Good morning, and welcome to Air Products And Chemicals Second Quarter Earnings Release 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.
Thank you, Leon. Good morning, everyone. Welcome to Air Products Second Quarter 2020 Earnings Results Teleconference. This is Simon Moore, Vice President of Investor Relations. I'm pleased to be joined today by Safi Kassemi, 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. This discussion contains forward looking statements. Please refer to the forward looking statement closure that can be found in our earnings release and on Slide 2. In addition, throughout today's discussion, we will refer to various financial measures.
Unless we specifically state otherwise when we refer to earnings per share, EBITDA, EBITDA margin and ROCE, both on a company wide and segment basis, we are referring to our adjusted non GAAP financial measures. Adjusted earnings per share, adjusted EBITDA, adjusted EBITDA margin and return on capital employed. Reconciliations can be found on our website in the relevant earnings release section. The significant, social and economic challenges the world is currently facing from the COVID-nineteen pandemic, we have restructured our call today to focus on the key information we believe is most important to our investors. You can find our Q2 segment slides in the backup section but we won't go through them in detail on the call today.
Also, given the significant uncertainty that remains regarding the duration of the crisis, the pace of recovery and the negative impact on the global economy, Air Products is not providing Q3 FY 2020 EPS guidance. In addition, we believe it is prudent to withdraw our FY 2020 EPS and capital expenditure guidance and therefore, we advise our investors that such guidance should no longer be relied upon. We are not providing new FY 2020 guidance at this time. And like all of you, we are conducting this call remotely. So during the Q And A, we will intentionally pause to help with any time delay and avoid two people speaking over each other.
We appreciate if you would do the same, and we also appreciate your patience. Now, I'll turn the call over to Safy.
Thank you, Simon, and good morning, everyone. Particularly during these challenging times, We thank you for taking time from your busy schedule to be on our call today. Before we talk about the quarter, I wanted to share some thoughts on the current situation. Please turn to Slide number 3, the true character and leadership of individual and companies is revealed during times of crisis. We are certainly going through a crisis something that none of us has experienced in our lifetime.
But I am delighted to report to you that the people of Air Products are demonstrating our culture and character to the world. They are responding to the crisis. It's cheering for our fellow employees and our fellow citizens around the world. They are responding with passion to keep our plans operating so that we can provide our customers with the vital products commitment and dedication to move Air Products forward, no matter what the challenges. We have always been a leader committed to safety as our number one priority.
In managing through this crisis, we have provided the right protective equipment and procedures to protect our people and transition many employees to work from home We are also committed to providing financial security During this crisis, we have not laid off any of our employees or cut their salaries. We will work to maintain this approach as we navigate through this crisis together. We have a strong financial position necessary to carry our people and their families through these unusual times. That product is looking after our customers. Our customers expect us to provide them with the products they need on time with the right quality and the focus on providing excellent service.
I am proud that during this crisis, we have checked All of our 750 plants operating around the world, I'd like to repeat. We have kept operating all of our seventy 750 plants around the world, significant accomplishment during these times. We provide products services and equipment essential to basic human needs, including medical oxygen, medium for MRI machines, products for food freezing, hydrogen for energy, and related equipment critical to energy and medical needs. We are proud to be identified as a critical industry by all the governments around the world. I want to thank our people on the front lines for keeping all our plants running and delivering to our customers the product they need.
In addition, the rest of our by keeping key processes running and continuing to pursue and win new projects like the PBF Hydrogen Plans acquisition that we announced in March and closed last week. Their products is also a leader in looking after our communities. I am proud of how our teams have mobilized safely and quickly to meet increasing oxygen demand. We are actively supporting medical facilities and the establishment of critical temporary hospitals. We have also made financial contributions, donated critical PPE and equipment and offered our talents to non topic organizations that are meeting so many urgent human needs during this crisis.
We are making the difference in people's lives. Air Products is also a leader in creating and preserving shareholder value with the prudent management of cash over the last 6 years. They now had a very strong balance sheet and plenty of cash on hand to weather the current crisis. Continue to pay dividends and invest in attractive opportunities. I would like to thank our team for their commitment and dedication during these difficult times.
Their hard work and our resilient business model allowed us to deliver our 24th and our repeat our 24th consecutive quarter of year on year earnings growth. Despite the negative impact in the 2nd quarter, of about $0.06 to $0.08 of earnings per share from COVID-nineteen virus. Now please turn to slide number 4. I am pleased that our team stayed focused on working safely This is always important and particularly during these challenging times. Now please go to slide number 5.
Which shows our goal, which remains unchanged. And now Please go to slide number 6, our management philosophy. We have included this slide in every presentation that I had that one can fully appreciate the value of following this key management philosophy that I have pursued in my 50 years career. Yes. Cash is And yes, the most important job of the CEO is prudent capital allocation.
We have been focused on generating and preserving cash. They did not waste our cash on stimulus acquisition or share buybacks. And we saved our cash for a black swan event that we have the cash to take care of our people, to continue to run our business, serve our customers, contribute to the benefit of our communities and create value for our shareholders. Now please turn to Slide number 7, which is our long term business strategy. You have seen this many times before.
There is no change to this strategy, and we will continue to pursue it as a state. On slide number 8, you can see our exciting gasification strategy. The fundamental drivers creating significant growth opportunities in gasification remain. Countries and large companies around the world continue to focus on gasification to utilize the abundant natural resources. They have to produce chemicals, transportation fuels, and energy in sustainable At this point, I think it's appropriate for me to update you on our important $12,000,000,000 deal the Jazan project for Saudi Aramco.
Despite the current challenging times, I'm happy to report that we have now completed the discussions regarding the legal documents. And these legal documents are being submitted to the lender's legal advisor. Therefore, we now expect to go through the market for the $7,000,000,000 project financing by the end of May, and we expect to close this transaction by October of 2020. Now please go to slide number 1, number 9, please, which summarizes the TBF Hydrogen Plans acquisition. We announced a few weeks ago.
Despite the unprecedented challenges in the world these days, I'm proud that we continue to win large on-site opportunities. We have closed on the purchase of the 5 operating hydrogen plants in California and deliver for $530,000,000 and had started providing long term hydrogen supply to 3 PBS Energy refineries. This project will have returns in excess of the minimum requirements we previously shared with you. And it will be accretive to our bottom line this year in 2020. I'm proud of our team who have worked diligently to negotiate, sign and close this deal in less than 30 days.
This project is aligned with our on-site growth strategy using our strong balance sheet to acquire own and operate assets for customers and supply gases under long term contracts. We are pleased to expand our strong relationship with TBS. In addition, we are working on many other opportunities around the world so that we remain confident. In our ability to deploy our value their capital to create significant shareholder value. Now please turn to slide number 10.
Again, with the hard work of our team, and the strength of our business model, our EBITDA margin remained over 40%, which is up over 1500 basis points from early 2014. Now I would like to turn the call over to Mr. Scott Crackle, our vice president, Executive Vice President and Chief Financial Officer, to provide a financial overview.
As Safie stated earlier, our company's financial position is very strong. Our cash flow generation is very stable. Supported by our industry leading on-site business which represents more than half of our sales. Additionally, our cash on hand and limited We are confident that As you can see in slide 11, we have over $2,000,000,000 of cash on hand. We also have an undrawn $2,300,000,000 committed revolving credit However, I don't anticipate any need Net debt is about $1,000,000,000 and our net debt to EBITDA ratio This allows us to increase debt considerably while still maintaining our targeted AA2 debt rating.
Our dividend and capital investment plans remain unchanged. We are committed to rewarding our investors, by increasing the dividend 38 consecutive years of dividend increase through many periods of challenging economic conditions. And we continue to believe that investing in high return projects will create more shareholder value over the long term than buying back shares. Into our exciting growth opportunities, including recent opportunities like the TDF asset acquisitions. We also have about us the debt markets.
Now please turn to Slide 13 for our 2nd quarter results. Our sales and profits grew despite the unprecedented disruption due to COVID 19. Demonstrating the stability of our on-site Overall, COVID 19 negatively impacted volumes by about 1% and EPS by $0.06 to 0.08 dollars. Primarily in the Asia Merchant Business. The Asia Merchant Business was down about 25% for about 6 weeks after As expected, our on-site business remained stable.
We also did not see much impact in Europe or the Americas for the quarter But we did begin to see an impact right at the end of the quarter. Safety will provide some comments later regarding what we have seen so far We are encouraged to see that business gradually return to normal by theendofthequarter. I would like to For the quarter, sales grew modestly to $2,200,000,000 as strong underlying sales were offset by 5% lower energy pass through and 2% unfavorable currency, primarily the Chinese RMB, the euro, and the Korean line. Volume and price improved in all three regions. Volume increased 6% as new plants, overall positive base business, LNG activity, acquisitions, and a short term contract in Asia And as I mentioned, our existing on-site business was stable.
Price was up 2%. The 11th consecutive quarter of year over year price increase. EBITDA reached almost $900,000,000. Up 8% with higher profits across all three regions. EBITDA margin was again over 40%.
The 4th consecutive quarter, exceeding the 40% mark, up 260 basis points. About 180 basis points of the improvement was from lower energy pass through with the rest primarily driven by higher price. EPS of $2.04 was up 6% despite the negative $0.06 to 0 point 0 $8 impact of COVID 19 and unfavorable currency. Sequentially, sales and profits were down. As a result of reduced activities due to lunereholidays and the COVID-nineteen impact.
ROCE of 13.5 percent continues to improve, up 90 basis points over last year. As Simon mentioned, we don't plan to review the individual segments in detail but I would like to make some summary brief comments on their 2nd quarter performance. All three geographic regions delivered stronger results with volume, price, EBITDA and EBITDA margin up in each region. Asia's volume was up 6 percent despite a negative 4% impact from COVID 19. The growth was driven by new plants, and a short term supply contract that we mentioned last quarter.
Almost 2 thirds of our Asia business is on-site, which remained stable as we expected. We saw strong hydrogen volumes for the refining industry in the U. S. Gulf Coast Canada and Rotterdam. Americas and EMEA only began to see impacts from COVID-nineteen during the last week of with about 350 of that from lower energy pass through.
EMEA EBITDA margin was up 90 basis points. Primarily from higher price. Now please turn to Slide 14. Our second quarter GAAP EPS was $2.21, which includes 2 one time items. A $34,000,000 gain due to a property sale and a $14,000,000 tax adjustment in India which combined contributed $0.18 of EPS.
Our 2nd quarter adjusted EPS of $2.04 was up $0.12 per share or 6%. Driven by strong operating performance. Volume and price together contributed more than the negative 0 point 0 $6 to 0 point 0 $8 impact from COVID-nineteen. Cost was unfavorable $0.17, due to our continued investment in resources to support our growth strategy coupled with additional planned maintenance and life extension work needed in our facilities, mainly in North America, as mentioned during our last quarter's call. We do anticipate customers delaying planned outages in the second half of the year.
Currency and foreign exchange was $0.05 unfavorable, primarily due to the Chinese RMB, the euro and the Korean yuan. Equity affiliate income contributed $0.03, while a modestly higher tax rate subtracted 0 point 0 $2. The effective tax rate We continue to expect an effective tax Now please turn to Slide 15. We continue to generate strong operational cash flow. As I mentioned, our EBITDA was up 8% despite the again, demonstrating the quality of our business model.
Over the last 12 months, we generated about $2,700,000,000 or over $12 per share of distributable cash flow. From this distributable cash flow, we paid almost 40 or over $1,000,000,000 as dividends to our shareholders and still have about $1,700,000,000 available for high return industrial gas investments. This strong cash flow, even in uncertain times, enables us to continue to Slide number 16 provides an update on our capital deployment progress. As you can see, we expect about 8 $18,000,000,000 of investment capacity available over the 5 year period from FY 2018 through FY 2022. Our total capacity is expected to continue to grow as we increase EBITDA.
The $18,000,000,000 includes about $10,000,000,000 of additional debt capacity available today. Over $4,000,000,000 of investable cash flow between now and the end of FY22 and almost $4,000,000,000 already spent. We will continue to focus on managing And as I mentioned earlier, we continue to evaluate As Stacy said, we continue to sign new projects. So our total project and M and A commitments are up to about $9,000,000,000 with about $8,000,000,000 remaining to spend on them. We have already spent over 20% and already committed almost 2 thirds of our total available capacity.
We remain extremely confident in our ability to deploy this capacity into on-site projects that will create significant long term shareholder value. Please turn to Slide number 17 for a summary of our perspective on COVID 19. We are safely keeping our plants running, and we are mobilized to meet our customers' needs, particularly for medical oxygen. Our results this quarter demonstrate the resilience of our business model despite the impact We have been seeing lower Americas and EMEA merchant volumes in April and expect that to at least impact Q3. We have seen customers delaying planned maintenance activities, and we are monitoring for any potential delays in our projects under construction.
Looking forward we are confident that our strong financial position will support our future investment opportunities. Now to provide some additional
Thank you, Scott. We have now seen how air products performed during the months of January February March of 2020. I would like to add that we did have a good month of March despite the just want to know what we are seeing as of today in the month of April. This is what I can share with you. First of all, as I speak to you now, just about all of our seven fifty plants around the globe, our operating and supplying essential products to our customers.
The 52% of our sales, now let's say 52% of our sale, that is our side business around the world is doing well, and we expect this to continue. In Asia, our merchant volumes have returned to pre crisis levels and some product lines are actually higher than last year. In Europe, our margin volumes are down about 25% in the month of April. Although this seems to have improved slightly in the past week. The main impact in our volumes in Europe is in our volumes are down about 15% in April and seem to be stable over the last week.
Please note that we do not have a packaged gases business in the United States. Although it is encouraging to see some improvement in the number of COVID-nineteen cases and a threatening of the curve in certain areas around the world. But we all need to realize that significant uncertainty still exists regarding the duration of this crisis. The pace of recovery and the negative impact on the global economy. Given this uncertainty, air products is not providing fiscal 3rd quarter EPS guidance, and we believe it is prudent to withdraw our prior fiscal year 2020 EPS and CapEx guidance.
While we are not providing guidance, I would like to remind you of a framework. You can use yourself to think about Air Products business in this complicated time. Together, the stability of our inside business around the world and the continued normal volumes in Asia represent about 2 thirds of our business. And we don't expect much impact For the other one third, which is our merchant business in America and Europe, we do reflect an impact in quarter 3 and for the full year. But given the level of uncertainty we are not in a position to quantify.
But one way to think about the potential impact is by assuming that the merchant volumes in these parts of the world aligned with industrial production. So for example, if both Americas and Europe merchant volumes were to be reduced by 25% for a single quarter because industrial production has dropped by about 25%. This would impact our air products earning per share by about 30% to 35% per share which is 3% to 4% of our analog EPS. And finally, please return to slide number 18. In these challenging times, our competitive advantage as always is the commitment and motivation of the great team we have at Air Products.
Our strong financial position and robust business model will allow us to continue to execute our strategy, to create long term shareholder value, and to increase our dividend as we have done for the past more than 30 years. The projects in our backlog continue as expected, and there continues to be significant opportunities investing projects in our core business. Most importantly, we will continue to protect our people's health and safety and take care of their welfare and the welfare of their families. Let me end today by thanking our 17000 people again. For their commitment and hard work for demonstrating the true character of Air Products.
Our success yesterday today and tomorrow depends on their dedication and commitment. And I am very proud to say that Air Products team is demonstrating that to the fullest extent and that the most extreme conditions. We are very proud to play a critical role and make a difference to the award during these challenging times but I think our plans running and providing critically needed industrial gases to keep people alive. This is our I just remember that we are all in this crisis together, and we'll we'll come out of this thing together, and we will win together. Stay safe.
Stay healthy. And now we will be more than happy to answer any questions that you have. Thank
And we will take our first question from David Begleiter with Deutsche Bank.
Thank you. Good morning. Stacy. Good morning, David. On Jazan, assuming we've closed this in October, how should we think about the earnings contribution in 20 Q1?
Well, obviously, we have given you a guidance about the fact that for every dollar that we invest, you should expect approximately $0.10 of operating profit. So, you can convert that to EPS and impact very easily. At this point, I think that's the guidance I want to give you. But once we actually close, then we will be a little bit more specific.
Very good. And just last thing on your on-site business, what's your exposure as refineries reduce their operating rates you highlighted the stability of your on-site business, but is there not some downside risk as we do see lower crude runs by refineries?
No. Our on-site business, as we have always said, we get a fixed monthly fee for running our plants and providing product to our customers whether they are operating at 100%, 90% or 80% doesn't make much of a difference. And you have seen that fully demonstrated during the second quarter, where there was obviously a lot of pressure on everybody around the world and in China and all of that. So That doesn't affect us that much.
And we'll take our next question from John McNulty with BMO Capital Markets.
Yeah, good morning. Thanks for taking my questions. So two questions on the backlog. I guess the first would be you have a lot of business coming in on the merchant front that you've listed in your backlog for 2021. I guess, can you give us some color as to your confidence in though in that demand or that business coming on?
And what the impact might be in terms of how we should be thinking about the earnings contribution in 2021?
First of all, good morning, John. With all due respect, John, I would like to disagree with you in terms of the fact that most of those investments in our backlog are in nurturing. They really are not. Most of them are in a our on-site model. So, As a result, I don't expect much of an issue with that.
As they come in, I think they are mostly on-site business. They fix the PFCs.
Got it. Yeah. That part, I mean, I see the big on-site ones. I guess I was curious because you do have 4 projects listed that are merchant. I was curious what the likely for those coming on and the impact might be.
So they did come on and they are very small in terms of the context of the thing and some of them actually replaces some older plants. So I don't expect that to be material at all, John.
Got it. Got it. Okay. And then for the second question, the macro obviously is going to be a lot slower short term and that may have some impact on the ability for new projects to get bid upon and things like that. At the same time, you just won the big PBF project or business.
I guess I'm wondering how you're thinking about the on-site opportunities out there and if we should be thinking about the project backlog expanding as we kind of go throughout the year or saying level to maybe going down a bit. How should we be thinking about that?
I think you should be thinking on that part of our business that it's business normal and actually the current crisis might actually create opportunities that some of the people who are reluctant to sell some of their kind of industrial gas plants that they own, that they might be thinking about maybe divesting those and generating some cash. So I actually think that our, the pace of what we have been doing is continue and maybe actually salary.
And we'll take our next question from Kevin McCarthy with Vertical Research Partners.
Yes. Good morning. Safie and listening to your comments, it sounds like your business in Asia is recovering nicely. If that is the case, would you expect earnings to improve sequentially in the fiscal third quarter in Asia relative to what you just posted in the 2nd quarter?
First of all, good morning, Kevin. Yes, I do. Our business in Asia is doing fine. Right now. And as I said in my comments, some of the product lines are actually higher than last year.
So I do expect an improvement in our Asia segment next
Sorry to interrupt. As a second question, I was wondering if you could elaborate on the decision to discontinue your capital expenditure guidance as distinct from the earnings guidance. It looks like the years have done, I imagine a lot of projects are already underway. Are there particular sources of uncertainty that have emerged now that might call into question the state of individual projects or what is the rationale there?
Kevin, that is driven by just one project, which is Jazan. As I said, we expect that project to close in October. Now if it closes on September 28, the capital expenditure, which is significant will be in 2000 and in our 2020 numbers. If it closes on October 2nd, it will be in 2020, 2021. That is why we didn't want to since we don't know exactly when the project is going to close, that is why we get through that guidance.
So that they don't, create an issue of having said something. And it becomes a few, a 1 week or 2 weeks back and forth, and it would significantly change that. It is that, that investment is not $200,000,000. It's 1,000,000,000 of dollars. So as a result, that is why we wanted to shy away from confirming the capital expenditure, Kevin.
That's the only one actually.
And we'll take our next question from Vincent Andrews with Morgan Stanley.
Thank you, and good morning, everyone. First, if you could just clarify, Safy, you know, at the end of your comments about how April was going and you talked about, if merchant volumes were down 25% Was that that it be a 3% to 4% hit to EPS or a $0.34 hit to EPS? And then I have a real question.
Sure. First of all, good morning, Vincent. Number 1, what I said is that if the industrial production drops 25% And as a result of that, both Europe and Americas dropped 25%. That is not the case as we see. As I said, European volumes as we see it in April is down 25%, but in the U.
S. It's only 15%. But I just wanted to give you some guidance that if both of those things drop 25% for the quarter, Then the impact for the quarter will be about 30% to 35%. $0.30 to $0.35, which is 3% to 4% of our total EPS approximately for the year. So the effect will be 30% to 35% for that quarter.
Okay. Understood. Yes. Okay. That's very
helpful. And then if I could just ask on the merchant gases side of the equation, there have been some reports in the U. S. And in Europe about shortages of CO2. In the U.
S. As a function of corn ethanol plants not having co product production. Is that something that you're seeing and that the company is going to be able to be a solution provider for that missing CO2.
And just to put it in context, CO2. First of all, your statement is absolutely correct. But in terms of aircraft CO2 is 1% of our sales in the U. S. And 5% of our sales in Europe.
Europe doesn't have a problem now. So in the U. S, it is a very, very small part of our business. So it's not going to have any kind of a material impact on our business. And we are not going to be able to do something to help the situation because it's such a small part for us.
Thank you very
question from Mike Harrison with Seaport Global Securities.
Good morning, Mike. How are you doing?
Doing well. Hope, hope you're well as, as well, safety.
Maybe
continuing on the question related to CO2 shortages. Just talking more broadly about your business, can you talk about any supply chain or logistical issues that you may have encountered as a result of COVID. Any any additional costs associated with shortages or availability or needing to move product around, at at higher cost or in less efficient ways than normal?
But related to CO2, as I said, for us, it's such a small business. We haven't seen much of an impact on our business and we haven't had to do anything significantly unusual?
I mean, more broadly speaking, though, when it comes to Las Lynn or or Argonne or or anything else?
No. Unlocks Lynn, Argonne, and all of that. Thanks to the outstanding efforts of our people. They get up in the morning. They go to work.
They obviously, they're the proper protective equipment, but they have kept all of our plants running, all of our supply chain. And we haven't had any issues of not delivering to a customer or not being able to meet customer demand. So I'm very proud of that. And that we have kept our company running, and we have supplied product to all of our
All right. And then I wanted to also ask about the impact of lower planned maintenance. You mentioned that a couple times. That's that's customer maintenance and planned downtime, but what does that mean to you guys in terms of your own maintenance costs And are these discretionary maintenance projects or why is there a decline?
Wendy had a plant like a hydrogen plant that is supplying a refinery. We obviously can only take our plan down for maintenance when they take the refinery down. Because if you take our plan maintenance and refineries operating, then we will create a disruption for the refinery. So we coordinate our downtimes very, very closely with the refinery. So what we are saying is that some of the refineries might decide, might decide to move their maintenance to another quarter.
And as a result of that, they would not take our plan down As a result of that, we would not have to do the maintenance. And therefore, that might be a favorable impact on our bottom line.
Understood. Thank you for clarifying.
And we'll take our next question from Steve Byrne with Bank of America.
You're still getting 2% to 3% overall price in each of the regions, which is driven by merchant or less than half of your revenue, given that in a couple of the regions now, you're seeing a contraction. Are any of those merchant customers asking you to renegotiate price or pushing back on on that. So just a general question about your outlook for pricing in this slowdown.
Good morning to see. Excellent question. Let me just be very specific. You're right. The numbers that we publish is for all of our business but I can give you, and we have been open about this thing before.
In terms of price increases for our merchant business, year over year. Americas was up 6%. Europe was up 5% in Asia was up 6%. So those are the facts in terms of the 2nd quarter Now what is going to happen in the future? We have a policy of not to comment on prices for the future in terms because of the nature of our industry.
So I, you, I'm sure you understand that, I wouldn't do that because it's not appropriate. But those are the facts in terms of what they have seen up to now.
And Scott, you mentioned that on about it is available capital deployment capacity that's is $18,000,000,000. You've committed, I think you said 2 thirds of it. That is a 5 year window that is fixed and you're now half way through that 5 year window. At what point do you kind of put that on a rolling 5 year forward basis? Because your future contribution of that is shrinking.
And is this lower oil environment doing anything to your outlook for gasification of coal?
You're right. We have committed 2, 3rd. We have another, almost two and a half years to go to commit the other one clear. In terms of giving you a rolling 5 year, yes, we will do that, but we will not do that now. We will do that probably next year.
To give you a view for the next 5 years after 2022. With respect the nature of the projects or any slowdown, quite frankly, you don't see any reason for the slowing down of those mega projects that we are very much attached to as a result of the virus being at least at this stage. So we continue to remain very optimistic about the robust nature of our fundamental strategy as we go forward in terms of focusing on gasification, carbon capture and hydrogen for mobility.
And our next question will come from Jeffrey Zekauskas with JP Morgan.
Hi, good morning, Sethi.
Good morning, Jeff. How are you?
Thanks. Very good. So as I understand air products, whether air products, on-site volumes grow or they contract, That piece of the business is irrelevant to year over year EBITDA changes excluding currency and acquisition. The real lever is in merchant merchant volumes and merchant prices. So in a world in which merchant volumes really move down, can you flex your cost structure down in order to cushion the effects to our products or it's difficult to flex your cost structure?
Well, Jeff, first of all, you understand our business very, very well. Secondly, you're asking an excellent question. My response to that is that if the driver for growth of Air Products is we are committed to 10% a year EPS growth. Is not the merchant volumes going up and down, is the investment in new opportunities and new projects coming down the stream. That is what has been driven our business.
If you look at our past 5 years, we have the level a cumulative average growth rate of 13% on EPS. That is driven. It was driven some by the cost structure that we took out and made ourselves more efficient. And we are done with that. As we go forward, the main driver is going to be the new projects that we are bringing on stream.
And they are going to be significantly accretive. And that is why no matter what happens to our Michigan business, I'm still very optimistic that we will be able to grow our EPS 10% a year as we move forward on the long term.
Thank you for that. In In gasification projects in China, people gasify in order to produce ammonia, methanol and fuels. And in the world that we live in today, I don't know if people need more ammonia methanol and fuels. Maybe they do if want to be more independent in China. So in a world in which oil prices are now, say, within a range of $25 to $40 a barrel to be conservative.
Is it the case that those projects in China still make sense And when you look at your, say, Luan, for example, how is that client faring in a world where energy prices are down sharply?
But Jeff, this is the general discussion we have always had is that these projects are not driven by financial driven by National security, oil might be $2 at $10 or $20, but coal, 3% sulfur coal, which is sitting in the ground, is worth 0. So when you take that and convert that to chemicals, it is still pays to do that. That is why we believe that these projects will still continue. And then the other thing is that in our terms of our gasification, Please, remember, and I know you know this very well that we are not just talking about call gasification. You're talking about gasification of pet coke.
People are not going to be able to burn pet coke, 6% pet coke, is not going to be something that people are going to consume. You have to convert that to something else. And the only way to do that is gasification. At the bottom of the barrel in the refinery is 6%. And you cannot sell it to ships because of IMO 2020.
Then you have to gasify it. So the gasification is not just coal. Right now, the biggest gasification project that we are doing is the $12,000,000,000 project in Jazan. That has nothing to do with the cold. It is the gasification of the bottom of the bear of the refinery.
So when we talk about gasification, it's a combination of all of these things. And that's why we continue to remain optimistic whether oil is $25 $40 or $16. Thank you very much, Jeff. I appreciate that. And by the time I've had a lot of time to play chess.
I'm sure you're doing the same thing. Yeah.
And we'll take our next question from John Roberts with UBS.
Thank you. I'm glad you
are all sounding pretty healthy.
Thank you, Charlie. I hope you are very healthy too.
Yes, thank you. European merchant is down 25% in April. How much more than the 25% decline is packaged gas down and how much less than the 25% decline is bulk liquid down?
Approximately package gathered is down about 40% and liquid is down about 16% approximately.
Okay. Thank you. And do you have any hydrogen customers operating below their contracted requirements and you anticipate any of your hydrogen customer suspending operations temporarily?
We do not. I mean, I'm sure some of our agents, customers might be operating below capacity, but we haven't seen a drop in we have not seen a drop in on hydrogen volumes from our pipeline, but I don't know in the future that might be the case, but it doesn't affect us as we have discussed before. Thank you. Thank you.
And we'll take our next question from Bob Koort with Goldman Sachs.
Thank you. You've long talked about maybe doing asset acquisitions and it seems like I know some of the JVs include a component of that, but this PBF was the first meaningful one that was solely assets and not a gas supply and rolling in your project work, but What does the pipeline look of other asset acquisition opportunities? And if you were handicapping, would you suggest your next big capital project would be at asset acquisition or a new gasification project?
Probably an asset acquisition.
And can you give us an update on YK? Is there any progress there? Some point, will you need to formalize a delay in your expectations of when that project will come on stream?
Yep. The thing is that, unfortunately, as I mentioned, I think, on our January call, we were supposed to have a big meeting on that thing in the month of February in China, but, obviously, that didn't happen. The issue with that project has not changed. It's still the issue of call allocation. And we are going to, kind of put a target for ourselves that by, the time that the announced or resolved at the end of October, we would give you a definite advance about whether that project is a goal or no go.
Got you. We are still optimistic that that is going to be a real project, but I do promise you that by the end of October, we will give you a definite answer on that rather than just keeping it kind of in suspense. Perfect. Thank you. Thank you.
And our next question will come from P. J. Juvekar with Citi. Group.
Yes. Good morning, Safie.
Hey, TJ. How are you doing?
I'm doing well. Is all your on-site business on facility fees, or is there some business, maybe some old business that was struck at a certain operating rate below which take or pay begins to kick in. So I guess what I'm asking is, is there any cyclicality in your on-site business?
No. Not no material sick cyclicality. No. There isn't. As you seen during 2008, and as we have demonstrated in the last few months, it's a pretty robust business.
The way we have it is structured Vijay.
Okay. And then when I look at your volume growth, what was the same store volume growth for Air Products overall? And particularly in Asia, you gave COVID impact, but can you take out the impact of new project startups? And so just trying to get same store sales?
It's obviously the growth is related to new projects, but we usually do not quantify that because then they will be giving away too much information. But Obviously, during, January, February, March, merchant volumes in China were down. Just like they are going to be down in this coming quarter in Europe and the U. S. But we did have new projects coming on a stream.
And as a result, it made up for him. That is what I was saying in answering the other question. That the main growth driver for air products is all of the work we have done in the past 6 years with new projects that are beginning to come on stream And you're going to see a lot of that coming on a stream in 2021, 2022, 2023, which would put us in an excellent position.
Right. No, I agree, but I would just tie in times like this would be helpful.
And we'll take our next question from Chris Parkinson with Credit Suisse.
Great. Thank you. So just a
quick question on the recent PBF deal. It appears it obviously came together fairly quickly, but can you just address on how long you've been you were targeting these assets? And then also just how should we think about the long term optionality potential optionality in terms of carbon capture in California as well as the potential to leverage your pipeline network. Any additional color there? Thank you.
Well, thank you very much, Chris. First of all, with TBS, We have known these people very well. They are an excellent company and we have a very good relationship with them. We have been supplying them outages for a long time. So the subject of acquiring the hydrogen plants has been discussed in the last 2 or 3 years.
But it became, you know, we made a specific offer to them. I can tell you, you still agree. Maybe we made a specific offer to them in October. At that time, they didn't want to, they took their time to take a look at it. And then finally in March, we made a very even more specific offer, which they were interested in taking a look at it.
But their requirement was that if we can do the transaction in a speedy way, which we said we can. And as a result, we did it during the time that we did. In terms of the other question that you have with respect to carbon capture opportunities, obviously in California, there are significant incentives for if you can capture carbon. And obviously, we have a lot of SG and A And now we have even more steam performers in California that do generate, CO2. And therefore, it makes sense for us to take a look at whether we can capture the CO2 from these things and do something with it whether it is enhanced recovery or sequence to capture some of that value.
So, yes, we are looking at that.
Great. And just also just could you just very quickly just hit on, just in terms of end markets, do you see any variance in terms of merchant volumes thus far. I understand it's linked to IT, but just any end markets worth highlighting? And then just also a quick update possibly on just your healthcare business. And also non medical healing demand would be appreciated.
Thank you.
Sure. In terms of the market sectors, obviously, the oxygen demand for hospitals, the demand has gone up. We do not have a huge business on that in the U. S, but we do have a very big business bid for hospitals in Spain and Italy and in some other parts of Europe. So the demand for oxygen is obviously because of the situation.
Food freezing demand has, relatively kept up pretty well. Obviously, the areas where you see reduction in demand is a basic industries and especially a smaller plan, a smaller industries that use for up secure burners and all of that for all of the manufacturing. And in terms of helium, the helium most of the helium goes with MRI machines and that has in soda.
Thank you.
Thank you.
And we'll take our next question from Duffy Fischer with Barclays.
Yes. Good morning, Fellas.
Good morning, Duffy. How are you doing? Very good. Thanks.
First question is just Can you help break out the decremental margin differential between the European business and the U. S. Business just because there you have packaged, here you don't. So if we're putting different, declines in revenue based on IP from those two regions, how should we think about either like on an EBITDA percent basis or an EBIT percent basis, differential and decremental margins?
You know, you're asking me to give you a lot more detailed information that we usually get to people. But overall, if you want to do the kind of calculation that you want to do, There isn't a huge amount of difference between the margins. Americas is higher than Europe, but it is not as if one is 10% another 40%. They are not too different. Let me put it that way.
Okay, fair enough. And then just the last one in the working capital line, this quarter, it seemed like you ate about $200,000,000 more in cash competing or is that kind of a one time thing that will end up going away?
Well, on that one, on that question, I would like turn it over to Scott who knows more about it than I do to answer that. Scott, would you like to take that question, please?
Sure. Happy to and hello, Duffy. First of all, it's not systemic. There's nothing in there. Related to the COVID-nineteen.
What it is is just some larger timing of some larger payments, particularly in our sales equipment business. On some of those contracts. So nothing large and that's something we expect to continue.
Great. Thank you, guys. Scott is saying is that it has has nothing to do with actually physical inventory and so on. It's just some of the accounts payable accounts receivable kind of thing.
Okay, great. That's great. Thank you, guys.
Okay. Are there any other questions?
There are. And we'll take our next question from Mike Sison with Wells Fargo. And you may have us on mute, sir.
Well, sorry about that. Hey, guys. Glad you all are safe. Thank you.
Safe, I think you
noted that, Asia merchant recovered in or was down for 6 weeks and then it sounds like maybe week 7, week 8 things were covered. Can you maybe walk us through kind of what happened when you talked to customers that allowed the merchant business to recover in kind of 7 to 8 weeks? And if those events sort of transpired here in Europe and the U. S, do you think we could be covering that sort of similar time period?
Well, I think that's what I can say is that obviously, China did a great job in terms of leading the dividers. I mean, they had a hard shutdown, which affected volumes and all of that significantly, but they took the pain and they contain the virus. And then when they opened, opened the society back up in a normal day, then the volumes came back. So if, in Europe and in the US, we act responsibly the way they did, and have our shutdown and then open up our society responsibly. Things will come back, but I just hope that we do the same thing that the that they did in China.
The Chinese did a great job in containing this wire. You see, they started there, but, you know the statistics in terms of the number of cases they have. And right now, the Chinese society is functioning normally, and that is why our volumes are up. And actually, there are people who, argue that, actually, the Chinese economy might benefit from what is going on because if, Europe and the U. S.
Have issues to deal that and industrial production and so on is down, then China has to make up for that and also for their own demand. So the Chinese economy might actually become better than it was before. But, I mean, it all depends in terms of how we end up happening the situation in the U. S. And in Europe and how we come back from that.
Got it. And then just a quick follow-up, just, yes, And just a quick follow-up when you think about the volume merchant declines in Europe and Americas, how much of that is driven by actual plant shutdowns, meaning if those shutdowns kind of revert auto and airspace and other areas, is, how quickly does that come back? Is that the bulk of the decline?
But that is obviously the bulk of the decline and also the consumer is not consuming the stuff and people are not producing that. But I just like to add that we felt an obligation, as you know, we never during our calls comment on the current month. We don't comment on things in the middle of the quarter. But we decided to do that because of the focus that everybody has, and we gave you the numbers as we see them in April. We are not projecting that those numbers will continue.
We don't not projecting that Europe will go down 25% the next month. They just told you what we see at this moment because we don't know how it's going to proceed. Next month, if Europe decides to open up some of these areas because they feel more confident that 25% might become 10% So the main reason that we didn't give you guidance is because we just don't know and we don't want to get ahead of ourselves. But please, take what we said in the context of what we are seeing. We are not projecting for you.
We are not projecting that the U. S. Merchant volumes will be down 25 sent. We just gave you an example of that, but told you exactly what we see as of right now. Got it.
Thank you. Thank you very much.
And our next question will come from Jim Sheehan with SunTrust.
Thanks. Good morning. So you noted that you have the top priority still of increasing your dividends and over the past many years, you've increased it at a 10% annual rate or compounds rate. Would you expect your dividend increase this year to be similar to prior years or would you change the amount of dividend increase given the uncertainty of the current environment?
Well, the decision of how we increase the dividend and how much we'd increase it by is obviously the decision by our Board of Directors and the board considers all of the different circumstances before they make that, they make that recommendation. But the one thing that I can tell you for sure is that definitely are not decreasing the dividend. And my intent is to recommend to the board to increase the dividend. The issue is by what percentage, and that I cannot, kind of, give you a number for that. We will see how it is, but you see how he surgical performance, and we definitely are not going to decrease the dividend.
And the amount of increase, if you would like to increase it, I would like to increase it the amount of increase will be something that our board will decide in January as we usually do. Thank you.
And our next question comes from Jonas Oxgaard with Bernstein.
Hello. Good morning, Safie.
Hey. Good morning. How are you doing these days?
Oh, not bad. Hold on. If if you're bored with chess,
I have a couple of kids
I can lend you.
They will keep you occupied.
No, I've never bored the chest. I love playing the game.
I have two questions, if you don't mind. The first one is on Jazan. So my understanding from your last call was that you expect the gasifiers to be up and running shortly, and the ASUs are obviously already running. So how what happens to the project when they when everything is actually running, but ownership is still with Aramco, does the earnings that come in just pay off corporate debt or how should we think about that?
Well, first of all, I don't want to speak for Aramco, but the gasifiers are not running.
Yet.
But the Bay Aug deed is, again, like any other deed, is that when we close When we close the transaction, the gasifiers are running on or whether the defining is running or not, then Aramco owes us the monthly fee. That's the way it works. So the upon the close of the transaction, but if it is the state of the refinery, we will get our monthly fee and therefore, the impact of EPS. Okay. Is that okay?
Yeah. Thanks.
Yes. That's okay. But the ASUs are running already. Right? And they are owned by you still, aren't they?
The ASUs are still owned by us, and they are going to say running. They are being commissioned. They are not yet supplying up decision for production to the refinery yet. But But the important thing is that we are going to be a C Federal contract with Aramco. Okay.
For the AC, which we own 25.
Yes, makes
sense. Yes.
Okay, perfect. Thank you. Then, separate question. So you referenced helium demand being strong, but since we're now reducing oil and gas production,
And we're all ready in what looks like a a
a global helium shortage. How how do you see the helium supply demand evolving over the next year? If crude price stays where it is?
Well, 1st of all, helium demand There are 2 main drivers for heating and demand. One main driver is obviously the MRI machines. And unfortunately, those things are in more demand than they've had before. Then the other thing they're either for helium is balloons, 30 parties and all of that. That is a flexible demand and depending on the price that business goes up and down.
So in terms of helium demand, we have not seen a significant reduction on the demand. And as you said, the supplies are still tight. But, I would like to be excused from making too many comments about helium because you saw it receive a very sensitive subject considering the market and all of that. And I don't want to get ahead of ourselves in making too many comments about that. Thank you very much.
Okay. With that, since that was the final question, I would like to thank everybody for being on our call. Thanks for listening to our presentation We appreciate your interest and look forward to discussing our result with you next quarter. And as I said earlier, please stay safe. Stay healthy and all the best to all of you.
And thank you again.
And that does conclude today's conference. Thank you for your