Please standby. We're about to begin. Good morning, everyone. 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, Alan. 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 Safi 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
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 $8 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 mark 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 dividend. Now please turn to Slide number 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 number 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 create a work environment that The slide number 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 do it on it. Slide number 6 shows our 5 point plan for Air Products as we move forward.
We are committed to have best in class grow the company by expanding our 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 they operate. A company that our people want to work for where they are proud to be part of an innovative process. 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 number 7, which shows the key milestones in our gasification strategy. Let me take the opportunity to provide an update on 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 plant which are very complex contracts and many of them are being negotiated with Saudi Aram and we expect the conclusion of those discussions by the end of calendar 2019.
We are continuing our project. This project is a still underway, and that there are some issues that related to the allocation code, 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. And for the Juitai project, that project is under construction with expected on a stream 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 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 up 37.7 percent, which is up over 1200 basis points from 5 years ago. This is a great achievement 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.
Please turn to Slide 10 for a summary of our Q2 results. As Safie 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 two $200,000,000 were up 1%.
As the better volume and price was due to a contract change in India. Into a tolling arrangement. 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 sales equipment project. Excluding this impact, volumes grew 5% due to positive base volumes and additional new plant on streams including Luanne in Asia. Price was particularly strong across all three regions. And across our merchant product lines. Great job by our team as we stay focused on pricing Currency was again a headwind as the dollar strengthened against all major currencies.
EBITDA of $825,000,000 and adjusted earnings per share of $1.92 both improved 12%. Driven by the higher volumes and positive EBITDA margin reached a record 37.7 percent, up 3 40 basis points compared to prior year. As a result of higher ROCE of 12.6 percent 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 2nd quarter GAAP EPS was $1.90 and includes a $5,000,000 one time pension settlement cost. Our 2nd quarter adjusted EPS of $1.92 was up 12 percent 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 costs, rate increases. Primarily, variable production costs such as power and distribution costs in our merchant business.
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 and the euro. Excluding the unfavorable currency, EPS increased $0.29 or 17% over last year.
Non operating items including interest expense, non controlling interest and non operating income combined for a negative 0 point 0 $1. Our effective tax rate for For FY 'nineteen, we expect an effective tax rate of approximately 20%. Now please turn to Slide 12. We continue to generate strong cash flow. During the last 12 months, we generated almost $11 per This distributable cash flow allowed us to pay almost $1,000,000,000 or about 40% as dividends to our shareholders, and still have nearly $1,500,000,000 available for high return investments in our core industrial gas business.
This strong cash flow enables us to create Slide number 13 updates our capital deployment progress, and we have re formatted the information to hopefully make it more clear for you. As you can see, we now show just over $16,000,000,000 of investment capacity available over the 5 year period from FY2018 through FY2022. This was 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 AA2 rating. If we maintain this rating at a debt level of about 3 times the last 12 months EBITDA, we have about $8,700,000,000 available today.
2nd, based on LTM investable cash flow, we expect to have over $5,000,000,000 between now and the end of FY 2022. 3rd, we have already deployed almost $2,500,000,000 on M And A And Growth Projects. This excludes maintenance CapEx. Today, we have a total of about $7,500,000,000 of project and M and A commitments with about $6,800,000,000 remaining to spend on So, you can see we have already spent 15 Now to begin the review
Thank you, Scott. Please turn to our Asia results on Slide number 14. Where 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 For the quarter, sales were up 12% from last year as a result of positive volume, and price mostly Luayan. Overall, pricing for the region was up 5% versus last year. The 8th 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 percent.
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, Safie. 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 in Canada. Our base merchant business also continued to grow in North America, while Latin America remains weak.
Overall, this is the 9th consecutive quarter of volume improvement for the region. Price contributed a positive 3% the best performance in over 4 years. America's EBITDA of almost $400,000,000 increased 10% and reported EBITDA margins of over 40 percent 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 costs 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 on stream 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 our 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 sub regions. The 3% price increase marked the 5th consecutive quarter of year on year improvement. Reported EBITDA of $182,000,000 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 approach the conclusion of our very successful Jazan ASU sale of equipment project. Please turn to Slide 18 corporate which includes LNG and other businesses, as well as our corporate costs. Although this quarter sales and profit have yet to show improved, 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
Thank you, Simon. Please turn to Slide number 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. To achieving a cumulative average growth rate of at least 10% in the coming years. Now that we are 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 will allow us to continue to deliver on our promises to investors as we go forward. We are increasing our EPS guidance for fiscal year 2019 to a range of $8.15 to $8.30. Despite currency headwinds, 10% growth over our For quarter 3 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 $2,400,000,000 to $2,500,000,000 Our team around the world continue to be excited about Air Products future.
Our 5 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 number 21. As always, of the great team dehydrated 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
you. We'll take our first question from John McNulty with BMO Capital.
Yes, good morning. Thanks for taking my question. It seems like there's a lot of opportunities in the coal gas 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?
First of all, good morning, John. Hope all is up. 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 1. 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 with.
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, pass 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 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 criteria that we follow.
Is that okay, John?
Absolutely, no. Thanks for the color. And then I guess when you look at the projects out there, I think last quarter you'd 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 their industry back, I don't know, 2030 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.
Great. Thanks very much for the color.
Thank you, John.
Next question comes from Christopher Parkinson with Credit Suisse.
Good morning. This is Kieran on for, for Chris.
Congratulations on the good quarter.
I was wondering if
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 a sequential
kind of basis? Thank you. Thank you very much. With respect in China, we I have said this many times, we don't see any particular weakening in entity. At least we have exposure to a lot of the businesses.
And one of the interesting thing about our business you know very well is that they don't have any inventory. So our performance is instantaneous, whatever the economy is doing, you see that in our numbers. China is going very well. And the lunar New Year, China this year, we were very concerned about that. And you know, that's why we were conservative in our guidance for the quarter, the Chinese New Year, although it fell in between big if you've been down and came back exactly like every other year and, the economy is doing very well and we continue to be very optimistic.
We are very bullish on China.
Great. Thank you. And then just when I look at your full year guidance, it implies a very strong 4th quarter, a little bit stronger, I think, than like the 3rd quarter. Maybe can you just discuss the key elements that are driving that positive outlook for the for the fourth quarter and then for the back half of
the year, I'd appreciate it. Thank you. 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 up domestic. 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 notice, it's 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 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 eight third.
Great. Thank you very much.
Thank you. Your next question comes from
the line of David Begleiter with Deutsche Bank.
Thank you. Good morning, Stacy. Hi. How are you?
Good. Thank you. Just on the merch pricing, can you go through 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 businesses 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 the each region. Multiplied by 2 and you end up with, what we achieved in the mission business. And you see that it is a strong.
It's, 7%, eight percent, 11% in the different regions.
Excellent. And just on the YK project safety, any concerns in 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 classification project when the source of coal is not 100 percent 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'm, think that that is a good project. It makes a lot of sense and it will eventually happen.
Thank you very much.
Thank you, David.
Next we'll go to Duffy Fischer with Barclays.
Good morning guys. 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 de operating 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 will 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 $150,000,000 of EBITDA a year and today it's making nothing. So we think that in time, we will get to that $150,000,000 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.
Great. Thank you.
Thank you.
Your next question comes from
the line of Jeff Zekauskas with JP Morgan.
Hi, good morning, Stacy. How are you today?
Good morning, Jeff. I'm very fine. Thank you very
Good. The EBITDA margin in Asia is now roughly 48%. And maybe a year ago, it was 38%. Is the difference in the margin, the Luanne project, essentially?
And no, the effect is 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 the last quarter was 11% ahead of last year. So that is a very positive contributor. And beside that, our people there are doing a good job in productivity and keeping their 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 in 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 this will definitely impact 2019 if we completed by the end of fiscal year this year.
Yes. Okay. Good. Thank you so much.
That will go to John Roberts with UBS.
Thank you. 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, Chuck.
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 $3,000,000,000.
We'll next go to Jim Sheehan with SunTrust.
Good morning, Safie. Can you comment on the ACP Europe acquisition, about how much should you pay for that and how much earnings contribution will it represent?
Good morning, Jim. The amount that we paid for that, I think we have disclosed that of more than $100,000,000. And, obviously, the rule of thumb that we always tell you, if you spend $100,000,000, that should give us a operating of $10,000,000.
Now we'll go to Robert Koort with Goldman Sachs.
Thank you. Good morning.
Good morning, Tom. How are you?
I'm well. Thanks. Safa, 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 fins or fertilizer were 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 player.
In that project portfolio that you're pursuing, are you seeing, greater interest in those maybe higher breakeven type applications of gasification? Yes. Those exclusively in China or are they more broad globally?
Yes, that as the price of oil goes up, the number of projects that become viable, obviously becomes bigger. Sure, you're right on that. I ask you on
the DECAP side, Safie? I think there's been over the last couple of years, there's been some shareholder frustration expressed about pulling that capital and now you're starting to do that more aggressively. Is there a decaf opportunity here in gasification? I know Shell, when they own the business, certainly advertise the process improvements they've made over time. The history and portfolio of gasifiers they have in 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 we will use. And quite frankly, the very best example of what you just said is the IGCC project in Saudi Arabia. The Jazan project that you're talking about. We went to Saudi Aramco and said that we have improvement the shell technology, and they are using the shell technology for gasifying the bottom of the refinery. And that is, asset buyback.
So that is a ideal example of what you're talking about. And there are others like that that obviously we are pursuing
Terrific. Thank you, Stacy.
Thank you.
Now we'll go to Vincent Andrews with Morgan Stanley.
Hi, this is Andrew Castillo on for Vincent. Thanks for taking my call on my question. Can you guys hear me?
Yes, we can hear you. Thank you. Good morning.
So just a quick question around the gasification projects. So with the explosion that happened in the fertilizer plant in China, I was wondering has anything changed in terms of the number of projects that you're seeing? Obviously, you're very bullish on 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 an oil defense 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.
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, to 2. It's just as we're halfway through the year, better estimate 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 a tough comps there last year, but as I look at the next couple of quarters, just curious as to your what will you view volume there going for the next couple of quarters?
I'm not sure quite honestly I understood the question.
Or just what are your expectations in
volume are for your, essentially, for the coming quarters?
For Josh Europe or for everybody else in general? For Europe, we expect the run rate to continue. We are, we are, we are not As I said, the Brexit delayed, we are not concerned about volumes in Europe, and we remain positive about pricing in Europe.
Okay thank you.
Next question comes from the line of Don Carson with Susquehanna Financial.
Good morning, Safie.
Want to go to your
John, how are
you doing today?
Very good. Thank you. Go to your favorite slide, slide number 9, you know, new record on EBITDA margin 377. How much of that was due to what's the impact of that India conversion to tolling on that. And and I assume that most of your your upward momentum and EBITDA margin is due to price.
So are we at an inflection point in pricing here? You know, traditionally, we didn't you you didn't get pricing in this industry till you were, you know, well into the eighties, but you seem to be getting pricing earlier. So I guess the final question is, you used to think 35 percent EBITDA margin was kind of a normalized level. So 37, 38, the new normal?
Okay. Thanks for your question. The number one is that the effect of the it's about 80 basis points in terms of the India. That's number 1. 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 where the kind of improvement you've seen in in merchant pricing is is sustainable. Again, you seem to be getting the pricing at at lower rates than you historically needed to get pricing.
Don, I heard your question and I was trying to get a baby, not answering it. You know that we don't 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.
Right, will do. Okay. Thank you.
Thank you.
Now we'll go to Steve Byrne with Bank of America.
Yes, thank you. 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 under your belt and be able to develop more 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 these coal gasifications, The part that we make ourselves is the air separation unit main that the main cold box 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 they designed and built at the job site. And they are prefabricated at different locations and brought together and assembled together to get it like an erector set. So, there is no kind of constraint on our ability to manufacture distance.
Well, just like some furnaces are fabricated and then shipped to a, to a job site, could you anticipate the gasifier units being moved in that direction and ultimately reducing the total capital costs for these projects.
Well, the, 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 pre fabricate them at the most cost effective area. When you look at Jazan and, hopefully, we can show you a movie of it on time you see that the 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 put, and then it was shipped and then put together with the rest of the plan. 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 these big projects, the air separation part is about 10% of the cost. That one, we manufacture it in several pieces in, coaching 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 you're involved in engineering and construction?
About more than 20%.
Thank you.
On engineering, the construction, the actual construction, when we are building a plant like Jazan, we have construction supervision 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 plan, there's 6000. Those people, they are locally for the project. They are not permanent employees.
Understood. Thank you.
Out of the 16,000, about 20% are dedicated engineering and project management people that we have and they are long term employees of products and we are very proud of
Very good. Thank you.
Thank you.
Next we'll go to Kevin McCarthy with Vertical Research Partners.
Good morning.
Good morning, Kevin.
Safety, 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 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, I'm 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 they 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 want to comment on this.
Okay. Thank you very much.
Thank you, Jay.
Next, we'll go to P. J. Juvekar with Citi.
Yes, hi, good morning.
Good morning, P. J. How are you doing?
I'm doing well, Safie. 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, they will still consume a lot of gases. So what are you seeing or hearing about request of bids for ASUs for those projects.
Well, I think on all of those projects, people would be looking for, bids for ASUs. That we are trying to differentiate ourselves, but making an offer to the customer that we provide you not only the ASU, but also the gas indication. And therefore, a different package rather than just competing for the ASU which most of the time, if the if the customer wants to buy the ASUs, by themselves, they usually do its 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 a bid for the air separation unit, we usually, depending on who the customer is, we usually give them a bid. Because I'll be happy to build the air separation unit. But, we are trying to differentiate ourselves by giving a bigger package to the customer.
Okay. Thank you. And then a question on Europe. You're pricing a lag 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, but on If you 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 it 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 different strategy for us. That's exactly right.
Great. Thank you.
Thank you.
All right. We'll next go to Mike Sison with KeyBanc.
Hey guys, next quarter.
Thank you. Thank you very
much. When you think about your 10% EPS growth goal, you've got Jazan gasifier coming on next year and looks like 4 projects on that one slide. Could 2020 be set up be, you know, 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 promised. So I don't want to get ahead of myself, but, I hope what you are saying would turn out to be true.
Got it. And then just one quick one on Asia. Again, margins very good. Actually pretty, 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 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.
Okay, great. Thank you. He's not screwing around this morning.
We'll next go to Mike Harrison with Seaport Global Securities.
Good morning.
I 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 Locksmith 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 regions 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 locksmith 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 plan, right away, So I expect that we would have continue to have good momentum.
All right. And then I was also wondering about you you in your appendix there, you have a number of projects that were listed as starting up, during the first quarter of fiscal team, 2 of them in Korea, 2 of them in the U. S. I was just wondering, did we see a full contribution from all four of those projects during the fiscal second quarter or some of them still ramping up?
Yes, we did.
Okay. Thank you very much.
Thank you.
Our next question comes from the line of Jonas Oxgaard with Bernstein.
Hi. Good morning, guys. Good morning. I I was wondering, yeah, you got some 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 and is that reflected in your in your guidance? Can you help me size the impact and how that's affecting your guidance. Sorry, I should rephrase that.
No, you see, but the fact that the capital cost of the project will go down a little bit. That is minute. It's not material to our numbers. As we go forward, the expect the headwind on the currency to subside a little bit when 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 3rd quarter,
but Scott can Amplify on that? Sure. Thanks. Dave, you just want to build on it. As we've said, we had $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 3rd quarter versus prior year third quarter and the 4th quarter versus prior year fourth quarter. We don't see, as SAPI just mentioned, we don't see the 3rd quarter to be as much as $0.08 down a little bit and then even less, in the 4th quarter, not because we're projecting an change in exchange rate, but rather just where were rates last year. Okay.
So I 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 and currencies of a 10% For the, RMB on an annual basis, a swing of 10% would 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 yuan, Taiwanese dollar, and the Canadian dollar. Each If you 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 approach at 85, 90 percent of the company.
So I just figured I'd, take you through some of those numbers.
Oh, I appreciate that. As a follow-up though, the 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 the, expectations of currency.
Okay. And if you take China coal as as the biggest one that that swings the future,
In China, the contracts that we have are in renminbi, in local Chinese. Yes, sir.
Okay.
Thank you very much.
Thank you.
Our next question comes line of Lawrence Alexander with Jefferies.
Hi, guys. This is Dan Rizzo on for Lawrence. I'm sorry if I missed this But did you quantify the backlog and how it has changed this quarter? Simon,
do you want
to Since you prepared a slide, do you want to make any comments? Sure.
As we said, our total project, our total project commitments are about 7 point $1,000,000,000. I think that's up from around $7,000,000,000 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 $6,800,000,000.
Okay. Sorry, I missed that. And then just one other question. Could the gasification business evolved to where we see a large take of pay arrangements rather than the JVs in some regions?
Well, right now, the gasification project, some of them is JVs and some of them is 100% ourselves like Judith. Is that the question?
If I could just add, they're all take or pay.
Us.
So just to be clear about that.
Yes, whether it's JV or Nadi Salte, CoPay. All right.
All right. Thank you, guys.
Thank you. 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 you