Air Products and Chemicals Inc (APD) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Air Products and Chemicals First Quarter Earnings Release Conference Call.

Today's call is being recorded at the request of Air Products.

Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved.

Beginning today's call is Mr. Simon Moore, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Don.

Good morning, everyone.

Welcome to Air Products' First Quarter of 2018 Earnings Results Teleconference.

This is Simon Moore, Vice President of Investor Relations.

I'm 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.

Beginning this quarter, we adopted the new pension accounting standard.

Adopting this accounting standard is required for all companies.

We chose to adopt earlier than many.

This new accounting standard does not impact pension or overall costs or earnings per share, but it does move the impact of non-service-related pension costs to other nonoperating income and expense.

For FY '17, this results in a modest increase in operating income and EBITDA of about $4 million and increases margins by 10 basis points.

This change provides a better reflection of our operating performance by moving the historically more volatile components of pension expense, including interest cost, expected return on assets and amortization of deferred amounts, to nonoperating.

Service costs remain in operating income as these represent the benefits earned in the current period by plan participants.

Again, just to emphasize, this doesn't change our pension or overall costs, it just moves a small component of cost from within operating income to nonoperating income.

We have used updated historical information for prior period comparisons in the results reported today and you can find a summary in an appendix slide and more detailed consolidated and segment information in the 8-K we filed today.

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.

Our talented and committed Air Products team delivered another excellent quarter.

For the first quarter of fiscal year 2018, our record earnings per share of $1.79 was up 22% versus last year.

This is the 15th consecutive quarter that we have reported year-on-year EPS growth.

This is also the third consecutive quarter we have delivered EPS growth of more than 15%.

We generated strong cash flow and are pleased to announce a dividend increase of $0.15 per share or 16%, the largest per share increase in our history.

Our annual dividend is now $4.40 per share, which equates to returning almost $1 billion per year to our shareholders.

We continue to be the safest and most profitable industrial gas company in the world with EBITDA margin of over 33%.

And most importantly, we have a great team totally focused on delivering strong operating performance while successfully winning exciting new growth opportunities.

Now, please turn to Slide #3.

You can see the significant progress we continue to make on improving our safety results with a reduction of 71% in our lost time injury rate and a reduction of 52% in our recordable injury rate.

This improvement only happens when all of our 15,000 employees around the world are totally focused on safety and operational excellence.

This same commitment is also driving our strong financial performance.

Now, please turn to Slide #4, which is our goal for the company.

As I shared on last quarter's call, we have elevated our commitment to diversity and inclusion by explicitly incorporating it in our goal.

This does not dilute our focus on being the safest and most profitable, in fact, being the most diverse will contribute to maintaining our position as the most profitable industrial gas company over the long term.

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 conduct -- to contribute and succeed, at our company regardless of their gender, color, race, religion, orientation, country of origin or any other dimension of diversity.

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.

On Slide #6, you can see our Five-Point Plan, which has been the road map to our success.

Now, please turn to Slide #7, where I would like to again remind everyone of the progress we have made in the last 3 years.

We made promises and we have delivered.

We have become the safest and most profitable industrial gas company in the world.

We have divested our noncore assets and created the best balance sheet in the industry.

And we have delivered greater than 10% per year EPS growth in each of the last 3 years and our guidance for this year implies another year of over 10% growth.

Now, please turn to Slide #8.

In summary, we have delivered what we promised and now we are well-positioned to grow Air Products.

The great thing is that we do have the balance sheet to do it.

Now, please turn to Slide #9 to discuss the areas of opportunity for us to invest and move Air Products forward.

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

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

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 to supply syngas to our customers based on long-term contracts.

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

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

We expect to do more of these in the coming years.

And the third area of opportunity is very large industrial projects around the world driven by demand for more energy, environmental requirements and emerging market growth.

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

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

Some of these new large projects that I'm talking about can also include gasification and syngas supply.

The Yankuang project that we announced is another great example of that.

Now, please turn to Slide #10 to discuss some of the -- or read some of our recent successes to grow Air Products in line with what I just described, which is consistent with our strategy.

First, the tremendous opportunity for Air Products to expand our well-proven onsite business model to supply syngas.

And we have some great recent examples.

In September, we announced the $1.3 billion Lu'An syngas joint venture.

We continue to make progress on the necessary approvals and hope we can close on this joint venture at some point during fiscal year '18.

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

We will continue to keep you updated on our progress.

In November, we announced the $3.5 billion syngas joint venture with Yankuang in China.

We also continue to make progress on finalizing the contracts and will keep you updated.

And earlier this month, we announced an agreement to acquire Shell's coal gasification technology supporting our syngas supply position and supporting our strategy in this area.

Finally, earlier this week, we announced an agreement to supply syngas to BPCL's Phase 2 petrochemical project in Kochi, India.

Our new facility will be integrated with the large plants we brought onstream in 2017 to supply their refinery.

In terms of acquiring assets or -- and plants or the so-called asset buyback that we have been talking about, in December, we announced an ASU asset buyback and long-term industrial gas supply agreements for Jinmei Huayu in China.

A great example of a customer becoming more comfortable with the outsourcing sale of gas model.

And we recently signed and closed on another deal to acquire 3 existing large air separation unit assets in China and have began supplying customers under long-term agreements.

And finally, we continue to see great opportunities in the new industrial gas projects around the world.

We announced new projects in China and Korea.

Notably, these include major contracts expanding our supply to 2 of Samsung's major sites in Korea.

Finally, we continue to make great progress on the Jazan project and currently expect onstream in phases starting in fiscal year 2019.

As I mentioned, yesterday we announced the largest dividend increase in Air Products' history, continuing our commitment to return cash to shareholders.

Now, please go to Slide #11, which shows you the results of our 3 key metrics for the quarter and the year.

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.

Finally, please turn to Slide #12, which continues to be my favorite slide.

It is great to see sustainable margins in the mid-30% range and it reminds us how far we have come in only a few years.

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.

Before I discuss our results for the quarter, I would like to provide a brief summary of the impacts we expect the U.S. Tax Cuts and Jobs Act to have on Air Products.

Please turn to Slide 13.

First, let me talk about the income statement impact for Q1.

Although the reduced U.S. tax rate under the new tax act was not effective until January 1, 2018, which is after the end of our fiscal Q1, this quarter's results reflect our estimated blended tax rate for the full year as required.

Overall, the new tax act reduced our tax rate in Q1 by about 260 basis points, which increased EPS by about $0.06 per share.

As you can see, the positive impact of the lower U.S. tax rate was partially offset by other tax act changes, including reduced benefits from the U.S. production activities deduction and changes to compensation deductions.

For the full year 2018, we expect the new tax act to reduce our tax rate by about 250 to 300 basis points to somewhere in the range of about 20% to 21%.

This would increase EPS by about $0.20 to $0.25 per share.

For fiscal year 2019, we expect a similar net impact as the full year effect of the lower U.S. rate is approximately offset by the repeal of the U.S. production activities deduction and credits for foreign taxes and other changes that take effect in 2019.

So I would use about a 20% to 21% book effective tax rate to model Air Products going forward.

Turning now to the tax-related non-GAAP items this quarter that totaled a negative $239 million or $1.09 per share.

Please keep in mind, these are based on our current reasonable estimates.

We had a charge of $453 million to recognize the liability associated with the deemed repatriation of foreign earnings with about $32 million recorded in equity affiliate income.

The deemed repatriation tax will be paid over the next 8 years.

Partially offsetting the charge, we had a benefit of $214 million due to revaluing our U.S. deferred tax assets and liabilities at the lower tax rate.

Finally, let me comment on the expected cash tax impact.

There was no cash tax impact in Q1.

For the full year 2018, we expect a modest reduction in cash taxes from the new tax act of about $15 million to $20 million as the benefit from the lower corporate tax rate is mostly offset by the tax on the expected repatriation of foreign cash from subsidiaries and joint ventures.

So we would still expect cash taxes in the range of about $400 million for 2018.

For 2019, we expect a cash tax reduction from the tax act of about $70 million to $80 million with the positive impact of the full year of the lower tax rate and the immediate expensing of capital investments being partially offset by the first payment of the deemed repatriation of foreign earnings.

Turning now to our Q1 results on Slide #14.

As Seifi mentioned, this was another record quarterly EPS.

Congratulations to the whole Air Products team.

Sales of $2.2 billion increased 18% versus last year as volume plus price were up 15% and currency added 3%.

Volumes were up 13% with positive contributions from all 3 regions driven by new plants, a contract termination and associated plant sale in Asia and base business growth.

The Asia plant sale was about 6% of the growth, new plants were about 5% and base business growth was about 2%.

Pricing was up 2% driven by the China merchant business.

Currency was positive driven by the euro, British pound and the Chinese RMB.

EBITDA of $735 million improved by 12% driven by the higher volumes and China pricing.

EBITDA margin of 33.2% was down 160 basis points.

The Asia contract termination and plant sale negatively impacted margins by about 90 basis points and the significant amount of energy pass-through on the new hydrogen plant in India due to the high natural gas prices negatively impacted margins by 40 basis points.

Excluding these 2 items, EBITDA margins were down 30 basis points primarily due to higher planned maintenance costs.

Let me provide some more background on the Asia contract termination and associated plant sale.

One of our onsite steel customers in China had a change in ownership and approached us to end our long-term supply agreement with them and purchase the plant from us.

The customer had no contractual right to do this, but we are satisfied with the outcome of the negotiation and are pleased to reduce our long-term exposure to this customer.

We recognized the sales and profit from the sale of equipment this quarter, but we'll not see the sales and profit from the sale of gas going forward.

Sequentially, EBITDA was down 4% primarily due to planned maintenance outage costs and lower OIE.

Net income increased 23% and adjusted earnings per share increased by 22% versus prior year.

ROCE of 11.9% declined by 80 basis points versus last year and 20 basis points sequentially despite the profit increase.

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

The denominator is based on a 5-quarter average and this now includes 4 quarters with a significantly higher denominator as a result of the gain from the PMD sale.

Please turn to Slide 15.

The only non-GAAP items we had this quarter were related to the new tax act and totaled $1.09 per share as I discussed earlier.

Our adjusted Q1 continuing operations EPS of $1.79 increased $0.32 or 22% versus last year.

As I mentioned, this includes the $0.06 benefit from the new tax act.

Excluding this benefit, our EPS was still up 18%.

Overall, higher volumes increased EPS by $0.19 per share.

This includes $0.08 for the contract termination and plant sale in China.

Price and raw materials, taken together, increased EPS by $0.08 driven by China merchant pricing.

Net cost performance was unfavorable $0.15 as we had some positive items last year that didn't repeat as well as higher planned maintenance costs and inflation.

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

The payment we received for this service was about $6 million this quarter and is shown in the other income and expense line.

This is down from recent quarters as the Evonik TSA ended during Q1.

We expect the Versum TSA to finish at the end of Q2.

We remain committed to taking actions to reduce the costs associated with providing these services, but would expect to see a brief gap between the end of the TSA income and the cost savings.

Currency and foreign exchange gains and losses were $0.06 favorable primarily due to the euro, British pound and RMB.

Equity affiliate income added $0.03 due to underlying strength across a number of our JVs, particularly in Mexico.

Note that this excludes the new tax act-related charge I mentioned earlier.

Other nonoperating income added $0.04 primarily due to interest income.

The overall tax rate was an $0.08 benefit versus last year, with $0.06 due to the new tax act.

Interest expense, noncontrolling interest and shares outstanding totaled $0.01 unfavorable.

Now, please turn to Slide 16.

We had another strong cash flow quarter in Q1 with distributable cash flow up almost $100 million to over $500 million.

You will see we have an updated slide that more closely aligns with our current situation.

Investable cash flow is the amount of cash we have discretion or a choice to deploy.

It is after we pay interest, taxes, maintenance CapEx and dividends.

Certainly, dividend payments create value and, given our 36-year track record of raising dividends, we don't expect this to change.

We then think of funding our growth capital, including acquisitions, from our cash and balance sheet capacity as well as from our investable cash flows.

Investable cash flow is what we have been describing as more than $1 billion per year.

You can see we generated almost $350 million of investable cash flow in Q1.

As Seifi mentioned, we did close on a few acquisitions during Q1 and have included these in our CapEx and earnings guidance.

Our total growth CapEx for Q1, including the acquisitions, is about $400 million.

Again, we think investable cash flow is now the right metric as it represents the cash generated that we can choose how to deploy in order to create shareholder value.

Turning to Slide 17.

I would like to update you on our capital deployment capacity.

As I just mentioned, we view this capacity as available to enable projects and acquisitions.

We have just over $3 billion of cash and short-term investments as of December 31.

After maintaining a modest operating cash balance, we have just under $3 billion of cash available to invest.

Our debt balance as of December 31 is about $3.5 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 $2.9 billion, this would support a debt level in the range of about $6 billion to $7 billion.

So in total, between our available cash and additional debt capacity, we have about $6 billion we can deploy today while maintaining our A/A2 rating.

As I discussed on the previous slide, we also expect to generate over $1 billion per year of investable cash that is after paying taxes, interest, maintenance CapEx and dividends.

So over the next 3 years, we expect to have a total of at least $9 billion available to invest, not including extra capacity created by EBITDA contributions from investing in profitable projects.

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

Thanks, Scott.

Volumes for all 3 industrial gas regional segments were up this quarter from a combination of new plants coming onstream, overall stronger merchant sales and the China plant that Scott mentioned.

The volume strength was broad-based, covering a wide range of end markets.

Pricing was also positive across the regions with Asia, and particularly China, posting the biggest gain.

I would like to thank our team for staying close to our customers, driving competitiveness and creating growth opportunities.

Now, please turn to Slide 18 for a review of our Gases Americas results.

For the quarter, sales were up 5% on higher volumes.

Hydrogen demand was strong, particularly in the Gulf Coast, as were North American merchant volumes, even including the impact of the end of the large wholesale contract.

It's not so much that we replaced the wholesale volume molecule by molecule, plant by plant.

By taking advantage of opportunities in one market, say higher activity in the oil patch, we offset impacts elsewhere.

Going forward, we would expect to replace the liquid oxygen and nitrogen more quickly than the liquid argon, which will dampen year-on-year sales comparisons.

In Latin America, we also achieved higher merchant gases volumes versus prior year.

Overall, pricing impact was slightly positive, but rounded to flat as higher North American pricing was partially offset by negative mix.

EBITDA was up 1% compared to prior year as contributions from higher volumes and better equity affiliate income more than offset higher planned maintenance outage costs and the wholesale contract termination impact.

These factors and a lower margin sale of equipment caused the margin to be down 160 basis points.

Sequentially, EBITDA was down 12% and margin was 310 basis points lower, primarily driven by the planned maintenance outage costs, seasonally weaker volume demand and the wholesale impact.

As we move into Q2, we have seen some modest negative customer demand and feedstock and utility impacts from the very cold weather in the U.S. Gulf Coast.

Now, please turn to Slide 19 to review our Europe, Middle East and Africa business.

Sales were up 29% with volumes up 17%, energy cost pass-through up 3% and currency up 9%.

Our new hydrogen plant in India, completing its second full quarter of operation, drove a significant portion of the sales growth while our merchant business contributed 3% volume growth.

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

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

EBITDA was up 18% compared to prior year, again primarily due to the new plant in India with higher merchant sales and positive currency also contributing.

EBITDA margin of 32% was down 320 basis points, almost completely due to higher energy cost pass-through versus last year and the new plant in India which has comparatively high natural gas costs.

Excluding these factors, EBITDA margin was down only 20 basis points primarily due to a large planned maintenance outage in the quarter.

EBITDA was down 9% sequentially on the planned outage costs, lower OIE and higher seasonal power costs.

Please turn to Slide 20, Gases Asia, where our businesses continued to deliver strong growth, strong sales and profit growth.

Sales were up 47%, including the sale that Scott mentioned earlier.

Excluding this, underlying sales were still up 15%.

Underlying volumes were up 8% driven by new plant onstreams and a 3% contribution from the merchant business.

Pricing for the region was up 7%.

In addition to strong base merchant pricing, we had a particularly significant spot sale which concluded in January and will not repeat.

We expect the supply and demand balance to ease in Q2 with the Chinese New Year, but coming out of that, we believe the underlying fundamentals remain positive and I know our team is working diligently to maintain pricing momentum.

EBITDA was up 38%.

Excluding the contract termination and plant sale, EBITDA increased 26% due to the strong volumes, higher pricing and favorable currency.

We are incurring higher distribution and sourcing costs to support our growing retail business.

We think this is the right course of action and the new business is certainly contributing.

EBITDA margin, excluding the contract termination and planned sale, was up 240 basis points.

As Seifi mentioned, we announced a number of exciting new projects in Asia for coal gasification to produce syngas, ASU purchases and 2 awards for new long-term supply agreements with Samsung in Korea.

The team is doing a great job of winning new opportunities while continuing to execute on the base business, productivity and safety.

Finally, please turn to Slide 21 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 down $15 million while profits were up slightly driven by the Jazan project.

We continue to make great progress on the Jazan project and, as we have said, expect onstream in phases in early fiscal 2019.

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

Thank you, Corning.

Please turn to Slide 22.

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

Sales and profits were down, primarily driven by lower LNG project activity.

For FY '18, we still don't expect 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 very excited about the strong opportunities that we have to build on our success.

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

We continue to be optimistic about the future of Air Products.

We obviously cannot predict and we do not have control over worldwide political or economic developments, but we do have control over the operational and growth performance of Air Products and we feel confident we can continue to deliver on our goals.

As you know, our portfolio actions and the strong cash flow generation of our company provides us with an expected capacity of over $9 billion to invest over the next 3 years.

I truly believe that Air Products will be successful in utilizing our balance sheet, the best in the industry, to invest in our core industrial gases business to create significant value for our shareholders.

We see great opportunities in mergers and acquisitions, asset buybacks and large new projects as well as a significant amount of more typical industrial gas projects.

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

Now, please turn to Slide #23.

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

Continuing our positive momentum, we have increased our guidance for fiscal year 2018 to a range of $7.15 to $7.35.

This is up $0.30 from the guidance we gave you last quarter.

As Scott mentioned, $0.20 to $0.25 of this is coming from the new tax act, with the remaining increase from improved confidence in our business performance.

Our new guidance represents 13% to 16% growth over our very strong fiscal year 2017 performance.

We remain confident in our ability to deliver on our commitments to grow EPS by at least 10% every year.

For quarter 2 of fiscal year 2018, our earnings per share guidance is $1.65 to $1.70, which is up 15% to 19% over the second quarter of fiscal year 2017.

This includes approximately $0.05 from the new tax act.

Excluding the tax act impact, our quarter 2 guidance is still up 12% to 15% over last year.

Including our quarter 1 acquisitions, we now expect our capital spending to be in the range of $1.2 billion to $1.4 billion in fiscal year 2018.

As I mentioned before, and I'd like to stress this, our EPS and CapEx guidance do not include any contribution from the Lu'An project or any future M&A opportunity.

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

Now, please turn to Slide #24.

We remain committed to our goal of being the safest, most diverse and most profitable industrial gas company in the world.

We will continue to focus on safety, controlling our costs and investing in the many strategic growth opportunities that we see.

Now, please turn to Slide #25, where I want to point out, once again, that we believe our real competitive advantage is the motivated and committed people of Air Products.

Our competitive advantage comes from the commitment of our drivers who transfer -- transport our products in all kinds of severe weather conditions to deliver product to our customers.

Our competitive advantage comes from the commitment from our operators and maintenance workers who, day in and day out, work hard to keep our plants running even during severe hurricanes and other challenging conditions to ensure reliable supply to our customers.

Our competitive advantage comes from the commitment of our sales people who work hard everyday to develop and bring in new opportunities to Air Products by creating value for our customers.

Our competitive advantage comes from the commitment and motivation of the rest of our team all over the world who work hard to run our company to the highest level of performance.

Yes, our competitive advantage comes from the commitment and motivation of our people.

I consider it an honor and a privilege to be part of this winning team.

Now, we are delighted to answer your questions.

(Operator Instructions) And we'll take our first question from David Begleiter with Deutsche Bank.

Seifi, just on the India syngas project, are there any metrics you can share with us on that project?

Sorry.

Did you say are there any...

Any financial metrics you can share with us on that project?

The return on that project is well above the guidance that we have told you, which is the so-called 10% internal rate of return.

It's well above that.

And capital to be deployed with this project?

I -- we cannot disclose the exact amount of the capital, David, but it is not a $1 billion project.

Understood.

And on pricing, Seifi, what type of price traction are you seeing in the U.S., Europe?

And when do you think we can get a little more positive pricing in the core merchant gas business?

David, as you know, we don't want to be commenting on pricing for the future, but -- and the pricing of what has happened in the past, we can comment on that and that has been positive and I'd like to -- Corning to, expand on that.

But as far as future pricing, because of the nature of our industry, we don't want to comment on that.

But Corning?

Yes.

So I think your questions are probably about Europe and the Americas.

Obviously, in Asia, it's quite a strong story for us.

Both in Europe and in the Americas, we have positive net pricing.

So same molecule, same customer year-on-year, have we been able to move those prices?

Yes, we have.

We do have a challenge with mix, which is typically larger customers just simply growing more in the current environment, taking more product year-on-year and, in some degree, mix of which molecules are being bought.

But I'd say there's, in terms of real activity and real pricing, meaning same customer, same molecule, there is progress.

We'll go next to Jeff Zekauskas with JP Morgan.

When you look at your backlog, how much of your backlog is in hydrogen and syngas?

And how much of your backlog is in the traditional industrial gases, oxygen and nitrogen, argon, those sorts of things?

Approximately 40% is syngas and about 60% is the traditional business.

In the commentary, you said that repatriation impacts would be about negative $453 million and then there's the revaluation of deferred taxes and you netted that out to $239 million.

Should we look at that $239 million as the amount of additional cash taxes that you will pay over the next 8 years, excluding the annual changes to your normal corporate rate?

I would like to -- that is really -- that is the net amount of cash that will go out of the company in the next 8 years.

That is correct.

But against that, obviously we have the benefit of lower cash cost in the United States because of the lower tax.

So when you balance that, you can calculate the real net present value.

And maybe if I could just build on that, Jeff.

Obviously with the deferred tax, there's some timing that might even go further out, but it's a reasonable way to think about it.

It's just in the time frame of the 8 years.

It may just kind of take that a little bit longer.

Yes.

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

Just wanting to flesh out a little bit more of the plant sale.

So just going off your 28% in the volume number and the delta that Corning gave of 12% in EBITDA, if you calculate, is that about $130 million sale price and about $22 million of profit that you recognize in EBITDA?

Is that the right way to strip out to get to an underlying?

As usual, Duffy, you are very good at doing your math.

Okay.

And then, if I assume that you sold it for about 12x EBITDA, would that mean that the underlying profit that's going to go away that we've seen from that plant historically is about $10 million a year or $2.5 million a quarter?

Well, no.

That's not the correct way of looking at that, but the -- I think we can go through that detail offline with -- Simon can give you a lot more detail on that.

Okay.

And then, just the last one, Seifi.

With the syngas stuff, how big in the portfolio would you be comfortable letting the syngas projects get over the next 2 or 3 years?

We are shooting for about 40%.

Well, that's 40% of the backlog, but not -- so I'm just wanting to know, like, you kind of talked before about having $8 billion or so to invest over a number of years.

Half of that, all of it, how much of it could end up in being in syngas at the end of the day?

Right now, we are targeting more than 50%.

We'll go next to Bob Koort with Goldman Sachs for a question.

Maybe one for Scott, if I could.

On Slide 15, I might have missed this, Scott, but you show a price component and a cost component to the EPS.

Can you talk why the costs were up 2x the price?

So sure.

On cost, we had a bunch of things that happened last year, good news items that didn't repeat as well as in this quarter we had some higher planned maintenance and, of course, as always, we have inflation.

So those would be the key items that are driving the costs year-on-year.

I'll also point out that in the price raw materials, is any changing in power and the input costs are netted in there, so that is price net of those input costs and still recovered $0.08 above, which is separate from the costs stated down below.

Got it.

And then, Seifi, if I could follow-up, within China, obviously there's a lot of environmentalism that seems to be gaining some traction and maybe a move away from coal as a fuel source.

Can you talk about how that's impacting at all the growth potential for coal to go into liquids and chemicals?

That is obviously a very positive development for us because the push obviously from an environmental point of view is to use less coal for producing power, but we are talking about here in the projects that we are pursuing is turning the coal, especially high sulfur coal, into environmentally friendly way by gasifying it and producing chemicals.

So all of the push for an environmental thing is actually a very positive thing for us.

And that is why, if you study the details of China's 13th 5-year plan, there is a significant number of projects designated for coal gasification.

And we are obviously very much involved in that.

We'll take our next question from Don Carson with Susquehanna Capital.

A question on the merchant business.

I can see the merchant operating leverage in China and the margin impact it had there.

What's going on in, say, North America and Europe?

Can you talk about merchant operating rates?

How much they're going up?

And what kind of incremental operating leverage we can expect?

I'll have Corning address that.

So in North America, we, of course, have the challenge of absorbing a loss of a large wholesale agreement that we had.

We still published overall positive volumes for merchant.

I just want to say that's a good accomplishment by the team but it's those same factors, when we report out our numbers that Scott mentioned, that are a challenge in that.

So the higher maintenance costs and some positives from last year not repeating, the new business that we're signing, however, is certainly contributing to the overall results.

But Jeff, to be very specific, the operating rates right now, in the U.S. and Europe are around 75%.

Usually in industrial gases business, when you're operating rates gets to around 80%, then you have significant pricing leverage and that is what is happening in China.

But that is not the case yet in the U.S. and Europe.

Okay.

Then Seifi, a follow-up on capital deployment.

If you look at all the projects you signed in the roster you've given, how much of that $9 billion total have you deployed thus far?

Well, quite frankly, if you add up the projects that we have announced, and some of them are in the process like the big Yankuang project and so on, out of that $9 billion, about almost $4 billion of it is committed.

For our next question, we'll go to Christopher Parkinson with Crédit Suisse.

Scott mentioned this a little, but in IG Americas, there was some planned maintenance turnarounds which hit margins, but volumes appear pretty solid in the merchant business as well as hydrogen.

Can you just give a little more color on these fronts, just for the balance of the year and just anything of note?

It would be greatly appreciated.

Well, I think I'll turn it over to Corning to expand on that.

But what I'd want to say is that these so-called plant maintenance cost are, basically, the big money is in our hydrogen facilities and those things, the timing of those, is not under our control.

It's not under control of our customers and a lot of our customers are having turnaround this year and each one of these turnarounds is $20 million, $30 million of expense.

So that -- it's timing, but it is a necessary thing that they need to do.

Corning?

Yes.

So I think you're sort of interested in the market conditions.

So I'd first say, I think underlying hydrogen demand remains really quite strong.

And we've seen a little dip in this period because we have the cold weathers in the Gulf Coast, but I'd say we bounced back from that very quickly and at this point, our customers are pretty nearly fully back as well.

Oilfield Services is probably a change with a higher oilfield prices.

We see more nitrogen going into that market, but, by and large, I'd say there's just broad-based strength in North America right now.

And just a quick derivative question, some trends in the Chinese merchant market in terms of lines of price.

Can you just comment on remaining supply-side dynamics that would help maintain the momentum of fiscal year '18?

Are there still additional facility closures, steel, for instance?

Or do you believe the comps will become more difficult as you progress throughout the year?

And then just also any quick comments on regional demand trends, if you have any, by end market would be helpful.

So I think -- first of all, maybe I'll take those in reverse order because I think the key point there is there's just broad-based industrial momentum in probably the world today but China, being to a certain degree, a workshop for the world, there's broad space demand growth there.

Obviously, the coastal area is a little bit stronger than inland.

We're going to see the Chinese New Year impact.

It will be interesting to see how quickly the volumes rebound from that.

Coming out of that, I would expect the overall supply-demand dynamics to remain very positive for the industry.

We have, last year, the shutting down of the induction furnaces.

I think what we're going to see is some new demand, perhaps from electric arc furnaces.

That will probably strengthen as we come into the coming year.

All in all, I think it's going to remain a positive dynamic for us.

I'd just like to stress on that, Chris, that we are very positive about the developments in China.

For our next question, we'll go to Jim Sheehan with SunTrust.

This is Pete on for Jim.

Do you see any significant acquisition opportunities outside of China?

And along those lines, can you quantify how much of the Praxair-Linde divestitures you might be interested in bidding for?

Well, in terms of M&A opportunities, we do see opportunities outside of China.

I don't want to say more than that, but we are working on some of them.

In terms of the Praxair and Linde thing, we have to wait and see what actually comes out, but we have always said that, out of what we think, they have to divest.

We don't have any inside knowledge on this thing.

But out of what we think, they have to divest.

There will be an opportunity for us to compete on about $1 billion to $1.5 billion of sale, which would have about, probably about $300 million to $350 million of EBITDA.

And obviously, when and if that thing comes on -- into play, we will be interested in that for sure.

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

Is your interest in coal-derived syngas driven more by growth prospects for that process?

Or would you say you bring to it a technological advantage, given coal-derived gasification's been around a long time over there?

Do you have a technological advantage, either from your ASU technology or with the Shell technology you acquired?

Is it demand or technology driven?

It is actually both.

The demand is obviously there and then in order to put ourselves in a competitively advantageous position, we not only bring our know-how in terms of ASUs and operations and maintenance of large facilities, but our competitors have that.

But that is the primary reason that we wanted to buy the Shell technology because now we will have a technological advantage.

That was the reason for that acquisition.

Okay.

Does any royalty-bearing revenue come with that technology?

Not much.

And on the demand side, would you say that most of these new projects that are -- coal-derived syngas are incremental production capacity projects or retrofits of old gasifiers that are inefficient and air-polluting and need to be shuttered?

No.

Well, none of the old gasifiers are polluting.

Gasification is a very clean way of using coal.

Most of these opportunities that you're talking about are greenfield plants.

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

Scott, maybe I could just ask you to give us some help on Americas margin sequentially, just given you had the maintenance in this quarter, the wholesale thing.

And then are there any positive things that took place last year that won't recur in the second quarter?

But just how should we think about margins sequentially?

Well, we obviously think that margins are going to become better.

But I'd like to turn it over to Corning to expand on that.

We do -- let's just make it very clear.

We do remain very bullish about opportunities for industrial gases, our conventional business around the world.

We think China is growing, U.S. is growing, Europe is growing and our margins -- we are not losing any margin.

It is just quarter-by-quarter.

So fundamentally, we are very confident about what's going on, and we actually feel pretty strong about that.

But Corning?

Yes.

So just building on everything Seifi just said, so we feel that the underlying demand, merchant gases, hydrogen and the whole package remains very strong.

We're going to have other maintenance, right, during the course of the year.

And so sequential to sequential, we don't really map out exactly as our maintenance spend is coming out.

But I would say we see the overall picture, one that's strengthening in the Americas.

Okay.

And then maybe just as a follow-up for Seifi, I guess that there's now $5 billion left that hasn't been allocated, out of the $9 billion from the answer to the previous question.

Given the change in the tax environment in the United States, are you focused at all anymore or focused at all incrementally on putting some of that money to work in the U.S.?

Has that changed your investment calculus at all?

Listen, on that one, if there is any project that we can go after, our #1 priority is to spend our money in the United States because of a lot of good reasons.

So the fact that we are investing in other parts of the world doesn't mean that we are not focused in the U.S. We are very focused in the U.S. And if there is any project that we can go after, we will go after in the U.S. That's our #1 priority for investing.

There is no question about that.

The issue is that there are not that many opportunities right now.

But we are absolutely focused on that.

We beat the bushes everyday on every single project, and I hope in time, we will announce some big runs in the U.S. too.

We'll go next to Kevin McCarthy with Vertical Research Partners.

With regard to the cold weather along the U.S. Gulf Coast, do you expect that to be good, bad or neutral to your results in the fiscal second quarter?

Just trying to think about the net effect of power cost versus any customer outages that you see.

Thank you, Kevin, for the question.

Corning will answer that.

Kevin, I think when we have a disruption in the market, it's never a positive for us.

But I would just say, the guidance that we have given reflects our expectations for the quarter, including what's happened in terms of weather.

Thank you.

Okay.

And then as a follow-up, if I may, for Seifi, can you expand upon the China contract termination?

What motivated your steel customer to want to purchase the plant from you?

And I think you mentioned that you are pleased with the development.

Perhaps you can expand on that as well.

Sure.

Corning can expand that -- on that.

Go ahead.

Yes.

So we had a contract with a customer, that customer then got acquired by another steel company who was less bought in, let's say, into the sale of gas concept.

We had a good contract.

They wanted to just enter basically good faith negotiations, understanding their thought process, how they looked at things, we thought the termination that we came up with was a good win-win for us.

I'd just point out in the same quarter, right, we have examples of where we've taken a plant that was going to be an SOE and we've converted it into a sale of gas.

So I think there are some do and some don't in China and that we continue to sort of progress the transformation of that market to be more of a traditional industrial gas environment.

Kevin, it was very simply the fact that the new owners of the steel facility -- they do their financials and all of that.

They decided that the way their cost of capital is on all of that, that they rather own the plant rather than us supplying it.

It's just preference of the customer, and we always are, obviously, do what the customer wants to do.

And the transaction, financially, was also very attractive for us.

We can put that money to work at higher returns.

And I'd say being -- our flexibility in changing had a lot to do with the fact that it was a new customer stepping in.

We'll go now to P.J. Juvekar with Citi.

Quickly, can you explain the advantage of your strong balance sheet when you're building for these large ASUs and large syngas plants in China?

And then what kind of competitors or competition do you run into for these large projects?

Well, P.J., we run into the standard competitors, you know who they are, and we compete with them on the basis of -- it's not just the price I'd like to mention -- it's not just the financial returns.

It's a combination of the trust, the relationship that we have with the customer, the demonstration that they have delivered, our technology.

Now we are going to have an advantage with the acquisition of the Shell technology.

So it's a combination of all of things that we compete, and we compete with the same people, basically, that we have been competing with for many years.

Okay.

And you talked about the environmental advantage of coal gasification.

What are the risks to coal gasification?

Let's say, if there's a -- if China implements carbon tax in the future, does that impact the economics of the project?

Well, the thing is that if they implement -- what does coal gasification do, P.J.?

The coal gasification is producing chemicals.

So whatever tax they put in, it just increases the price of the chemicals because they can say, "Okay, I'm not going to do coal gasification." So if you're not going to do coal gasification, what are you going to do?

Then you have to buy all of these chemicals and import them into the country.

The fundamental thing is that coal is the only energy source that China has.

As a result, their only option, if they want to become -- independent, is to turn that coal into chemicals and syngas.

Otherwise, they would have to import that, which is what they do right now.

That is why this is a high priority for the government.

And coal gasification has the advantage of being able to use 2%, 3% high-sulfur coal that you can't do anything else with it.

So it's financially very attractive.

Can I just build on it?

So the gasification has a step in which you remove that sulfur after we've gasified it.

So I mean, literally coal that you can't really legally use in other applications, you can use it here because were going to get the sulfur out and another element is if there was an incentive around carbon capture, coal gasification has the benefit of giving you a very concentrated stream of CO2 that would be easier to work with than almost any other process.

P.J., the subtle point about what Corning just said is that if you are building any kind of a facility to produce syngas, gasification is the process where the CO2 that you produce is what is called capture ready.

You can actually capture that and then put it into use -- for enhanced oil recovery and a lot of other applications.

Okay?

All right.

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

Scott, tax reform didn't start until January 1. So fiscal September '17, I guess, has 3 quarters of benefit, and I assume the December quarter accrued essentially 1/4 of those 3 quarters of benefit.

I'm just trying to understand why the tax rate is even lower in the December quarter.

And will the fiscal '19 tax rate go down a little bit more because you'll have 4 quarters of benefit in '19?

Right.

So very good question, John.

So first, in terms of our base underlying rate, you're absolutely right.

We have 1 quarter at 35%, 3 quarters at 21%.

We're required to take an estimate and blend that together so its -- that underlying would be 24.5%.

But as you pointed out too, we had a -- even after you're adjusting for the new Tax Act, we had a little bit lower ETR here in the first quarter, principally driven by the accounting for share-based compensation.

So when we look at that, we talk about in total versus last year, then we're down about 370 basis points, about 260 of which is coming from the Tax Act and the balance of about 110 is from the share-based comp.

And so I think, as I said in my prepared remarks, then, too, going forward, for the full year, maybe it's a 20% to 21% rate to be used.

And then when we look at the timing and the implementation of the various elements of the Tax Act, I think that's -- at this point in time, these are all best estimates, but I think that's a reasonable type of a rate to carry into '19 as well.

Okay.

And then Corning, could you remind us why you split India between EMEA and Asia?

Is it how you have your hydrogen group reporting up globally versus you have regional on the industrial gas on the atmospheric gas side?

Yes, I'd say that's a reflection of a point in time when we did that.

Clearly, at this point, we're tremendously beefing up our syngas capabilities in Asia, however.

But in terms of reporting that you're talking about, in terms of how we report that, quite honestly, traditionally, we have been reporting that, that way, and we didn't want to change that, not to confuse the numbers.

But on operationally, we run Middle East and India separate from Europe.

But in terms of reporting the results, we put all of that together because we didn't want to create a lot of confusion about comparison to previous years.

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

Seifi, in terms of the underlying improvement in the Asia margin performance this quarter, if I exclude the impact in the plant sale, is that really just the impact of the pricing improvement there?

Can you maybe talk about other dynamics that are at work there helping your margin and how sustainable that is going forward?

Corning has 2 pages of details on it.

So he'll answer your question.

I think the big positive for us in Asia is pricing right now and you'd add onto that volume leverage and incremental loading.

It's those things that are pulling us forward.

I would say maybe if you're just building on it like a highly motivated team, that's, again, organized by subregions, all of them with their own incentive plan on their own actual results, so they are just driven to, let's get the volume and let's get the price and let's take advantage of this opportunity to absolutely the fullest.

All right.

And you haven't commented on where your capacity utilization rates are for LOX/LIN in China, but I know one of your competitors mentioned that they're running over 90%, which is the point at which we might get concerned or expect to see some capacity additions.

Are there any expectations on your part to debottleneck or otherwise add merchant capacity in China over the next year or so?

Yes, I don't think we want to really give a clear road map exactly what all our strategic options are in China at this point.

Clearly, it's an area of opportunity, though.

We're quite focused on that.

All right.

If I can sneak one more in, Seifi.

Any updated thoughts on share repurchase opportunities?

Not interested.

(Operator Instructions) We'll take our next question from Laurence Alexander with Jefferies.

Just very quickly for Scott on the EBITDA margins.

Can you give a little bit more detail on how much of a tailwind you had globally from merchant pricing in the quarter?

And then going forward, if we're thinking out to 2019, 2020, are the acquisitions of plants and the syngas projects both margin accretive or does one offset the other to some extent?

And do you have any on-site business, any pools of assets that are below the take-or-pay threshold, such that volume growth does not translate into profit growth if the strength in the end markets continue for the next couple of years?

Let me -- Laurence, this is Scott.

Let me take the first one.

The impact from pricing is maybe 50 basis points or so, something like that, as a total company.

Yes.

But overall, Laurence, the -- overall, when you look at the new projects that we have taken and the on-site projects that we have taken and as they come onstream, their margins, they are not going to have a negative effect on our margins.

Therefore, we expect to maintain an EBITDA margin, as we have said before, of somewhere between around 32% to 35%.

And none of the projects that we have taken is going to cause that margin to go down.

Actually, some of them might actually improve the margin.

I guess, if you can just clarify that a little bit.

If your merchant pricing already, before things get tight, is a 50 basis point tailwind, then over 3 or 4 years, it's probably going to be a little bit more of a tailwind from here.

And if you're -- the rest is basically flattish, shouldn't you be able to overshoot the 35%?

Or what's offset that you'd see?

Well, you're getting us into trying to give guidance now for '19 and '20.

But I think you are on the right track to assuming that the overall conditions are positive for Air Products and our margins.

And we agree with that.

But I don't want to...

That does conclude today's question-and-answer session.

At this time, I'd like to turn the conference back to Mr. Seifi Ghasemi for any final remarks.

Thank you very much.

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

Thanks for taking time from your busy schedule to listen to our presentation.

We appreciate your interest, and we look forward to discussing our results with you again next quarter.

Have a very nice day, and all the best.

Thank you.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.