Good morning, and welcome to the Air Products And Chemicals Fourth 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, Mr. Simon Moore, Vice President of Investor Relations.
Please go ahead.
Thank you, April. Good morning, everyone. Welcome to Air Products 4th quarter 2018 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 will be pleased to take your questions. Our earnings release and the slides for this call are available on our website at airproducts.com. Please refer to the forward looking statement disclosure that can be found in our earnings release and on Slide 2. Now, I'm pleased to turn the call over to Seifi.
Thank you, Simon, and good morning to everyone. Thank you for joining us on our call today. We do appreciate your interest in Air Products. For the quarter the year, the talented, committed and motivated team at Air Products delivered another excellent set of safety and financial results. Our full year adjusted earnings per share of $7.45 is up 18%.
This is the highest annual EPS Our record quarterly adjusted earning per share year. I'd like to remind everybody that this is share growth. We continue to be the safest and most profitable industrial gas company in the world with an EBITDA margin of about 35 percent. This allows us to continue to commit a significant amount of capital to grow air products into the future. We generated over $10 per share about 40% of that or almost $900,000,000 to our investors via dividend.
Our team continues to prove their ability to execute the largest and most complex projects in the history of our industry, successfully completing mega projects in India, Saudi Arabia, China and the United States. And most importantly, we have a great team of dedicated, talented and committed people at Air Products, who stay focused on working hard every day to serve our customers and create value for our shareholders. Now please turn to Slide number 3. We continue to improve our safety results with a reduction of 75% in our last time injury rate and a reduction of 50% in our recordable injury rate. These results can only happen when all of our 15,000 employees around the world are committed to safety and continuous improvement.
On Slide number 4, you can see our goal for the company. To be the safest, most diverse and most profitable industrial gas company in the world, providing excellent service to our customer Now please turn to Slide 5. You can see our overall management philosophy that we have talked to you about many times over the last 4 years. But it is worth repeating because we continue to be focused on shareholder value, capital allocation and an empowered and decentralized organization. Now please turn to Slide number 6.
This is our updated 5 point plan that I have shared with you last quarter. We remain focused on sustaining our lead We see tremendous opportunities to deploy capital in value creating projects in our core industrial gas business primarily in our on-site business. Scott will take you through the numbers, but let me provide you a quick overview of our progress. In fiscal year 2018, we spent about $1,500,000,000 on just the growth projects including M And A. In addition, we have more than $6,000,000,000 remaining to expand on our already committed future investment opportunity.
You have heard Scott and I emphasize many times that we are committed to managing our debt balance to maintain our current targeted AA2 rating. At that rating, we believe we have almost $14,000,000,000 remaining available 4 years. So we have already spent or committed about half of the total fifteen billion available over the next 5 year period of fiscal year 2018 to fiscal year 22. This is a great progress so far and I remain very confident and I repeat very confident of our ability to deploy the rest of this capital into high return industrial gas projects that generate significant value for our shareholders. The 4th point of our plan is to continue to further improve our ForEx culture meaning safety, simplicity, speed, and self confidence.
And we are working to create an environment then our committed and motivated team brings their positive attitude and open minds to work every day. And finally, we do have a higher purpose to create an open and diverse environment for all of our people. So that everyone feels that they belong and their contribution is valued. Let me be clear. This is Air Products 5 point plan and remain and we remain focused on executing this strategy.
Regardless of what others may do in our industry. Our goal is not to be the biggest but to be the best industrial gas company. Now please turn to Slide 7 for a summary of our fiscal year accomplishments. I want to thank the very hardworking teams who have successfully executed some of the largest projects in the history of our industry. We completed for BTCL refinery in Cochie India.
This project took more than 10,000,000 man hours to build and we did this without any safety incidents. The facility has successfully supplied hydrogen nitrogen, oxygen, and steam that enables BPCL to produce cleaner fuels. We reached a critical milestone as the largest air separation unit project in the history of our industry attained mechanical completion. The Jazan Saudi Arabia air separation unit complex was completed with 0 lost time injuries in 25,000,000 man hours of work, a tremendous accomplishment by the team particularly given the remote for you. That is equivalent to over 1000 people working over 10 years with no last time injury.
We expect the 6 air separation units to come on stream in 2019. We successfully closed and started up the Luayan China air separation unit and gasifier joint venture, which has success fully been supplying Syngas to LuAN for their chemical production. The plant is fully operational with all 4 gasifiers service. This is a great accomplishment for our China team, and I congratulate and thank them for a job well done. In June, we held a ribbon cutting event for our new world class steam methane reformer in Baytown, Texas that provides CO and hydrogen to Covestro and other customers along our Gulf Coast pipeline network.
It's great to see these projects starting up and contributing to our growth, but most importantly It demonstrates to our customers and our employees that Air Products can be counted on to successfully deliver on our commitments. Safely building and operating large complicated projects that provide critical gas supply to our customers. Our proven reliability and successful execution of these projects helped us to win additional projects in China Korea, India, Louisiana, and Texas for customers in the electronics, chemical and manufacturing markets. One of these is for Eastman in Kingsport, Tennessee when we have been successfully supplying oxygen and nitrogen today as coal gasifiers for 35 years. We continue to commit to both class engineering and technology resources where we need them around the world, including Saudi Arabia, India, and China.
These are in addition to our existing engineering and technology capabilities in the U S, UK, and China. And in January, we announced a $0.15 dividend increase, the largest in the company's history. This 16% increase marks the 36th consecutive year Air Products has increased our dividend. In fiscal year 2018, we shared about 40 percent of our distributor cash flow or about $900,000,000 with our investors via the dividend. And with our focus on creating our own growth opportunities, we continue to successfully execute on our gasification strategy.
So please the next slide, slide number 8. Gasification is a process that has been in existence for many years, and air products has been involved in this market for many years. The process basically use oxygen plus coal, liquids or natural gas to produce synthetic gas, which is in combination of carbon monoxide and hydrogen. This thin gas can then be used to produce chemicals diesel fuel, high end olefins, polymers, hydrogen, and or power. Gasification has significant benefits.
That it enables an environmentally friendly way to use lower value feedstocks. Over the last few years, air products was successful in building very large air separation units to provide oxygen to customers operating their gasifiers in China and Saudi Arabia. Over the last year, we announced 4 large projects where air products could own operate the gasifiers and syngas cleanup and provide syngas for related products to our customers. The key is that these projects are consistent with our on-site business model when we don't take any raw material or product volume or price risk. First, I mentioned the Lu'An project that is successfully supplying Syngas to Lu'An for their chemical production 2nd, in August, we announced the $8,000,000,000 gasifier power project in Jazan, Saudi Arabia, the same site where we just finished building the world's largest air separation unit complex.
This project continues to move forward and we continue to expect on stream late in calendar year 2019. 3rd They continue to make great progress on the $3,500,000,000 air separation unit gas powered project, to provide Syngas to Yang Quang in Shaanxi province. We expect our ownership of the joint venture to be 55% to 60 send with the project expected on a stream in 2022. And finally, we also announced an agreement for the first 100% air products gasifier project to provide Syngas to Zhuri Thai in China expected on stream in 2022. A key aspect of our strategy is the critical gas communication technology.
Please turn to Slide 9 for an overview of Air Products 2 gasification technologies. We have already seen the benefits of our acquisition and joint venture for the shell solids and liquid gasification technology. This is the same technology being used in the Lu'an and Jazan and Jazanq reservoirs. This is a very well proven technology with 100 of gasifiers built over the last few decades. Another complement is our recent announcement yesterday to acquire the GE gasification business and technology.
The GE gasifier technology was originally developed by Texaco and also hundreds of units built over the last few years. We view these technologies as complementary. There are specific feedstock and product situations for which one technology or the other is better suited. These are technology acquisitions that put us in a better position to win the very large gasification on-site projects in the future. Now please turn to Slide 10 which shows the results of our 3 key metrics for the quarter.
We remain committed to our goal to be the most profitable industrial gas company in the world as measured by each of these 3 key metrics. Now please go to Slide number 11, which has always been my favorite slide. Showing approximately 1000 basis points improvement in our EBITDA margin in the last 4 years. Finally, please turn to Slide 12. Over the last 4 years, I have stressed the fact that we are committed to deliver at least 10% per year growth in our EPS over the long term.
You can see that we have actually delivered 14% compounded annual growth over the last 4 years, and this year we delivered 18% growth. We will continue to execute our strategy that we believe will drive our EPS by at least 10% per year on average over the coming years. Now I would like to turn the call over to Mr. Scott Crackle, our Executive Vice President and Chief Financial Officer to discuss our results in detail. Scott?
Thank you very much, Safie. Now please turn to Slide 13 for our full year results from continuing operations. Sales of almost $9,000,000,000 increased 9% versus last year, primarily on 6% higher volumes and 1% higher price. We saw strong volume increases across all three regions, partially offset by lower activity from the Jazan project in global gases. Excluding Jazan, volumes were up 10% with about half from new plants.
Versus last year, pricing was up 1%, primarily driven by our China and Europe merchant businesses. Positive currency was driven by the euro, British pound and the Chinese RMB. EBITDA of over $3,100,000,000 improved by 11 equity affiliate income, points. Record adjusted earnings per share of ROCE of 12.4 percent improved 30 basis points versus last year. The impact on ROCE of our profit improvement is still moderated by the larger denominator, which increased as a result of the gain from the PMD sale in early 2017.
The FY18 denominator has the PMD gain in all five quarters, while FY 'seventeen only has three quarters with the PMD gain. Please turn to Slide 14. Our record adjusted full year continuing operations EPS of $7.45 increased by $1.14 per share. Overall, higher volumes increased EPS by $0.71 per share. Price and raw materials taken together increased EPS by $0.16.
Net cost performance was productivity was again offset by a few factors, including inflation, planned maintenance costs and the end of the cost reimbursement for our Port Arthur CO2 CAPTURE project. We also continue to see higher costs in strategic areas focused on pursuing exciting growth opportunities. Currency and foreign exchange was $0.16 favorable primarily due to the euro, British pound and the Chinese RMB. Equity affiliate income added $0.15, primarily due to underlying operational strength in Mexico and Italy. The overall tax rate was year with about $0.33 from the new tax act.
For both fiscal year 2019, and Q1 FY19, we expect a tax rate of about 20%. Finally, we had other items that combined for a positive $0.02. This includes $0.08 from higher non operating income, primarily from higher interest income, This was somewhat offset by $0.03 higher interest and a $0.03 impact from higher shares outstanding. Now, please turn to Slide 15. We had a very strong cash flow year with over $10 per share or $2,200,000,000 of distributable cash flow which is up over $300,000,000 from prior year.
From the $2,200,000,000 of distributable cash flow, we paid almost $900,000,000 or about 40% as dividends. Even with this robust dividend, we still have over $1,300,000,000 available for high return investments in our core industrial gas business. Slide number 16 provides an update on our capital deployment as Safie previously mentioned. We are making it easier for investors to understand how much we have spent, how much we have committed and how much remains of our capital deployment capacity. The first point is that we are tracking capital deployment over the 5 year period of FY18 through FY22.
As you can see, we spent about $1,500,000,000 on growth projects including M And A, but excluding maintenance capital. In addition, we have committed but not yet spent almost $6,500,000,000 on projects and M and A. You've heard both, safety and I emphasize many times the importance of 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 $8,500,000,000 available to invest today. 4 years.
Therefore in total, we have almost $14,000,000,000 remaining to invest. The $1,500,000,000 we have spent this year and the $14,000,000,000 available gives us over $15,000,000,000 of total available capacity and committed about half of the total available capacity. Turning to Slide 17, I'll make a few comments on our quarterly results. Sales of $2,300,000,000 increased 4% versus last year, as volumes were up 3% and price contributed 1%. We saw strong volume increases Excluding Jazan, volumes were up 6% with about 3% from new plants, primarily driven by the Lu'An project.
Versus last year pricing impacted our overall sales by a positive 1%, primarily driven by China. Pricing changes are driven by EBITDA of $822,000,000 improved by 7%, driven by the higher volumes and equity affiliate income, partially offset by higher costs. EBITDA margin of 35.8 percent was up 90 basis points, driven by the higher volume. Record adjusted quarterly continuing operations EPS of $2 per share was up 14% versus prior year. Please turn to Overall, as productivity was again offset by a few factors.
In addition to the ones I had mentioned during my full year comments, we also saw higher primarily due to the underlying operating strength You can also see we had several non GAAP items that totaled the $0.05 benefit for the quarter. These included a pension settlement, a valuation change due to a change in inventory accounting policy, and a few tax reform related items. Now, to begin the review of our business segment results, I'll turn the call back over to Safie. Thank you, Scott.
Please turn to Slide number 19, CASES Asia, where we continue to deliver strong sales and profit growth, thanks the efforts of our excellent and committed team in Asia. Sales increased 15% versus last year driven by various strong volume growth and higher prices. Volumes were up 14% with new projects driving about 10% of the increase, while base business and acquisitions, they're roughly equal to the rest. Lou Anne was a significant contributor this quarter, responsible for about half of the total sales growth. Pricing for the region was up 3% versus last year, the 6th consecutive quarter of year on year improvement.
This also marked a 2% sequential increase from the prior quarter showing the continuing strength in this region's mentioned market, primarily in China. Strong base volumes, the addition of LuAN, and favorable pricing drove profits and margins higher. EBITDA increased over 20% and EBITDA margin improved 210 basis points compared to prior year. Consistent with our prior guidance, Duane contributed about $0.04 of EPS this quarter. As I said, we are pleased that all 4 gasifier trains have come on stream and expect luance contribute more than $0.25 earnings per share in fiscal year 2019.
We continue to believe that our business in China will improve in the coming years, and we have not seen any negative impact as a result of the imposed tariffs. Now I would like to turn the call back to Scott to discuss our Americas results. Scott? Thank you, Safie. Please turn to Slide 20 for a review of
our Gas of America's results. To the quarter, sales grew 4% on higher volumes and price. Volumes improved 4% as both on-site and merchant volumes were strong. Our new plant in Baytown, Texas supported increased hydrogen demand on the Gulf Coast. Merchant volumes also grew despite the termination of a wholesale contract in Q4 of FY17.
Overall price was 1% higher, which is our first positive pricing result in the last six quarters. America's EBITDA was roughly equal to prior year as improved volume and price as well as higher equity affiliate income due to better results in Mexico were offset by increased costs. While we did have positive productivity, this was more than offset by higher power costs and we no longer have the cost reimbursement for our Port Arthur CO2 capture project. We saw higher transportation costs in part due to driver shortages Finally, the difficult business environment in South America negatively impacted our ability to collect from certain customers. Sequentially, sales and EBITDA both improved 4%.
Strong volumes grew higher sales, and EBITDA was further supported by 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 21 for a review of our guesses EMEA results. Sales were up 8%, primarily driven by 7% higher energy pass through mostly due to a significant increase in natural gas prices in India. Volumes contributed a positive 2% due to merchant growth as well as recent acquisitions. Higher merchant pricing added another 1%.
Improved merchant markets lifted both price and volume in stream in Q4 last year, so there was no year over year benefit in Q4 this year. EBITDA declined 5% as unfavorable currency and higher costs negated the positive pricing effect and better equity affiliate performance in Italy. Power costs in Europe have risen sharply during the quarter, and our team is working hard to recover these higher costs through pricing actions. EBITDA margin was 31.4 percent, a drop of 410 basis points. Excluding the impact of higher energy pass through, EBITDA margin but would have been nearly flat excluding the higher energy pass through.
Now, please turn to Slide 22 for a brief comment on our Global Gases segment which includes our air separation unit sale of equipment business as well as central industrial gas business costs. EBITDA was flat, although sales were down due to lower project activity as we approach the conclusion of the Jazan ASU sales equipment project. We continue to expect the DESAN ASU project on stream in phases in fiscal 2019, but we do expect the DESAN ASU overall to be a headwind for FY19 versus FY18. Now, please turn to Slide 23 for a brief comment on our corporate segment which includes our LNG business, our helium container business, and our corporate costs. Sales increased modestly compared to prior year as we began to see renewed interest in LNG Projects.
Overall, segment profit was up due to additional equipment sales and lower costs. We continue to be optimistic about future prospects for Now I'm pleased to turn the call back over to Safie for a discussion of our outlook.
Thank you, Simon. Our team around the world, all of us continue to be very excited about Air Products' future. Our safety, productivity, and operating performance continue to provide the foundation for our continued growth. As I said before, we have fully win key growth projects. There is no doubt that there is uncertainty in the world.
I guess that's an understatement. And while we cannot predict or control worldwide political or economic developments, we do have control over the operational performance and growth of Air Products. And we are confident we will continue to deliver on the commitments that they have made. Let me address what we are seeing relative to global relationships and tariffs. Very simply, we have not, and I stress not seen any material impact on Air Products at this point.
Our business is local, so we don't have any direct exposure Also, we have not seen customers changing their behavior or attitude toward us and we have not seen any impact on our major projects or interaction with customers in the different parts of the world. Now please turn to Slide number 24. We are all working hard every day to be the safest, most diverse and most profitable industrial gas company in the world, providing excellent service to our customers. Our guidance for fiscal year 2019 is for a range of $805 to $8.30. At midpoint, our guidance represents 10% growth over our very strong fiscal to grow APS by more than 10% per year on average in the future.
For quarter 1 of fiscal year 2019, our earnings per share guidance is $1.85 to $1.90 at midpointup5 percent over last year. But I would like to remind you that in quarter 1offiscal year 2018, there was an $0.08 benefit from a planned sale in Asia that will not repeat. Excluding this item, our quarter bond guidance is up 10% versus prior year. We expect our capital expenditure to be in the range of $2,300,000,000 to $2,500,000,000 in fiscal year 2019. We expect the Jazan gasification power joint venture to close late in calendar 2019 so we have not included this in our fiscal 'nineteen CapEx forecast.
You can also see we have about $7,000,000,000 of commitments, including projects and M and A. This is up significantly as it now includes the Jazan Yankuan, Zhuhai gasification Projects. And then please turn to Slide 25. As always, our real competitive advantage is the commitment and motivation of the great team we have at Air Products. That is what allows us to I want to thank all of our fifteen 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.
And as I always say, I'm very proud to be part of this winning team. As you know, execution without strategy is aimless, and our strategy without execution is worthless. Our 5 point is our strategy. Our people's execution against this strategy in the years to come will ensure our continued success and value creation. Now we are delighted to answer
we'll take our first question from P. J. Juvekar from Citi. Please go ahead.
Morning, TJ. How are you this morning?
Good. In Americas and Europe, the leverage from sales growth doesn't seem to be coming down to the EBITDA line. You know, last quarter, it was maintenance cost. This quarter, I think you mentioned high power cost. When can we begin to see the leverage flowing to
the EBITDA line? Well, first of all, you are absolutely correct that the margins are the the marginal contribution has been coming down. You mentioned the reasons very accurately in Americas. It is a combination of a lot of things. Hydrogen turnarounds, driver shortages and a lot of other things that I can delineate for you.
And in Europe, we have had a significant issue with power costs that we haven't been able recover. We are working very hard, and we are hoping that we would reverse these trends in 2019.
Okay. And then quickly on margin utilization, can you compare them around the world now that you're getting pricing in each region, what can we expect in what are we seeing in terms of utilization in each region?
Well, overall, our utilization in Europe is still around 78%, 79%. In the U. S, it is approximately the same. In China, it obviously differs from different parts of China. There are parts of China where our utilization is almost 90%, and that is what is helping us to drive the prices up.
Thank you.
And we'll take our next question from Robert Koort from Goldman Sachs. Please go ahead.
Year over year variance in how you drove your EPS growth As we look into 2019, I think you mentioned Jazan would be a headwind. I don't suspect tax will be as big of a tailwind in maybe exiting the fourth quarter, the U. S. And the Americas and EMAA were not that, growing so much. So Can you give us a sense of what those buckets would look like that drive that pretty significant EPS growth you see in 2019?
But the main reasons, first of all, good morning, Bob. The main drivers for increasing our EBITDA significantly next year. And as you see, they are suggesting about 10%. But I mean, that is more than that if you take away the effect of the tax thing. But fundamentally, the drivers are our growth projects that are coming on stream in China, in India, in the U.
S. So and then we are hoping that there are some other projects that we haven't announced would, materialize. And then in addition to that, we are hoping that the utilization rates will maybe improve slightly in China I don't know about how it will work out in the U. S, because as you know, manufacturing in the last 6 months in the U. S.
Has actually gone down. And so those are the factors. And then in addition, Bob, I have to say that I'm not that excited about our performance on cost last year, and I'm hoping that we will have additional productivity and cost improvement programs that would help deliver the results.
And if I might follow-up, Safa, you guys had about a 1% price improvement this year. Can you give us some sense of what you might see in fiscal 2019?
Well, Bob, 1st of all, the 1%, I'm sure you know that the 1% is over our total portfolio. So since half of our portfolio is unsides where we don't get any price increase. Therefore, the price increase on our merchant side is really 2%. But as far as the future, you know, because of the nature of our industry, I would hesitate to make any comment on that.
All right. Thanks, Safie.
Thank you very much, Bob.
And we'll take our next question from Jeff Zekauskas with JPMorgan. Please go ahead.
Hi, good morning.
Good morning, Jeff. How are you this morning?
Very fine. How do you think the, Praxair Lindy, merger will change the industrial gas landscape or perhaps will change the opportunities for Air Products in the coming year?
Well, you know, Jeff, I'm obviously very hesitant to make any comments about other people's business. But as I said during my comments, We do not expect any change memo to our own people, we have a strategy, we are excluding that strategy. And quite frankly, I do not see any change or any reason for change as a result of the merger because the merger hasn't really changed anything. It's just a little bit moving the pieces on the chessboard. So, we do not and in terms of opportunities, actually we think that that might enhance opportunities for us because usually if there is a customer who was going to divide their business by 4 giving each one of us 25%.
Now they would divide it by 3. And therefore, we will get more share and the other guys will get less share. So we actually think that overall, as I said, no change in terms of what we do and if anything, slightly positive.
Can you compare, what you paid for the GE Technology business to what you paid for the shell business? And what are the annual revenues of the GE business and what were the annual revenues of the shell business?
But on both of those things, we have an agreement with both LNG not to close those numbers. I would have not minded in disclosing them, but they don't want to do that. And in terms of what we paid for them, let's just say a general thing that is approximately similar.
Okay, great. Thank you.
As you said before, the value creation those acquisitions is much more about the ability to be in a better position for the big on-site projects than the specifics associated with the technology licensing revenues.
Absolutely. Because we bought the business for, and the Shell business acquisition of that has given a significant advantage in knowing the future projects that might happen. So that has been a very successful thing, and I'm very happy that we were able to reach agreement with GE. It took a very long time, but they have an excellent technology. It's their former Texaco Technology, I'm very familiar with that.
I was trying to promote that in the, in 1990s with for Savita to try to get BOC in that business, but that didn't happen. So I'm very pleased that we were able to acquire that.
Okay, good. Thank you so much.
Sure. We'll take our next question from John McNulty from BMO Capital Markets. Please go ahead.
Yes, thanks for taking my question. On the GE gasification business, I guess, when you think about how much it potentially expands your addressable market, is that the right way to think about it? And if it is, how how much does that help when you kind of bundle that in with the Shell platform as well?
First of all, good morning, John. And secondly, it almost doubles because GE And Shell Technologies are approximately equal late in terms of what is being used. And therefore, it literally doubles the exposure that we have and our ability to promote that technology. And obviously, if we have the technology for a gasifier, our chances of building owning and operating that gasifier significantly increases.
Great, thanks. And then just a question, you had announced a couple of, I guess, a couple of new projects during the quarter, the Kingsport facilities and also the, I believe it was a liquid helium platform as well. I guess, can you help us to understand how to think about the earnings power on those? I guess, the ones tied to Eastman sounds like they're more replacement projects. So if you can kind of help us to think about how to quantify that, that would be helpful.
Sure, John. John, 1st of all, Eastman coal gasification project It is more than replacement. It is actually some additional volumes that they will need, but that will, contribute to our earnings about 3 years from now. Once after we have built a plan. And in terms of the other things, we also announced Juitai which is a big project about $600,000,000 investment, and that is going to come on stream on 2021.
Great. Thanks very much.
Thank you.
And we'll take our next question from Vincent Andrews with Morgan Stanley. Please go ahead.
I'm very well. Thank you, Seifi. Another question on the GE gasification technology. The slide talks about adaptable to a wide range of feedstocks. Maybe you could just help us understand sort of what the principal wide range of feedstocks is in there and maybe again, how that expands your pallet?
The principle applications on that is in coal and natural gas gasification. Have an excellent technology for that. And the technology is related to the quality of the coal the ASH content of the call, whether you use a slurry system and all of that, then that is why they're keen to have both shell and GE, because then we can tailor make it to the specific situation that the customers have.
Okay. And just as a follow-up, your reference in South America and inability to collect on payments Is that a function of customers being below minimum take or pay or is that a separate type of issue?
It's just the issue of some customers going bankrupt. Okay. And our merchant business,
we have very little on-site down.
Okay.
Thank you very much.
And we'll take our next question from Christopher Parkinson from Credit Suisse. Please go ahead.
Great. So you've recently been speaking more positively on some projects in the U. S. And India And it's always the Middle East for obvious reasons. But just given the remaining plus or minus, you know, $8,500,000,000 left to deploy over the next few years in these projects in these geographies, are the recent acquisitions that I mean, obviously Shell and Gee were both very intentional.
Are they complimentary? And is there anything that you're attempting to triangulate, for the ongoing bidding processes of these projects or are there other technologies you still feel you would need to acquire?
Well, I don't want comment on the second part, but, first of all, good morning, Chris. The second thing is that, when you look at the GE Technology, GE Technology has been chosen actually for some very big projects in India. Some of it has been publicly announced. So that, I think, is giving us an opportunity. And then obviously, we are looking forward to deploying some of these for projects in the U.
S. Absolutely.
Got it. And just given the volatility of the electricity rates in Europe and just broadly, just give us the puts and takes of the merchant market and kind of how you're thinking about that not only the next quarter, but over the next year? And what you're hearing from your team there? Thank you.
Well, the team is that our teams are obviously optimistic, but they are in no position to predict what happens to break it or what happens to the elections tonight in the U. S. So we are at the mercy of industrial production. GDP really doesn't mean very much to our business. Because it includes financial activity and people going out to dinner.
We are focused on industrial production and that we have given you the guidance conservative. We don't see significant improvements. So now if, for some magic reason, things significantly improve, will benefit from that, but we have been on the cautious side.
And we'll take our next question from Duffy Fischer from Barclays. Please go ahead.
Good morning, guys. This is Mike Leithead on for Duffy this morning. Savi, could you maybe expand on synergies of having both GE and Shell's gasification technology. And what I mean by that is in your mind does having both technologies provide you with a meaningful bidding advantage versus saying having 1 or the other, so sort of a 1+1 equals 3 type equation. Just how should we think about the complementary nature of these?
Well, just, think of a situation if there are 10 projects and half of them are using Shell and half of them are using GE, by owning GE Technology. Now we have an opportunity to participate in all 10, rather than 5 of them. So it is complimentary and it does expand our scope. It's actually a very positive thing. Thank
you. Got it. That's helpful. And then maybe one for Scott. Could you just remind us on how the P and L impact shift for the Jazan ASUs as the project is complete and we start to ramp that up in 2019?
So in terms of design, 2 parts, there's the SOE that we've been doing over the last couple of years. That's, as Safi mentioned, I think in the prepared remarks, wrapping up here in the next year. And, so you'll see that as a headwind. And again, I think, safety address earlier. Then our 25 percent that we own for the long term supply contract is going to be an equity affiliate, and it's going to be a very, very small contribution.
So not much in there going forward from that portion of the Jazan opportunity.
Can I just add, but that is for the air separation unit part? That means basically we are saying that you're not going to see a lot of actually you're going to see a headwind from the air separation part in 2019. But the gasifier part is the big part. And that one is going to be significant contribution in 20 after we actually close it in 2019.
Great. Thank you.
And we'll take our next question from David Begleiter with Deutsche Bank. Please go ahead.
Good morning, Safie. How are you?
I'm fine, David. Haven't seen you for a while. How is everything?
We're good. Thank you. If you just look at your large project activity, could you walk around your key regions, China, India, the Middle East and the U. S? Talk about the pace and cadence of activity that you're seeing today?
Okay. We see significant opportunities still in the U. S. Some of these projects were delayed, but there are a lot of projects in the projects, whether they are ammonia projects and all of that. We are obviously involved in all of them, and I hope they materialize because as you know, our preference, if it was if the opportunities exist, then we would invest all of our $15,000,000,000 in the U.
S. I mean, that goes without any saying, this is the place our home base this is where we want to invest. So we see still opportunities in the U. S. Then there are significant and I mean significant opportunities in China.
They are there is more projects than we can handle quite honestly right now. There is is starting to have significant opportunities in India because of the change in the law that they had about co ownership So a lot of people are participating in that, and there was a big announcement about a fertilizer project, which is gasification in India and all of that. So that we are seeing that in Saudi Arabia, you have seen the opportunities and we believe that there will be opportunities in other parts of the world. I don't want to be that specific, but then the pipeline is pretty robust And with us being on top of both technologies, which are the key technologies being used, I think you should have a competitive advantage. Obviously, time will tell and the results will, back up what we are claiming, but we remain very optimistic.
Very good. And Scott, following up, Bob's earlier question on the 2019 earnings bridge, you have about $0.75 forecasted increase. Could you just broadly speaking, but breakout that $0.75 bridge between 2019 2018, if possible?
Well, we don't give out all the specifics. I think, though, safety in his comments back to Bob talked about the new onstreams, the full year as well as new things coming on stream, you know, hopefully favorable volume growth and pricing, so forth. Let me add a couple of things tax as well as currency. So we see, our, as I think I mentioned in my prepared remarks, a 20% effective tax rate book for next year, which would translate into about a $0.10 headwind. And it's really driven by the absence of some favorable things, some favorable tax audit settlements we had in this year.
So that's part of the bridge into 'nineteen. The other is currency, and we see somewhere in the order of about a $0.10 to $0.15 headwind on currency. And just recall, the way that we look at this, we just take the last data points on currency and then just move that sideways through the year as opposed to try to project where rates are going to go. Let me give you, so everybody can have their own view of where currency is going to go. And again, our view is at this point in time, it's about dollars.
Let me give you the rules of thumb, that you can apply to whatever your own assumptions are. So if we move the RMB by 10%. And as always, I want to remind folks, this is just mathematics, right? It's just translation. There's no transact in there.
So if you move the The euro same 10% swing in exchange would be about $0.09. And then there's a handful of other ones that Each of which are about $0.03 to $0.04. That includes the pound and the Korean lawn, Taiwanese in these dollar and the Canadian dollar. So each of those individually, if the exchange moves about 10%, it'd be $0.03 to $0.04 on an annual basis. And what I've just given there, plus, the U.
S. Sales is about 90% of our sales. So hopefully that's helpful. So you can put in your models.
We'll take our next question from Steve Byrne with Bank of America. Please go ahead.
Yes, thank you. Would you characterize the number of coal gasification projects under consideration in China including refurbishment of old gasifiers as being neighborhood of a few or more likely a few dozen.
How about like 50?
Okay. And to the extent that the new plants are much more efficient than the old ones. What's the role of the Chinese government in any of these? Are they providing any support financing wise or streamlined regulatory path?
So most of these companies that are doing these are the state owned anyway. So they are 100% owned by the government. Therefore, as they invest, they obviously have the support of the government.
Just lastly, your outlook for incremental demand growth for hydrogen on the U. S. Pulse from IMO 2020.
Yes, we expect that. I think that the industry is has not acted because they are hoping that they would get some help from the White House and delay the implementation. But I don't know where that will go, but in Europe pre fill our credit series about implementing in that in the rest of the world. And we will in time see significant demand, but as I said, it hasn't really happened in the U. S.
Right now, it will take about 3 years before this thing any new plan comes on the stream. And I think most of the people here are thinking that at the end of the day, this will become like the auto emission thing. They wait until the last minute, nobody does anything. And then we kind of say, okay, we delayed another 4 or 5 years. That's what the industry is hoping.
But I have no insight in terms of what the administration will do. Thank you.
And we'll take our next question from Don Carson with Susquehanna Financial. Please go ahead.
Good morning, Safie.
Hey, good morning, Don. How are you doing?
Very good. Thanks. A couple of questions. 1, you talked about slowing base business outlook. I know your growth for the full year was 10% ex Jazan, it slowed to 6% ex Jazan in Q3 Q4, was that all due to the slowdown in global industrial production?
And what's your specific industrial production forecast for your fiscal 'nineteen guidance?
Well, the first question, I think Simon had a quick answer for that.
Yes. Just remember, of course, that we didn't have any year over year volume benefit from the big plant in India this quarter and the prior four quarters we did. So that slows the, comparator down.
Exactly. So it's the effect of the plant and India coming on a stream. So we haven't really seen any slowdown in that respect. In terms of industrial production done, I mean, you are more of an expert than this than any one of us here. I mean, we can't predict what's going to happen tomorrow.
So I'm you can ask me, I mean, but I can answer is that, in terms of our guidance, the way we have come up with the guidance is that we have assumed that there will be no significant uptick, but at the same time, no significant downturn. So we are expecting or we are giving you our guidance based on the fact that things it'll stay about the same. So if there is any significant change up or down, then obviously it will be affected by that.
And on the cost side, both in in Europe with power and North America with supply chain, do you have the ability to surcharge for those 2 specific items? And, you know, if not, how do you expect to address those costs in fiscal 2019?
Well, we theoretically have the ability and I always every day challenge our people to use that ability and actual ability to increase the prices, but it obviously depends on what our competitors do. But those are the challenges that we to face in 2019. And the way we have given you the guidance is that we have assumed that we will overcome those challenges.
Okay. Thank you.
Thank you, Don.
And we'll take our next question from John Roberts with UBS. Please go ahead. Thank
you. I forget if you mentioned it, but are you a major oxygen supplier to many of these GE gasification locations?
The existing ones, I think we are by far the most major supplier in terms of sale of gas. Yes. But a lot of these projects that I'm talking about in the future, obviously they haven't been built. But
how many existing gasifiers you supply oxygen to?
We supply to about at least 8 of them, but some of them have 4 or 5 units. So We supply more than 100,000 ton a day of oxygen to these people.
Okay. Thanks. And then Praxair Lynda still have some divestments coming post closing, assets in Korea and Neon in the U. S. I assume you would not be allowed to bid for those, but I just wanted to check.
We are not counting on it at all. That's correct. Thank you.
We'll take our next question from Jonas Oxgaard with Bernstein. Please go ahead.
Good morning. Hey, how are you?
I am great. Two part question if you will, on yet another 2 on the coal gasification here. I was wondering if there if this also means a research push from you guys on developing better, more efficient, cleaner, etcetera. And if you can see an uptick in R and D spend as a result? And then the second question on the same topic here is, my understanding was that the GE Xinguab venture was the provider of practically all the, GE licensed gasifiers in China.
How does that JV fit into with your plans of going into the gasification in China?
Great questions. First of all, first question, yes, it does mean that we are going to spend more on R&D. That is one of the reasons that you see a negative costing in 20 18 performance. That's very true, and we are committed to make sure that we provide the support for these technologies to improve forward. The other thing is that We are now in China, a partner in Xinhua.
That means that the way we bought this thing, we bought all the rights to the gas gasifiers in outside China. It's all 100% ours. And in China, we are partnered with Xinhua. Which is now called China Energy Corporation. So we are their partners.
Okay. How does that partnership, interact with your, your strategy of becoming the builder operator of these gasification units?
It did significantly help. Because hopefully they will bond to those new gasifiers and all of that. And now we are, I mean, China Energy Corporation is one of the largest companies in the world. They are operating about at least 10 gazifiers in China. Most of them, do use GE Technology, and they have plans for the future.
So we are very, very honored and happy to be a partner with, China Energy Corporation. For Machin Huang.
We'll take our next question from Mike Harrison with Seaport Global Securities. Please go ahead.
Hi, good morning.
Good morning, Mike. How are you doing today?
Doing well. Thanks, Safie. Just going back to the EU, the European power cost situation, you've dealt with this fairly recently in the past. You seem to have managed through it and now we're getting hit with what you called another surge Can you quantify how much impact you saw this quarter? And is it something that's carrying into Q4 And the fact that you dealt with these cost increases more pretty recently, does that make it any easier to maybe pass this through to customers or get additional pricing?
Mike, it's a very good question. Obviously, power costs are going to go up in Europe. Because, I mean, you pay a price if you want clean energy and you don't want to use a nuclear power plants. Therefore, the cost of renewable energy and all of that is higher. The issue that we have with these, power costs and all of that is that when they happen, We have a program.
We understand how to increase prices to recover that, which is not easy, but there is a delay factor. So when it happens in a quarter, we are not going to instantly be able to, recover that in the same quarter. So usually, we have a impact on the quarter and then 1 or 2 quarters later on, we have increased the prices and we recovered that. There is a little bit of a phasing here.
Understood. And then another question regarding the competitive environment. You talked a little bit about the change related to 4 major players now becoming 3 But we also have had some divestitures, to 2, call them somewhat smaller players that are going to make those 2 competitors a little bit bigger. Do you see them having a significant impact on the, in particular, the merchant gas competitive landscape over the next couple years?
Well, again, I mean, what do you want me to say? Mean, in terms of competitors, we consider we have 2 competitors. The rest of them are companies. We don't consider them competitors.
Alright. Thanks very much.
And we'll take our next question from Lauren Alexander from Jefferies. Please go ahead.
Good morning. Just two quick clarifications. The only, capital outlay for the gasification this year will be the Jazan investment. Is that right? Or will more of that $7,000,000,000 pipeline get pulled into 2019?
And secondly, just comparing pages 16 24, it looks like you're calling out about $600,000,000 of M and A. Is that future M and A related to bolt ons or decaptivation or is that including the gasification acquisitions?
Well, first of all, with respect to the first question, that you had, Let me put this thing in context because we are very careful about how we talk about these things. When we talk about M And A, that includes buying a company or it includes decapivation. So we expect that. The second thing is that in terms of spending money, for example, the Jewitai, we signed the contract last year, $600,000,000, we are going to spend capital on building that plant, obviously, tomorrow and some other projects that we have won. So cash why our capital expenditure for next year, we are giving you a guidance of $2,000,000,000 to $2,500,000,000, which is almost $1,000,000,000 more than this year, which is spending money on the projects we have won so that they come on a stream in 2020, 2021.
Clarify one thing we did say, the Jazan gasifier project is not included in our capital guidance. As SAPI said, we expect that to as late in 2019. And just one more point to make, too, is that, on one of the slides, we're showing a remaining capital to spend on our commitment the other one, we're showing the total amount. So I think that's the difference that you're talking about there.
Okay. I'll be on time for one more questions.
Perfect. We'll take our last question from Jim Sheehan from SunTrust. Please go ahead.
Good morning. This is Pete Osterland on for Jim. In Asia, you called out volume growth from Lu'An as well as pricing strength in the merchant market. And I'm just trying to sigh can you estimate how much of the EBITDA margin uplift that you experienced during the quarter was due to each of these?
Well, the thing is that we said that half of our growth, I mean, we have specifically said that, Luanne contributed $0.04 to our bottom line. So that's about $12,000,000 approximately. And then merchant growth is basically, then we had some other projects coming on stream in addition to And then, the merchant volume was about maybe 40% of the increase. Thank you. Well, with that, I would like to thank everybody for being on the call.
Thank for taking time from your busy schedule to listen to our presentation. We do appreciate your interest and we look forward to discussing our results with you again next quarter. Have a very nice day. Have a nice holidays and all the best. Thank you.
This concludes today's presentation. We thank you for your participation. You may now disconnect.