Air Products and Chemicals Inc (APD) 2019 Q2 法說會逐字稿

Good morning, everyone, and welcome to Air Products and Chemicals Second Quarter Earnings Release Conference Call.

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

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

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

Please go ahead, sir.

Thank you, Allen.

Good morning, everyone.

Welcome to Air Products Second Quarter 2019 Earnings Results Teleconference.

This is Simon Moore, Vice President of Investor Relations.

I'm pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Scott Crocco, our Executive Vice President and Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel and Secretary.

After our comments, we'll be pleased to take your questions.

Our earnings release and the slides for this call are available on our website at airproducts.com.

Please refer to the forward-looking statement disclosure that can be found in our earnings release and on Slide #2.

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

Thank you, Simon, and good morning to everyone.

We appreciate your interest in Air Products and thank you for joining us on our call today.

At Air Products, we have a talented, committed and motivated team who stays focused on serving our customers and creating value for our shareholders every day of the year.

This team delivered yet another quarter of very strong safety and financial results.

I want to thank all of our 16,000 employees for their hard work, dedication and contribution.

Our quarterly adjusted earnings per share of $1.92 is up 12% and represents the 20th consecutive quarter -- I'd like to stress that -- the 20th consecutive quarter that we have reported year-on-year quarterly EPS growth.

This strong result overcame a negative $0.08 currency impact.

Our EPS is up 17% on a constant currency basis.

We continue to be the safest and most profitable industrial gas company in the world with a record quarterly EBITDA margin above 37%.

We remain in a very strong financial and technological position with a business that generates significant cash flow.

I remain extremely confident of our ability to deploy this capital into high-return industrial gas projects that will generate significant value for our shareholders while also continuing to return cash through our dividends.

Now please turn to Slide #3.

All our employees around the world are focused on safety, and as a result, we have improved our lost-time injury rate by 83% and our recordable injury rate by 45% since 2014.

Slide #4 states our long-standing goal.

5 years ago, we set the goal to be the safest and most profitable industrial gas company in the world, providing excellent service to our customers.

I am very happy and proud to say that we have achieved this goal and are committed to maintaining our position in the years to come.

We expanded the goal to include being the most diverse, and that is part of our continuing journey, to create a work environment where everyone can achieve their true potential.

Slide #5 is my management philosophy that I have followed throughout my business career.

And we have talked about this many times before, so I don't want to dwell on it.

Slide #6 shows our Five-Point Plan for Air Products as we move forward.

We are committed to have best-in-class performance to maintain our current leadership position, grow the company by expanding or offering related to our core competencies, continue to change the culture of the company, and most important, to achieve our higher purpose.

That higher purpose is to create a company where people feel they belong and their contributions are recognized and valued, a company that is committed to sustainability and supportive of the communities in which we operate, a company that our people want to work for, that they are proud to be part of an innovative process to solve the energy and environmental challenges facing the human race.

That is our higher purpose and we are committed to it.

Please turn to Slide #7, which shows the key milestones in our gasification strategy.

Let me take the opportunity to provide an update on a few of these exciting projects.

As I said last quarter, the Lu'An project continues to run very well and it's contributing to our results as we expected.

The Jazan ASU, the main air separation units, were built on budget and on time and they are in the process of being commissioned as we speak.

The definitive contract for the Jazan gasifier and power plants, which are very complex contracts -- and many of them -- are being negotiated with Saudi Aramco, and we expect the conclusion of those discussions by the end of calendar 2019.

We are continuing our discussion with YK Group for the very large coal-to-syngas project.

This project is still underway and that -- there are some issues related to the allocation of coal, which is very important for us.

But the project has the support of the central government, and we are optimistic that we will have more definitive announcements about the project as we move forward.

At the Juitai -- and for the Juitai project, that project is under construction with expected onstream in 2022.

In addition to these announced projects, as we have said before, we continue to work on a significant number of very large new gasification opportunities around the world.

Now please go to Slide #8, where you can see the results of our key profitability metrics.

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

Now please go to Slide #9, which is always my favorite slide and particularly this quarter.

You can see our record quarterly EBITDA margin of 37.7%, which is up over 1,200- basis points from 5 years ago.

This is a great achievement by the people of Air Products, and all of us are very proud of it.

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

Scott?

Thank you very much, Seifi.

Now please turn to Slide 10 for a summary of our Q2 results.

As Seifi said, our team delivered another impressive quarter.

Volume added 3%, demonstrating the success of our growth strategy.

Price was also up 3%, which is our best performance in over 4 years.

Sales of $2.2 billion were up 1%, as the better volume and price was roughly offset by 4% negative currency and 2% due to a contract change in India.

As a reminder, we agreed with a customer in India to convert our hydrogen supply agreement into a tolling arrangement.

This change has no impact on our profits, but reduces sales for the company and for our EMEA segment.

So we are showing the sales impact in the Other line.

This change began in December, so the second quarter includes the full quarterly effect.

We saw lower sales as we near the end of our successful Jazan sale of equipment project.

Excluding this impact, volumes grew 5% due to positive base volumes and additional new plant onstreams, including Lu'An in Asia.

Price was particularly strong across all 3 regions and across our merchant product lines.

Great job by our team as we stayed focused on pricing.

Currency was again a headwind as the dollar strengthened against all major currencies.

EBITDA of $825 million and adjusted earnings per share of $1.92 both improved 12%, driven by the higher volumes and positive pricing, partially offset by unfavorable currency and higher costs.

EBITDA margin reached a record 37.7%, up 340- basis points compared to prior year as a result of higher volume and price as well as the India contract modification.

ROCE of 12.6% improved 80- basis points versus last year, primarily due to higher profits.

Sequentially, EBITDA increased 4% as better results in Americas and EMEA more than offset reduced Jazan sale of equipment and lower volumes due to the Lunar New Year holidays in Asia.

Please turn to Slide 11.

Our second quarter GAAP EPS was $1.90 and includes a $5 million one time pension settlement cost.

Our second quarter adjusted EPS of $1.92 was up 12% or $0.21 per share, driven by strong operating performance.

Volume, price and cost together contributed $0.30.

As you see on this slide, the impact of price increases is shown net of the impact of variable cost rate increases, primarily variable production costs such as power and distribution costs in our merchant business.

The other cost line refers to fixed cost increases such as personnel and plant maintenance costs.

The other cost increase this quarter was driven in part by labor inflation and higher maintenance.

And as we have said previously, we continue to see costs associated with investment in our capabilities to successfully win and execute our growth strategy.

Currency and foreign exchange was $0.08 unfavorable, primarily due to Chinese RMB and the euro.

Excluding the unfavorable currency, EPS increased $0.29 or 17% over last year.

Nonoperating items, including interest expense, noncontrolling interest and nonoperating income, combined for a negative $0.01.

Our effective tax rate for the quarter was 19.9%, roughly flat compared to prior year.

For FY '19, we expect an effective tax rate of approximately 20%.

Now please turn to Slide 12.

We continued to generate strong cash flow.

During the last 12 months, we generated almost $11 per share or over $2.4 billion of distributable cash flow.

This distributable cash flow allowed us to pay almost $1 billion or about 40% as dividends to our shareholders and still have nearly $1.5 billion available for high-return investments in our core industrial gas business.

This strong cash flow enables us to create shareholder value through increasing dividends and capital deployment.

Slide #13 updates our capital deployment progress, and we have reformatted the information to hopefully make it more clear for you.

As you can see, we now show just over $16 billion of investment capacity available over the 5-year period from FY 2018 through FY 2022.

This is made up of 3 components.

First is additional debt available today.

We will continue to focus on managing our debt balance to maintain our current targeted A/A2 rating.

If we maintain this rating at a debt level of about 3x the last 12 months' EBITDA, we have about $8.7 billion available today.

Second, based on LTM investable cash flow, we expect to have over $5 billion between now and the end of FY 2022.

Third, we have already deployed almost $2.5 billion on M&A and growth projects.

This excludes maintenance CapEx.

Today, we have a total of about $7.5 billion of project and M&A commitments with about $6.8 billion remaining to spend on them.

So you can see, we have already spent 15% and already committed well over half of our total available capacity.

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

Thank you, Scott.

Please turn to our Asia results on Slide #14.

There you can see that our great team in Asia delivered yet another strong set of results.

Our China-based business recovered well from the Lunar New Year holiday and continues to show positive growth, and our other strong positions throughout Asia continue to contribute.

We remain very focused on our current business and are also very positive about our long-term growth potential in this region.

For the quarter, sales were up 12% from last year as a result of positive volume and price more than offsetting negative currency.

Volumes increased 12%, primarily driven by new projects, mostly Lu'An.

Overall pricing for the region was up 5% versus last year, the eighth consecutive quarter of year-over-year price improvement.

The strong volume and price also favorably impacted both profits and margins.

EBITDA increased by 32% and EBITDA margin improved 700- basis points to a record 47.7%, making Asia our most profitable region.

I am very proud of the performance of our team in this region.

Now I would like to turn the call back over to Scott to discuss our Americas result.

Scott?

Thank you, Seifi.

Please turn to Slide 15 for a review of our Americas results.

For the quarter, sales increased 9% primarily driven by 5% higher volume and 3% higher price.

Demand for hydrogen was robust in both the Gulf Coast, which is supported by the new Baytown facility and Canada.

Our base merchant business also continued to grow in North America, while Latin America remains weak.

Overall, this is the ninth consecutive quarter of volume improvement for the region.

Price contributed a positive 3%, the best performance in over 4 years.

Americas EBITDA of almost $400 million increased 10%.

And reported EBITDA margins of over 40% were up 60- basis points, primarily driven by higher volumes and pricing.

EBITDA margin was up 150- basis points, excluding the impact of higher energy cost pass-through.

Earlier this week, we announced a new project for our second ASU for Big River Steel in Arkansas.

This new ASU will support Big River Steel's expansion and the local merchant market, and it builds on the success of our first ASU that came onstream a few years ago.

Now I would like to turn the call back over to Simon to discuss our other segments.

Simon?

Thank you, Scott.

Please turn to Slide 16 for a review of our EMEA results.

Our EMEA business produced positive operational results this quarter despite limited economic growth, as strong pricing offset negative currency.

Compared to last year, price improved 3%, while volume held firm.

We saw a 7% sales impact from unfavorable currency and a 9% sales reduction due to the India contract change.

Price improved across all major merchant products and across all subregions.

The 3% price increase marked the fifth consecutive quarter of year-on-year improvement.

Reported EBITDA of $182 million was up 2%, and EBITDA was up 9% on a constant currency basis.

Reported EBITDA margin improved 500- basis points.

Excluding the India contract change, EBITDA margin was up about 200- basis points.

And although we continue to see Brexit as a potential risk to our future results, at this point, we have not seen any significant negative impacts.

Now please turn to Slide 17, Global Gases, which includes our air separation unit sale of equipment business as well as central industrial gas business costs.

Sales and EBITDA declined due to lower project activity as we approached the conclusion of our very successful Jazan ASU sale of equipment project.

Please turn to Slide 18, Corporate segment, which includes LNG and other businesses as well as our corporate costs.

Although this quarter's sales and profit have yet to show improvement, we anticipate a turnaround in the LNG business.

We recently announced a major project win to supply our proprietary technology and equipment to the Golden Pass LNG Export Project in the Gulf Coast.

Since this is sale of equipment where the revenue and profit are booked based on percentage of completion, we expect this project to contribute to our earnings later in calendar 2019.

Now I'm pleased to turn the call back over to Seifi for a discussion of our outlook.

Thank you, Simon.

Please turn to Slide #19.

Almost 5 years ago in July of 2014, during my first conference call with the investment community, I promised to grow the company's earning per share by at least 10% annually.

As you can see, we have done better than that and achieved 13% cumulative average growth rate over the last 5 years.

We have delivered what we promised and more, thanks to the great team at Air Products.

Our goal continues to be to achieving a cumulative average growth rate of at least 10% in the coming years.

Now that we're talking about the coming years, we do understand that we live in an uncertain world.

And we at Air Products cannot influence the world's economic or political developments, but we do have control over what Air Products can and should do as a company to react to the changing world.

We have a strong, capable and flexible organization, which remains focused on productivity and creating our own growth opportunities, which would allow us to continue to deliver on our promises to investors as we go forward.

So now for what we promise this year, please turn to Slide #20.

We are increasing our EPS guidance for fiscal year 2019 to a range of $8.15 to $8.30.

Despite currency headwinds, at the midpoints, our guidance represents 10% growth over our very strong fiscal year 2018 performance.

For quarter 3 of fiscal year 2019, our earning per share guidance is $2.10 to $2.15, up 8% to 10% over last year.

We have also slightly increased our CapEx forecast to a range of $2.4 billion to $2.5 billion for fiscal year 2019.

Our team around the world continue to be excited about Air Products' future.

Our Five-Point Strategic Plan provides the framework to drive our success going forward.

And our safety, productivity and operating performance continue to provide the foundation of our continued growth.

We have the financial capacity, the technological know-how and the talent to successfully pursue the exciting opportunities that we see ahead.

And finally, please turn to Slide #21.

As always, our real competitive advantage is the commitment and motivation of the great team we have at Air Products.

This is what allows us to continue to generate our superior safety and operational performance.

I want to again thank all of our 16,000 employees around the world for their commitment and hard work and for embracing the opportunities in front of us with energy and a spirit of winning together.

I am very proud to be part of this winning team.

Now we will be delighted to answer your questions.

(Operator Instructions) We'll take our first question from John McNulty with BMO Capital.

It seems like there is a lot of opportunities in the coal gasification arena.

You're certainly highlighting, it sounds like, a lot of projects that you're at least considering.

Can you help us to understand how you prioritize or what some of the bigger priorities are when you're picking a partner for these projects as we think about kind of the future investment for them going forward?

Very good question.

John, we have always said that when we look at these projects, and there are many of them as you said, the very first thing that we do is make an assessment whether the project is economically viable.

That means that if they are making diesel fuel or if they are making olefins or whatever it is that the end product is going to come out of this project, how is the market for that product, where is it going to be sold, what are the expected prices and does the full project make economic sense?

That's number one.

Once we have satisfied ourselves that, that is the case, then the second thing that we focus is on the customer that we are dealing, who is actually doing this project, what is their financial strength, what is their status, what is their market position and all of that.

Then if we have passed the economic test and passed the market test, then quite honestly, we do the project unless it is in a very, very, very difficult part of the world, and there are not that many of them.

So the basic message that I have is that we don't look at the projects like, oh, this project is in China, we don't want to do it.

Or this project is in India.

Or -- we don't look at that.

We look at what is the project and whom is it for?

I have said many times, if you give me a project that makes economical sense and it is for Saudi Aramco, we'll do it no matter where it is in the world.

So that -- those are the criterias that we follow.

And then, I guess, when you look at the projects out there, I think last quarter, you had highlighted there were 50-plus projects out there that you were at least evaluating.

What portion of those are projects that are already up and running where the actual producer is saying, "You know what, we'd rather outsource this," similar to what we saw with the refining industry back, I don't know, 20, 30 years ago as they started kind of outsourcing the business.

So how should we be thinking about that and the opportunities there?

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

Next question comes from Christopher Parkinson with Credit Suisse.

This is Kieran on for Chris.

I was wondering if you can discuss the trends that you're seeing in APAC, particularly in China.

I mean, are there any key end-markets that you're seeing slower accelerate?

Then also just regarding this quarter, any impacts you saw from the Lunar New Year and how we should think about volumes in the sequential kind of basis?

With respect in China, we -- I have said this many times, we don't see any particular weakening in anything.

At least -- we have exposure to a lot of their businesses.

And one of the interesting thing about our business that you know very well is that we don't have any inventory.

So our performance is instantaneous.

Whatever the economy is doing, you see that in our numbers.

China is growing very well.

And the Lunar New Year, China this year, we were very concerned about that.

That's why we were conservative in our guidance for the quarter.

The Chinese New Year, although it fell in between weeks, it went down and came back exactly like every other year, and the economy is doing very well and we continue to be very optimistic.

We feel very bullish on China.

And then just when I look at your full year guidance, it implies a very strong fourth quarter, a little bit stronger, I think, than like the third quarter.

Maybe can you just discuss the key elements that are driving that positive outlook for the fourth quarter and then for the back half of the year?

I'd appreciate it.

Sure.

we -- first of all, we expect that the pricing momentum that we have seen would continue and actually might become even better than what we have seen before.

So that is one thing that keeps us optimistic.

The other thing is that Brexit is delayed until October, so we don't expect any significant negative effect on that.

The other thing is that our LNG project business, as you know, this is not contributing anything.

But we did win a very big project, Golden Pass in Texas.

And since with that project, we start getting paid as soon as we start working on it, we expect some contribution from that.

And the fourth thing is that we expect that the effect of negative currency to be a little bit better.

So -- and you put all of that together, that is what makes us optimistic that we would be able to meet the higher end of -- or at least our goal is to meet the higher end of our forecast, which is $8.30.

The next question comes from the line of David Begleiter with Deutsche Bank.

Just on the merchant pricing, can you give us the merchant price gains you realized in each of the 3 major regions?

Well, David, you know our business better than anybody.

And you know that half of our business is on-site and there is not a lot of price increase in that.

So as a rule of thumb, you can take the numbers that we have given you for each region, multiply it by 2 and you end up with what we achieved in the merchant business.

And you see that it is strong.

It's 7%, 8%, 11% in the different regions.

Excellent.

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

No, I don't have any concern.

That project is a project that has a strong support of the central government.

The central government wants that to happen.

The issue is the allocation of coal to that project.

That is a very important issue for us, because we don't want to do any big gasification project when the source of coal is not 100% guaranteed.

I mean, YK is a big coal company, but they need to get allocation of the coal.

So that -- the negotiations with that is taking longer than what we expected, but I fully expect that project to go forward.

The timing might be a little bit different than what we expect today.

But I think that, that is a good project.

It makes a lot of sense, and it will eventually happen.

Next we'll go to Duffy Fischer with Barclays.

This is actually Mike Leithead on for Duffy this morning.

I guess, to follow up on the pricing dynamics, a nice acceleration this quarter.

I was hoping you can maybe give a sense of where you think merchant operating rates are today, particularly in North America and Asia?

Sure.

North America operating rates are in about mid-70s.

The operating rates in Europe are around -- in low 80s.

And the operating rate in the areas that we operate in, in Asia is about in mid-80s.

Great.

And then on the LNG market, it seems like activity and optimism is starting to pick up in that area.

I was hoping you could maybe characterize whether -- outside of the project you just signed, whether you think overall market dynamics will start to be a tailwind as we get to the back half of this year or maybe that's closer to a 2020 event.

Well, in 2019, our fiscal year ends at the end of September.

So we did have a positive impact from the Golden Pass Project, but that's not going to be huge.

But as we go forward, we are very optimistic about that business.

As you know, that business used to make us $150 million of EBITDA a year.

And today, it's making nothing.

So we think that in time, we will get to that $150 million rate in the next 3, 4 years.

We are very optimistic about the LNG business.

That's why we never considered divesting of it.

We have a huge technological advantage, almost 70% -- 75% of all the large LNG projects use our technology, and we see many of them happening in the U.S. and around the world.

So we continue to -- we expect a very positive future for that business.

The next question comes from the line of Jeff Zekauskas with JPMorgan.

The EBITDA margin in Asia is now roughly 48%.

And maybe a year ago, it was 38%.

Is the difference in the margin the Lu'An project essentially?

No.

In fact, a significant amount of that is also -- Lu'An is obviously affecting it, but there is obviously the fact that we have gotten significant pricing.

I mean, our merchant pricing in last quarter was 11% ahead of last year.

So that is a very positive contributor.

And besides that, our people there are doing a good job in productivity and keeping the costs under control.

So overall, as I said, I'm very proud of what they have done and that -- I'm optimistic that we will be able to maintain that kind of a margin as we go forward.

For the Jazan gasifier and the power JV, I think you said earlier in the call that you're trying to negotiate the final terms by the end of the year.

If you successfully negotiate those terms, when would that project begin to affect your income statement?

If we successfully complete the negotiations by the end of the year and financially close, that project will contribute in 2019 and then obviously 2020 and then the big impact will be 2021.

But it will definitely impact 2019 if we completed by the end of fiscal year this year.

Now we'll go to John Roberts with UBS.

Pricing was largely offset by foreign exchange.

I guess, in one sense, you could say that pricing in dollar terms was roughly flat year-over-year.

Do you think pricing and currency are completely unrelated?

Or do you think the exchange rates are giving you a little bit more ability to price in local currency?

The currency has nothing to do with it.

Our business is absolutely local.

And whether the dollar is up or down, it has no effect on our ability to increase or lower prices in different parts of the world.

This is not like crude oil or anything like that.

So it is totally independent, John.

Okay.

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

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

Let's go to Jim Sheehan with SunTrust.

Can you comment on the ACP Europe acquisition?

About how much did you pay for that and how much earnings contribution will it represent?

The amount that we paid for that, I think we have disclosed that, it's more than $100 million.

And obviously, the rule of thumb that we always tell you, if you spend $100 million, that should give us an operating income of $10 million.

Now we'll go to Robert Koort with Goldman Sachs.

Seifi, you mentioned -- I want to talk about gasification a bit about how you prioritize your project load there.

And I guess, if we look at breakeven levels for maybe making glycol or olefins or fertilizer, we're easily there.

When Brent starts to get up in the $75 range, then maybe coal to fuels or coal to synthetic natural gas comes in play.

In that project portfolio that you're pursuing, are you seeing greater interest in those maybe higher breakeven type applications of gasification?

Yes.

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

No.

That -- as the price of oil goes up, the number of projects that become viable obviously becomes bigger.

So you're right on that.

Can I ask you on the decap side, Seifi?

I think there's been -- over the last couple of years, there's been some shareholder frustration expressed about deploying that capital, and now you're starting to do that more aggressively.

Is there a decap opportunity here in gasification?

I know Shell, when they owned the business, certainly advertised the process improvements they've made over time, the history and portfolio of gasifiers they have an operation gave them an advantage.

Is there an ability to go speak to existing gasifiers and suggest you can operate them better with improvements in technology?

Or how would you -- what would be the selling points that you'd make to an existing gasification customer to maybe let you take that off their hands and operate it?

Well, Bob, I mean, you are exactly accurate in terms of the kind of argument that is used.

And quite frankly, the very best example of what you just said is the IGCC project in Saudi Arabia, the Jazan project that you are talking about.

We went to Saudi Aramco and said that we had improvements in the Shell technology.

And they are using the Shell technology for gasifying the bottom of their refinery, and that is an asset buyback.

So that is an ideal example of what you're talking about, and there are others like that, that obviously we are pursuing.

Now we'll go to Vincent Andrews with Morgan Stanley.

This is Angel Castillo on for Vincent.

So just a quick question around the gasification projects.

So with the explosion that happened in the fertilizer plant in China, I was wondering, is -- has anything changed in terms of the number of projects that you're seeing?

Obviously, you're very bullish on that.

But maybe you can give us an update on that 50-plus project number that you mentioned earlier and just how that explosion is impacting that number?

Well, first of all, that explosion has nothing to do with what we are doing.

It has no impact.

I guess, I mean, just more from a regulatory perspective in terms of, I guess, new projects whether it's in olefins or anything else?

Just I guess, you're not seeing any impact from that is what you're saying?

That's correct, sir.

That's correct.

Okay.

And then maybe just a quick follow-up just on the CapEx.

I was wondering if you could give us some color as to like what drove that increase in the CapEx for 2019?

In 2019, I think Scott can answer that.

Sure.

I think you're referring to taking up the bottom of the range from [$2.80 billion to $2 billion].

It's just as we're halfway through the year, better estimates of the spending and some other smaller projects that we're spending on.

That's all.

Great.

And then if I may, just one quick follow-up as well on your volumes.

Obviously, you had tough comps there last year.

But as I look at the next couple of quarters, just curious as to your -- what would you view volume there going for the next couple of quarters?

I'm not sure, quite honestly, I understood the question.

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

For just Europe or for everywhere else?

In general...

For Europe?

For Europe, we expect the run rate to continue.

We are not -- as I said, with the Brexit delayed, we are not concerned about volumes in Europe and we remain positive about pricing in Europe.

Next question comes from the line of Don Carson with Susquehanna Financial.

Want to go to your favorite slide, Slide #9, new record on EBITDA margin, 37.7%.

How much of that was due to -- what's the impact of that India conversion to tolling on that?

And I assume that most of your upward momentum in EBITDA margin is due to price.

So are we at an inflection point in pricing here?

Traditionally, you didn't get pricing in this industry till you were well into the 80s, but you seem to be getting pricing earlier.

So I guess, the final question is, you used to think 35% EBITDA margin was kind of a normalized level.

So is 37%, 38% the new normal?

Okay.

With respect to -- thanks for your question.

The number one is that the effect of the -- it's about 80- basis points in terms of India, that's number one.

The second thing is that with respect to where would the EBITDA margin be, I've always told people from way back that when you are modeling Air Products, model an EBITDA margin of 35% to 36%, and I would still suggest that.

We did do very well this quarter.

We'll see what the next quarter brings, but I don't want to start kind of predicting that we will hit 37.7% every quarter.

But I think it is safe to assume that we will be around 35% on average.

And on pricing, do you think we're at an inflection point here with the kind of improvement you've seen in merchant pricing is sustainable?

Again, you seem to be getting the pricing at lower rates than you've historically needed to get pricing.

Don, I heard your question and I was trying to get away with not answering it.

You know that we don't like to make any comments on pricing considering the nature of our industry.

So you need to let me off the hook on that one.

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

For these large coal gasification projects that are now in your backlog, what fraction of that total installed equipment would you say is going to be fabricated at one of your locations versus field fabrication?

And do you expect that shift to change over time as you get more and more of these projects under your belt and be able to develop more of a capability to fabricate at a central location and lower your capital costs, time to erect and competitiveness?

Let me answer them one at a time.

With respect to air -- with these coal gasifications, the part that we make ourselves is the air separation unit, the main cold boxes.

Those cold boxes are manufactured right now exclusively mostly in China.

So as we expand -- we have expanded our operation in China in Caojing, south of Shanghai.

As we expand, we continue to expand that facility.

And if we get to a stage that we need additional capacity, we know where to go.

So that is -- with the rest of these coal gasification facilities, we do not manufacture them ourselves.

A lot of them are engineered and designed and built at the job site, and they are prefabricated at different locations and brought together and assembled together like an Erector Set.

So there is no kind of constraint on our ability to manufacture these things.

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

Well, the capital cost for these projects, depending on where they are, can significantly be reduced if you break down the project like we did in Jazan and prefabricate them at the most cost effective area.

When you look at Jazan, and hopefully, we can show you a movie of it one time, you see that it was like an Erector Set.

We had a 450-ton unit of all of the piping manufactured actually in China, which was the lowest cost.

And then it was shipped and then put together with the rest of the plant.

So we did a lot -- not -- we did not do a lot of the cutting and building and all of that in Jazan, which would have been very expensive.

So that is what you do in terms of trying to reduce the cost.

The air separation part, which is about -- usually on this big project, the air separation part is about 10% of the cost.

That one, we manufacture it in several pieces in Caojing and then ship it to the job site and put it together.

Okay.

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

About more than 20% on engineering.

The construction, the actual construction, when you are building a plant like Jazan, we have construction supervision people.

And just to give you a number for Jazan when we were building it, we had about 200 of our people supervising it.

But the number of people who are actually building the plant, they're 6,000.

Those people, we hired locally for the project.

They are not permanent employees.

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

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

Seifi, I was wondering if you could comment on the nature and level of competitive intensity in the gasification arena specifically?

Anecdotally, it would seem that some of your competitors have a different strategy in terms of their focus.

Curious, if you survey your 50-plus projects there, how often are you running into the other global majors?

And to what degree is the customer a source of competition in a sense for you?

Well, you're asking me a very difficult question.

I don't know how to answer that, because I obviously am in no position to speak for our competitors.

If their strategy is that they are not optimistic about these projects, I hope they continue to follow that strategy.

But I really cannot comment on behalf of our customers that when they are dealing with us, how many other people they are talking and all of that.

We always behave as if we have competition, and we try to give the very best offer that we can to our customers.

So -- I mean, that's the extent that I'm going to comment on this.

Next we'll go to P.J. Juvekar with Citi.

A question on crude to chemicals projects that are being discussed around the world.

Do you have any technology there similar to your gasification technology?

And if not, it would still consume a lot of gases.

So what are you seeing or hearing about request or bids for ASUs for those projects?

Well, I think all of those projects, people would be looking for bids for ASUs.

The way we are trying to differentiate ourselves by making an offer to the customer that we provide you not only the ASU, but also the gasification, and therefore, a different package rather than just competing for the ASU, which most of the time -- if the customer wants to buy the ASUs by themselves, they usually do a sale of equipment rather than sale of gas.

So -- and as you see most of the current existing gasifiers in China, which there are many, have all been sale of equipment.

So we are trying to differentiate ourselves by giving a bigger package.

But if the customer insists that no, I just want the bid for the air separation unit, we usually -- depending on who the customer is, we usually give them a bid, because we'll be happy to build the air separation unit.

But we are trying to differentiate ourselves by giving a bigger package to the customer.

And then a question on Europe.

Your pricing has lagged there in the past.

Now you're getting some solid 6% merchant pricing.

And I know in the past, you walked away from some low-margin businesses in Europe.

What are you seeing from new players that were created recently in merchant business in Europe?

And there's also a new merchant player in the U.S. What are you -- what kind of behavior are you seeing from them?

Well, it's too soon for us to comment on that quite honestly.

We usually don't comment on that anyway.

But these people have been in business for a few months, so it's very difficult to make an assessment on that.

But you said the key thing, P.J., and I said this publicly in February at a conference.

The reason we are getting the pricing is, because we are willing to walk away from volume.

That is the key thing that we are saying that we -- our costs have gone up and all of that.

This is the price of our product.

If the customer wants to go buy from somebody else, they can.

And the willingness to walk away from low-margin business is what is giving us the ability to increase the prices.

Otherwise, we will never increase prices.

So that is a very different strategy for us, that's exactly right.

We'll next go to Mike Sison with KeyBanc.

Seifi, when you think about your 10% growth -- EPS growth goal, you've got Jazan -- the gasifier coming on next year and looks like 4 projects on that one slide.

Could 2020 be -- given those projects coming on, could 2020 be a year where you maybe outpace that goal?

Well, we always say that we always promise what we can deliver and usually deliver more than what we promise.

So I don't want to get ahead of myself, but I hope what you're saying would turn out to be true.

Got it.

And then just one quick one on Asia again.

Margins, very good, actually pretty sweet.

And if you think about the second half of the year, do you think you can sustain that level?

And then what kind of impacts that margin going forward, given 48% is a pretty impressive level?

Well, thank you for saying that, by the way.

I expect our EBITDA margins in Asia to continue to be at around those numbers.

(Operator Instructions) We'll next go to Mike Harrison with Seaport Global Securities.

Wanted to go at the pricing question a little bit differently.

I wanted to ask specifically about China.

Can you comment on what you're seeing in LOX/LIN supply and demand dynamics in the areas that you play in China?

Just trying to get a sense of how sustainable the pricing momentum could be there.

Mike, as I mentioned before, the operating rates in the region that we operate in China is getting to around mid-80s.

And when you get to mid-80s, then you do have pricing power.

So our LOX/LIN pricing has been going up.

And if the economy stays the way it is and the operating rate stays the way it is, which I think it will, because nobody is building a brand new plant right away, so I expect that we would continue to have good momentum.

Right.

And then was also wondering about you -- in your appendix there, you have a number of projects that were listed as starting up during the first quarter of fiscal '19, 2 of them in Korea, 2 of them in the U.S. Was just wondering, did we see a full contribution from all 4 of those projects during the fiscal second quarter?

Or are some of them still ramping up?

Yes, we did.

Our next question comes from the line of Jonas Oxgaard with Bernstein.

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

Well, you are very right.

Yes, to some extent, we do.

I mean, the dollar content of a lot of the projects that we make is not that huge, but we do get a tailwind from that.

You're right, yes.

And is that reflected in your guidance?

Can you help me size the impact on how that's reflected in your guidance?

Sorry, I should rephrase that.

You see -- but -- the fact that the capital cost of the projects will go down a little bit, that is minute, it's not material to our numbers.

As we go forward, we expect the headwind on the currency to subside a little bit, then you go quarter-by-quarter.

So as Scott was just telling me before the call, we expect that for next quarter the headwind will be less than the $0.08, and hopefully for the quarter after that, less than that.

Obviously, none of us can predict what will happen to the currencies and all of that.

But if the currency rates stay about the same, we should have not as much of a headwind in the third quarter.

But Scott can amplify on that.

Sure.

Thanks, Seifi.

Just want to build on as Seifi -- as we've said, we've got $0.08 unfavorable here in this quarter.

For the year, our projection is maybe it's $0.15 to $0.20 headwind.

And just as a reminder, the way that we look at this is when we come out of the quarter, we don't try to project where rates are going to go.

We just hold them steady to where they are.

And when you compare then the third quarter versus prior year third quarter and the fourth quarter versus prior year fourth quarter, we don't see -- as Seifi just mentioned, we don't see the third quarter to be as much as $0.08 down a little bit and then even less in the fourth quarter, not because we're projecting a change in exchange rate, but rather just where were rates last year.

Okay?

So just want to get grounded.

And again, as was mentioned earlier in the call, we're talking all translation, right?

There's no economic impact.

It's just math bringing it back.

So I just figured I'd take you through.

And lastly, since I'm on the subject, we've given sensitivities in the past around swings in currencies of the 10% for the RMB.

On an annual basis, a swing of 10% will be about $0.12.

For the euro, a swing of 10% would be about $0.09.

And then there's a basket of other currencies like the pound, Korean won, Taiwanese dollar and the Canadian dollar.

Each, you just move them by 10%, it's about $0.03 to $0.04 each.

And what I've just given you there is roughly, when you throw in the U.S. dollar sales, approaching 85%, 90% of the company.

So I just figured I'd take you through some of those numbers.

I appreciate that.

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

It depends where it is.

In some countries, it's in local currency.

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

Okay.

And if we take China coal as the biggest one, that swings the future?

In China, the contracts that we have are in RMB, in local Chinese currency.

Yes, sir.

Our next question comes from the line of Laurence Alexander with Jefferies.

This is Dan Rizzo on for Laurence.

I'm sorry if I missed this, but did you quantify the backlog and how it has changed this quarter?

Simon, you want to -- since you prepared the slide, you want to make any comment?

Sure.

As we say, our total project commitments are about $7.5 billion.

I think that's up from around $7 billion last time.

And again, just to be clear on that, that's the total value of the commitments we have.

What we have remaining to spend on those is about $6.8 billion.

Okay.

Sorry, I missed that.

And then just one other question, could the gasification business evolve to where we see large take-or-pay arrangements rather than the JVs in some regions?

Well, right now, the gasification projects, some of them is JVs and some of them is 100% ourselves like Juitai.

Is that the question?

If I could just add, they're all take-or-pay.

Yes, yes.

So just to be clear about that.

Yes.

Whether it's JV or not, it's all take-or-pay.

(Operator Instructions)

Okay.

Well, we have run over the time and since there are no other questions, I would like to thank everybody for being on our call.

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

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

Have a very nice day and all the very best.

Thank you again.

And that does conclude today's call.

We thank everyone again for their participation.