Good morning, and welcome to Air Products And Chemicals Second Quarter Earnings Release Conference Call. Today's call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and All Rights are reserved. Beginning today's call is Mr. Simon Moore, Vice President of Investor Relations.
Please go ahead, sir.
Thank you, Vicky. Good morning, everyone. Welcome to Air Products Second Quarter 2018 Earnings Results Teleconference. This is Simon Moore, Vice President of Investor Relations. I'm pleased to be joined today by Safi Gossimi, our Chairman, President and CEO Scott Crocco, our Executive Vice President and Chief Financial Officer and Corning Painter, Air Products Executive Vice President, responsible for Industrial Gases.
After our comments, we'll be pleased to take your questions. Our earnings release and the slides can be found in our earnings release and on Slide 2. Now, I'm pleased to turn the call over to Safie.
Thank you, Simon, and good morning to everyone. Thank you for taking time from your very busy schedule to be on our team at Air Products, delivered yet another excellent set of safety and financial results in second quarter of fiscal year 2018. Our adjusted earnings per share of $1.71 were up 20% versus last year. This is the 16th consecutive quarter, we have delivered EPS growth of more than 15%. We continue to be the safest and most profitable industrial gas company in the world with EBITDA margins over 34% for the quarter.
And most importantly, we have a great team of focused and committed people at Air Products who work hard every day to serve our customers We continue to improve our safety results with a reduction of 71% in our last time injury rate, and a reduction of 57% in our recordable injury rate. These results can only happen then all of our 15,000 employees around the world are totally focused on safety and continuous improvement. This same commitment to operational excellence is what is driving our strong financial performance. Now please turn and most profitable industrial gas company in the world providing excellent service to our customers. Now please turn to Slide number 5, our overall management philosophy that we have talked to you about many times in the last 4 years.
We continue to be focused on shareholder value, cash generation, capital allocation and an empowered and de centralized organization. On Slide number 6, you can see our 5 point plan, which has been the roadmap to our success over the last 4 years. Now please turn more than the promises that we made to you over 3 years ago. We have become the safest and most profitable industrial gas company in the world. We have delivered that we have divested our noncore assets and created the best balance sheet in the industry.
And we have delivered greater than 10% per year earning per share growth in each of the last two years. With our guidance for this We have delivered what they have promised. And as a result, we now have the balance sheet and are well positioned to grow air products as we move forward. We continue to see great opportunities in the three areas that I have talked to you about previous to mention them again: 1st, acquisitions of small and medium sized industrial gas companies or assets or listening industrial gas facilities from our customers where we own and operate the plant and sell industrial gadgets to the customer based on a fixed fee and their long term contract. This is what we call asset buybacks, and we see opportunities for oxygen, hydrogen and syngas plants around the world in this category.
And the 3rd area of opportunity is very large industrial gas projects around the world driven by demand for more energy, environmental requirements and emerging market growth. Now please turn to Slide number 8, where I would like to provide an update on one of our exciting projects that is a great example of the growth opportunities I just talked about. We announced the 1,300,000,000 Luance Singale joint venture in September of last year. As a reminder, the joint venture will be 60% owned and majority controlled by Air Products. Lu Anne provides coal, steam and power to the joint venture and the joint venture will supply Syngas to the WAN.
The joint venture will be paid a fixed fee by WAN under a long term contract. Our team has been working closely with Duane and the many government agencies in China. To get final approval so that expected this to be to announce today that due to the outstanding efforts of Air Products team, and the efficient and cooperative support of government entities in China, we formally closed this transaction just a few hours ago. I'd like to repeat that since this is not in our press release because it happened just a few hours ago. We now are formally closed on the transaction with Lu'An and we owned the facilities.
Now that the transaction is closed, we will begin receiving our monthly fee from Luanne based on the gradual startup of the facility. That is why they have included a modest contribution of about $0.04 in our updated 2018 full year EPS guidance, as well as including approximately $400,000,000 in our CapEx guidance. I would like to confirm that the expected transaction contribute about $0.25 to our earnings per share for full 2019. This project is a It is an asset buyback of an expanded scope project under the on-site business model. Now please go to Slide number 9, which shows you the results of our 3 key metrics for the quarter the year.
We remain committed to our goal to be the most profitable industrial gas company in the world as measured by each of obviously continues to be my favorite slide. It's great to see sustainable margins in the mid-30s range, The chart also reminds us how far we have come in only a few years. Now I would like to turn the call over to Mr. Scott Crocco, our Executive Vice President and Chief Financial Officer to discuss our results in detail. Then I will come back after comments from Corning and Simon to make some closing remarks, and then we will be pleased to answer your questions.
Scott?
Thank you very much, Safie. Please turn to Slide 11 for our Q2 results. Sales of $2,200,000,000 increased 9% versus last year on 4% higher volumes and 5% higher currency. We saw volume increases across all three regions, partially offset by lower activity from the Jazan project in global gasses. Excluding Jazan, volumes were up 10% with about half from new plants.
Pricing was up 1%, primarily driven by the China merchant business. Positive currency was driven by the euro, British pound and the Chinese RMB. EBITDA of $739,000,000 improved by 13% driven by the higher volumes, 34.3 percent was up 100 and 40 basis points, primarily on the higher volumes. Sequential volumes were down and margins were up due to the plant sale in China last quarter. Net income and adjusted earnings per share both increased by 20% versus prior year.
ROCE of 11.8 percent declined 50 basis points versus last year, despite the profit increase. This is because the denominator of The denominator is based on a while Q2 FY 'seventeen only had 1 quarter with the PMD gain. Please turn to Slide 12. We had one non GAAP item this quarter as we recognized an income tax benefit of $39,000,000 due to the restructuring of select foreign subsidiaries. Our adjusted Q2 continuing operations of $1.71 increased 28 dollars or 20 percent versus last year.
Overall, higher volumes increased EPS by $0.12 per share. Price and raw materials taken together increased EPS by $0.02. Net cost performance was unfavorable $0.06 as productivity was offset by a few factors, including inflation, higher incentive compensation, a legal settlement and the end of a cost reimbursement for our Port Arthur CO2 project. In addition, as you would expect, we are incurring higher costs associated with the exciting growth This cost major factor includes the transition service agreements or TSAs we have been providing to both Evonik and Versum. The Evonik TSA ended in Q1 and the Versum TSA ended in Q2.
We did take actions to reduce the costs associated with providing these services, but as expected, we saw a small timing gap in Q2. Going forward, we don't expect to see any impact from the TSAs. Primarily due to the euro, British pound, and the Chinese RMB. Equity affiliate income added $0.03 due to currency and underlying strength across several of our JVs, particularly Mexico. The overall tax rate was EPS by about $0.06 per share.
The other $0.03 was due to geographical earnings mix and a larger impact from accounting share based compensation. For the full year 2018, we expect to see a tax rate of approximately 20% including the benefit of the and other non operating income totaled $0.01 unfavorable. Now, please turn to Slide 13. We had another strong flow and investable cash flow was up almost $150,000,000 to a total of $300,000,000. Investible cash flow is the amount of cash we have discretion or a choice to deploy to create shareholder value.
In other words, cash available after we pay interest, taxes, maintenance CapEx and dividends. Through two quarters, investable cash flow is almost $650,000,000. Turning to Slide 14, I would like to update you on the capital deployment capacity that we have available for major projects and acquisitions. We have about $3,000,000,000 of cash and short term investments available to invest as of March 31st. Our debt balance as of March 31st is about $3,500,000,000.
As you know, we have an active dialogue with the rating agency and are committed to At this point, we believe this should enable a debt level of at least 2.5 times EBITDA or about $7,500,000,000. This provides about $4,000,000,000 of debt capacity to invest. So in total, we have about $7,000,000,000 we can deploy today while maintaining our AA2 rating. In addition, we expect to generate over $1,000,000,000 per year of investible cash, Again, that's after paying taxes, interests, maintenance CapEx and dividends. So over the next 5 years, we expect to have at least $13,000,000,000 available to invest, mix.
Now to begin the review of our business segment results, I'll turn the call over to Corning. Thanks, Scott. All three industrial gas regional segments delivered strong volume results with a combination of new plants coming on stream, and higher base business sales. EBITDA was up in all three regions with particular strength in EMEA and Asia I would like to thank our team who remains focused on driving improvement in our existing business, while we pursue exciting new opportunities like now please turn to Slide 15 for a review of our GASES America's results. For the quarter, sales were up 3% primarily driven by higher volumes.
Hydrogen demand was again strong despite the lower Gulf Coast demand during early in the quarter due to severe winter weather there. The merchant business achieved positive growth overcoming the terminated wholesale contract I mentioned last quarter. Overall Latin American merchant volumes were slightly higher versus prior year on strength, particularly in Brazil. Overall pricing impact We continue to work hard on pricing and just announced an argon price increase. Our and our customers' operations.
Our team worked tirelessly in challenging conditions to minimize I would like to extend my gratitude EBITDA was up 3 more than offset packs, while EBITDA improved maintenance costs to increase as several major plant turnarounds are scheduled for our hydrogen business. These plants operate at of turnarounds every 4 years or so. So, the maintenance costs will vary quarter to quarter and year to year. Some of these plants have been in operation for over 20 years, and the good news is that we've been able to extend the original contracts. As you would expect, more work is done during an outage for these older plants.
And this is part of our commitment to reliably serve our customers. Partially offsetting the higher maintenance, we expect a positive impact associated with a customer terminating a contract for an old flu gas desulfurization. Plant. Now, please turn to Slide 16 to review our Europe, Middle East and Africa business. Sales were up 36% with volumes up 20%, pricing up 1% in currency, up 15%.
Our new hydrogen plant in India in its 3rd full quarter of operation contributed about 3 quarters of the volume growth. Other on-site volumes were up driven by strong hydrogen demand in our Rotterdam franchise. And despite Easter shifting into Q2, the year, merchant volumes were up supported by both liquid bulk and packaged gases, with a modest contribution from a few small acquisitions. Overall, pricing was up 1% as a result of our pricing program success. EBITDA was up 29% compared of prior year, underpinned by the new plant in India, merchant sales and pricing actions and favorable currency.
EBITDA margin of 32 percent was down 160 basis points, but excluding the new plan in India, which comparatively high natural gas costs, EBITDA margin was up slightly from prior year. Please turn to Slide 17, Gases Asia, where we continue to deliver strong sales and profit growth. Sales increased 28% compared to pricing and 8% favorable currency impact. New Onsites contributed just over half of the 17% volume growth. Base business contributed about a third, while net acquisitions and divestitures added another 2%.
Pricing for the region was to retail sales in China remain positives for us. As we predicted in our last call, sequential pricing slightly due to demand easing with the lunar new year holidays and the spot opportunity last quarter. Between our approach to the market, and the improved market conditions, we believe we are positioned to continue the positive pricing trend, which began in Q3 of FY17. Strong volume, higher pricing and favorable currency drove the 30% EBITDA increase. EBITDA margin was up 70 basis points, primarily due to higher pricing.
Sequential comparisons were impacted and plant sale in the prior quarter and the lunar new year. Excluding the plant sale, profit was nearly flat compared to Q1 despite the lunar new year slowdown. Safety provided an exciting update on the Luan project, The team welcomes this new opportunity, while we continue to execute on the base business productivity and safety. In February, we announced a significant win to supply Samsung Electronics Second Semiconductor fab in Xian, China Air Products has been successfully supplying Samsung's first Sheehan fab since 2014. This is our 3rd major announcement really to Samsung since the beginning of comment on our Global Gases segment, which includes our air separation unit sale of equipment business, as well as central industrial gas business costs.
Sales and profits were down as we get closer to the end of the Jazan sale of equipment project. We expect this to result in lower revenue in FY18, while profits should be about flat. We continue to make great progress on the Jazan project. And as we have said, expect on streams in phases early in fiscal 2019. Now I'll turn the call back to Simon for a comment on our corporate segment.
Thank you, Corning. Please turn to Slide 19. Our corporate segment includes our LNG business, our helium container business, and our corporate costs. Sales were flat as LNG project activity remains weak. However, there are some signs of renewed interest in future LNG projects.
Corporate costs were up slightly in part due to the higher growth related costs that Scott mentioned. For FY18, we still don't anticipate an headwind for the corporate segment. Now, I'm pleased to turn the call back over to Seifi for a discussion of our outlook.
Thank you, again, Simon. Let me take a few moments to talk about Air Products' exciting future. Our team around the world feels very proud of what we have achieved in the last few years. Our safety, productivity and operating performance continue to provide us the opportunity to build on growth. We remain very optimistic about Air Products' future.
While we cannot predict or control political or economic developments, we do have control over the operational performance and growth of air products, and we are confident that we will continue to deliver to our on our commitments. As Scott discussed, our very strong balance sheet and cash flow provide us the capacity to invest at least $13,000,000,000 over the next 5 years. I continue to believe that we will be able to develop win and execute projects in our core industrial gas business so that we can deploy all of this cap in the next 5 years. We continue to see great opportunities in mergers and acquisitions, asset buybacks and large new projects as well as significant number of more typical industrial gas projects. Now please turn to Slide number 20.
We are all working very hard every day to be the safest, most diverse most profitable industrial gas company in the world, providing excellent service to our customers. Continuing our positive momentum We have again increased our guidance for the year to a range of $7.25 to $7.40 per share. At midpoint, this is up $0.08 from the guidance we gave you last quarter, in part due to the closing of the Lu'An project. Our us. We remain confident in our ability to deliver on our commitments to grow EPS by at least 10% each year in the foreseeable future.
For quarter 3 fiscal year 2018, our earnings per share guidance is $1.80 to $1.85, up 9% to 12% over last year. Including the Iran project, we now expect our capital expenditure to be in the range of $1,800,000,000 to $2,000,000,000 in fiscal year 2018. Now please turn to Slide 21. Where I want to point out, as I have done before, that we believe our real competitive advantage is the commitment and motivation of the great team we have at Air Products. This is what allows us to generate the superior safety and operational performance that you can see for their total commitment and hard work, and I'm very proud to be part of the spinning team.
Now we are delighted to answer
And And we will take our first question today from Don Carson with Susquehanna. Please go ahead.
Yes, a question on base business. Scott, you mentioned that if you take out Jazan, your volume was up about 10% half new plant, half base business. That appears to be a pickup from last quarter when I think base was only contributing about 2%. So can you comment on the base business outlook or merchant loadings improving? And as a result, should we be expecting some some good incremental margins going forward from the base business.
Scott, would you like to?
Sure. As you pointed out, we had good the performance on the base business across each of the geographies, fundamental improvements. And who knows what the future holds, but we feel as though, the loadings will continue to improve. I think as we mentioned in the past, we've been in Asia. We're in the low 80 percent capacity utilization.
And in Europe, we've crept up to upper 70s. So, that's improved as well. So, we feel very good about what we've seen this quarter in our cautiously optimistic about the outlook.
Don, this is Seth, if I may add. We do see positive momentum in volumes. And obviously, if there is positive momentum on volumes, pricing will follow. So we are actually or bullish than they have been before.
And safety, what's the competitive environment for bidding on some of these major new projects? I assume your primary competitors have other issues that caused them not to be as aggressive in going after some of these new projects. So who's the real competition? And what does the, competitive environment imply for returns on these new projects?
Well, the competitive environment hasn't changed that much. Our major competitors are all very strong and they compete with us on a project and the customers make sure that they get competitive bids. But as you know, we have a return expectation on these projects, which we have closed very publicly at least 10% internal rate of return. And if because of the competitive pressure, the returns are below that, they just don't take the projects. So that's our guiding principle, whether there is addition or not.
We obviously have had a lot of good projects that's significantly higher than that, but that is our threshold. And if, another one of our competitors wants to take the project for lower return, then they get it.
Okay. Thank you.
Thank you.
Thanks. And the next question will come from John Roberts with UBS.
Thank you. Could
I just confirm that you're still in discussions to possibly acquire some of the assets for sale related to the Praxair Linda merger?
John, good morning. I cannot comment on that, please.
Okay. And then, the $0.18 non GAAP benefit in the quarter. Could you just talk about what were the activities that generated that?
As part of a restructuring of a acquisition that we did some time ago when we moved some legal entities and, we're able to, to get that sort of a benefit. And so as I mentioned, some foreign subsidiaries. We made some adjustments that contributed to that.
We have been working on this thing for a while. It's a matter of the consolidation of some of the subsidies that then you consolidate it, you get attack benefit and that is what the number is.
And then maybe since the first question couldn't get answered, unfavorable cost year over year on Slide 12 that you had, what would you expect going forward without the TSAs and the CO2 reimbursement issue?
We will continue to have those kind of costs because, I mean, it is a fact that we are working on significant number of projects. And as you know, the current rules are in the old times when you were working on these projects, out of your legal costs and your people costs and so on, you used to charge them to the project. Now you can't do that. You expense it. So if we are going to deploy $13,000,000,000, we need to do to bid on a lot of projects and the orbiting on those and we are expecting the costs.
So that is a natural thing that is going to be with us as we've in these projects.
Thank you.
Next is Duffy Fischer with Barclays.
Yes, good morning. Can you comment just on the strength you said you were seeing down in Mexico? Is that just general Mexican economy getting better or are you guys taking some market share down there or is there something dynamic happening with your business?
Corning is kind of in charge of our business in Mexico, and we'll make a comment. Good morning.
Yes, I'd say in
Mexico, excuse me, we see improvement across several of the business lines. The, packaged gas environment is good. There's a lot of infrastructure around pipeline projects, that sort of thing that, are going on and continue. And we've seen a pickup in the nitrogen injection for the oil field business there. So I'd say relatively broad based.
And just reminding everybody that supports an equity affiliate for us, so you wouldn't actually see the volume in our reported numbers. Fair.
And then, can you comment on the progression of the Yulin City project? What's the timeline look like there? And when might we get an announcement on that project?
We continue to make progress. That is a huge project and it involves a lot of different entities. I don't want to put a timeline on it because, from a negotiating point view. We don't want to sound too anxious, but, but we are working on it and it is moving forward, definitely.
Great. Thank you guys.
Thank you.
And we'll go to Steven Byrne with Bank of America Merrill Lynch.
Hi, thank you. What would you say are the primary value drivers for owning and operating both the used in the gasifier in the Luan project? Is there a, an operating efficiency that you have by having both Is the combination improve the return on invested capital? Or is this an example of of more gasifier projects that you would try to differentiate yourself for?
Well, there are several benefits. 1 is obviously operational efficiency and all of that that you mentioned. But the fundamental driver is that when we were just supplying the oxygen, we had deployed $300,000,000 of our business at a return. Now we are deploying $800,000,000 of our business at the same kind of return or even higher. So that means that This is an opportunity more capital at the kind of returns we are talking about.
So I mean, everybody gets excited about GDP going up 2%. And creates growth. But like this, we are creating growth despite GDP. It gives us opportunity significantly deploy additional amount of capital.
And say for you, you always comment on the safety performance of the company. Would you say commensurate with that? There has also been an improvement in operating efficiency of your of your facilities and or less downtime?
Well, of course, because look at our up our EBITDA margin, we have gone from 23%, 24% to 34%. That is, almost $700,000,000 to $800,000,000 of improvement. Obviously, that has come up through the fact that the company is running better and is much more efficient. Yes. I think that is one of I mean, safety is the emotional responsibility.
We don't want anybody to get hurt, but a company who has a good safety record. At the levels that we are achieving definitely has excellent operational efficiency.
Thank you.
Thank you.
Next is Jim Sheehan with SunTrust.
Thanks for taking my question. Can you talk about merchant operate operating rates in North America well. I think you covered the other regions, but didn't mention, North America.
Corning can comment on that?
Yes. So we had the termination of that very large, long term wholesale agreement. And I'd say we have largely replaced that on the Locksmith side. I think the Argon is going to take a little bit longer. However, certain tightness in the Oregon market has certainly helped us to move that along.
And today, I'd say we are in the mid to slightly below mid-70s range in terms of our loading. But that's an improving story for us. And I think the ground the team has covered in replacing that volume is just tremendous performance.
Great. And as far as crude oil prices moving higher, do you see that factoring into your 2018 outlook? Is that a major tailwind for you?
Jim, we have always said that crude oil prices doesn't affect our business that much because we are not very involved in the upstream side of the oil business. So that's not going to be material to us.
Thank you.
Thank you.
And we'll go to Chris Parkinson with Credit Suisse
Perfect. Thank you. Can you just walk us through, just an update on Jazan given a little bit of noise in the quarter? And what your rough expectations are for the balance of fiscal year 2018? And more importantly, just anything preliminary on your thoughts on the cadence ramp in fiscal years 2019 2020.
So any thoughts on that would be greatly appreciated. Thank you.
I'm sorry, Chris. The connection is not that great. So I didn't fully understand you. Simon, can you help me
So, Chris, I think your question was, Safi, could you give an update on Jazan kind of where we stand on the project and how it looks over the next couple of
Sorry, Chris. I didn't hear you on the phone that I am. Chris, we are making no, no problem at all, not 2 or 4. We are making excellent product on Jazan. We are ahead of schedule.
We are close to 90% done with the project. And we fully expect that to come on a stream at the time that we expected. So we are it's a very positive a very positive story for us. It has, demonstrated to our very, very important customer, Aramco, that air products can deliver and air products is capable of executing a $2,000,000,000 project in the middle of the desert. So It's a very good story for us and it's a great achievement for our people.
We are all very proud of them.
Great. And just a second question on backlog. The vast majority of your backlog is overwhelmingly on-site sticky business. But can you comment on any particular end markets you'd like to further increase your exposure to over time? Is CO2 something you should be paying incremental attention to?
Given recent transactions. Just any broad insight on your thinking there would be appreciated. Thank you.
Absolutely, Chris. On a very macro basis, the always say energy environment and emerging markets. But particular sectors, we are very focused on the oil and gas sector, obviously, in the downstream side, especially chemicals and also co gasification. Those are the areas that we are very focused and there are significant amount of as you know, a lot of the major old companies are switching from, just providing crude to going downstream. You see a major shift in what Aramco is doing.
There is the shift because of the cheap natural gas in the U. S. And there's obviously the coal gasification in China and there are significant large projects in emerging markets. So as I said, energy environmental requirements and emerging markets. That's what we are focused on.
And we obviously like the on-site business.
Fair enough. Thank you very much.
We'll go to David Begleiter with Deutsche Bank.
Well, thank you. Savi, just on America's pricing, is pricing proving to be more difficult to get this cycle than prior cycles? And if so, why?
David, pricing, we are selling in our rock and Lynn and Lara, basically, we are selling a commodity. Pricing is subject to supply demand and utilization of our facilities. Industrial production in the United States in the last year to year is up around 4%. And we have always said that if you see industrial production go up, utilization rates going up, then pricing will follow. So that's just a natural course of it.
And we seem to be in that cycle right now. And if you see the results of everybody else, it points to that direction. Very good. Overall industrial production activity.
Understood. And just in the Q3, you mentioned some additional maintenance costs in the Americas, offset by the contract formation. Could you quantify those elements that might impact Q3 Americas profitability?
Quantifying it would be difficult because then we give too much information a very competitively. But the fact is, as Corning mentioned, A lot of these plants that are undergoing so called turnaround are very old plants that we have won contracts 20 years ago. The good news is that all of these contracts have been renewed and therefore, this is a little bit of a life extension some of that we report in maintenance CapEx and some of that is an ordinary maintenance expenditure that goes to our bottom line. It is a positive development rather than a negative development.
Right, right.
Okay, now very good. Thank you very much.
Next is Vincent Andrews with Morgan Stanley.
Savey, I'm just wondering as you think out over the next 5 years and the $13,000,000,000, I mean, do
you think there's going to
be an opportunity to raise that sort of 10% minimum return target. I'm just thinking improving economy, rising interest rates, those types of things. I think there's an opportunity to bring that up.
Vincent, 1st of all, good morning. To answer your question, Vincent, when you say 10%, 10% is the minimum, we have won a lot of projects at higher than that rate. So whenever we are bidding on a project, we obviously we do not price things on a cost basis. We price things based on the competitive nature and quite honestly, but the market there. So we have had projects, which have been 15%, 16% and the 10% that we keep mentioning is that, that is our kind of, bottom line that below that we don't take projects.
Okay. So nothing will change there. And just as a follow-up, could you just remind us what you're expecting from foreign exchange and guidance versus last quarter?
Scott, do you want to mention this?
Sure, sure. So let me take you through. Thanks for the question, Vince. Let me take you through. So as we've mentioned this quarter, we had versus prior year currency impact of $0.09.
And at a high level, that's, the euro is at $0.03 RMB and the pound is at $0.02 and then everything else makes up the remainder of about $0.02. That's on top of what we had last quarter of about $0.06. And as you know, what we end up doing is we just move sideways from wherever the latest rates are. So when we look forward now for the full year, currency would be kind of more on the closer to the $0.25. We had previously said maybe $0.10 to $0.15, but just unless developed, it's more like $0.25.
Let me also just for everybody, just to reiterate a couple of the sensitivities that we try to provide you. So first grounded in that these are transactional exposure, right? So there's no economics. It's just doing the, mathematically, I'm sorry, translational exposure. It's just mathematically to bring it back into U.
S. Dollars. So for the euro, a 10% swing of the euro is about $0.09 per year. EPS, same with, with an RMB 10% swing is about And then the pound, the Korean 1, the Thai dollar, and the Canadian dollar, each individually would be about $0.03 to $0.04 on annual basis, EPS, if there's a 10% swing. So I wanted to take you through that a little bit and share with you not only what we're seeing and projection for the year, but also please.
Hopefully, that's all.
That's very helpful. Thank you very much.
Thank you.
We'll go to P. J. Juvekar with Citi.
Yes. Hi. Good morning.
Good morning, P. J. How are you doing?
Good, good, Savi. Savi, do you consider seeing gas as a core industrial gas? And when you bid for these projects like Luan or YK are you running into other gas suppliers in the traditional competitors or is the field wide open for you?
No, they do run into them. They have their ambitions of their own and in a lot of the projects that done. They have been there. They have relationship with these customers. So it's not as if they have a totally open field and a lot of times customers don't share with us exactly whom they are talking to, but we operate on the basis that on every project that we do They are there and our competitors are very smart people.
They see this thing as an opportunity and they are active.
Okay. And then geographically, in which region do you think you have the highest leverage to incremental sales? Or in other words, where do you think you have the highest incremental margins going forward?
Right now, the highest incremental margin that we have is actually the United States for the total business, the other, around 42%. But as we move forward, we think the highest growth area for us will be emerging markets. It will be China. It will be Middle East. It will be places like coming Russia and places like that.
Those are the markets where there are significant growth opportunities in terms of the actual sales dollars. But in terms of margins, currently our highest margin region is the United States.
And now we'll go to Kevin McCarthy with Vertical Research Partners.
Yes, good morning. A number of companies across the chemical industry have cited rising logistics costs as a challenge. I'm wondering if you're seeing that and if so, what mechanisms you have in place or might need in the future to combat that tension?
For us, that is not an issue, Kevin. You know, our business very well. Our business is very, very local. And the logistics would apply if you have an extensive packaged gases business, which is gone. So for us, that is not an issue, Ken.
Okay, very good. Then second, the question on China, if I may, we've obviously seen a lot of supply restrictions for environmental reasons. And those seem to be more pronounced over the winter time. I'm wondering if there's any impact the seasonality of Air Products business in China related to that or if that's not a factor and we can rely on historical patterns?
There is no impact on us. We can rely on historical factors. And beside that, the more pressure environmentally, the better it is for us for the long term because then coal gasification becomes even more pronounced.
And we'll go to Bob Koort with Goldman Sachs.
Thanks very much. Courtney, I might have missed it, but could you give me a little more sense of in the Americas, how I think you showed a $23,000,000 sales improvement, but operating profit actually declined. What were the components that drove that?
Well, so we had the base improvement. We had some of the cost side that Scott mentioned that, let's say, a little bit less of an operating cost, but still there in our P and L.
Okay. And then, Scott, it seems like maybe at the margin since your last update on guidance, the FX numbers a little better. You're throwing the land in there now and you've got maybe the tax guidance is at the better end of things as little surprised maybe there wasn't more ambition in the earnings path. Is that a function of maybe some of these other costs continuing to stay elevated. Why not maybe a little bit more ambition on your guide?
Bob, we did we are raising the by 8% our guidance. So we were at 7 15 to 7 35 Now we are at $7.25 to $7.40. So we have increased the bottom of our estimate by at least $0.10. So, as we go forward, obviously, very difficult to predict exactly what the economy does. We are seeing a positive momentum.
And obviously, at the end of next quarter, if teams are positive, we will increase our guidance. But at this time, we thought it's prudent to stay where we are, but we have given you all of the elements. But, you can make a judgment about where we are conservative and then be or not.
Got it. Thank you, Steve.
And we'll go to Jeff Zekauskas with JP Morgan.
Good morning, Jeff. How are you this morning?
Good. Maybe I'll try Bob's question in a different way. I think operating profit and EBIT has been flat for the first half, year over year, even though you're growing your volumes in the Americas, 4% or 5%, shouldn't your returns be higher than what you're reporting?
Well, obviously, I would like it to be better, but we have, as Scott mentioned, Corning mentioned some of the costs that we have in terms of some of the turnaround costs and some of the costs for pursuing other projects and all of that. And the fact is that we did have some one offs that helped us last year that do not exist this year. So if you really take the 1 offs off, the ore up and the ore, I obviously go through the details of this thing, for every dollar of incremental dollar of sale, we are getting $0.40 to the bottom line. So I'm not worried about the fact that we are losing margins so on. But then you put all of that for a big company like us in aggregate, the result is what you see.
And earlier in the call, I think Scott commented on the decrease in returning return on capital employed year over year from $12.3 to $11.8. And I think he attributed it to some one time items, but if you look at the return on capital employed through the last 4 or 5 quarters, it keeps moving incrementally lower. And it looks like your incremental return on capital is around 9%. Can you talk about what's going on and whether that's noise or when you expect your return on capital to go up?
Scott is most qualified to answer that. And then if there is anything, I'll make you comment.
Sure. Thanks, Evan. Just back to my prepared remarks. So as part of the gain that we had almost $2,000,000,000 in PMD that goes into the base of that calculation. That dilutes the ROC calculation about 200 basis points.
So that's my comment around just the mathematics as it, comes for five quarters in the denominator associated with the gain that we booked last year in PMD on the increment though. So that's the math of that. We've got your basic question around 10% minimum after tax internal rate of return on all these projects. And as those are done and as they come out of the backlog and start contributing, that will be accretive to the return on capital as well.
One other thing that I would like to add, Geoff, is that The return on capital, the way you calculate it, if you are comparing us to others. Since we have a lot of cash, we are showing, that decreases. If you actually if we calculate our return on capital, the way other people are calculating it, our return on capital is about 15%. So there is that subtle thing also.
And we'll go to Mike Harrison with Seaport Global Securities.
Hi, good morning. Good morning, Mike. How are you doing?
Doing well. Thank you, Seifi. A couple of questions on the Luan JV and just kind of modeling related questions. You talked about that as receiving a monthly fee. Should we think about that as being more of a tolling arrangement in which you receive a sort of relatively low revenues at relatively high margins.
Or do you end up taking any ownership of the raw materials, which would make it higher revenue and lower margin?
We do not take any ownership of the raw material.
And then in terms of you mentioned the annual EPS expectation of $0.25 But for fiscal 2018, you're only including $0.04, if I understood correctly in the guidance. Is that due to some startup headwinds and how much should we think of those startup headwinds as costing you in the 3rd and 4th fiscal quarters?
No, it's not a startup headwind. It is there are 4 gasifiers, my end. And we get paid the monthly fee based on these gasifiers coming on a stream. So obviously, we are not starting out of the 4 gasifiers at the same time. So when the first gasifier comes on a screen, we get a certain amount.
The second the 3rd and the 4th. And we expect to have all of the 4 gasifiers on stream by 20 19, which is in October, and then we will get what we will get on an annual basis.
All right. And if I can ask you one other question, just related to the commentary on the LNG heat exchangers Obviously, still under some pressure now, but sounding like that activity is picking up. What's your forecast for maybe what that does as we look at 2019? Thank you.
We have not seen, and we are not expecting any substantial increase there. Therefore, we have said that we don't really expect that business to come out of the doldrums until 2020. But if it comes sooner, that would be a positive, but I don't expect it.
Thank you very much.
Thank you, Mike.
And now we'll go to Mike Son with KeyBanc.
Hey, good morning. Nice quarter. Thank you, Mike. Safie, when you, you know, Luan's going to be a nice contributor here in 'nineteen. You have other projects and I take a look at the major project slide coming on in 2019.
How much can those contribute to earnings growth next year And so yes, so that's the question.
We don't disclose that specifically, but I have said that we expect 2019 that we increase our EPS by at least send. So some of that will come from those. But, if you don't mind, did you want to disclose this specific contribution from new projects because then it makes it very easy for people to tackle exactly what our returns are and we don't want to do that.
Okay. And then as a follow-up, the electronics market on that project slide,
has been a big, been a
good area for you this year. And in the backlog, how big of an opportunity? How much capital can you deploy in that market over the next couple of years?
Well, that market is growing very fast right now. I think the year. If you add up, we probably have contributed more than $300,000,000 of new projects in there. And what will happen next year depends on the new fabs that people build and all of that. But, I like Corning to make a little bit more comment on this
I was just in China meeting with the team, which is where a lot of this activity is China, Korea, Taiwan right now. And I would say the prospect list is still quite robust for us. So we expect another good year of hunting.
Yes. And I'd like to add that we are very, very well positioned, by the way, on that one.
We'll go to Lawrence Alexander with Jefferies.
Good morning. Could you clarify 2 things? My impression with the traditional on sites was that once you had the oxygen ASU up and running, you would be paid your fee, regardless of if the customer was operating. But it sounds as if with the gasifiers, if the gasifiers are down in, say, 2020 or 2025, you would then lose that part of the revenue stream. I just wanted to see if that's correct that that's a slightly different model.
Sorry, interrupt
you. That is not the case. The reason that we are getting the fee is we are getting a fee right now for the startup. Once we get we have all of the 4 gasifiers running, then in 2020, if because of the customer demand, only 2 gasifiers are needed to run, we still get our full BFC. So the market is exactly the same.
It's just that during the startup period.
Okay. And then the second one, I guess, just to flag one of the previous horses again, I think you made a comment that you were more bullish than you were on the last quarter about volumes and then price following in the merchant business. FX is about a $0.10 tailwind. The, you get about $0.04 or $0.05 from the JV. And, but you're moving the range by only about $0.10.
So the implication is that the growth investments or the efforts to pursue other growth projects is an incremental maybe $0.05 or $0.07 kind of drag. Is that the way you're thinking about it? Or is it more just that you're allowing for some squishness in the economy just because it's only halfway through the year and you just want to have that cushion? I guess what I'm getting at is, are you ramping up growth investments to take advantage of the tailwinds?
I think, I don't want to confirm or not confirm the exact numbers that you quoted, but do see the positive effects of the FX. We do see the positive effect of, Blue Anne coming on stream right now. But as we have been saying, we do see higher maintenance costs because of the turnaround of some of the hydrogen facilities, and we do see higher costs in terms of pursuing other opportunities. I mean, like Yingville last year, it cost us $55,000,000 that we had to absorb in our results. So those are the two principal reasons that we haven't increased our guidance by more than 10¢.
Perfect. Okay. Thank you.
Thank you.
And gentlemen, there are no other questions at this time.
Very good. Well, in that case, then, I would like to thank everybody again for being on the call. Thanks for taking time from your very, very busy schedule to listen to our presentation. We do appreciate your interest and look forward to discuss our results with you again next quarter. Have a great day.
Thank you very much.
And thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation and you may now disconnect.