have about $3.7 billion of cash and short-term investments as of September 30.

After maintaining a modest operating cash balance, we have about $3.5 billion of cash available to invest.

Our debt balance as of September 30 is about $4 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 2.0x to 2.5x EBITDA.

Based on a trailing 12 months EBITDA of $2.8 billion, this would support a debt level in the range of about $5.5 to $7 billion.

So in total, between our available cash and additional debt capacity, we have about $5.5 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.

Please turn to Slide #23.

FY '17 was a good year across our regional businesses.

We grew both sales and profits in all 3 of them and concluded the year on a high note.

In summary, I'd say in the Americas, the profit improvement was driven primarily by higher volumes and productivity.

In EMEA, the team overcame currency headwinds through productivity actions.

And in Asia, we had great success in both volume and pricing.

We made significant productivity gains this year, while at the same time supporting merchant demand growth.

For example, our investments in distribution efficiency have helped us absorb the higher distribution costs inherent in our drive to increase our retail business.

We ended the year with 2 quarters of sequential sales and profit growth in each of the 3 regions, and we delivered record quarterly profits in Q4.

I would like to thank our team around the world for all their dedication and hard work in achieving exceptional safety and business results in FY '17.

Now please turn to Slide 24, Gases Americas.

Before discussing our results, I'd like to express a special thanks to our operating team in the Gulf Coast.

As is our practice, teams of employees volunteered to ride out Hurricane Harvey in our facilities to ensure safe and reliable supply to our customers.

Our plants operated extremely well, did not sustain any damage, and we only shut down plants due to low customer demand.

We were able to keep running.

Reliability is an important part of our business model and we delivered.

Our team did all this safely and efficiently under trying conditions.

Well done.

The hurricane had little to no impact on costs and only a modest impact on sales.

As a result of our people's dedication and the strength of our business throughout the Americas, we were very pleased to report strong results despite the hurricane.

For this quarter, sales were $953 million, an increase of 9% versus last year.

Volumes were up 7% while currency and energy pass-through were both up 1%.

North American volumes grew on strong hydrogen volumes as our refinery customers continued to operate at a high level with less planned maintenance outages despite the disruptions caused by the hurricane.

We also saw positive volume across our other product lines in North America.

Latin American volumes were up slightly this quarter versus prior year, however, economic activity remains weak.

The overall pricing impact was slightly positive but rounded to flat versus last year, as higher North American pricing more than offset negative Latin America pricing.

EBITDA of $402 million was up 14% as higher volumes, lower planned maintenance costs and our Taking the Lead productivity programs more than offset the hurricane impact on volumes.

EBITDA margin of 42.2% was up 220 basis points higher than last year, driven by higher volume and cost savings.

Higher energy pass-through reduced the margin by about 60 basis points.

So excluding this, the margin was up about 280 basis points.

Sequentially, EBITDA was up 9%, primarily driven by lower planned maintenance costs and stronger volumes.

Now please turn to Slide 25.

In our Europe, Middle East and Africa business, the volume growth versus prior year and prior quarter was driven primarily by our new hydrogen plant in India that was onstream for the full quarter.

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

Versus last year, sales of $515 million were up 24% with volumes up 18%.

Currency, primarily the euro, added another 5%.

While the new India plant was the strong majority of the volume growth, our LOX/LIN and cylinder volumes were both up mid-single digits with the base business contributing almost 3% to the segment volume growth.

Overall pricing was slightly positive but rounded to flat as slightly higher underlying real pricing was partially offset by customer and product mix.

EBITDA of $180 million was up 17% compared to prior year, again primarily driven by the new plant in India.

However, the higher merchant sales, productivity and positive currency impact also improved profitability.

EBITDA margin of 35% was down 220 basis points versus last year primarily due to the new India plant.

We are very pleased with the returns of this new project in India.

But since there's always a significant amount of natural gas pass-through in any hydrogen project and natural gas is particularly expensive here, it is margin dilutive.

EBITDA was up 16% sequentially on higher volumes, productivity and positive currency.

Please turn to slide 26, Gases Asia, where our pricing and sales momentum continued.

Sales of $552 million were up 23% compared to prior year, driven by strong volume and increased prices.

Volumes were up 17%, roughly split 60/40 between new plants, primarily Yitai, and our base business.

Merchant volumes were up across all product lines, and the LOX/LIN retail to wholesale ratio continued to improve.

Sequentially, reported volumes were down due to the equipment sales last quarter.

We raised prices significantly in the merchant market in China, which drove the overall 6% increase for the region.

Our team worked hard to raise prices across all liquid businesses and was particularly successful in the spot and wholesale markets.

We believe China's government's focus on consolidating the steel industry and its corresponding impact on captive air separation plants has improved the supply-demand balance.

That said, we are closely monitoring this market as spot and wholesale pricing can be volatile.

EBITDA of $224 million was up 31% compared to prior year driven by the strong volumes and higher pricing.

EBITDA margin of 40.6% was up 240 basis points.

Finally, please turn to Slide 27 for a brief comment on our Global Gases segment, which includes our air separation unit, sale of equipment business as well as central industrial gas business costs.

Sales were up $14 million, while profits were down $10 million versus prior year.

We continue to make good progress on the Jazan project, but as you may remember, we recorded a large profit in Q4 of FY 2016, making for a tough comparison for this quarter.

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

Thank you, Corning.

Please turn to Slide 28.

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

For the year, segment sales were down about $150 million and EBITDA was down about $90 million, primarily driven by significantly lower LNG project activity.

For the quarter, in addition to the weaker LNG business, we also had a negative impact from helium inventory revaluation.

For FY '18, although we've still have not yet seen LNG customers moving forward with their investment decisions, we don't anticipate an earnings headwind for the Corporate segment.

Now I'm pleased to 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 Air Products' future.

As I discussed earlier, we are very proud of having delivered on our promises from 3 years ago, and we are excited about the opportunity to build on our success.

Our safety, productivity and operating performance continues to be strong.

In fiscal year '18 and beyond, we will continue to focus on productivity, which remains an important factor in delivering our earning per share growth commitment.

As you will recall, 3 years ago, we stated that we will deliver $600 million of productivity improvement.

Up to now, we have delivered more than $475 million, and we will deliver the balance in the next 2 or 3 years.

As you know, our portfolio actions and strong cash flow generation of our company provides us with an expected capacity of over $8 billion to invest over the next 3 years.

I am confident that Air Products will be successful in utilizing our balance sheet to invest in our core Industrial Gases business to create significant value for our shareholders.

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

First, acquisition of small- and medium-sized industrial gas companies or assets from -- businesses from our industrial gas competitors.

The 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.

This is what we call asset buybacks, and 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 agreements.

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.

The Lu'An project that we described before is a perfect example of this area of possible growth for us.

We expect to do more of these.

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 market growth.

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

The plant 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.

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.

Now please turn to Slide #29.

Our great team of hard-working, dedicated, talented and motivated employees remain focused on being the safest and most profitable industrial gas company in the world, providing excellent service to our customers.

Continuing our positive momentum, we expect to deliver earning per share of $6.85 to $7.05 for fiscal year 2018, up 9% to 12% from our very strong fiscal year 2017 performance.

We remain confident in our ability to deliver on our commitment to grow earning per share by at least 10% each year in the future.

For quarter 1 of fiscal year 2018, our earning per share guidance is $1.60 to $1.70, up 9% to 16% over the first quarter of fiscal year 2017.

We expect our capital expenditure to be in the range of $1 billion to $1.2 billion in fiscal year 2018.

As I mentioned before, our EPS and CapEx guidance do not include any contribution from the Lu'An project or any other M&A opportunities that we might execute during the year.

We are certainly working on other opportunities that could potentially add to our results in fiscal year 2018, but have not included any other significant acquisition in our guidance.

Let me summarize on Slide #30.

I'm proud of the performance that our great team delivered in the last few years and very excited about the potential for Air Products in 2018 and beyond to deliver real growth in our sales and profitability.

Please turn to Slide #31.

In addition to being the safest and most profitable industrial gas company in the world, we are now elevating our commitment to diversity and inclusion by explicitly incorporating it in our goal.

This is a natural extension of the culture that we are building at Air Products.

I believe this focus on diversity and inclusion will actually contribute to maintaining our position as the most profitable industrial gas company over the long term because, as I've always said, the degree of commitment and motivation of our people is the real sustainable competitive advantage that we have.

We want to ensure that we are providing opportunities and the right environment for everyone to contribute and succeed, regardless of their gender, color, race, religion, orientation, country of origin, or any other dimension of diversity.

At this point, we will be delighted to answer your questions.

(Operator Instructions) And we'll take our first question from Vincent Andrews with Morgan Stanley.

Just on the merchant pricing in China, obviously, nice acceleration from 4% last quarter to 6% this quarter.

Where do you think we are in terms of utilization right there?

It feels like there's been a very significant uptick in the past few quarters.

I think we're in the mid-80s?

And I felt like you were being a little bit conservative maybe on the outlook, just talking about how it can lump around.

But what are you seeing?

And what do you think the bull and bear case is on this line item going forward?

First of all, good morning, Vincent, and I'd just like to -- I'm going to ask Corning to answer the specifics, but I'd just like to say that you have to make a distinction between utilization of the overall industrial gas companies in China and our utilization rate.

So Corning is going to address our utilization rate.

Yes.

So our utilization rates are in the low-80s.

I think you're fishing for what we think the larger market might be.

But I think with the dynamic situation in the steel industry, it is difficult to make a precise estimate of where we think overall industry loading is at.

Clearly, though, the supply/demand dynamic is better than it has been.

Okay.

And just as a follow-up in the Americas, year-over-year, there was an issue with lower maintenance expense.

But then obviously, also the volume came back nicely, and I would assume that had an incremental positive impact.

So can you just help us bridge last year to this year?

And what was the gross positive benefit from the maintenance?

Or would you say the volume was maybe better anyway regardless of the difference in maintenance year-over-year?

Yes.

Corning?

Yes.

So there was -- I would say, the volume was a positive for us if we look across the business.

Maintenance was a mild positive for us if we look at the fourth quarter.

If we look at the full year, relatively flat.

Yes, Vincent, I'd just like to add that one of the main drivers for our volume growth is our hydrogen business.

We'll take our next question from Christopher Parkinson with Credit Suisse.

You had a little on this during your prepared remarks, but can you just kind of give us a little more detail and the update on the Lu'An, just the regulatory process, I guess it was the original 4 to 6 months.

I guess that's the reasoning for excluding it from your fiscal year '18 guidance.

And then more importantly, probably as well as the Chinese opportunity that may await once you receive the regulatory approval.

Chris, with respect to Lu'An, the approval that we need is that Lu'An is a state-owned company.

Whatever they need to do has to be approved by SASAC which is the overall controller of the -- all of the assets for all of the state-owned companies in China.

That process does take time.

It is difficult to make an assessment.

We, quite honestly, had a lot of debate what to do about this thing, and we thought that the best thing is to say that let's not exclude it in our estimate.

And then when the time comes and we get approval, we will obviously add it.

But I'd just like to say that Lu'An, on a full year operating basis, if it was operating for a full year, it will contribute to our bottom line about $0.25, $0.26.

So now during fiscal year '17, whenever it comes out, we will inform you.

We expect this process to take about 5 or 6 months.

It's just like a little bit like an antitrust approval, but we don't know for sure.

But as soon as that happens and be closed, we will let the investment community know, and we will adjust our guidance accordingly.

With respect to other projects in China, obviously, we are working on other projects in China, and when and if they happen, we will, obviously, make an announcement.

Great.

And you hit a little on the merchant pricing, but overall, just results across -- it seems China, India continue to do well.

Can you just walk us through your rough expectations for Asia, if you have any additional comments by country, and I even think you have a project or 2 in South Korea as well.

So any additional comments there would be helpful.

Well, I think I'll just -- we have been saying this for quite a while, Chris, that we are very positive about growth opportunities in China.

India is growing very fast.

You don't see the results because we don't consolidate the numbers.

They are making very good progress in Korea.

We are executing a lot of -- so we feel very positive about that region.

Corning, would you like to add anything?

Yes.

So let me just say, I think in China, it's across many different industry groups where we're seeing success, and you see that in merchant, which really cuts across most manufacturing fields out there.

In a country like Korea, the overall economy I would say, is not quite as dynamic as the Chinese, but the Electronics one is very strong.

And we're well positioned to succeed there and have an active project in Pyeongtaek and are already building a second plant for that.

So I think that's where we see the growth in a country like that.

We'll take a next question from Don Carson with Susquehanna Financial.

A question on the underlying business.

You had a pickup in volume growth.

I think you were 6% for the year, but you were 9% for the quarter.

If you strip out some of the new projects like India, it would appear that you're seeing some accelerating momentum in your base business in merchant and cylinder gas globally.

Is that the case?

And how do you feel about that momentum as 2018 unfolds?

Well, I think that is the case.

Quite honestly, when you look at the -- what our competitors have announced, you get a sense for that.

So overall, we are seeing positive signs for the overall industrial gas industry, and we -- based on what we see right now, we're obviously positive for 2018, but anything can happen.

But in general, there is a positive environment for all of us.

Corning, would you like to answer?

Maybe just to clarify for that.

In our base number, India is in our equity affiliate.

So the biggest driver you're seeing in there is really in the other areas.

And if I was going to look in a region like Europe, the base business up 3%, and that's both packaged gases, which has been on a rebound for us for over a year, but the liquid/bulk is a more positive trend for us.

So I'd say mildly improving conditions and that we're seeing that across many of the industries that we serve.

Corning, how about in North America and Europe as opposed to Latin America?

Are you seeing improvement in merchant business as well?

Well, to be clear, most of the improvement we saw was really in the HyCO space for us.

I'd say we clearly had positive LOX/LIN volume growth for the quarter, but it was modest.

The growth in the U.S. is very modest.

(Operator Instructions) We'll take our next question from Jeff Zekauskas with JPMorgan.

There were $48 million in restructuring charges.

Are those cash charges or noncash?

Or what's the split?

And in the fund flow statement, there was $165 million annual benefit from other adjustments.

Is that something that will repeat next year?

Or it won't?

I think the best person to answer this is Scott.

Sure.

Hi, Jeff.

Scott.

So in terms of the costs for the restructuring, yes, there will be cash costs that we'll see.

We saw a little bit in this quarter, but most of that will be seen earlier part of next year.

So yes, that will be a cash cost that's in there.

And the other thing in terms of the cash flow statement and the comment on the other tax election, so as I've mentioned, we took a restructuring of our South America business that allowed us to recognize a loss that partially offset the gain for Evonik.

So we also saw a benefit.

That's going to be $111 million of benefit to the cash flow statement, about 1/3 of that came forward in the fourth quarter and the other 2/3 will be in the second quarter is when we expect to see that.

Okay.

And then was the contribution from Jazan in the fourth quarter similar to what it was in the third quarter or different?

And did you notice that Praxair signed a deal with BASF in the syngas area in Louisiana?

And do you think that, that shows that the syngas area is now sort of identified by the industrial gas industry generally and will become more competitive over time?

Well, on -- with respect to the Jazan thing, I think there wasn't much of a difference between the third quarter and fourth quarter.

And then with respect to the syngas, they did announce that they're doing something with BASF on syngas, though, quite honestly, 1 month ago, we did -- about 1.5 month ago, we are building a bigger project for Huntsman in the same area.

It's a very large HyCO unit providing CO to their MDI unit.

So I think the idea of providing -- we have been providing basically syngas to most of these companies when we build SMRs.

The part that we are getting into is when that syngas is being converted to other materials like liquids or diesel fuel and so on.

We are getting involved in that part, and I leave it for the other company to come in if they are getting into that or not.

We'll take our next question from Duffy Fischer with Barclays.

Just question again on Jazan to follow on there a little bit.

That has been sequentially somewhat lumpy at times since we've undertaken it.

Can you give us any guidance as we go through this year?

Should we expect meaningful lumpiness?

And can you help us with which quarters might be up or down significantly if that's the case?

I don't expect any lumpiness because, quite honestly, that project is going very smoothly.

The reason that it was lumpy last year in 2016 was because we were not taking any profit for a while, just making sure that the project is real and is on- stream.

But during the course of 2017, it has been very kind of not very lumpy, and we don't expect that to be -- we expect that to be smooth for the balance of 2018.

Okay.

And then just on Lu'An.

You talked about kind of that $0.25 of profitability the first year.

Should we think about that as a baseline that would then grow roughly in line with what Air Products does kind of 10% plus?

Or, is there some natural synergies there that would mean year 2 and year 3 should see meaningfully faster growth than what the base company would see?

Duffy, the agreement that we have on Lu'An is like our other on-site agreements.

It is a fixed BFC.

So the profitability of that business is going to be approximately $0.25, $0.26 on an annual basis, and it will be the same in the future, except for some adjustments for inflation.

So that's -- it's not a business that is going to grow beyond just the adjustments that we have agreed with the other side for inflation.

So that is the good thing because it's not going to go down.

It's going to be consistent, and it's fixed fee that we charge Lu'An for providing the syngas.

We'll take a next question from P.J. Juvekar from Citi.

Seifi, your backlog of $1.5 billion, it's quite strong in Asia but has only 2 projects on the U.S. Gulf Coast.

So when -- the industry adds investment on the Gulf Coast, do you expect to see more projects down the road in your backlog?

Yes.

If there are projects done in the Gulf Coast, when they would happen, we expect to get our fair share of the market, yes.

But there are not that many projects being executed in the Gulf Coast.

Okay.

And a long-term question for you, Seifi.

You know a lot about lithium and electric cars, given your background from Rockwood.

Do you think that electrification of automobiles would be negative for hydrogen assets for the industry and you could end up with some stranded assets down the road?

No, not at all.

I actually, the way I see that, P.J., I think the industry -- I'm not an expert, but I tell you my view.

I think the industry is going to shift to electric for sure.

But then people are going to find out that now they have to generate the electricity.

And certain countries like China, they have a lot of coal that they can burn, it's called clean coal gasification, which is great for us to create -- use the coal and create clean electricity.

But there are countries like Japan.

How do you generate electricity in Japan?

That is why the -- in Japan -- now you look at Toyota, they are not working on electric cars.

They are working on hydrogen cars because they don't have coal to generate the electricity.

And they don't want to do nuclear.

I see the transition over time by internal combustion and electric cars and eventually hydrogen.

So we are very bullish on that, and we are, as you know, the leader in this field.

And this is a long-term thing.

It will happen 15, 20 years from now.

But right now, we are very active in this area, and we see actually a very great future for hydrogen cars, which would be a better solution in the long term than electric cars.

And are you actively investing in hydrogen cars, or creating hydrogen assets for hydrogen-powered cars?

We are actually investing, yes, quite a bit in -- not in the production of the hydrogen cars but in production of fueling station and creating fueling stations, so that when you have your hydrogen car, you can go like a gas station and fill your car with hydrogen.

We have some of those operational.

If you are in Los Angeles, we can show you those where it says Air Products, and you can actually drive there and fill up your car with hydrogen.

We are working on hundreds of these.

We are working on those in the United States, in California.

We have a joint venture now with [Xinhua] in China to do this.

We are working on this thing in Japan.

We are working on this thing in Europe.

Yes, we are active.

I think of all of industrial gas companies, we are the most active in this area.

Take our next question from Kevin McCarthy with Vertical Research Partners.

Seifi, over the past year in particular, we've seen a lot of environmental-related supply constraints across various industries in China.

If I look at your volume numbers in Asia, they're up 17%.

I think you indicated 2/3 of that was new plants.

So maybe mid-single-digits baseline growth.

And so my question is, are you seeing or not seeing any impact from some of those supply constraints broadly in China?

Or put differently, would your volume numbers in Asia be even better were that not the case?

Yes.

The environmental constraints in China are very beneficial to us because one of the effects of the environmental constraints is the shutting down of a lot of inefficient steel industry, which is basically elimination of our competitors because those are small steel companies, each had an air separation unit and it was a competitor.

So from that point of view, it's positive.

The second thing is that China is moving in a big way toward clean coal technology, and that is why you see all of these gasification projects.

That is why we are focused on them.

So overall, we are benefiting from the constraints that they have put in there.

That is why when we talk about growth in the future, you always see that we talk about energy, about environment and about emerging markets.

So that is a very positive trend for us.

And fortunately, we are in a leading position about coal gasification, and we will see a lot of benefits and a lot of big projects in the future.

And then the second question on EMEA.

Volume of 18% there.

What would that number have been were it not for the new plant in India?

How would you characterize the baseline growth regionally in EMEA?

Corning?

That would have been 3%.

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

Just a quick one.

I'm wondering, is there any rays of hope out there on the LNG side?

I think you said it's not going to get worse, but I guess we've seen oil's rallied 25% or 30% here in the last 3 or 4 months.

Is that something that might spark some increased activity?

Bob, I -- on LNG, basically is right now not making any money.

We have restructured the business in such a way that we wouldn't lose anything.

So we are at the bottom.

Anything that happens will be on the upside.

Depending on whom you talk to the industry, and I'm sure you are very much a -- very knowledgeable on this thing, different people take different views.

We are prepared to live with -- we have said that in 2018, we don't expect any improvement.

But in 2019/2020, I think it will come back.

Because no matter how you look at it, -- the world is going to need LNG.

So it's just a matter of riding through the cycle.

But fortunately for us, the worst is over.

And so if you characterize the China changed behavior towards some of these end markets or production assets helping you, is there also some scope that, as we've seen in some industries, these will only be temporary adjustments?

Or do you think there's actually some permanent closure over there that's giving way to some sustainability on these trends?

We are very optimistic that these are permanent things, but Corning, you want to make some comments?

Yes.

I think that the underlying megatrend in China and their approach to steel and all of that is going to continue.

I do think it could be a little bit bouncy between now and then and especially, let's say, in some of the wholesale business areas, but of course, we're moving more towards retail.

But I think the underlying megatrend is going to be sustained for some time.

It's going to be good for us.

Sure.

With a question from David Begleiter from Deutsche Bank.

Seifi, just on your 2018 guidance, I believe there that you're looking for a $0.65 EPS increase at the midpoint.

Do you have an earnings bridge to get from '17 to '18 for the $0.65?

Well, David, Air Products used to do that.

I told them to stop that because we don't want to give too much information to our competitors.

But basically, what is that $0.65?

That $0.65 consists of productivity that we will continue to deliver.

It will consist of new plants coming onstream, which is not a lot if you exclude Lu'An.

And then it will come from what we believe will be some modest growth in volumes and some modest growth in pricing and then -- you add all of that up, and we come up with the $0.63.

We obviously feel very confident that we can deliver that.

Otherwise, we wouldn't put it in our guidance.

But those are the key elements.

But we don't break it down anymore as we used to do.

Very clear.

And just on capital deployment, Seifi, and I know it's -- you can't discuss it till it happens.

But is it more likely to be second -- first half than second half or vice versa in terms of when the next project or 2 might be announced for that $1 billion plus of deployment?

Well, what do you want me to say, David?

I can say, first half.

You're trying.

Okay.

Thanks.

We'll take our next question from Steve Byrne with Bank of America Merrill Lynch.

You had this price increase announcement about 1 month ago in your North American merchant business in the 10% to 20% range.

Can you just comment on what's the average term of your North American merchant contracts and, therefore, the percentage that might be up for renewal in any given year?

And do you see this market tight enough for that to flow through upon contract renewal or the risk of losing some of these accounts?

Corning will answer that.

Yes, so let me speak about the term and then be a little more coy on the pricing just because I think of the competitive situation there.

So the term typically is 5 years.

So you can think of about 20% of it coming up in any given year.

Different contracts have different clauses in it.

Some get rolled before the 5-year period is up and so forth.

So I would just say we work pricing hard, and that announcement is part of our overall pricing program, but I'd really not like to go into specifics around that.

And then one for you, Seifi.

One of your long-term plans was just a culture change at Air Products.

How would you assess where you are at now?

Do you see more to go there?

Or has that -- has there been a sufficient amount of change in the overall company organization?

Well, I -- on that front, I'm obviously pleased with the improvements that we have made.

But I think there is more room to go.

As I always tell our people, I'm happy where we are, but I'm never going to be satisfied.

Whatever we are, we can do even better than that.

I think people have responded very well.

I'm very, very proud of the team.

I always say that I'm very -- quite honestly, very proud and honored to be part of this team.

But there is still room to go.

We have 15,000 people in this company, and to claim that we have reached every one of them with the new culture would be an exaggeration.

So we do have more work to do, but we have made a lot of progress.

And I think the best example of that is our safety record because that we need the participation of all the 15,000 people.

And obviously, our financial performance, and it's not easy to improve the EBITDA margin of a company like the size of Air Products by 900 basis points in 3 years unless you had the full cooperation and support of all of the people.

So I thank them for that and -- but as I said, there's always more room to go.

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

As the Jazan equipment sales ramp down and with LNG at a low level, does it make sense to roll the global segment at some point into the regional segments and maybe take out some more overhead?

No.

The global thing is just what we report.

It is not creating us any -- it's not a different sector that somebody is running with a staff or anything, John.

That's just how we report it to you because I did not want to allocate Corporate overhead to the regions.

And so that -- it stands out, and you can take a look at it, and we can challenge it every day.

But it's not an organization that if we kind of roll it into other things, we would save any money.

Okay.

I withdraw the question, then.

Any opportunities for Air Products to own 100% of Jazan?

I mean, it seems like Saudi Arabia is more in a monetization mode as a country, and obviously, Air Products is in an investment mode here.

Is that a possibility?

Or you don't see that down the road?

Well, the thing is that if the 75% of Jazan that we don't own was owned by the government of Saudi Arabia, I think we might have an argument on that.

But the 75% that we do not own is owned by a private company, ACWA Energy, and they like Jazan as much as we do.

So unless we are willing to go and offer them a very high price, I think they like where they are and they would like there so -- and certainly that company's a very strong company, and they're not suffering from cash.

So I think the possibility is very low, John.

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

With respect to your cash flow focus and distributable cash flow for -- the outlook for 2018, where do you expect your maintenance CapEx level to be relative to the $377 million in fiscal '17?

I think I'd be on solid ground to say that it would be around $400 million.

Scott?

Yes, I agree.

Roughly flat to this year.

Yes.

About $400 million.

We'll take our next question from Mike Harrison with Seaport Global Securities.

Corning, can you quantify what was the hydrogen growth in the Americas and maybe give a little bit more color on the impact that the hurricane had.

Was it all just lost volume?

Or did you end up getting some unusual spot sales because competitors may have been out or people needed hydrogen in unusual places.

Mike, this is Seifi.

I am certain that Corning can quantify exactly what the growth in hydrogen was, but he's not going to do that because we don't want to give that information away.

I'm sure you understand that, Mike, right.

Understood.

And then was wondering if you could comment on the progress that you're making in replacing the merchant revenue related to Airgas?

Just kind of update on what kind of impact you expect from the loss of that business and the timing of when it hits you?

That was a contract where we were not making a lot of money on it.

So I'm not sure that it was a huge loss on that.

But Corning, you want to -- I don't think we're going to quantify anything for you.

But Corning, you want to make any general comments?

Yes.

So we're working hard to replace that volume, and we've had modest volume growth, as I talked about earlier, in terms of LOX/LIN and LAR, and so we continue to work that.

You'll see a full quarter impact of that next quarter.

And we have taken that into consideration, obviously, when we gave you our guidance.

Yes.

And we'll take our next question from Laurence Alexander with Jefferies.

Two quick ones.

Can you characterize bidding activity and, in particular, whether the Lu'An JV returns are comparable to what you're seeing on new bids or if they're above average?

And secondly, with reference to your discussion about hydrogen cars, are you seeing any shift particularly in Europe about carbon taxes and, therefore, renewed interest in your technology around carbon capture?

With respect to Lu'An, I mean, we have told you that the Lu'An returns are -- we don't take any projects less than 10%.

So Lu'An is at higher than that.

With respect to carbon capture in Europe, we are seeing some legislation, but I think Corning is very informed on this thing.

He can give you an answer.

Go ahead.

Yes.

Let me just say a few weeks ago I was in Europe talking with a major customer about a carbon capture project.

I think the conditions are always going to require government support, and that's not fully in place.

But the opportunity is enough there that we're in direct conversations with people about it.

And we have no further questions at this time.

Okay.

With that, I would like to thank everybody for being on our call today.

Thanks for taking time from your very 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.

And that does conclude today's call.

Thank you for your participation.

You may now disconnect.