Good day, everyone, and welcome to Air Products And Chemicals First Quarter Earnings Conference Release Conference Today's call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Mr. Simon Moore Vice President of Investor Relations. Please go ahead.
Thank you, April. Good morning, everyone. Welcome to Air Products first quarter 2019 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 com. Please refer to the forward looking statement disclosure that can be found in our earnings release and on Slide number 2. Now, I'm pleased turn the call over to Seifi.
Thank you, Simon, and good morning to everyone. Thank you for joining us on our call, and we do appreciate your interest in Air Products. Motivated and committed team at Air Products delivered another quarter of strong safety and financial results. Our quarterly adjusted the 19th consecutive quarter that we have reported year on year quarterly EPS growth. Excluding the impact of a planned sale last year our EPS was up 9%.
We continue to be the safest and most profitable industrial gas company in the world with an EBITDA margin above 35%. We are in a very strong financial position, and our business generates significant cash flow. This allows us to continue to invest capital into value creating projects, to profitably grow the company but also continuing to return cash to our shareholders. Yesterday, we announced our 37th consecutive year of dividend increase We are proud of our new quarterly dividend of $1.16 and I'd like to stress quarterly dividend of $1.16 per share, which in turn means that dividend return about $1,000,000,000 in cash to our shareholders over the next year. At Air Products, they had a great talented and committed team who stayed focused on serving our customers and creating value for All of our 16,000 employees around the world are focused on safety.
And as a result, we have improved our last time injury rate by 83% and our recordable injury rate by 33% since 2014. On a slide number 4, you can see our goal, which is to be the best safest most diverse and most profitable industrial gas company in the world, providing excellent service to our customers. On a slide number 5, you can see our overall management philosophy that we have shared with you many times before. They have come a long way over the last 4 years. However, they continue to be focused on shareholder value capital allocation and an empowered and decentralized organization.
Now please turn to Slide number 6 to see our 5 point strategic plan. We remain focused on sustaining our lead in safety and financial performance. We continue to see tremendous opportunities to deploy capital in value creating projects, primarily in our on-site business. Scott will take you through the numbers, but let me provide you a quick overview of our progress. Since the start of over $8,000,000,000 on exciting new growth projects Both Scott and I remain committed to managing our debt balance to maintain our current targeted AA2 rating.
At this rating, we believe we still have about $14,000,000,000 remaining to invest. So we have already spent or committed over half of the $16,000,000,000 available over the 5 year period of fiscal year 2018 to fiscal year 22. We recently announced new projects in California, Minnesota, India, Algeria and China. We have made great progress so far, and I remain very confident, and I'd like to stress the board very confident of our ability to deploy this capital into high return industrial gas projects that will generate significant value for our shareholders. The 4th point of our plan is to continue speed and self confidence to create a committed and motivated environment that our team brings their positive attitudes and open minds to work every day.
And finally, we do have a higher preference to create an inclusive and enjoyable environment for all of our people so that everybody feels proud to innovate, solve challenges and contribute to our communities. We remain focused on executing this 5 point plan. Our goal is to be the best industrial gas company in the world, not the biggest Now please turn to Slide 7, then you can see our dividend history. As I said, we are proud of our 37 year record of increasing the dividend. And we are excited about going, giving over $1,000,000,000 to our shareholders in 20 19 via dividend in cash.
This direct cash return to our shareholders complements the tremendous investment opportunities On a slide number 8, you can see our gasification strategy that continues to be a key focus of our investment opportunities. Gasification is just another way to make CINGA that can be turned into hydrogen and or power. A key benefit of gas education is that it enables an environmentally friendly bay to use lower value feedstocks. We have successfully supported this market over the last few years with very large air separation units providing oxygen to customers operating their gasifiers in China and Saudi Arabia. We have announced 4 large projects where air products will own and operate the gasifiers and Syngas cleanup and provide Syngas and all related products to our customers.
The key is that these projects are consistent with our on-site business model where we don't have any raw material or product volume or price risk. The Luanna project that we had announced before is fully on the stream. Thanks to the continued effort of our great team in China and continues to successfully supply Syngas to Lu Anne for their chemical production. You see the positive impact of Lu Anne in our Asia and company results quarter, and we remain confident Lu Anne will deliver over $0.25 of earning per share in fiscal year team, and we continue to make good progress on the other gasification projects we have announced. Now please turn to Slide 9.
We remain committed to our goal of being the most profitable industrial gas company in the world as measured by each of these three metrics. NDR. Now please go to slide number 10, which is always my favorite slide, showing the over 1000 basis point improvement in our EBITDA March Finally, please turn to Slide number 11. Will allow us to deliver 13% compounded annual earning per share growth over the last 5 years based on the midpoint of our fiscal year 2019 guidance. We will continue to execute our strategy, 10% per year on average over the coming years.
Now I would like to turn the call over to Mr. Scott Crackle, our Executive Bosch President and Chief Financial Officer, to discuss the results in details. Scott,
Thank you very much, Safie. Now please turn to Slide 12 for a summary of our Q1 results. As Safi said, our team delivered another strong quarter with underlying volumes and pricing up across all three regions. Before I get into so we will help you understand our results, excluding this event. Also, during this quarter, We agreed passed through and turned this into a but it does reduce company sales as well as sales for our EMEA segment.
So we are showing the sales impact in the other line. This change only impacted December, so it will be a larger impact beginning next quarter. Overall reported sales of $2,200,000,000 were flat, but were up 9% excluding the Jazan sale of equipment, the prior excluding Jazan and the plant sale, volumes grew 5% with positive base volumes up in all three regions, and the full on stream of Luanne in Asia. Sequential volumes were down 4%. Primarily due to customer planned maintenance outages and weaker seasonal volumes.
Price improved in all three regions for the 2nd consecutive quarter. Merchant pricing rose 3%, which translated to an increase of the euro, the India rupee and the Chilean Peso. EBITDA of nearly $800,000,000 improved 8% and was up 12% excluding positive pricing and equity affiliate income, partially offset by higher costs and unfavorable currency. EBITDA margin of 35.7 percent was up 250 basis points compared to prior year. Adjusted earnings per excluding the prior year plan sale.
ROCE of 12.4 percent improved 50 basis points versus last year. Primarily due to higher items this quarter that totaled $0.29 per share. This included $0.10 for an asset write off for a government enforced customer plan shutdown. We continue to negotiate this situation but do not anticipate
packs.
Our 1st quarter adjusted continuing operations EPS of $1.86 was up $0.07 per share and up $0.15 excluding the prior year plant sale. Overall, higher volumes increased EPS by $0.13. Excluding the prior year plan sale, volume contributed $0.21. Price and raw materials taken together increased EPS by $0.05. Net cost performance was unfavorable $0.06 as productivity in Asia was offset by higher costs in Americas.
Additionally, and as we have said in the past, we continue to see costs associated with our investment in capabilities in our business development, engineering, project execution, and technology areas to drive growth in the future. Currency and foreign exchange was $0.04 unfavorable, primarily due to the Chinese RMB and the euro. Equity affiliate income added $0.03, primarily due to new plants and operational strength in Mexico. The overall tax rate was We expect the FY19 tax rate to be in the range of 19% to 20%. Finally, we had other items that offset by higher interest expense.
Strong cash flow. During the last 12 months, we generated almost or $2,300,000,000 of distributable cash flow, nearly $100,000,000 higher than fiscal year 2018. The $2,300,000,000 of distributable cash flow allowed us to pay over $900,000,000 or about 40% as dividends. And still have over $1,400,000,000 available This strong cash flow enables us to create Slide number 15 shows our capital deployment progress and is an update of the information we introduced last quarter. Since the start of FY 2018, we have spent about $1,800,000,000 on M and A and growth projects, excluding maintenance capital.
In addition, we have committed, $5,000,000,000 on projects and M and to maintain our current targeted AA2 rating. If we maintain this rating at a debt level of about three times the last 12 months' EBITDA, we have over $8,500,000,000 available to invest today. And
based on
our last 12 months investable cash flow, we expect to have almost $5,500,000,000 over the remaining 3 3 quarter years. Therefore, in total, we have about $14,000,000,000 remaining to invest The almost $10,000,000,000 of total available capacity for FY2018 through FY2022. So you can see we have spent over 10% and committed over half of our total available capacity. Now to begin the review
Thank you, Scott. Please turn to Slide 16, Asia, where we continue to deliver strong sales and profit growth. I was just in Asia last week and remained very excited about our growth opportunity. We have an excellent and committed team running our business seen any meaningful impact on our trade issues between the United States and China. It will be interesting, however, to see how the lunar New Year holiday impacts the economy this coming quarter.
We remain focused on our business in China and very positive on our favorable currency, partially offset by better pricing and higher energy pass true. Excluding the impact of plant sale last year that Scott mentioned, sales were up 16%. Again, excluding the impact of plant sale last year, volumes were up 17%. With new projects, primarily Luanne, driving about 10% of the increase, while the base business and the small acquisitions accounted for the rest. For the region was up 1% versus last year, the 7th consecutive quarter of year on year pricing improvement.
The merchant business pricing was up 3% with positive pricing across all subregions in Asia. Their strong volumes and pricing plus favorable productivity increased both profits and margins. EBITDA increased by over 20% and EBITDA margin improved 9 twenty basis points. Excluding prior year plan sale, EBITDA was up more than 30% and margins that up 4 seventy basis points. Sequentially, profits and margins increase due to productivity and the full running rate from Luanne.
Now I would like to turn the call back over to Scott to the discuss our American results.
Thank you, Safie. Please turn to Slide 17 for a review of our Americas results. For the quarter, sales grew higher energy pass through added 7%, more than offsetting a negative 2% currency effect. Volumes from new plants and North America based merchant were both positive and overcame weaker Latin America volumes, and customer plan maintenance outages negatively impacting hydrogen volumes. Overall this is the 8th consecutive quarter of volume improvement for the region.
The impact of our pricing actions is merchant pricing was up 4%. America's EBITDA increased 4% as improved volume and price as well as higher equity While the team EBITDA margin, excluding Sequentially, planned customer maintenance outages negatively impacted both hydrogen volume and maintenance costs. Excluding points. 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 18 for a review of our EMEA results. Sales were up 2%, primarily driven by 1% better volumes and 2% higher price. The 6% higher energy pass through was offset by unfavorable currency and the contract modification in India. As Scott mentioned, this change to a tolling agreement reduces sales and volumes, but has no profit impact.
Price and volume were both up for the quarter as we continue to see solid demand in the merchant market and positive results from our percent. EBITDA was nearly flat as EBITDA margin was 31.6%, down 70 basis points. Excluding the impact of higher energy pass through, EBITDA margin was up 80 basis points, primarily due to the India plant contract change. Sequentially, volumes were down on seasonality. Price was slightly positive, but rounded to flat.
The EBITDA decrease was primarily due to currency and a reduction in equity affiliate income following a seasonally strong 4th quarter in our Italy joint venture. Now, please turn to Slide 19 for a brief comment on our Global Gases segment, which includes our air separation unit, sales equipment business, as well as central sale of equipment project. 18. And as previously communicated, we expect the Jazan ASU overall to be a headwind for FY19 versus FY18. Now, please turn to Slide 20 for a brief comment on our corporate segment, which includes our LNG business, our helium container business, and our corporate costs.
Sales and profits were about optimistic about future prospects for the LNG business, but have not yet seen the industry optimism translate into firm orders. Now, I'm pleased to turn the call back over to Safie for a discussion of our outlook.
Thank you, Simon. As you all know very well, we are living in a very uncertain war today. Air products can't predict or control worldwide political or economic developments. But we do have control over our operational performance and continue to deliver on the commitments we have made despite the world events. We have not seen any material impact on air products at this point from these global uncertainties.
As demonstrated by our results in to be very excited about Air Products' future. Our 5 point strategic plan provides the framework to drive our continue to provide the foundation for and the team to successfully We are all working hard every day to be the safest, most diverse and most profitable industrial gas company in the board providing excellent service to our customers. Despite increased economic and political uncertainty, Our guidance for the fiscal year 2019 remains unchanged and is in a range of $8.05 to $8.30 per share and despite currency headwinds at midpoint Our guidance represents 10% growth over our very strong fiscal year 2018 performance. For quarter 2 of fiscal year 2019, our earnings per share guidance is $1.80 to another to $1.90 at midpointup8 percent over last year. Continue to expect our capital expenditure to be in the range of $2,300,000,000 for fiscal year 2019.
As always, our real competitive advantage is the commitment and motivation of the great team via Valera products. This is what allows us to continue to generate our superior safety and operational performance. I want to thank all of our sixteen thousand people around the world for their total commitment and hard work. And for embracing the opportunities in front of us with energy and a spirit of working together. Now we are delighted
And we'll first hear from Don Carson of Susquehanna.
Good morning, Don. How are you doing?
Very well. Thank you. You commented that you can't control economic events, obviously, but could you sort of do a walk around the world just in terms of what you're seeing in your base business, given that we're hearing that in many regions, industrial production is slowing?
Sure. I start from Asia. We continue to see very good growth in countries like Korea, Taiwan, Malaysia, Indonesia, out of those countries, India, out of those countries. With respect to China, we have not seen any slowdown yet. The only thing that concerns us and we are keeping an eye on it is how is the lunar, New Year in China play out.
That means that our people are going to take longer shutdowns because of the way that the Chinese New Year is kind of with a calendar buys that people would take longer weekends or longer. That is the only thing that we are watching. And quite frankly, that is one of the reasons that contrary to our usual practice, we have given you a guidance of $0.10 rather than $0.05 a spread for this quarter. In China, but the Lunar New Year and how it plays can have an effect. And that is why it will be the you can say that you're conservative in our guidance for the quarter.
The rest of Asia is doing very well, as I say. When we come in Europe, Europe is flat. Again, the concern that we have is what are the out of the turmoil with respect to Brexit, what would be the effect in the next few months on the pound exchange rate and also the business in our business in, United Kingdom, as you know, we have a big business there. So that is again another reason why we were conservative in our estimate for the second quarter. In the United States, things have not changed since we have talked last time.
There is a there is a slowdown industrial production, but we do not see any material impact on our results, and that is why we are not changing our overall estimate for second half than the first half because of some of the projects and pricing actions that we have taken. And that is why we remain very confident about the guidance that we have given for the year. In addition, I also have to add that things remain very, very negative in Latin America, but that's not a big part of our business.
Okay. And then a quick follow-up. I noticed on Slide 13, your price cost gap narrow considerably was only a $0.01 negative delta versus $0.14 last quarter. So, that delta, specifically on the cost side where it was only a $0.06 drag this quarter versus $0.16 last quarter?
Well, as you recall, in the last call, I was very, transparent about my dissatisfaction with our cost performance. So obviously, everybody took that to heart and we have worked very hard on productivity to improve our cost position. And we hope to see that number improving as we go forward. So we have taken action done. Thank you.
And next we'll hear from Christopher Parkinson of Credit Suisse.
Thank you.
Given the circumstances, your result in Asia was pretty solid. Can you just parse out the key volume drivers outside of Lu'An as well as your intermediate term expectations post the New Year, just that and any quick use on the merchant market operates, etcetera, would be helpful. Thank you.
Good morning, Chris. Sure. Obviously, Duane was about 10% of the growth. But the rest of the growth, we are reporting Asia results. The rest of the growth is coming from, as I said, China, despite what everybody says, a slowdown, a slowdown but they are growing at 6.6%.
So we see the benefit of that in our merchant business. But in addition, as I said, countries like Korea, Taiwan, Indonesia, Malaysia, they are doing very well, and they contributed to our positive results. And if I could just
add also that this is also an area that we saw good cost improvement, as Sabey mentioned, earlier. Nice cost performance in the quarter too.
Thank you. That's helpful. No, perfect. And then also just, you mentioned plenary outages in North America affecting results, but this was also a theme last year. So regarding the year on your comp, can you just comment if the planned downtime was in line with your initial expectations?
And then also, just what are your updated views on hydrogen demands intermediate to long term in the U. S, globally, etcetera? Thank you.
Sure. First of all, the plant outages are totally in line with expectations. These are, as we grow our business and, We have more and more hydrogen plants. Obviously, the turnaround, there are more turnarounds to deal with. But there is nothing out of line.
They are all in a with our expectation. There is nothing unexpected, has happened. With respect to hydrogen demand, obviously, significant driver for our hydrogen demand in the U. S. Is how many Mars people drive and the gasoline demand, but that has a continuous to remain stable.
As for the future, as you know, we have announced 2 new hydrogen plants that we are going to build, liquid hydrogen plants, we see significant growth opportunities for liquid hydrogen. And in terms of the so called gases hydrogen, there are projects being discussed in the United States, in the Gulf Coast and other areas. That would require significant amount of hydrogen for the production of chemicals, and we will obviously participate on that. So overall, we remain very positive.
Thank you very much.
Thank you.
Next we'll hear from Robert Koort of Goldman Sachs.
Thanks very much. Good morning.
Good morning, Bob.
Hope you're doing good.
I'm doing well. Thank you. It strikes me that over the last couple of years, you've moved towards maybe derisking or improving the stability of the the organization by some of the divestitures you've made and then enhancing some of these large gasification projects. And yet there are multiple continues to go in the wrong direction. So I'm wondering, can you help frame sort of your competitive advantage and what it means to have such a significant on-site presence and sort of how you see that developing and what it means to the volatility of your business?
Well, Bob, first of all, thank you for your comment. We definitely have moved in the direction of stabilizing the business, getting the company focused on the right business and significantly enhancing our on-site presence because that is a much more stable business. And we have changed our business model to get into a Syngas production where we see significant opportunity. We do have a lot of cash on hand. We have a very strong balance sheet.
And with the acquisition of the technologies from Shell And GE and others, we are in a very strong position to be the leader in gasification and there are many, many, many, many opportunity As for the YR multiple, you know, I'm not selling a product at the start. I mean, my job is to articulate our strategy and tell our investors what we are doing and then they will decide, the multiples. I think the market is underestimating And I also understand that there is a lot of concern about gasification. It's a new area. There was a lot of, concern when we announced Luanne about where what is this, do you know how to run gasifiers and all of that?
I'm hoping that as we go forward, we demonstrate that we can run these facilities. And as we sign more large deals, which will significantly strengthen our portfolio, that the investors will give us due consideration in time. As I said, my job is not to argue about multiple. My job is to explain and articulate our strategy. And I think in time, the investors will see where we are as compared to our competitor
I appreciate that. Can I ask you, very briefly on the shell technology you guys have mentioned applying that maybe to help solve some of the high sulfur resid streams as companies try to adhere to the IMO 2020 standards in 2020 is pretty close? Is that something that looks like there's some development there or is it getting pushed out? Is this a meaningful opportunity or just something maybe on the periphery for that business?
Bob, it is a meaningful opportunity. The best example of that is the $8,000,000,000 project that they are doing in Saudi Arabia. That is all about taking the bottom of the refinery and gasifying it and upgrading it, because they wouldn't be able to sell that to the market for, fueling the ships. So that is the best example. This opportunity is great.
There is a great opportunity. The issue is that a lot of people are not taking action because they are hoping that the implementation of IMO 2020 will be delayed. And, as I sure. There is a lot of lobbying going on by some of the industry in the United States to do that. But in the long term, that is going to be a good in opportunity.
Yes.
And next we'll hear from Jeff Zekauskas of JP Morgan.
Good morning, Jim. How are you?
Good. In the different slides, you spoke about merchant pricing being up 3% in the Americas, 3 in Asia, 4 in EMEA, but the actual price in the slides for each of the geographic segments is lower. It's 2 in the Americas, 1 in Asia, 2 in Europe. What accounts for the difference? What's pushing down that price level?
And in the overall slide that describes price, it seems that costs are going up faster than price. Is is that the right comparison or is there a real price benefit in the costs or more internal or having to do with turnarounds or something like that?
Yes, I'll have Scott answer the question that you had asked. But on the cost side, the cost side is related to increasing our capabilities. But I'd like Scott to answer your first question.
One of the things we've introduced in the last quarter or so is a, we'll refer to it as a merchant on merchant price increase. And price change. So as you know, your products has a large percentage of our portfolio over 50% in Onsites. So when we go through the slides, we'll do price over the entire business, of which 2 thirds or so in the U. S.
Is tonnage. So we felt that's the 1, the 1 for AP and the 1 for Asian and 2 for Americas and 2 for EMEA. That's over the total portfolio. Of those businesses. What we thought would be helpful is to also additionally provide you with a that looks at CMA, the price increase on the merchant business.
So we could provide you a little bit more insight as to what's going on on that portion of the business as opposed to spread across the entire hopefully I was clear on that. Is that clear?
Yes, that's clear. And then, for my follow-up, Is it the case that your pension costs this year will drop about $65,000,000 from $90,000,000 to $25,000,000 or so? And when I looked at your income statement, the non controlling interest was 9,500,000 I think, versus 6.9% last year. And I would have thought the non controlling interest number would have been larger. Given that Luanne is now on stream and is quite profitable, is there something eccentric in the non controlling interest number?
And what about
Jeff, Scott can address those things. We have talked about that as all the details. Sure.
So first on pension, we expect to have a little bit of a drop this year versus last year on pension, maybe for the year, total pension expense. And let me put it that way. Maybe it's like 30 or so, from an expense perspective. And by the way, I know, Jeff, you're always in the cash flow statement, our contributions for the pension should be in the same line. So we think non cash expense versus contribution on the pensions to be about a wash and call it the 30 and change.
Then in terms of non controlling interests, you are right that Luanne was the biggest part of it, recognizing that we had, I think it was in the third quarter of last year. We had a pure air adjustment That was a little bit of anomaly because of the way that, that arrangement was canceled. But I think in going forward, we would expect to see, by the way, the other We also have a venture, the minority position over in Asia as well. So that's going to move around the non controlling interest. But the biggest item in there is going to be the way it going forward.
Was pension expense $90,000,000 last year?
Including a bunch of the non GAAP stuff that we had in there, I think it was up about that level Now my comments here around the kind of the ongoing underlying to be, was a little bit lower than that, but then an all in was something that order.
Next we'll hear from Vincent Andrews of Morgan Stanley.
Thank you and good morning everyone. If I could just ask on the price cost equation, as was mentioned before, you're down to sort of a negative $0.01 in the fiscal first quarter, Should we anticipate as we move through the balance of the year that price is going to exceed cost inflation, or is it going to stay kind of the way things are?
That is our goal, Vincent.
You think you're going to achieve it?
To be all about the senior price increase and cost increase. That is our goal. Yes.
Okay. And if I could ask you on the dividend, and I'll preface this by noting that you have almost a 3 percent yield and you're a dividend aristocrat. But the increase this year was
a lot less than the
last couple of years. And less than, sort of the EPS growth that you're anticipating. So I'm just wondering if there's any particular reason the dividend increase wasn't larger.
Yes, we had promised the investors to keep our promise that our dividend will be 2.5% to 3% of the stock price. And we, right now, increase the dividend to be at around 3%. So if next quarter, the stock price goes up significantly, which obviously we hope some, then we will increase the dividend. Okay. Thank you very much.
That is the guiding principle.
Okay. That's very helpful. Thank you.
Steve Byrne of Bank of America.
Yes, thank you. Is it reasonable to assume that the incremental EBITDA margin on Lu'An is well above 50% and would it have been even better if you had built the gasifier rather than buying it?
Well, Steve, how do you want me to answer that question without giving a lot of information to our competitors is not necessary. You know, obviously, you are very right that, that, EBITDA margin on that business is over 50 percent, actually a lot better than 50%. Yes.
And safety is what drives the attractiveness of the gasifier that you have the intellectual property that gives you an edge? Yes.
Absolutely. The fact that beyond the technology, we have inherited the people who know what the hell they're doing, And we were able to take over those gasifiers and run them very efficiently, a lot more efficiently than either other boys run that is why the profitability is higher because we are creating value for our partners because we are running that plan very efficiently. And obviously, as a result, we are seeing the good results. Yes, owning the technology, owning the satellite technology is by far the biggest competitive advantage that we have and also the GE technology. That is putting us in 2, advantages.
Number 1, we know what they're doing, but number 2, owning these technologies is giving us visibility to projects, way before everybody knows about it, because if somebody is thinking about a project 10 years from now, The first thing they do, as you know, in the feeder study and all of that, they select the technology. Therefore, they talk to us there before they even have a project or announce a project or issue a request for quotation. So we end up having a 3, 4, 5 year head start on our competitors.
And this plant that was a forced shutdown in China by the government, do we should we assume that was an older plant that didn't have a take or pay contract?
That plant, it was shut down, has nothing to do with gasification. As you know, it's a seed plant. It's a plant that they have been supplying oxygen to since 2005. And that plant was in the middle of a city. So it is not a surprise that in time, the city grows and therefore, that plant either has to move or get shut down.
So right now, that plan has been shut down. We did have a take or pay contract on that. But the take or pay contract, obviously, at the end of the day, if the plan is shut down, it's force majeure, and you have to deal with that. But that's not a material part of our business. And in the future, do we have other plants who are in the middle of cities that might be shut down to smaller plants that can happen to.
Next, we'll hear from Kevin McCarthy of Vertical Research Partners.
Yes, good morning. Safy, you indicated that you were very confident in your ability to deploy capital into high return projects. Can you elaborate on that? Is it the case that you've got such a target rich environment that even if macroeconomics don't cooperate, you've got plenty to choose from on the menu. And then second, can you us an update on the Yang Quang gasification project and what the timing of that looks like these days?
Good morning, Kevin. Thank you very much for your good questions. Number 1, with respect to opportunities, the opportunities that on these gasification projects. They are not driven by the economy. They are driven by the strategic decision by countries like China, India, Indonesia, Uzbekistan, and all of these other key places to become independent of oil they have the cold resources and they want to convert that to chemicals.
So as a result, the reason I'm very confident is because currently, we are working on more than 52 of these projects. So if they all materialize, it would require a $70,000,000,000 of investment. So We are, we have positioned ourselves properly. We chosen the technology. We have the people and the other position, and we have the cash to invest.
And therefore, that is what makes me confident. And whatever happens to the economy, I think these countries will need to do, these projects in order to become independent strategically from oil. So that With respect to the Yang Kwan project, that project is a huge project. It's about a $12,000,000,000 project. And, we are working on that Yankuan in trying to develop that.
There are obviously environmental issues, investment issues, and all of that. And we expect that project to be on a stream somewhere in around 2022. And we will give you an update as we go forward.
And secondly, if I may, can you talk about the modification of your contract in India? I imagine if you're moving to a tolling arrangement, we should expect your sales to decline and your margins to rise so that there's no net profit impact to your EMEA segment. I guess, A, is that correct? And B, if if possible, maybe you can comment on some of those effects in terms of magnitude?
First of all, you are analyzing it absolutely correctly that when it becomes a tolling thing, then the price of natural gas is not put into our sales. And therefore, it will reduce our sales but improve our margin with no effect on the bottom line. The reason that that has happened is that our partner in India had found a way that if they do it that way, it is beneficial to them from attack point of view. And obviously, from our point of view, we still get the same DFC. It doesn't change But in terms of the optics for the results, you are right.
It decreases sales and increases the margins. Is that okay?
P. J. Juvekar of Citi has our next question.
Good morning, TJ. How are you?
Good. So, David, you got good merchant on merchant pricing. Can you just review merchant utilization rates around the world? I think last year, you had mentioned that China utilization was close to 90%. Is that still the case?
And this good pricing that you saw, which end markets or which industries were you able to raise prices to?
Vijay, 1st of all, if I may just go around the world, China, if you take all of China, that utilization rate is only about 56%, 57%. But there are a China is a very big country. There are pockets in China that fair audio utilization is about 90%, ninety two percent, and that is what is giving us the pricing power. Utilization rates in Europe are still at around 75%, 76% and the same thing is in the United States. But again, even in Europe or in the U.
S, there are pockets, as you know, industrial gases the merchant business is very, very local. So we can be have another capacity in California, but no capacity in Pennsylvania. So we obviously analyze these things in detail and take action as appropriate. With respect to the end markets, there is no specific end market that is driving this. It is just the utilization of the plant in the specific geography that you are located.
Okay. And then secondly, CFP, you haven't been buying back stock, and I know the preference is to invest in high return projects. But why not buy back some stock which gives you flexibility to take advantage of any market dislocation?
We are not buying a stock and we don't plan to buy stock because we think if you do the math that you can do better than I do, if you have projects like Luanne to invest The return for the investors is a lot higher than us going and wasting that cash on giving money to a bunch of people who are going to go away and will not be a longer term shareholder. So it is a a very economic decision. If I think people who buy stock are people who have run out of a steam in terms of growth And therefore, the only way that they can make shareholders happy is to announce biggest stock buyback programs. We have the opportunity to invest our money in projects that in the long term, we generate a hell of a lot more value for our shareholders than buying back stock. And as you know, I'm a big shareholder, and I'm very passionate about this because I don't make money more money in the long term not to get cash this afternoon and then disappear.
Next we'll hear from Duffy Fischer of Barclays.
Yes. Good morning, Fellas. Question just on the WAN.
Now that it's
up and running for 3 months, how is it running? Number 1, what lessons learned have you had from that? And then Second one is just, have you closed the GEDO yet?
So your first question, I am, I don't want to jinx ourselves, so I'm going to be knocking on wood a little bit. The Lu'Am project operation is going very well. All four gadget fires are running at capacity. Our customer has the need for the product. Their business is doing very well.
They are taking all of the same gas and converting it to chemicals and selling it and making money. So, up to now it has been very positive. I am very, very, very proud of our team down there. We have something about 400 people working on this gadget fire and running it every day. And we have, as I have always been telling investors, we know how to run process plans, which run a hydrogen plant, it should be able to run a gasifier.
But I have to say that the acquisition of the shell technology and having those people on our team has significantly helped us to be able to do that. So on that, from that point of view, it is, a second one. GE, we closed the GE. With respect to the GE, we have closed the GE, yes. And beyond the process of yes, thank you very much.
Next, we'll hear from Jim Sheehan of SunTrust.
Thank you. Good morning. What is your outlook for the LNG business in the second half of the year, please?
Well, Jim, as you know, these our LNG business is the kind of business that you either get a big contract or you don't get a big contract. So I don't want to make too much of a prediction here, but the signs are positive. That means that it is possible that we would be awarded some additional contracts. And that is one of the reasons that maybe we are a little bit more optimistic about confirming our results. But, these things are not done until they are done.
There are a lot of projects on the drawing board, as you know, And if anything happens, we will obviously make appropriate announcement. But I have to say that I'm more optimistic today than I was 6 months ago.
Great. And in your full year guidance, what are you guys assuming for the corporate segment, please?
In terms of what, Jim?
Yes. In terms of your incremental change from fiscal 2018 to 2019, just trying to get some color on how to model the corporate segment?
Well, I think that the corporate segment in terms of the cost of running the company on a day to day basis are finance department, legal department, IT department, and all of that, you know how we operate. You shouldn't expect much of a change there. I mean, That is going to be a steady with no significant increases. As far as any kind of plant sale that we might have, that would show up in that sector. Or our LNG business and all of that, I think, for your model, assume flat and then anything that happens would be good news.
Our next question comes from John Roberts of UBS.
Thank you. Scott, for the $6,300,000,000 in commitments on page 15, or the approximate $7,000,000,000 on page 21, whichever one you want. Could you remind us roughly of the pace at which the cash will go out the door against the commitment?
It's going to come in, hi, John. Good morning. It's going to be coming in different method, so to speak, right? So if it's in, if it's an asset buyback and then it's going to come in a big check. If it's an organic project, these are large, particularly with the gasification projects, spending of curve can be 3, 4 years.
And so it will be, lumpy, so to speak, driven by the nature of the project self, whether it's an asset purchase or a or an organic.
But as a rule of thumb, I think you should assume, this year, we are maybe to spend about $2,500,000,000. I think you should assume that in the next few years, that number will go to about $3,500,000,000.
Thank you. That's helpful. And then on Slide 13, the $0.06 unfavorable cost, talked about a lot of things like technology, engineering, business development. Is that primarily in the Americas Gases segment or is significant part of that over in global gases as well?
It is cost increases related to when we buy shell technology, when we buy, the technology Gee, we get a lot of people. We are pursuing, as I told you, more than 50 gasification projects. So that's another almost one hundred people that you have to put in there in order to develop these projects. Those are the costs in terms of the section where you see that Scott, yes, for that will be in a corporate and spread around depending on
the nature of these costs that we're building our capability. But on the other item is, the maintenance, the plan customers outages. So that's in that number as well. And that's largely at America's comment with the brand Heiko turns.
Okay. Thank you.
Next, we'll hear from John McNulty of BMO Capital Markets.
Savi, you highlight a big backlog or at least potential backlog on gasification projects. And I know in the past, you've targeted 10% returns on capital. As you become more evidently, the, the kind of partner of choice, you've got greater experience doing this, you built up the technology. Do you see risk to the upside in terms of how to think about the returns on capital for future projects? And how should we be thinking about that?
Well, John, we have said that our minimum requirement in 10%. But if we can get a project at 25%, we will do that. So I think your analysis is exactly correct that as we become the partner of choice, we should be able to command a higher price. And obviously, there is other dynamic is that if our competitors are, announcing $6,000,000,000 share buyback, then I assume they don't have the money to compete in this project, which would put us in a better position.
Great. Thanks very much for the color.
Thank you.
Thank you. Good morning.
Good morning, David.
How are you?
Well, thank you. Pricing in the Americas, the plus 4%. Are you seeing competitor support for the pricing? And has there been any impact from the Linde merger on pricing dynamics in the industry?
Well, first of all, the Linde merger is not closed. David, as you know, so there is certainly no impact from that. But as you know, in general, competitors pricing and so on, I have my lawyer looking at me and saying, don't say anything, considering the nature of the industry. So I I apologize for not being able to comment on that. I shouldn't comment on that.
Understood. And just on the guidance for your safety, what do you need to do or see happen to get to the per half or the guidance range for this year?
I think what would help us is lunar new year shutdown in China, which is normal rather than being longer. A stabilization of the discussions on Brexit and making sure that our business in UK doesn't suffer and a better, hopefully a few orders for the LNG that would help too.
Thank you very much.
Thank you.
Next we'll hear from Mike Sison of KeyBanc.
Hey guys, nice quarter. You had mentioned that you feel confident air products can continue to grow at 10% annually for some time. Then you've talked positively about gasification. Is there a way to help us understand what of that 10% how much gasification can support in terms of growth over the next couple of years?
Well, if all of the projects that we are talking about gasification actually materialize and we deploy the capital that we are talking about, we will grow a lot better than 10%. The temp is we look at the conventional industrial gas business, Worldwide and consider that that business We'll grow with the GTV board wide. Therefore, you can't expect much more than 3% to 4% growth every year. So when we say 10%, we expect at least 6% from gasification and larger projects. But as I said, if you can actually and deploy the capital and have 10 more projects like to earn, then we will grow a lot better than 10
Got it. And then as a quick follow-up, if you had your choice, which you probably do and you think about the capital deployment, is it preferable to spend all the capital and gasification versus historical ASUs and maybe talk about, that concept going forward?
Well, I'm glad I answered the question. We remain totally committed to our core business. We are going to invest as much as they possibly can in our merchant business, in our standard gas generators, hydrogen business and all of that. So the gasification is not taking anything away from that. We will be as aggressive and as enthusiastic and investing in our core business.
Gasification is on top of that. But the identification is not going to take away from our focus on our, normal business. We are not going to concede any market share anywhere in the world in our locks, lane, lower business, our idiom business, our hydrogen business, and we will invest in those businesses as appropriate. All we are saying is that those businesses fundamentally are not going to grow much better than GDP. And therefore, you need to have another vehicle in order to meet our ambitious goal of delivering more than 10% and we have found that vehicle to be gasification and very large projects.
Got it. Thank you.
Thank you very much
Next we'll hear from Mike Harrison of Seaport Global Securities.
Hi, good morning.
Good morning, Mike. How are you doing?
Doing well. Thank you. Safie, we've talked a little bit about the merchant business and you talked a little bit about utilization. I was wondering if you can talk about your approach to merchant capacity in North America We've seen you announce some merchant ASUs in Ohio, New York, Minnesota. Any details on which end markets are customer dynamics are driving the need for more capacity?
And what kind of utilization rates would you expect on those plants once they get up and running?
Well, Mike, that's a very good question. We remain committed as there has always been to make sure that, our cost customers have access to, competitive products. So the way we approach this thing is that, I mean, this our business every day, when we look at an area and we see that we are operating at 90% and the market is growing, we obviously go on the other merchant plan in order to make sure we can supply the market. And then when we see an area in like in Minnesota, where there is really very few competitors competing in there. And the market is growing, then it is appropriate for us to go and build a plan.
So our approach is focused on meeting the demands of our customers and making sure they have access to product.
All right. And then I was also hoping to get an update on the Helium market. I know that you recently announced an agreement with Sonitrack in Algeria. Any comments on the growth or pricing dynamics you're seeing in Helium?
Helium is obviously embedded at commodity. There are not that many places where you can produce it. And we are the largest helium producer in the board. So we are very committed again to meet the demands of our do. We have been operating in Algeria for many years, and we saw an opportunity to be able to expand on our operation there.
And to make helium available to our customers. We are very proud that right now, as we speak, we are the only helium producer in the world who has not declared force majeure. I think we are very committed on that. We always make sure that we have supply for our customers. So the helium business is growing.
There is significant the rocket launches that require helium. There's significant amount of growth in medical use for MRI machines and all of that. And air product as the leader of the helium business worldwide is committed to make sure that we have product for our customers.
All right. Thanks very much.
Thank you.
Lawrence Alexander of Jefferies has our next question.
Good morning. Just a quick one. Can you give a sense for how much your backlog has gone up excluding the gasification projects? Given the number of announcements that were made during the quarter?
During the quarter, it hasn't gone up that much because we haven't announced too many projects. But overall, the backlog for our standard business is somewhere in the order of about $1,500,000,000 and that hasn't changed significantly.
Okay. And for the commitments on the gasification side, are those at this point basically fixed or will you have some wiggle room in terms of project financing and other ways to maybe reduce the capital investment or the capital outlay buyer products for the sake?
We look at those that issue on a project by project basis in terms of where it is and all of that. So as you know, when we announced the big project in Saudi Arabia, we said that that project is going to be order of magnitude, more than $8,000,000,000. And on that front, we are going to use 40% equity and 60% project finance So it's very much driven by the specific project and the nature of the project. But when it comes to a project like Juitai in China where the capital requirement is $700,000,000. We do that, 100% corporate finance.
It's very specific project driven. We have to put another question. We have significantly run over time. So can we have one other question, please?
Absolutely. Our final question for today will come from Jonas Oxnard of Bernstein.
Hi. How are you?
Oh, living the dream every day.
That's great. That's great. That's a good positive attitude.
Thank you. So to go from that positive attitude to a less positive question perhaps, if you can return to that plant in China that that you closed down. And so the take or pay, was voided by a force majeure. In the past, when you talked about the, the gasification plants, and the potential risk of China closing down gasification because of cold usage. The answer has always been, the take or pays are there to protect us.
So is was there something unique about this particular one or how should I think about this in the grander context?
I think you shouldn't, the 2 are not comparable. I mean, the reason that the plant in, that Kuvang plant was shut down was because it was in the middle of the city. The city is growing and obviously the steel plant is an older steel plant and is not equipped with all of the latest technology, and they didn't have the money to do that, so the government shut them down. The gas education plan that they are building are not in populated areas. They are significant projects which are related to significant ten $12,000,000,000 investment for chemical production and the possibility of those things being shut down for MR.
They are actually being built because they are environmentally friendly. So there is really kind of no comparison on the between the two.
Okay. But if they were to be shut down, then the take or pays would be voided?
Friend. It's just like saying that if there is war in Venezuela, they come and take over your plants like it has happened to Exxon before. So those are the kind of things that force majeure works for today is because we want to be protected that in case the government, we have a plan supplying a seed plan and something goes wrong with our plan and they come and say, you can't operate, we can't be liable to the customer to kind of supply them out decision because we are on their force majeure situation. Or when air compressor blows up in a plant, which we have had situations like that, We declare force majeure so that we can go and get sued by the customer for not supplying them oxygen to run their, or Hudges and to run their refineries. So that works both ways.
That's kind of a standard in the contracts.
Okay. Thank you.
Thank you. Okay. With that, I would like to thank everybody for being on the call. Thanks for taking time from your very busy schedule. And we appreciate your interest in our company.
Thank you for the very good questions that allows us to kind of articulate our results and we look forward to talking to you next quarter with hopefully better results. Thank you very much.
That does conclude today's conference. Thank you all for your participation. You may now disconnect.