Air Products and Chemicals Inc (APD) 2019 Q3 法說會逐字稿

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

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

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

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

Please go ahead.

Thank you, Eduardo.

Good morning, everyone.

Welcome to Air Products Third Quarter 2019 Earnings Results Teleconference.

This is Simon Moore, Vice President of Investor Relations.

I'm pleased to be joined today by 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 certainly do appreciate your interest in Air Products, and we thank you for taking time from your busy schedule to join us on this call.

At Air Products, we have a great team of talented, committed and motivated people who have stayed focused on serving our customers and creating value for our shareholders every single day.

This team delivered yet another quarter of very strong results.

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

Our quarterly adjusted earnings per share is a record $2.17 per share, 11% higher than the last year and 14% higher at constant exchange rates.

This is the 21st, I'd like to repeat, the 21st consecutive quarter that we have reported higher results compared to the previous year.

We continue to maintain our position as the safest and most profitable industrial gas company in the world.

Our EBITDA margin this quarter was a record 40%, which is 1,500 basis points higher than 5 years ago.

We remain in an extremely strong financial and technology position with a business that generates significant cash flow.

Each quarter, my confidence increases in our ability to deploy this capital into high-return industrial gas projects that will generate significant value for our shareholders while also continuing to return cash to our shareholders through our dividends.

Now please turn to Slide #3.

In terms of safety, our goal has always been 0 accidents and 0 incidents.

We are pleased that we have improved our lost time injury rate by 72% and our recordable injury rate by 31% since 2014.

But none of us can be satisfied until and unless we reach 0 accidents.

Even 1 accident is too many.

Now please turn to Slide #4 that states our long-term goal.

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

We are very proud of achieving this goal and are committed to maintaining our leadership position in the years to come.

Our goal has also been extended to include being the most diverse.

That means we are an inclusive company that depends on the contribution of all people.

Now turn to Slide #5, which is my management philosophy that has guided me throughout my business career, that is focused on cash generation and responsible capital allocation.

Now please turn to Slide #6, which is our Five-Point Plan for moving forward.

We have shared this with you many times before.

In summary, we are focused on cost and productivity to maintain our industry-leading margins.

We are poised for growth by expanding on our core competencies and financial strength, and we are very focused on promoting a higher purpose for the company in addition to creating value for the shareholders.

We are committed to create a company where all people -- all of the people feel they belong.

A company where people's contribution are recognized and rewarded.

A company that is committed to sustainability and the environment.

A company that is supportive of the communities in which we operate.

A company that people want to work for, where they are proud to be part of the innovative process to solve the world's energy and environmental challenges.

That is our higher purpose, and we are committed to that.

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

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

As expected, the Lu'An project continues to run very well and contribute to our results.

The Jazan air separation units were built on budget and on time with excellent safety performance.

We continue to work toward financial closing of the Jazan gasifier and power project by the end of this calendar year.

We are continuing our discussion with the YK Group for the very large quote to syngas project, and the Juitai project is going well with expected onstream in 2022.

Building on this momentum, we just announced the completion of an asset buyback arrangement with Jinmei, a leading coal chemical company in China.

We purchased 2 ASUs previously owned by Jinmei and entered into a long-term contract to supply oxygen and nitrogen for the customer's coal-to-clean fuel project in Shanxi Province.

This project is another great example of the customers' increased confidence in outsourcing their industrial gases.

In addition to these announced projects, we continue to work on a number of existing gasification opportunities around the world.

Now please go to Slide #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.

And now, please go to Slide #9, which is always my favorite slide and even more so this quarter.

You can see our record quarterly EBITDA margin of 40.1%, up 1,500 basis points from 5 years ago.

This is a tremendous 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 our results in detail.

Scott?

Thank you very much, Seifi.

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

As Seifi said, our business continues to perform very well.

Price was up 4% with strong performance across the regions and products, continuing the positive trend we saw last quarter.

Volume added another 2% primarily driven by new plants, including Lu'An.

Sales of $2.2 billion were down 2% as the positive volume and price were more than offset by 4% negative currency and a 3% impact from a contract modification.

As I mentioned on past calls, this India contract modification reduces sales but has no impact on our profits.

Our underlying volume was positive but was partially offset by lower sales from the Jazan sales equipment project as that project nears completion and from a prior year contract termination for an old flue gas desulfurization plant.

Excluding Jazan, volumes grew 4% due to new plants, base business growth and acquisitions.

We continue to see strong pricing in all 3 regions and across our merchant product lines.

Our team has worked very hard to realize the value we provide to our customers.

And I want to thank the team for a job well done.

Although unfavorable currency persisted, both EBITDA and adjusted earnings per share reached new highs.

EBITDA of $892 million improved 9% and adjusted earnings per share of $2.17 was 11% higher.

EBITDA margin of over 40% is another record high, up almost 400 basis points compared to prior year, primarily from the higher price and the India contract modification.

ROCE of 12.7% improved 50 basis points versus last year primarily due to higher profits.

Sequentially, EBITDA increased 8% as all 3 regions improved, particularly Asia following Lunar New Year in Q2.

Please turn to Slide 11.

Our third quarter GAAP EPS was $2.20 and includes 3 onetime items, which totaled a positive $0.03 per share impact.

You can find more details in our press release and appendix slides.

Our third quarter adjusted EPS of $2.17 was up 11% or $0.22 per share.

Volume, price and cost together contributed $0.24, repeating the strong operating performance from last quarter.

As a reminder, the impact of price increases is shown net of the impact of variable costs, primarily variable production costs, such as power and distribution costs in our merchant business.

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

It increased slightly this quarter versus prior year, but is less of a headwind than in recent quarters.

Currency and foreign exchange was $0.05 unfavorable primarily due to the Chinese RMB and the euro.

Excluding the unfavorable currency, EPS increased $0.27 or 14% over last year.

Nonoperating items, including tax rate and nonoperating income combined added $0.03.

Our effective tax rate for the quarter was 18.6%.

For the full fiscal year 2019, we expect an effective tax rate of between 19% and 20%.

Now please turn to Slide 12.

We continue to generate strong cash flow.

During the last 12 months, we generated about $11.50 per share or over $2.5 billion of distributable cash flow.

From this distributable cash flow, we paid almost $1 billion or about 40% as dividends to our shareholders and still have nearly $1.6 billion available for high-return investments in our core industrial gas business.

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

Slide #13 provides an update on our capital deployment progress.

As you can see, we now show almost $17 billion of investment capacity available over the 5-year period from FY '18 through FY '22.

As expected, the total capacity continues to grow as we increase EBITDA.

The almost $17 billion includes about $9 billion of additional debt capacity available today, over $5 billion of investable cash flow between now and the end of FY '22 and almost $3 billion already spent.

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

Today, we have a total of about $7.7 billion of project and M&A commitments with about $6.7 billion remaining to spend on them.

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

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

Thank you, Scott.

Please turn to our Asia results on Slide #14, where you can see that our business has recovered strongly following the Lunar New Year holiday and our great team in Asia delivered yet another strong set of results.

We remain very positive, and I'd like to stress very positive about our long-term growth potential as we continue to invest in this region.

While there has been some modest reduction in the reported growth rate of Chinese economy, we have not seen, as I said, we have not seen any significant impact on our business.

And most importantly, we have not seen any change in behavior towards Air Products from our customers or the government of China.

We continue to be very optimistic about our operations in China.

For the quarter, sales were up 9% from last year with volume and price together up 15%.

Volumes increased 10% primarily driven by new projects, mostly Lu'An.

As a reminder, Lu'An has started up late in quarter 3 of last year and continues to perform very well.

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

Price was positive across all major product lines and key countries.

A strong volume and price combined with productivity drove higher profits and margin.

EBITDA increased 24% and EBITDA margin expanded nearly 600 basis points to more than 49%, which is another record level.

Sequentially, volume and EBITDA improved 8% and 12%, respectively, benefiting from a strong recovery from the Lunar New Year holidays and new plant startups.

In addition to the asset buyback I mentioned earlier, we have recently announced 2 contract awards in Korea: one, from MEMC to provide Industrial Gases for its new 300-millimeter wafer fab; and the other from POSCO Chemical to supply oxygen and nitrogen for its new cathode material manufacturing complex.

Great examples of our team earning the confidence of the important customers.

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 Americas results.

Americas pricing success continued.

The 4% improvement represents our best performance in at least 4 years.

Overall, sales were up 1% as higher price was partially offset by 1% lower energy pass-through and 2% unfavorable currency impact.

Underlying volumes grew 1%, but were offset by the prior year contract termination I mentioned previously.

Record EBITDA of $410 million increased 7% and EBITDA margin of 43% was up 270 basis points, primarily driven by higher pricing.

Sequentially, EBITDA margin improved 270 basis points or 100 basis points, excluding the impact of lower energy pass-through.

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

Simon?

Thank you, Scott.

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

We continue to show positive operational results despite limited economic growth.

Price increased 4% with improvement across all major products and subregions.

The EMEA team has now delivered 6 consecutive quarters of year-on-year price improvement.

Volume was up 2% primarily driven by the acquisition of a CO2 producer while base business volume remains stable as positive retail volumes were offset by lower wholesale volumes.

Sales were negatively impacted by 2% lower energy pass-through, 5% unfavorable currency and an 11% sales reduction due to the India contract change that Scott mentioned.

Reported EBITDA of $190 million was up 2% and was up 7% on a constant currency basis.

Reported EBITDA margin improved 520 basis points to reach a new high of over 38%.

Excluding the India contract change, EBITDA margin was up about 100 basis points.

Sequentially, volumes were higher on better merchant volume, including the acquisition.

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

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

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

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

Although modest, it is great to finally see improvement in this segment with the best sales and profits in almost 3 years.

The Golden Pass LNG project in the U.S. Gulf Coast began to contribute this quarter, and we are optimistic about additional LNG orders.

It is important to note that our LNG technology has been selected for several North America and international projects that are awaiting final investment decisions by our customers.

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

Thank you, Simon.

Please turn to Slide #19.

As I said on our last call, 5 years ago I promised we would grow the company's earnings per share by at least 10% annually.

As you can see, we have done better than that over the last 4 years and expect to exceed 10% again this year, thanks to the great team at Air Products, we have delivered on our commitments.

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

As you all know, we continue to live in an uncertain world that we at Air Products cannot control, but we definitely do have control over the actions Air Products can take to succeed in a dynamic world.

We have a strong, capable and flexible organization that remains focused on productivity and creating our own growth opportunities, which will allow us to continue to deliver on our promise to investors to increase earning per share by 10% per year as we move forward.

Now please turn to Slide #20.

Our updated EPS guidance for fiscal year 2019 is in the range of $8.20 to $8.25.

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

For quarter 4 of fiscal year 2019, our earning per share guidance is $2.26 to $2.31, up 13% to 16% over last year.

Our team around the world continues to be very optimistic about the future of Air Products.

Our Five-Point strategic plan will differentiate us and drive our success going forward.

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

We have the financial capacity, the technical position and the talent to take full advantage of our existing opportunities.

And finally, please turn to Slide #21.

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

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

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

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

Now we are delighted to answer your questions.

(Operator Instructions) We'll now take the next question from P.J. Juvekar from Citi.

Yes.

Seifi, good pricing in the quarter.

I think this was by far one of your best pricing quarters ever.

Your onsite pricing is kind of set contractually so I assume that merchant prices are up a lot more than what you reported here.

Can you talk about what's going on there?

Is it driven by utilization?

And what are you seeing from competitors?

Are you seeing more disciplined behavior from competitors?

PJ, you are very right when we report our results, we report over the whole sector, including the onsite business.

Obviously, the onsite business, that prices are not going up and that's half of our business.

So when we report 4% price increase, it really is about 8% or 9%.

What is driving the pricing is our decision to increase prices because it's about almost 8 years that we haven't really increased prices.

Our costs are going up.

I made a very, very public statement in February of this year that we at Air Products have decided to increase our prices to recover our costs, and we are willing to lose volume if people want to buy from somebody else.

And obviously that's a free choice they have.

We consciously have decided that we need to maintain our margins, and we are increasing the prices.

I certainly cannot and will not comment on the behavior of the other people.

I mean that's up to them to comment when you ask them the question.

But we certainly have made a conscious decision despite utilization rate or anything like that, that we need higher prices to maintain our margins.

We can't let our margins go down.

And then just quickly, this U.S.-China trade war going -- and I know you are not directly impacted -- but your customers are.

And so can you talk about what end markets where you are seeing that impact of the trade war and which markets are strong for you?

Well, P.J., quite frankly, we do not see that.

Now maybe it is because in China, for example, more than 60% of our business is onsite business.

And, therefore, as a result, we have a lot of protection there.

But overall, I mean I know the headline says that China is slowing.

But then the next line it says China grew 6.32%.

I mean if that was the case in the U.S., we would all be doing cartwheels.

So the Chinese economy is growing, and we are seeing the benefit of that.

(Operator Instructions) We'll now take our next question from John Roberts from UBS.

Do you think that Yima oxygen explosion in China will affect product activity at all in China?

No, I don't think so because I think once people investigate, they find out what the cause is and it's -- and I don't want to speculate.

But I don't think that is an indication of any fundamental issue with respect to processes and so on.

From what we understand, the explosion was at the ASU, not at the gasification unit.

No, I don't expect any impact, not at all, John.

Then how much was volume up in the U.S. because I assume it was probably down in Latin America at least a little, and I don't really know what Mexico did.

Actually that's equity income, so that probably doesn't show up in your numbers.

Our volumes in Americas was up about 4% in total.

Yes, am I quoting the right number, Scott?

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

No.

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

We don't usually break that down.

But the U.S. is not -- the economy in the U.S. is not growing that much.

It's flat.

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

Seifi, I wanted to explore your Jinmei project, is that just the fruition of something -- I think you guys have worked a couple of weeks ago on buying back those ASU and supplying the gasifiers?

Is that the same project now it's just getting formalized and completed?

That is correct.

That, that you are absolutely right.

We have been working on this project for a while and it finally came to fruition, and we are announcing it.

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

No, John.

Our pipeline is next to our plant.

It just that it is delivered within a pipe.

That means we are not delivering liquid but it from our facility.

Jinmei is massive.

Does this portend future opportunities there?

Could you do as you've done with Jazan and others and eventually convert this into some potential gasification opportunity as well from an investment standpoint?

Bob, obviously, that would be our ambition, yes.

And if I might, the last one.

In Jazan, have you guys finalized your ownership structure there?

The percentages?

In Jazan, I think we have said that we will end up owning about 51%.

But we are finalizing the contract.

The numbers might change 1% up and down but nothing massive, no.

We will end up owning the majority there.

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

Seifi, you certainly affected a significant culture change at Air Products and just wanted to get your view on where you are at right now with respect to that process.

Is there more to go on a structural change?

Or is it primarily at this point, that you've incentivized employees to come forward with new opportunities for improvement?

Well, thank you for your question.

Obviously, I'm very proud of what we have achieved but at the same time, with the culture change, you are never done.

You can always, always, always do better.

But I am very, very satisfied with the progress we have made, our results show that.

And in terms of the future, I think our people are very excited about the growth opportunities that we have.

And as a result, we are a lot more productive.

People are excited about coming to work.

People are excited about working on very exciting new projects, and we are hiring people.

And so that always creates a positive mood within the company.

We always work on productivity and -- but we are hiring people for our new projects from all of that.

So I feel very good about the organization.

They are a great team of people but at the same time, we can always do better.

And on gasification, you mentioned, Seifi that you're still working on numerous opportunities.

Just curious as to whether or not you're seeing the bidding activity increase or get more competitive, particularly since your margins in Asia have really escalated with Lu'An?

We are seeing very good opportunities.

We are working on new projects.

And in terms of the bidding activity, quite honestly, we are not in a good position to answer because our customers don't necessarily tell us whom we are competing with and have many other bidders and all of that.

But overall, you know who our competitors are.

There are really 3 people who are -- who can participate on these big projects.

There are not 20.

So out of the 3 of us, we are all focused on different parts of the world and -- whether all the other 2 are in every project that we are in, I don't know.

But when we approach a customer, we try to do the best we can for them and for Air Products.

And fortunately, we have been -- we are fortunate, we see a lot of opportunities and I expect us to get additional orders as we move forward.

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

Seifi, if we can go to your favorite Slide 9, you were in that band of 34% to 36% for basically '16, '17 and '18.

Now in the last 2 quarters, you've kind of broken out of that band to a much higher range.

Is the last 2 quarters indicative of where you think the new range will be over the next several years?

Or are the last 2 quarters more of an anomaly and will trend back towards that 34% to 36% over time?

Duffy, you always ask me difficult questions but that's fair.

We had been guiding you that the margins are going to be around 33% to 35%.

Right now, we have delivered around 40%, 37%, 40%.

So right now, if I was going to make a prediction for the future, we are going to be in a higher band.

We are going to be somewhere between 38% to 40%.

That is correct, Duffy.

Great.

And as long as we're predicting the future, could you give us an early peek what 2020 looks like for you guys and maybe not business conditions because they can change.

But when you look at the projects that you've got feathered in for 2020, is that supportive of the 10% plus growth rate you're trying to get on EPS?

I said in the call twice that our goal is to improve our profitability by 10% so I think that kind of answers your question, right?

That is what you get.

We'll now take the next question from Jeff Zekauskas from JPMorgan.

What was your Asian volume growth ex Lu'An?

Jeff, excluding Lu'An, it was about maybe 4%.

About 4%, okay.

And prices in the United States are -- prices in North America and Europe have been very good year-over-year, but pricing in Europe and in the Americas was flat sequentially.

And capacity utilization rates in North America and Europe have flattened out and come off.

So generally speaking, has pricing in Industrial Gases as the base case plateaued at the current levels that we're at?

I wouldn't want to say that.

I expect continued price improvement in the next -- at least in the next 2 quarters.

And then after that, we'll see how it works out.

But I think the momentum that we have will still continue in the next few quarters, Jeff.

We'll now take our next question from Don Carson from Susquehanna Financial.

Seifi, you've been delivering strong earnings growth despite the drag from LNG.

So can you remind us what has that drag on earnings has been in the last few years?

And as your Project backlog starts to improve, what's your contribution could you see the sale balance sheet equipment making over the next few years?

Don, that's an excellent question.

We, in 2015, our LNG business delivered us about $0.50 earning per share, about $150 million of EBITDA.

Last year and this year, it almost contributed nothing.

So the drag has been about $0.50.

So I'm hoping that in time, we will recover that and hopefully even improve on that.

Okay.

And then a follow-up on your EPS contribution, you have 4% volume growth if you exclude Jazan, but you show that as a four percent drag on EPS year-over-year.

So I'm trying to reconcile why volume improvement would be an EPS drag.

I think Scott in a best position to answer this.

Scott, please.

Sure.

Don, thanks for the question.

I think I mentioned this in my prepared remarks.

So importantly, when we look at the underlying volumes up modestly and the contribution from those volumes were good.

There were a couple things in there that I would refer to as kind of a negative mix impact, which is the timing for the Jazan project, which as you recall is the sale of equipment so the timing on revenues versus profit year-on-year is throwing that off a little bit as well as the prior year contract termination that I mentioned in Americas.

So that's why you see the difference between the EPS contribution versus the sales.

But again importantly, when you peel those kind of one-off things out, the underlying volumes were up and the contribution from those volumes were positive.

Take our next question from David Begleiter from Deutsche Bank.

Just on Jazan, as we get closer to 2020, can you talk about the cadence for the earnings ramp from that JV into 2020 and 2021 earnings, either pretax basis or an EPS basis?

Well, David, first of all, we are working on that thing, and we are hoping that everything we worked hard and we do the financing and signing.

So I just want to say that it is not a done deal yet, but if it is done, what we have said publicly, is that considering what we are investing, we will see a contribution about more than $0.75 from that project when it comes onstream.

Now once we actually get the contract signed, put all of the numbers together and all of that, and we make the final announcement that this has been done hopefully before the end of this calendar year, then we will give you a better guidance in terms of the impact on 2020 and 2021 and moving forward.

Very good.

And just on merchant pricing, Seifi, what was the merchant price gained by region that you realized in the quarter?

I'd like to read the numbers.

Merchant pricing was 9%, 6%, 14% and 9% total.

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

We'll now take our next question from Christopher Parkinson from Crédit Suisse.

So when you're looking at the set up overall for fiscal year '20, there are obviously a few base moving parts, business growth, which obviously can go with the macro.

Your projects in Saudi Arabia very [transient] small or backlog projects and the initial ramp up of some LNG wins.

I understand if you can't quantify these buckets but can you just comment on your confidence in terms of the line of sight that you see into these and just your general level of your enthusiasm pertaining to each?

Chris, I can say that I'm very optimistic that we will deliver a 10% improvement over 2019.

Now if the number is going to be any better, we will talk to you about that in October.

But right now, sitting here looking at what is happening in the world, we think that we should be able to improve our EPS next year by 10% versus this year.

And the way we look at it is that our job, I get paid $15 million a year to come and deliver results rather than come and explain why I didn't deliver the results.

We are committed to improve our EPS 10% a year in the years to come.

We have done that, we'll define different levers to pull in order to make that happen whether it is cost reduction, price increases, new projects in all of that, so that is our commitment to the investor that has been our commitment to the investor since 5 years ago, and we hope to continue to deliver that, Chris.

Fair enough.

In new materials, you've been consistently referencing an additional $6.7 billion remaining capital to deploy, and you've made it very clear that you only explore projects in excess of 10% returns.

When you just look at the remaining backlog opportunities, which it's my understanding there's still ample, can you just comment on the returns mostly close to that 10% level or is fair to say that there's still plenty in there that will be more similar to the implied return of Lu'An?

Well, it's very difficult to predict that, but we have said that we would be very hesitant to take any project that's less than 10% return.

So hopefully all of these projects will be 10% or higher.

We'll take our next question from Jonas Oxgaard from Bernstein.

You talked -- well, you talk quite some time about expanding your onsite as a percentage of your total.

But considering the success of your merchant business now are you revisiting that strategy at all?

No because we are -- you see, our merchant business, we are going to grow it as fast as we can.

We are not downsizing that.

But we think that our onsite will grow faster than that.

So our ratio will change not because we are slowing down on the merchant business but because we think onsite business has a potential of growing faster than the merchant.

Okay.

Don't see an opportunity to double down on the merchant either?

Well, the merchant business, we are going to double down based on economic growth.

I mean if -- in China, it's growing 6%, you can build new merchant plants.

But if you have a situation in Europe or the U.S. where the market is not growing, then obviously we are going to add capacity.

But we are committed to our merchant business.

We will grow it as fast as we can grow it, which is basically GDP.

Nobody can grow their merchant business faster than GDP.

I don't care what they say.

Because if they say, oh, we are going to grow faster than the other guy, that means they're going to take market share away from the other guy and that doesn't happen.

Nobody can take away market share from us, and vice versa.

So the merchant business is going to grow with the GDP of each region and as it grows dividend less than that, we are committed to that, we have the know-how, we have the people.

But my point is that, that growth is in emerging markets.

It is not in the U.S. and it is not in Europe.

Okay?

(Operator Instructions) We'll now take our next question for

We have time for one more question, please.

Well it doesn't seem like there's any other questions.

So with that, I would like to thank everybody for being on our call.

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

We do appreciate your interest and good questions and look forward to discussing another set of good results with you again next quarter.

Have a nice summer holiday and all the best.

Take care.