Good morning, and welcome to the Air Products And Chemicals First 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, Don. Good morning, everyone. Welcome to Air Products first quarter 2018 earnings results teleconference. This is Simon Moore, Vice President, Investor Relations. I'm pleased to be joined today by Safi Gisemi, 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 for this call are available on our website at airproducts dotcom. Please refer to the forward looking statement disclosure on Page 2 of the slides and in today's earnings release. Beginning this quarter, we adopted the new pension accounting standard. Adopting this accounting standard is required for all companies we chose to adopt earlier than many.
This new accounting standard does not costs to other nonoperating income and expense. For FY 2017, this results in a modest increase in operating income and EBITDA of about $4,000,000 and increases margins by 10 basis points. This change provides a better reflection of our operating performance by moving the historically more volatile components of pension expense, including interest cost, expected return on assets, and amortization of deferred amounts to non operating. Service costs remain in operating income as these represent the benefits earned in the current period by planned participants. Again, just to emphasize, this doesn't change our pension or overall costs.
It just moves a small component of costs from within operating income to non operating income. We've used updated historical information for prior period comparisons in the results reported today, And you can find a summary in an appendix slide and more detailed consolidated and segment information in the 8 K we filed today. 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 Our talented and committed air products team delivered another excellent quarter. For the first quarter of fiscal year 2018, Our record earning per share of $1.79 was up 22% versus last year. This is the 15th consecutive quarter that we have reported year on year EPS growth. This is also the 3rd consecutive quarter we have delivered EPS growth of more than 15%.
We generated strong cash flow and are pleased to announce a dividend increase of 15% per share or 16% the largest per share increase in our history. Our annual dividend is now $4.40 per share which equals to returning almost $1,000,000,000 per year to our shareholders. We continue to be the safest and most profitable industrial gas company in the world with EBITDA margin of over 33%. And most importantly, We have a great team, totally focused on delivering strong operating performance while successfully winning exciting new growth opportunities. Now please turn to Slide number 3.
You can see the significant progress we continue to make on improving our safety results with a reduction of 71% in our last time injury rate and a reduction of 52% in our recordable injury rate. This improvement only happens then all of our 15,000 employees around the world are totally focused on safety and operational excellence. This same commitment is also driving our strong financial performance. Now please turn to Slide number 4 which is our goal for the company. As I shared our last quarter's call, we have elevated our commitment to diversity and inclusion by explicitly incorporating it in our goal.
This does not dilute our focus on being the safest and most profitable. In fact, being the most diverse will contribute to maintaining our position as the most profitable industrial gas company over the long term. As I've always said, the degree of commitment and motivation of our people is the real sustainable competitive advantage that we have. We want to ensure that we are providing opportunities and the right environment for everyone to conduct, to contribute and succeed in our company regardless of their gender, color, race, religion, orientation, country of origin or any other dimension of diversity. Now please turn to slide number 5, our overall management philosophy that we have talked to you about many times.
We continue to be focused on shareholder value, cash generation, capital allocation, and an empowered and decentralized organization. On Slide number 6, you can see our 5 point plan which has been the roadmap to our to again remind everyone of the progress we have made in the last 3 years. We made promises and we have delivered. We have become the safest and most profitable industrial gas company in the world. We have divested our noncore assets and created the best balance sheet in the industry.
And we have delivered greater than 10% per year EPS growth in each of the last 3 years. And our guidance for this year implies another year of over
10
We have delivered, but we promised, and now we are well positioned to grow air products. The great thing is that we do have the balance sheet to do it. Now please turn to Slide 9 to discuss the areas of opportunity for us to invest and moved their products forward. 1st, acquisition of small and medium sized industrial gas companies or assets or businesses from other industrial gas companies. The second area of opportunity is to purchase existing industrial gas facilities from our customers, where we own and operate the plant and selling industrial gases to the customer based on a fixed fee under a long term contract.
This is what we call asset buybacks, and we see opportunities for oxygen and hydrogen plants around the world in this category. We also see the opportunity to expand our scope of supply to include the operation of existing gasification units to supply Syngas to our customers based on long term contracts. Essentially, these opportunities something that they do every day, but with the existing rather than new production assets. The Lu'An project we described before is a perfect example of this area of growth for us. We expect to do more of these in the coming years.
And the 3rd area of opportunity is very large industrial projects around the world, driven by demand for more energy environmental requirements and emerging market growth. The Jazan project in Saudi Arabia is a great example of how big these opportunities can be. The plant we are building in Jazan is the largest project in the history of the industrial gas industry. With close to $2,000,000,000 of capital investment. Some of these new large projects that I'm talking about can also include gasification and syngas supply.
The Yang Kwon project that we announced is another great example of that. Now please turn to Slide number 10 to discuss some of the our some of our recent successes to grow products in line with what I just described, which is consistent with our strategy. 1st, the tremendous opportunity for Air Products to expand our well proven on-site business model to supply Syngas. And we have some great recent examples. In September, we announced the $1,300,000,000 luanceing gas joint venture.
We continue to make progress on the necessary approvals and hope we can close on this joint venture at some point during fiscal year 18. However, as we did in October, there used some uncertainty in the timing of the necessary government approvals We have not and I'd like to stress, we have not included any contribution from Lu'An project in our EPS or CapEx guidance for fiscal year 2018. We will continue to keep you updated on our progress. In November, we announced the $3,500,000,000 Syngas joint venture with Yang Quang in China. We also continue to make Chris on finalizing the contracts, and we'll keep you updated.
And earlier this month, we announced an agreement to acquire Shell's coal gasification technology, supporting our Syngas supply position and supporting our strategy in this area. Finally, earlier this week, we announced an agreement to supply Syngas to BPCL's phase 2 petrochemical project in Koji, India. Our new facility will be integrated with the large plant we brought on a stream in 2017 to supply their refinery. In terms of acquiring assets or plans or the so called asset buyback that we have been talking about, In December, we announced an ASU asset buyback and long term industrial gas supply agreements for Junmai, who are in China. A great example of a customer becoming more comfortable with the outsourcing sale of gas model.
And they recently signed and closed on another deal to acquire 3 existing large air separation unit assets in China and have began supplying customers and their long term agreements. And finally, we continue to see great opportunities in the new industrial gas projects around the world. We announced new projects in China and Korea. Notably, these include major contracts expanding our supply to 2 of Samsung's major sites in Korea. Finally, we continue to make great progress on the Jazan project and currently expect on stream in phases starting in fiscal year 2019.
As I mentioned, yesterday, we announced the largest dividend increase in Ed Products history, continuing our commitment to return cash to shareholders. Now, Please go to Slide number 11, which shows you the results of our 3 key metrics for the quarter and the year. We remain committed to our goal to be the most profitable industrial gas company in the world as measured by each of these three key metrics. We remain focused on driving further improvements as we move forward. Finally, please turn to Slide 12 which continues to be my favorite slide.
It is great to see sustainable margins in the mid-thirty percent range, and it reminds us how far we have come in only a few 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. 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. Before I discuss our results for the quarter, I would like to provide Please turn to Slide 13. First, let me talk about the income statement impact for Q1. Although the reduced U. S.
Tax rate under the new tax act was not effective until January 1, 2018, which is after the end of our fiscal Q1 this quarter's results reflect our estimated blended tax rate for the full by about 260 basis points, which increased EPS by about $0.06 per share. As you can see, the positive impact of the lower U. S. Tax rate was partially offset by other tax act changes. Including reduced benefits from the U S production activities deduction and changes to compensation deductions.
For the full year 2018, we expect the new tax act to reduce our tax rate by about 250 to 300 basis points to somewhere in the range of about For fiscal year 2019, we expect a similar net impact as the full year effect is approximately offset by the repeal of the in 2019. So I would use about a 20% to 21% book effective tax rate to model air products going forward. Turning now to the tax Please keep in mind these are based on our $453,000,000 to recognize the liability associated with with about $32,000,000 recorded in equity affiliate income. The deemed repatriation tax will be paid over the next 8 years. Partially offsetting the charge, we had a benefit of $214,000,000 due to revaluing our U.
S. Deferred tax assets and liabilities at the lower tax rate. Finally, let me comment on the expected cash tax impact. For the full year 2018, we expect a modest reduction in cash taxes from the new Tax Act of about $15 to $20,000,000 as the benefit from the lower corporate tax rate is mostly offset by the tax on the expected repatriation of foreign cash from subsidiaries and joint ventures. So we would still expect cash taxes in the range of about $400,000,000 for 2018.
For 2019, we expect a cash tax reduction from the Tax Act of about 70 to $80,000,000, with the positive impact of the full year of the lower tax rate and the immediate expensing of capital investments being partially offset by the first payment As Safie mentioned, this was another record quarterly EPS. Congratulations to the Whole Air Products team. Sales of $2,200,000,000 increased 18% versus last year as volume plus price were up 15% and currency added 3%. Volumes were up 13% with positive contributions from all three regions, driven by new plants, a contract termination and associated plant sell in Asia, and base business growth. The Asia plant sale was about 6% of the growth.
New plants were about 5% and base business growth was about 2%. Pricing was up 2% driven by the China merchant business. Currency was positive, driven by the euro, British Pound and Chinese RMB. EBITDA of $735,000,000 improved by 12% driven by the higher volumes and China pricing. The Asian contract termination of plant sale negatively impacted margins by about 90 basis points.
And the significant amount of energy pass through on the new hydrogen plant in India due to the high natural gas prices negatively impacted margins by 40 basis points. Excluding these two items, EBITDA margins were down 30 basis points, primarily due to higher planned maintenance costs. Let me provide some One of our on-site steel customers in China had a change in ownership and approached us to end our long term supply agreement with them and purchased the plan from us. The customer had no contractual right to do this, but we are satisfied with the outcome and the negotiation and are pleased to reduce our but will not see the sales and profit from the sale of gas going forward. Sequentially, EBITDA was down 4% primarily due to planned maintenance outage costs and lower OIE.
Net income increased 23% and adjusted earnings per percent versus prior year. ROCE of 11.9 percent declined by 80 basis points versus last year and 20 basis points sequentially, despite the profit increase. This is because The denominator is based on a 5 quarter average and this now includes four quarters with the significantly higher denominator as a result of the gain from the PMD sale. Please turn to Slide 15. And totaled $1.09 per share, as I discussed earlier.
Our adjusted Q1 continuing operations EPS of $1.79 increased $0.32 or 22 percent versus last year. As I mentioned, this includes the $0.06 benefit from the new Tax Act. Excluding this benefit, our EPS was still up 18%. Overall, higher volumes increased EPS by $0.19 per share. This includes $0.08 for the contract termination of plant sale in China.
Price and raw materials taken together increased EPS by $0.08 driven by the China merchant pricing. Net cost performance was unfavorable $0.15 as we had some positive items last year that didn't repeat as well as higher planned maintenance costs and inflation. As a reminder, included in the cost major factors is the other income and expense line on the consolidated P and L. As I shared last quarter, we are providing services via transition service agreements or TSAs, to both Versum and Evonik. The cost to provide these services are primarily in SG And A.
The payment we received for these service was about $6,000,000 this quarter and is shown in the other income and expense line. This is down from recent quarters as the Evonik TSA ended during Q1. We expect the Versum TSA but would expect to see a brief gap between the end of the TSA income and the cost savings. Currency and foreign exchange gains and losses were $0.06 favorable, primarily due to the euro, British pound and RMB. Equity affiliate income added $0.03 due to underlying strength across a number of our JVs, particularly in Mexico.
Note that this excludes the new Tax Act related charge I mentioned earlier. Other nonoperating income added $0.04 primarily due to interest income. The overall tax rate was Interest expense, non controlling interest, and shares outstanding totaled $0.01 unfavorable. Now please turn to Slide 16. We had another strong cash flow quarter in Q1 with distributable cash flow up almost $100,000,000 to over $500,000,000.
You will see we have an updated slide that more closely aligns with our current situation. Investable cash flow is the amount of cash we have discretion or a choice to deploy. It is after we pay interest, taxes, maintenance CapEx, and dividends. Certainly, dividend payments create value. And given our 36 year track record of raising dividends, we don't expect this to change.
We then think of funding our growth capital including acquisitions from our cash and balance sheet capacity as well as from our investable cash flows. Investible cash flow is what we've been describing as more than $1,000,000,000 per year. You can see we generated almost $350,000,000 of investable cash flow in Q1. As Safie mentioned, we did close on a few acquisitions during Q1, and have included these in our CapEx and earnings guidance. Our total growth CapEx for Q1, including the acquisitions is about $400,000,000.
Again, we think investable cash flow is now the right metric as it represents the cash generated that we can choose how to deploy in order to create shareholder value. Turning to Slide 17, I would like to update you on our capital deployment capacity. As I just mentioned, we view this capacity as available to enable projects and acquisitions. We have just over $3,000,000,000 of cash and short term investments as of December 31. After maintaining a modest operating cash balance, we have just under $3,000,000,000 of cash available to invest.
Our debt balance as of December 31st is about $3,500,000,000. As you know, we are committed to managing our debt balance to maintain our to 2.5 times EBITDA. Based on a trailing 12 months EBITDA of $2,900,000,000, This would support a debt level in the range of about $6,000,000,000 to $7,000,000,000. So in total, between our available cash and additional debt capacity, we have about $6,000,000,000 we can deploy today, while maintaining our AA2 rating. As I discussed on the previous slide, we also expect to generate over $1,000,000,000 per year maintenance CapEx and dividends.
So over the next 3 years, we expect to have a total of at least $9,000,000,000 available to invest. Not including extra capacity created by EBITDA contributions from investing in profitable projects. Now to begin the review of our business segment results, I'll turn the call over to Corning.
Thanks, Scott. Volumes for all three industrial gas regional segments were up this quarter from a combination of new plants coming on stream overall stronger merchant sales and the China plants that Scott mentioned. The volume strength was broad based, covering a wide range of end markets. Pricing was also positive across the regions with Asia and particularly China posting the biggest game. I would like to thank our team for staying close to our customers, driving competitiveness and creating growth opportunities.
Now please turn to Slide 18 for a review of our Gases America's results. For the quarter, sales were up 5% on as were North American merchant volumes even including the impact of the end of a large wholesale contract. It's not so much that we replaced the wholesale volume molecule by molecule plant by plant by taking advantage of opportunities in one market. Markets, say, higher activity in the oil patch. We offset impacts elsewhere.
Going forward, we would expect to replace the liquid oxygen and nitrogen more quickly prior year. Overall, pricing impact was slightly positive, but rounded to flat as higher North American pricing was partially offset by negative mix. EBITDA was up and better equity affiliated income more than offset higher planned maintenance outage costs and the wholesale contract termination impact. These factors and a lower margin sale of equipment caused the margin to be down 160 basis points. Sequentially, EBITDA was down 12% and margin was 310 basis points lower, primarily driven by the planned maintenance, outage costs, seasonally weaker volume demand and the wholesale impact.
As we move into Q2, we have seen some modest negative customer demand, and feedstock and utility impacts from the very cold weather in the U. S. Gulf Coast. Now please turn to Slide 19. To review our Europe, Middle East and Africa business.
Sales were up 29% with volumes up 17%, energy costs passed through up 3% and currency up 9%. Our new hydrogen plant in India, completing its 2nd full quarter of operation drove a significant portion of the sales growth, while our merchant business contributed 3% volume growth. As a reminder, this 100% owned India hydrogen facility is reported in the EMEA segment, while the rest of our India business continues to be reported in the Asia equity affiliate income. Overall, pricing was slightly positive, but rounded to flat as higher real pricing was partially offset by customer and product mix. EBITDA was up again, primarily due to the new plan in India, with higher merchant sales and positive currency also contributing.
EBITDA margin of 32 percent was down 320 basis points, almost completely due to higher energy costs pass through versus last year and the new plant in India, which has comparatively high natural gas costs. Excluding these factors, EBITDA margin was down only 20 basis points, primarily due to a large planned maintenance outage in the quarter. EBITDA was down 9% sequentially on the planned outage costs lower OIE and higher seasonal power costs. Please turn to Slide 20, gas is Asia, where our business continued to deliver strong growth, strong sales and profit growth. Sales were up 47%, including the sale that Scott mentioned earlier.
Excluding this, underlying sales were still up 15%. Underlying volumes were up 8%, driven by new plant on streams and a 3% contribution from the merchant business. Pricing for the region was up 7%. In addition to strong base merchant pricing, we had a particularly significant spot sale which concluded in January and will not repeat. We expect the supply and demand balance to ease in Q2 with the Chinese New Year, But coming out of that, we believe the underlying fundamentals will remain positive, and I know our team is working diligently to maintain pricing momentum.
EBITDA was up 38%, excluding the contract termination and plant sale, EBITDA increased 26% due to the strong volumes, to support our growing retail business. We think this is the right cause of course of action and the new business is certainly contributing. EBITDA margin, excluding the contract termination and plant sale, was up 240 basis points. As Safy mentioned, we announced a number of exciting new projects in Asia for coal gasification to produce syngas, ASU purchases and 2 awards for new long term supply agreements with Samsung and Korea. The team is doing a great job of winning new opportunities while continuing to execute on the base business, productivity and safety.
Finally, please turn to Slide 21 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. Sales were down $15,000,000, while profits were up slightly driven by the Jazan project. We continue to make great progress on the Jazan project, and as we have said, expect on stream in phases in early fiscal 2019. Now, I'll turn the call back over to Simon for a comment on our corporate segment.
Thank you, Corning. Please turn to Slide 22. Our corporate segment includes our LNG business, our helium container business, and our corporate costs. Sales and profits were down, primarily driven by lower LNG project activity. For FY 2018, we still don't expect an earnings headwind for the corporate segment.
Now, I'm pleased to turn the call back over to Safie for a discussion of our outlook.
Thank you, again, Simon. Before we take your questions, I would like to make a few comments about Air Products' future. As I discussed earlier, we are very proud of having delivered on our promises from 2 years ago. And we are very excited about the strong opportunities that we have to build on our success. Our safety, productivity and operating performance continues to be strong.
We continue to be optimistic about the future of air products. We obviously cannot predict, and we do not have control over broadband, political or economic developments. But we do have control over the operational and growth performance of Air Products, and we feel confident we can continue to deliver on our goals. As you know, our portfolio actions and the strong cash flow generation of our company provides us with an expected I truly believe that Air Products will be successful in utilizing our balance sheet, the best in the industry to invest in our core industrial gases business to create significant value for our shareholders. We see great opportunities in mergers and acquisitions, asset buybacks and large new projects.
As well as a significant amount Let's assure we are committed to staying disciplined and won't invest our money unless we are confident that the risk retained profile is create significant value for our shareholders. Now please turn to Slide 23. Our great team of hardworking, dedicated, talented and motivated employees remain focused on being the safest and most profitable and diverse industrial gas company in the world, providing excellent service to our customers. Continuing our positive momentum, we have increased our guidance for fiscal year 2018, to a range of $7.15 to $7.35. This is up $0.30 from the guidance we gave you last quarter.
As Scott mentioned, $0.20 to $0.25 of this is coming from the new tax act, with the remaining increase from improved confidence in our business performance. Over our very strong fiscal year 2017 performance. We remain confident in our ability to deliver on our commitments to grow EPS by at least 10% every Our earning per share guidance is $1.65 to $1.70, which is up 15% to 19% over the second quarter of fiscal year 2017. This includes approximately $0.05 from the new tax act. Excluding the Tax Act impact, our quarter 2 guidance is still up 12% to 15% over last year.
Including our quarter 1 acquisitions, we now expect our capital spending to be in the range of $1,200,000,000 to $1,400,000,000. In fiscal year 2018. As I mentioned before, and I'd like to stress this, our EPS and CapEx guidance do not include any contribution from the Lu'An project or any future M and A opportunity. We are certainly working on other opportunities that could potentially add to our results in fiscal 2018 but have not included any other significant acquisition in our Now please turn to Slide 24. We remain committed to our goal of being the safest most diverse and most profitable industrial gas company in the world.
We will continue to focus on safety, controlling our costs and investing in the many strategic growth opportunities that we see. Now please turn to Slide 25 Where I want to point out, once again, that we believe our real competitive advantage is the motivated and committed people of Air Products. Our competitive advantage comes from the commitment of our drivers who transfer transport our products in all kinds of severe weather conditions to deliver product to our customers. Our competitive advantage comes from the commitment from our operators and maintenance workers who day in and day out work hard to keep our plants running, even due set severe hurricanes and other challenging conditions. To ensure reliable supply to our customers.
Our competitive advantage comes from the commitment of our salespeople who work hard every day to develop and bring in new opportunities to add products by creating value for our customers. Our competitive advantage comes from the commitment and motivation of the rest of our team all over the world, who work hard to run our company to the highest level of performance. Yes, our competitive advantage comes from the commitment and motivation of our people. I considered an honor and a privilege to be part of this winning team. Now we are delighted to answer your questions.
You. And we'll take our first question from David Begleiter with Deutsche Bank.
Thank you. Good morning, Stacy.
Good morning, David. How are you this morning?
Very well. Thank you. Savi, just on the India Syngas project, are there any metrics you can share with us on that project?
Sorry. Did you say Are there any
financial metrics you can share with us on that project?
The return on that project is well above the guidance that we have told you, which is the so called 10% internal rate of return. It's well above that.
And capital to be deployed in this project?
I, we cannot disclose the exact amount of the capital, David, but it is not a $1,000,000,000 project.
Understood. And just on pricing safety, what type of price traction are you seeing in the U. S. And Europe and when do you think we can get a little more positive pricing in the core merchant gas business?
David, as you know, we don't want to be commenting on pricing for the future. But the pricing of what has happened in the past we can comment on that, and that has been positive. And I'd like to, according to expand on that. But as far as future pricing, you know, because of the nature of our industry, we don't want to comment on that. But Corning?
Yes. So I think your questions are probably Europe and the Americas. Obviously, in Asia, it's quite a strong story for us. Both in Europe and in the Americas, we have positive net pricing So same molecule, same customer year on year. Have we been able to move those prices?
Yes, we have. We do have a challenge with mix, which is typically larger customers just simply growing more in the current environment, taking more product year on year, and in some degrees, mix of which molecules are being bought. But I'd say there's in terms of real activity and real pricing, meaning same customer, same molecule, there's progress
Thank you very much.
Thank you, David. We'll go next to Jeff Zekauskas with JPMorgan.
Thanks very much.
Good morning, Ken.
Hi, good morning. When you look at your backlog, how much of your backlog is in hydrogen and Syngas? And how much of your backlog is in the traditional industrial gases, oxygen and nitrogen, Oregon, those sorts of things.
Approximately 40% in Syngas and about 60% is a traditional business.
In the commentary, you said that repatriation impacts would be about negative 4.53 and then there's the revaluation of deferred taxes and you netted that out to $239,000,000. Should we look at that 2.39 as the amount of additional cash taxes that you'll pay over the next 8 years excluding the annual changes to your normal corporate rate?
I would like to That is really the that is the net amount of cash that will go out of the company in the next 8 years. That is correct. But against that, obviously, we have the benefit of lower cash costs in the United States because of the lower taxes. So when you balance that, you can calculate the real net present value. Okay,
great. Thank you
so much.
And maybe if I could just build on that, Jeff, obviously with the deferred taxes, there's some timing that might even go further out, but it's a reasonable way to think about it. It's just in the timeframe of the 8 years, maybe you have to kind of take that a little bit longer.
Yes. Okay, great. Thank you so much.
Thank you, Jay.
We'll take our next question from Duffy Fischer with Barclays.
Yes, good morning. Just wanted to flesh out a little bit more of the plant sale. So just going off your 28% in the volume number and the delta that Corning gave of 12% in the EBITDA. If you calculate, is that about $130,000,000 sale price in an about $22,000,000 of profit that you recognized in EBITDA. Is that the right way to strip out, to get to an underlying?
As usual Duffy, you are very good at doing your math.
Okay. And then if I assume that you sold it for about 12 times EBITDA, would that mean that the underlying profit that's going to go away that we've seen from that plan historically is about $10,000,000 a year for $2,500,000 a quarter?
Well, no, that's not the correct way of looking at that. But I think we can go through that detail offline that Simon can give you a lot more detail on that.
Okay. Thanks. And then just the last one, Safie, with the Syngas stuff, how big in the portfolio would you be comfortable letting CIN gas projects get over the next 2 or 3 years?
We are shooting for about 40%.
Well, that's 40% of the backlog, but not so I'm just wondering, like, if you kind of talked before about having $8,000,000,000 or so to invest over a number of years, half of that, all of it, how much of it could end up in being in syngas at the end of the day?
Right now, we are targeting more than 50%.
Great.
Thank you guys.
Thank you very much.
We'll go next to Bob Koort with Goldman Sachs for a question.
Thanks. Maybe one for Scott, if I could. On Slide 15, I might have missed this, Scott, but you show a price component and a cost component to the EPS Can you talk why the costs were up 2x the price? Sure.
On cost, we had bunch of things that happened last year. Good news items that didn't repeat, as well as in this quarter, we had some higher plan, maintenance And of course, as always, we have inflation. So those would be the key items that are driving the cost year on year. I'll also point out that in the price raw materials, is any changing in power and the input costs are netted in there. So that is priced net of those input costs and still recovered, $0.08 above.
Which is separate from the cost item down below.
Got it. And then, safety, if I could follow-up, within China, Obviously, there's a lot of environmentalism that seems to be gaining some traction and maybe a move away from coal as a fuel source. Can you talk about how that's impacting at all the growth potential for coal to go into liquids and chemicals?
That is obviously a very positive development for us because the push obviously from an environmental point of view is to use less coal for producing power. What we are talking about here in the projects that we are pursuing is turning the coal, especially high sulfur coal into environmentally friendly day by gasifying it and producing chemicals. So all of the push for the environmental thing is actually a very positive thing for us And that is why if you study the details of China's 13 5 year plan, there is a significant number of projects designated for coal gasification and we are obviously very much involved in that.
Got it. Thank you very much.
We'll take our next question from Don Carson with Susquehanna Capital.
Yes, thank you. Question on the merchant business. I can see the merchant operating leverage in China and the margin impact that had What's going on in, say, North America and Europe? Can you talk about merchant operating rates? How much they're going up and what kind of incremental operating leverage we can expect?
I'll have Corning address that.
So in North America, we of course had the challenge of absorbing a loss of a large wholesale agreement that we had. We still published overall positive volumes for merchant. I just want to say that's a good accomplishment by the team. But it's those same factors when we report out our numbers that Scott mentioned that are a challenge in that. So the higher maintenance costs and some positives from last year not repeating, the new business that we're signing, however, is certainly contributing to the overall results.
But, Jeff, to be very specific, the operating rates right now in the U. S. And Europe are around 75%. Usually in industrial gases business, when your operating rates gets to around 80%, then you have significant pricing leverage that is what is happening in China. But that is not the case yet in U.
S. And Europe.
Okay. Then, Safi, a follow-up on capital deployment, if you look at all the projects you signed in the roster you've given, how much of that $9,000,000,000 total have you deployed thus far?
Well, quite frankly, if you add up the projects that we have announced, and some of them are in the process like the big Yankuan project and so on. Out of that 9,000,000,000, about almost 4,000,000,000 of it is committed.
Okay, all right. Thank you.
Thank you.
Our next question will go to Christopher Parkinson with Credit Suisse.
Thank you. Scott mentioned this a little, but in IG Americas, there were some planned maintenance turnarounds, which hit margins, but volumes appear pretty solid in the merchant business as well as hydrogen. Can you just give a little more color on these fronts just for the balance of the year and just anything of note? It would be greatly appreciated. Thanks.
Well, I think I'll turn it over to corning to expand on that. But what I want to say is that these so called plant maintenance costs are basically the big money is in hydrogen facilities. And those things, the timing of those is not under our control. It's under control of our customers. And a lot of our customers are having turnaround this year.
And each one of these ten rounds is $20,000,000, $30,000,000 of expense. So that it's timing, but it is a necessary thing that you need to do. Courtney?
Yes. So, I think you're sort
of interested in the market condition. So, firstly, I think underlying hydrogen demand remains really quite strong. And we've seen a little dip in this, period because we had the, the cold weathers in the Gulf Coast, but I'd say we bounced back from very quickly. And at this point, our customers are pretty nearly fully back as well. Oilfield services is probably a change with the higher oilfield prices.
We see more nitrogen going into that market. But by and large, I'd say there's just broad based strength in, in North America right now.
And just a quick derivative question, some trends in the Chinese merchant market in terms of volumes and price. Can you just comment on any supply side dynamics that would help maintain the momentum in fiscal year 'eighteen. Are there still additional facility closures still, for instance, or do you believe the comps will become more difficult as you progress throughout the year? And then just also any quick comments on regional demand trends you have any by end market would be helpful. Thanks.
So I think first of all, I'd maybe take those in reverse order because I think a key point there is there's just broad based, industrial momentum in probably the world today, but China being to a certain degree, a workshop for the world, there's there's broad space demand growth there. Obviously, the coastal area is a little bit stronger than inland. We're going to see the Chinese New Year impact. It'll be interesting to see how quickly the volume rebound from that. Coming out of that, I would expect the overall supply demand dynamics to remain very positive for the industry.
We had last year the shutting down of the induction furnaces. I think what we're going to see is some new demand, perhaps from electric arc furnaces that will probably strengthen as we come into the coming year. All in all, I think it's going to remain a positive dynamic for us.
Yes, I'd just like to stress on that, Chris, that we are very positive about the developments in China.
Thank you.
Sure. Our next question will go to Jim Sheehan with SunTrust.
Good morning. This is Pete on for Jim. Do you see any significant acquisition opportunities outside of China? And along those lines, can you quantify how much of the Praxair Lindy divestitures you might be interested in bidding for?
Well, in terms of M and A opportunities, we do see opportunities outside of China. I don't want to say more than that, but we are working on some of them. In terms of the Praxel and Linde think, you know, we have to wait and see what actually comes out, but we have always said that, out of what we think they have to divest. We don't have any inside knowledge on this thing, but out of what we think they have to invest there will be an opportunity for us to compete on about $1,000,000,000 to $1,500,000,000 of sale, which would have about probably about $300,000,000 to $350,000,000 of EBITDA. And obviously, when and if that thing comes into play, they will be interested in that for sure.
Great. Thank you.
We'll take our next question from Steve Byrne with Bank of America.
Is your interest in coal derived syngas driven more by growth prospects for that, process, or would you say you bring to it a technological advantage given cold arrived gasification has been around a long time over there. Do you have a a technological advantage either from your ASU technology or with the shell technology acquired? Is it demand or technology driven?
It is actually both. The demand is obviously there. And then in order put ourselves in a competitively advantageous position, we not only bring our know how in terms of ASUs and operations and maintenance of large facilities, but our competitors have that, but that is the primary reason that we wanted to buy the shell technology because now they will have a technological advantage. That's all for that acquisition.
Okay. Does any royalty bearing revenue come with that technology?
Not much.
And on the on the demand side, would you say that Most of these new projects that are, are, coal derived syngas are incremental production capacity projects or retro fits of old gasifiers that are inefficient in air polluting and need to be shuttered.
No, none of the, none of the old gasifiers are polluting. Gasification is a very clean way of using coal. Most of these opportunities that you're talking about are greenfield plants.
We'll take our next question from Vincent Andrews with Morgan Stanley.
Scott, maybe I could just ask you, to give us some help on America's margin sequentially, just given you had the maintenance in this quarter. The wholesale thing? And then are there any positive things that took place last year that won't recur in the second quarter, but just how should we think about margins sequentially?
Well, we obviously think that the margins are going to become better, but I'd like to turn it over to Corning to expand on that. Let's just make it very clear. We do remain very bullish about opportunities for industrial gases, our conventional business around the world. We think China is growing, the U. S.
Is growing, Europe is growing and our margins, we are not losing any margin. It is just quarter by quarter. So fundamentally, we are very confident about what's going on, and we actually feel pretty strong about that. But Good morning.
Yes. So just building on everything safety just said, so we feel that the underlying demand, merchant gas is hydrogen in the whole package remains very strong. We're going to have other maintenance, right, during the course of the year. And so sequential sequential, we don't really map out exactly as our maintenance spend is coming out. But I would say we see the overall, picture of one that's strengthening in the Americas.
Okay. And then maybe just as a follow-up for Safy, I guess now 5,000,000,000 left that hasn't been allocated out of the 9 from the answer to the previous question. Given the change in the tax environment in the United States, are you focused at all anymore on or focused at all incrementally on putting some of that money to work in the U. S. Has that changed your investment calculus at all?
Question on that one, If there is any project that we can go after, our number one priority is to spend our money in the United States. Because of a lot of good reasons. So the fact that we are investing in other parts of the world doesn't mean that we are not focused in the U. S. We are very focused the U.
S. And if there is any project that we can go after, we will go after in the U. S. That's our number one priority for investing. There is no question about that.
The issue is that there are not that many opportunities right now. But we are absolutely focused on that. We beat the bush every day. On every single project. And I hope in time we will announce some big ones in the U.
S. Too. Okay. Thank you very much.
We'll go next to Kevin McCarthy with Vertical Research Partners.
Yes, good morning. With regard to the cold weather along the U. S. Gulf Coast. Do you expect that to be good, bad or neutral, to your results?
In the fiscal second quarter. Just trying to think about the net effect of, power costs versus any customer outages that you see.
Thank you, Kevin, for the question. I accordingly answered that. I think, Kevin, I think when we have
a disruption in the market, it's never a positive for us, but I would just say The guidance that we have given reflects our expectations for the quarter, including what's happened in terms of weather. Thank you.
Okay. And then as a follow-up, if I may, for safety, can you expand upon China contract termination, what motivated your steel customer to want to purchase the plant from you? And think you mentioned that you were pleased with the development, perhaps you can expand on that as well.
Sure. Corrigan can expand that on that go ahead. Yes. So we had a contract with a customer. That customer then got acquired by another steel company.
Who was less bought in, let's say, into the sale of gas concept. We had a good contract. They wanted to just open and there's basically good faith negotiations, understanding their thought process, how they looked at things. We thought the termination that we came up with was a good win win for us. I just point out in the same quarter, right?
We have examples of where we've taken a plant that was going to be an SOE and we've converted it into a sale of gas. So I think there's some do and some don't in China and that we continue to sort of, progress the transformation of that market to be more of a traditional industrial gas environment?
Kevin, it was very simply the fact that the new owners of the steel they do their financials and all of that. They decided that, the way their cost of capital is and all of that, that own the plan rather than us supplying it. It's just preference of the customer. And we always are obviously, to what the customer wants to do And the transaction financially was also very attractive for us and put that money to work at a higher return
And I'd say being our flexibility and changing had a lot to do with the fact that it was a new customer stepping in.
That's very helpful color. Thank you.
Sure.
We'll go now to P. J. Juvekar with Citi.
Yes, good morning, Safi.
Good morning, P. J. How are you doing these days?
Good. Good. Quickly, can you explain the advantage of your strong balance sheet when you're bidding again bidding for these large ASUs and large Sing gas plants in China? And then what kind of competitors or competition do you run into for these large projects?
Well, Vijay, we run into the standard competitors, you know, who they are. And we compete with them on the basis of it's not just the price I'd like to it's not just the financial returns. It's a combination of the trust, the relationship that they have with the customer, the demonstration that they have delivered, our technology. Now we are going to have an advantage with the acquisition of the shell technology. So it's a combination of all of teams like we compete and we compete with the same people, basically, that we have been competing with for many years.
Okay. Thank you. And you talked about the environmental advantage of coal gasification. What are the risks to coal gasification? Let's say if there's a if China implements carbon tax in the future, does that impact the economics of the project?
Well, the thing is that if they implement what does coal gasification do, PJ? The coal gasification is producing chemicals. So whatever tanks they put in is just in is the price of the chemicals because they can't say, okay, I'm not going to do coal gasification. So if you're not going to do coal gasification, what are you going to do? Then you have to buy out of these chemicals and import them into the country.
The fundamental thing is that coal is the only energy source that China act has. As a result, their only option, if they want to be be independent, is to turn that code into chemicals and syngas. Otherwise, they would have to import that, which is what they do right now. That is why this is a high priority for the government and co gasification has the advantage of being able to use 2%, 3% high sulfur call that you can't do anything else with it. So it's financially very attractive.
Yes. Can I just build on?
So the gasification has a step in which you remove that sulfur after we've gasified it. So I mean, literally coal that you can't really legally use in other applications, you can use it here because we're going to get the sulfur out. And another element is if there was an incentive around carbon capture, coal gasification has the benefit of giving you a very concentrated stream of CO2 that would be easier to work with than almost any other process.
Vijay, the subtle point about what Corning just said is that if you are building, any kind of a facility to produce Syngas. Gasification is the process where the CO2 that you produce is what it's called capture ready. You can actually capture that and then put it into for enhanced oil recovery and a lot of other applications. Okay.
Thank you for that explanation. Thanks.
Thank you, sir.
We'll take our next question from John Roberts with UBS.
Thank you. Scott, tax reform didn't start until January 1. So fiscal September 17, I guess, has 3 quarters of benefit. And I assume the December quarter accrued essentially a quarter of those 3 quarters of benefit. Just trying to understand rate go down a little bit more because you'll have four quarters of benefit in 2019?
Right. So very good question, John. So first, in terms of our base underlying rate. You're absolutely right. We have 1 quarter, 35, 3 quarters of 21.
We're required to take an estimate and blend that together. So it's that underlying would be 24.5%. But as you pointed out, too, we had a even FGR adjusting for the new tax act, we had a little bit lower ETR here in the first quarter principally driven by the accounting for points, about $2.60 of which is coming from the tax act. And the balance of about $110,000,000 is from the share based comp. And so I think as I said in my, prepared remarks then to going forward, for the full year, maybe it's a 20 to 21 rate to be used.
And then when we look at it, the timing and the implementation of the various elements of the tax act, I think that's at this point in time, these are all best estimates. But I think that's a reasonable type of a rate to carry into 2019 as well.
Okay. And then, Corning, could you remind us why you split India between EMEA in Asia, is it how you have your hydrogen group reporting up globally versus maybe regional on the industrial gas on the atmospheric gas side?
Yes, I'd say that's a reflection of a point in time when we did that. Clearly at this point, we're tremendously beefing up our syngas capabilities in Asia, however.
But in terms of reporting that you are talking about, in terms of how they report that, quite honestly, traditionally, we have been reporting that that way, and we didn't want to change that not to confuse the numbers. But on operationally, we run Middle East and India separate from Europe. But in terms of the reporting, the results, we put all of that together because we didn't want to create a lot of confusion about comparison to previous years.
We'll take our next question from Mike Harrison with Seaport Global Securities.
Good morning, Mike. How are you doing these days?
Doing very well. Thank you. Stacy, in terms of the underlying improvement in the Asia margin, performance this quarter. If I exclude the impact of the plant sale, is that really just the impact of the pricing can you maybe talk about other dynamics that are at work there helping your margin and how sustainable that is going forward?
Koning has two pages of details on that. He'll answer your question.
I mean, the big positive for us in Asia is pricing right now and you'd add on to that volume leverage and incremental loading, that's those things that are pulling this forward. I would say maybe even just building on it like a highly motivated team that's, again, organized by subregions, all of them with their own incentive plan on their own actual results. So they are just driven to let's get the volume and let's get the price and let's take advantage of this off opportunity to absolutely the fullest.
All right. And I'm you haven't commented on where your capacity utilization rates are for reloxylin in China, but I know one of your competitors mentioned that they're, running over 90%, which is the point at which we might get concerned or expect to see some capacity additions. Are there any expectations on your part to, debottleneck or otherwise add merchant capacity in China over the next year or so?
I don't think we want to really give a clear roadmap exactly what all our strategic options are in China at this point. Clearly, it's an area of opportunity we're quite focused on that.
All right. And if I can sneak one more in, Safie, any updated thoughts on share repurchase opportunities?
Not interested.
All right. Fair enough. Thank you.
Thank you sir.
Take our next question from Laurence Alexander with Jefferies.
Good morning. Just very quickly for Scott on the EBITDA margins. Can you give a little bit more detail on how much of a tailwind you had globally from merchant pricing in the quarter? And then going forward, if we're thinking out to 2019, 2020, are the acquisitions of plants and the Syngas projects, both margin accretive, or does one offset the other to some extent And do you have in the on-site business any pools of assets that are below the take or pay threshold such that volume growth does not translate into profit growth? If this strength in the end markets continues for the next couple of years?
Let me, let me, hi, Lawrence, this is Scott. Let me take the first one. The impact from pricing is maybe 50 basis points or so, something like that as a total company.
Overall, Laurence, the overall, when you look at the projects that we have taken, and the on-site projects that we have taken. And as they come on stream, their margins, they are not going to have a negative effect on our margins. Therefore, we expect to maintain an EBITDA margin as we have said before of somewhere between around 32% to 35%. And none of the projects that we have taken is going to cause that margin to go down. Actually some of them might actually improve the margin.
I I guess if you
can just clarify that a little bit, if your if your merchant pricing already before things get tight, is it 50 basis point tailwinds and over 3 or 4 years, it's probably going to be a little bit more of a tailwind from here. And if your dress is basically flattish, shouldn't you be able to overshoot the 35% or what's the offset that you see?
But you're getting us into trying to give guidance now for 2019 2020. But I think you are on the right track to assuming that the overall conditions are positive for, air products. And our margins. And we agree with that, but I don't want to state it. Thank you, Ben.
Understood. Thanks.
Thank you.
That does conclude today's question and answer session. At this time, I'd like to turn the conference back to Mr. Safy Kassemi for any final remarks.
Thank you very much. With that, I would like to thank everybody for being on the call. Thanks for taking time from your busy schedule listen to our presentation. We appreciate your interest, and we look forward to discussing our results with you again next quarter. Have a very nice day and all the best.
This does conclude today's conference. Thank you for your participation. You may now disconnect.