Air Products and Chemicals, Inc. (APD) Q2 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Air Products & 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. Simon R. Moore - Air Products & Chemicals, Inc.: 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 Seifi Ghasemi, 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.com. Please refer to the forward-looking statement disclosure that can be found in our earnings release and on slide number 2. Now, I'm pleased to turn the call over to Seifi. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you, Simon, and good morning to everyone. Thank you for taking time from your very busy schedule to be on our call today. We do appreciate your interest in Air Products. The talented, motivated and committed team at Air Products delivered yet another excellent set of safety and financial results in the 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 that we have reported year-on-year EPS growth, and the fourth 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 and create value for our shareholders. Now please turn to slide number 3, we continue to improve our safety results with a reduction of 71% in our lost time injury rate and a reduction of 57% in our recordable injury rate. These results can only happen when 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 to slide number 4, which is our goal for the company. To be the most the safest, most diverse 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 four years. We continue to be focused on shareholder value, cash generation, capital allocation and an empowered and decentralized organization. On the slide number 6, you can see our five-point plan which has been the roadmap to our success over the last four years. Now, please turn to slide number 7. We have delivered on the promises we made over the – more than the promises that we made to you over three years ago. We have become the safest and most profitable industrial gas company in the world. We have delivered that we have divested our non-core 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 year implying yet another year of over 10% growth. In summary, we have delivered what we 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 previously. To mention them again, first, acquisitions of small- and medium-sized industrial gas companies or assets or businesses from other industrial gas companies. Second, the opportunity to purchase existing industrial gas facilities from our customers where we own and operate the plant and sell 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, hydrogen and syngas plants around the world in this category. And the third 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 $1.3 billion Lu'An syngas joint venture in September of last year. As a reminder, the joint venture will be 60% owned and majority controlled by Air Products. Lu'An provides coal, steam and power to the joint venture, and the joint venture will supply syngas to Lu'An. The joint venture will be paid a fixed fee by Lu'An under a long-term contract. Our team has been working closely with Lu'An and the many government agencies in China to get final approval so that they can formally close the transaction. We had indicated before that we expected this to be done by this summer. I am very pleased 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 own the facilities. Now that the transaction is closed, we will begin receiving our monthly fee from Lu'An based on the gradual start-up of the facility. That is why we have included a modest contribution of about $0.04 in our updated 2018 full year EPS guidance as well as including approximately $400 million to $500 million in our CapEx guidance. I would like to confirm that we expect this transaction to contribute about $0.25 to our earning per share for full 2019. This project is a perfect fit with our strategy and a great example of the investment opportunities in our core Industrial Gases business. It is an asset buyback of an expanded scope project under the onsite business model. Now, please go to a slide number 9, which shows you the results of our three 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 metrics. Finally, please turn to slide number 10, which 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? Michael Scott Crocco - Air Products & Chemicals, Inc.: Thank you very much, Seifi. Please turn to slide 11 for our Q2 results. Sales of $2.2 billion 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 Gases. 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 million improved by 13%, driven by the higher volumes, positive pricing and currency. EBITDA margin of 34.3% was up 140 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% declined 50 basis points versus last year despite the profit increase. This is because the denominator of the ROCE calculation increased as a result of the gain from the PMD sale. The denominator is based on a five-quarter average. Q2 FY 2018 includes five quarters that include the PMD gain, while Q2 FY 2017 only had one 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 million due to the restructuring of select foreign subsidiaries. Our adjusted Q2 continuing operations EPS of $1.71 increased $0.28 or 20% 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 opportunities we are pursuing. Finally, as I mentioned previously, this cost major factor includes the Transition Service Agreements or TSAs we had 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. Currency and foreign exchange was $0.09 favorable 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 a $0.09 benefit versus last year. As expected, the lower tax rate due to the new Tax Act increased EPS by about $0.06 per share. The other $0.03 was due to geographical earnings mix and a larger impact from accounting for share-based compensation. For the full year 2018, we expect to see a tax rate of approximately 20%, including the benefit of the new Tax Act. Non-controlling interest, interest expense, shares outstanding and other non-operating income totaled $0.01 unfavorable. Now, please turn to slide 13. We had another strong cash flow quarter in Q2 with over $500 million of distributable cash flow and investible cash flow was up almost $150 million to a total of $300 million. Investible cash flow is the amount of cash we have discretion or choice to deploy to create shareholder value. In other words, cash available after we pay interest, taxes, maintenance CapEx, and dividends. There were two quarters investible cash flow is almost $650 million. 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 billion of cash and short-term investments available to invest as of March 31. Our debt balance as of March 31 is about $3.5 billion. As you know, we have an active dialogue with the rating agencies and are committed to managing our debt balance to maintain our current targeted A/A2 rating. At this point, we believe this should enable a debt level of at least 2.5 times EBITDA or about $7.5 billion. This provides about $4 billion of debt capacity to invest. So, in total, we have about $7 billion we can deploy today, while maintaining our A/A2 rating. In addition, we expect to generate over $1 billion per year of investible cash. Again, that's after paying taxes, interest, maintenance CapEx and dividends. So, over the next five years, we expect to have at least $13 billion available to invest which does not include leverage above 2.5 times or extra capacity from investing in profitable projects. Now, to begin the review of our business segment results, I'll turn the call over to Corning. Corning F. Painter - Air Products & Chemicals, Inc.: Thanks, Scott. All three industrial gas regional segments delivered strong volume results with the 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 Lu'An. Now, please turn to slide 15 for a review of our Gases Americas 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 the strength particularly in Brazil. Overall pricing impact was again slightly positive but rounded to flat as our pricing actions were partially offset by negative mix. We continue to work hard on pricing and just announced an argon price increase. The extreme weather I mentioned impacted both our and our customers' operations. Our team worked tirelessly in challenging conditions to minimize the impact to our customers. I would like to extend my gratitude to the whole team for their excellent work and dedication. EBITDA was up 3% compared to prior year, as contributions from higher volumes and underlying productivity more than offset the adverse weather impact and several of the cost items that Scott mentioned. Sequentially, volume was down due to the winter weather impacts, while EBITDA improved due to reduced maintenance costs. In Q3, we expect maintenance costs to increase as several major plant turnarounds are scheduled for our hydrogen business. These plants operate at high temperatures and typically have major turnarounds every four 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 flue-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% and currency up 15%. Our new hydrogen plant in India, in its third full quarter of operation contributed about three-quarters of the volume growth. Other onsite volumes were up driven by strong hydrogen demand in our Rotterdam franchise. And despite Easter, shifting into Q2 this 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 to prior year, underpinned by the new plant in India, Merchant sales and pricing actions and favorable currency. EBITDA margin of 32% was down 160 basis points, but excluding the new plant in India, which is 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 prior year, driven by 17% higher volumes, 3% positive 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 up 3% versus prior year and down 1% sequentially. The supply and demand balance and our shift to retail sales in China remained positives for us. As we predicted in our last call, sequential pricing dipped 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 FY 2017. 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 by the contract termination 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. Seifi provided an exciting update on the Lu'An 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 Xi'an, China. Air Products has been successfully supplying Samsung's first Xi'an fab since 2014. This is our third major announcement related to Samsung since the beginning of the year; the others being Pyeongtaek and Tanjung, Korea. Finally, please turn to slide 18 for a brief comment on our Global Gases segment, which includes our air separation unit sales 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 FY 2018 while profits should be about flat. We continue to make great progress on the Jazan project, and as we have said, expect the onstreams in phases early in fiscal 2019. Now, I'll turn the call back to Simon for a comment on our Corporate segment. Simon R. Moore - Air Products & Chemicals, Inc.: 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 cost that Scott mentioned. For FY 2018, we still don't anticipate an earnings headwind for the Corporate segment. Now, I'm pleased to turn the call back over to Seifi for a discussion of our outlook. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you again, Simon. Let me take a few moment to talk about Air Products' exciting future. Our team that are on the board 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 our success. As I said before, we now have the balance sheet and the organization to aggressively pursue growth. We remain very optimistic about Air Products future. While we cannot predict or control worldwide political or economic developments, we do have control over the operational performance and growth of Air Products and we are confident that we will continue to deliver on our commitments. As Scott discussed, our very strong balance sheet and cash flow provide us the capacity to invest at least $13 billion over the next five years. I continue to believe that we will be able to develop when and execute projects in our core Industrial Gas business, so that we can deploy all of this capital in the next five 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 and 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 new guidance represents 15% to 17% growth 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% each year in the foreseeable future. For quarter three of fiscal year 2018, our earning per share guidance is a $1.80 to a $1.85, up 9% to 12% over last year. Including the Lu'An project, we now expect our capital expenditure to be in the range of $1.8 billion to $2 billion in fiscal year 2018. Now, please turn to slide number 21. There, 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 today. I want to thank all of our 15,000 people around the world for their total commitment and hard work and I'm very proud to be part of this winning team. Now, we are delighted to answer your questions.

Thank you. 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 business was only contributing about 2%. So, can you comment on the base business outlook, are merchant loadings improving? And as a result, should we be expecting some good incremental margins going forward from the base business? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Scott, would you like to...? Michael Scott Crocco - Air Products & Chemicals, Inc.: Sure. As you pointed out, we had good 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 it's been mentioned in the past, we've been in Asia, we're in the low-80% 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 see in this quarter and are cautiously optimistic about the outlook. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Don, this is Seifi, 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...

Okay. Seifollah Ghasemi - Air Products & Chemicals, Inc.: ...actually more bullish than we have been before.

And Seifi, what's the competitive environment for bidding on some of these major new projects? I assume your primary competitors have other issues that cause 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? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Well, the competitive environment hasn't changed that much. Our major competitors are all very strong and they compete with us on every project. And the customers make sure that they get competitive bids. But as you know, we had a return expectation on these projects which we have disclosed very publicly, of at least 10% internal rate of return. And if because of the competitive pressure the returns are below that, we just don't take the projects. So that's our guiding principle, whether there is competition or not. We obviously have had a lot of good projects at 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. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you. Michael Scott Crocco - Air Products & Chemicals, Inc.: 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-Linde merger? Seifollah Ghasemi - Air Products & Chemicals, Inc.: 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? Michael Scott Crocco - Air Products & Chemicals, Inc.: Was part of a restructuring of a acquisition that we did some time ago when we moved some legal entities and were able to get that sort of a benefit. And so, as I mentioned, some foreign subsidiaries, we made some adjustments that contributed to that.

Then, maybe if I... Seifollah Ghasemi - Air Products & Chemicals, Inc.: We have been working on this thing for a while. It's a matter of the consolidation of some of the subsidiaries that when you consolidate it, you get a tax benefit. And that is what the number is.

And then, maybe since the first question couldn't get answered, the 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? Seifollah Ghasemi - Air Products & Chemicals, Inc.: We will continue to have those kind of costs, because I mean it is a fact that we are working on a 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 cost and your people cost and so on, you used to charge them to the project. Now, you can't do that. You expense it. So if they are going to deploy $13 billion, we need to bid on a lot of projects and we are bidding on those and we are expecting the costs. So that is a natural thing that is going to be with us as we win these projects.

Thank you. Seifollah Ghasemi - Air Products & Chemicals, Inc.: 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? Are you guys taking some market share down there? Is there something dynamic happening with your business? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Corning is kind of in charge of our business in Mexico and will make a comment. Corning? Corning F. Painter - Air Products & Chemicals, Inc.: I'd say in Mexico, we see improvement across several of the business lines. The packaged gas environment is good, there is 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 oilfield business there, so I would like to say, relatively broad-based. Michael Scott Crocco - Air Products & Chemicals, Inc.: And just reminding....

Okay. Michael Scott Crocco - Air Products & Chemicals, Inc.: ...everybody that's, of course, 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 Lu'An City project? What's the timeline look like there and when might we get an announcement on that project? Seifollah Ghasemi - Air Products & Chemicals, Inc.: 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 of view, we don't want to sound too anxious but we are working on it and it is moving forward, Duffy.

Great. Thank you, guys. Corning F. Painter - Air Products & Chemicals, Inc.: Thank you.

And we'll go to Stephen Byrne with Bank of America Merrill Lynch.

Hi. Thank you. What would you say the primary value drivers for owning and operating both the ASUs and the gasifier in the Lu'An project? Is there an operating efficiency that you have by having both? Has the combination improved the return on invested capital or is this an example of more gasifier projects that you would try to differentiate yourself for? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Well, there are several benefits. One 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 million of our business at their return. Now, we are deploying $800 million of our business at the same kind of return or even higher. So that means that this is an opportunity for us to create growth, so that we can invest 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 the opportunities to significantly deploy additional amount of capital.

And then, Seifi, 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 facilities and/or less downtime? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Yeah, of course. Because look at our EBITDA margin. We have gone from 23%, 24% to 34%. That is almost $700 million, $800 million 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 the reasons – I mean, safety is a moral responsibility. We don't want anybody to get hurt but a company who has a good safety record at the level that we are achieving definitely has excellent operational efficiency.

Thank you. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you, sir.

Next is Jim Sheehan with SunTrust.

Thanks for taking my question. Can you talk about Merchant operating rates in North America as well? I think you've covered the other regions but didn't mention North America. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Corning, can comment on that. Corning F. Painter - Air Products & Chemicals, Inc.: Yeah, so we the termination of a very large long-term wholesale agreement. And I'd say we have largely replaced that on the LOX, LIN side. I think the argon is going to take a little bit longer. However, certain tightness in the argon 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 team has covered in replacing that volume is just tremendous performance.

Great. And as far as crude oil prices moving higher, how do you see that factoring into your 2018 outlook? Is that a major tailwind for you? Seifollah Ghasemi - Air Products & Chemicals, Inc.: 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. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you.

And we'll go to Chris Parkinson with Credit Suisse. Christopher S. Parkinson - Credit Suisse Securities (USA) LLC: Perfect. Thank you. Yeah. 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 and 2020? So, any thoughts on that would be greatly appreciated. Thank you. Seifollah Ghasemi - Air Products & Chemicals, Inc.: I'm sorry, Chris. The connection is not that great, so I didn't fully understand you. Simon, can you help me out? Simon R. Moore - Air Products & Chemicals, Inc.: So, Chris, I think your question was, Seifi, could you give an update on Jazan, kind of where we stand on the project and how it looks over the next couple of years? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Yeah. Sorry, Chris. I didn't hear you on the phone that I am. Chris, we are making... Christopher S. Parkinson - Credit Suisse Securities (USA) LLC: My apology. Seifollah Ghasemi - Air Products & Chemicals, Inc.: No, no problem at all. Not your fault. We are making excellent progress (00:39:01) on Jazan. We are ahead of schedule. We are close to 90% done with the project and we fully expect that to come onstream at the time that we expect it. 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 billion 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 that. Christopher S. Parkinson - Credit Suisse Securities (USA) LLC: Great. And just a second question on backlog. The vast majority of your backlog is overwhelmingly onsite 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 which you're paying incremental attention to given the recent transactions. Just any broad insight on your thinking there would be appreciated. Thank you. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Yeah. Absolutely, Chris. On a very macro basis, we always say energy environment and emerging market. But particular sectors we are very focused on the oil and gas sector obviously in the downstream side, specialty chemicals and also coal gasification. Those are the areas that we are very focused and there are significant amount of projects as you know. A lot of the major oil 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 – and as I said, energy, environmental requirements and emerging markets; that's what we are focused on and we obviously like the onsite business. Christopher S. Parkinson - Credit Suisse Securities (USA) LLC: Fair enough. Thank you very much. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Sure.

We'll go to David Begleiter with Deutsche Bank.

Thank you. Good morning. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Good morning, David. How are you doing?

Well, thank you. Seifi, just on Americas pricing, is pricing proving to be more difficult to get this cycle than prior cycles, and if so, why? Seifollah Ghasemi - Air Products & Chemicals, Inc.: David, pricing, we are selling in our LOX, LIN and LAR, 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 the natural course of it and we seemed to be in that cycle right now. And if you see the results of everybody else, it points to that direction.

Very good. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Overall, industrial production activity.

Understood. And just in Q3, you mentioned some additional maintenance costs in the Americas offset by the contract termination, could you quantify those elements that might impact Q3 Americas' profitability? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Quantifying it would be difficult because then we give too much information 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 on ordinary maintenance expenditure that goes to our bottom line.

Understood. Seifollah Ghasemi - Air Products & Chemicals, Inc.: It's a positive development rather than a negative development.

Right, right. Okay. No, very good. Thank you very much. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you.

Next is Vincent Andrews with Morgan Stanley. Vincent Stephen Andrews - Morgan Stanley & Co. LLC: Thank you, and good morning, everyone. Seifi, I'm just wondering as you think about over the next five years and the $13 billion, 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, think this would be an opportunity to bring that up? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Vincent, first of all, good morning. To answer your question, Vincent, when we say 10% – 10% is the minimum. We have won a lot of projects that's higher than that today. So whenever we are bidding on a project, we obviously – we do not price things on a cost basis. We price the things based on the competitive nature, and quite honestly, about 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. Vincent Stephen Andrews - Morgan Stanley & Co. LLC: 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? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Scott, do you want to mention this? Michael Scott Crocco - Air Products & Chemicals, Inc.: Sure, sure. So let me take you through – thanks for the question, 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 higher level, that's the euro is at RMB 0.03 and the pound is at RMB 0.02, and then everything else makes up for 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 moved 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 on what's developed, it's more like $0.25. Let me also just for everybody, just to reiterate a couple of sensitivities that we try to provide you. So, first grounded in the – these are transactional exposure rates, there's no economics. It's just doing a mathematic – I'm sorry, translational exposure, it's just mathematics 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 an RMB, 10% swing is about $0.09; and then the pound, the Korean won, the Tai dollar and the Canadian dollar, each individually would be about $0.03 to $0.04 on an 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 the sensitivities. So, hopefully, that's helped. Vincent Stephen Andrews - Morgan Stanley & Co. LLC: That's very helpful. Thank you very much. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you.

And we'll go to P.J. Juvekar with Citi.

Yes. Hi. Good morning. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Good morning, P.J. How are you doing?

Good, good, Seifi. Seifi, do you consider syngas as a core industrial gas and when you bid for these projects like Lu'An or YK, are you running into other gas suppliers, the traditional competitors or is the field wide open for you? Seifollah Ghasemi - Air Products & Chemicals, Inc.: No, we do run into them. They have their ambitions of their own, and in a lot of the projects that we have done, they have been there. They have relationship with these customers, so it's not as if we have a totally open-field and a lot of times our 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? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Right now, the highest incremental margin that we have is actually the United States for the total business. It's 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, I mean, 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.

Okay. Thank you. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you.

And now we'll go to Kevin McCarthy with Vertical Research Partners.

Yes, good morning. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Good morning, Kevin.

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? Seifollah Ghasemi - Air Products & Chemicals, Inc.: 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 had an extensive packaged gases business, which we don't. So for us that is not an issue, Kevin.

Okay. Very good. And second, a question on China if I may. We've obviously seen a lot of supply restrictions for environmental reasons and those seemed to be more pronounced over the winter time. I'm wondering if there's any impact in 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. Seifollah Ghasemi - Air Products & Chemicals, Inc.: There is no impact on us. You 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.

Understood. Thank you very much. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you, sir.

And we'll go to Bob Koort with Goldman Sachs. Robert Koort - Goldman Sachs & Co. LLC: Thanks very much. Corning, 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 million sales improvement but operating profit actually declined, what were the components that drove that? Corning F. Painter - Air Products & Chemicals, Inc.: So we had the base improvement. We had some of the cost items that Scott mentioned that, let's say, are a little bit less of an operating cost but still there in our P&L. Robert Koort - Goldman Sachs & Co. LLC: Okay. And then, Scott, it seems like maybe at the margin since your last update on guidance, the FX number is a little better, you're throwing Lu'An in there now and you've got maybe the tax guidance is at the better end of things. I was a little surprised maybe there wasn't more ambition in the earnings path, is that a function of Jazan scaling down, is it a function of maybe some of these other costs continuing to stay elevated? Why not maybe a little bit more ambition on your guide? Michael Scott Crocco - Air Products & Chemicals, Inc.: Bob, we are raising 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 it's very difficult to predict exactly what the economy does. We are seeing a positive momentum and obviously at the end of next quarter if things 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 where we are not. Robert Koort - Goldman Sachs & Co. LLC: Got it. Thank you, Seifi. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you.

And we'll go to Jeff Zekauskas with JPMorgan.

Thanks very much. Good morning. Seifollah Ghasemi - Air Products & Chemicals, Inc.: 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 EBITDA 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? Seifollah Ghasemi - Air Products & Chemicals, Inc.: 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 one-offs off, we are up and we are – I obviously go through the details of this thing, for every dollar of incremental dollar of sales, we are getting $0.40 to the bottom line. So I'm not worried about the fact that we are losing margins and so on, but then you put all of that for a big company like us in aggregate, the result is what you see.

Okay. Earlier in the call, I think Scott commented on the decrease in 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 four or five 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? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Scott is most qualified to answer that. And then if there is anything, I'll make a comment. Michael Scott Crocco - Air Products & Chemicals, Inc.: Sure. Thanks, Jeff. And just back to my prepared remarks. So as part of the gain that we had, almost $2 billion in PMD that goes into the base of that calculation, that dilutes the ROCE 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, so that's the math of that.

Right. Michael Scott Crocco - Air Products & Chemicals, Inc.: Back to 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. Seifollah Ghasemi - Air Products & Chemicals, Inc.: One other thing that I would like to add, Jeff, is that the return on capital, the way you calculate it if you're 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.

Okay. Good. Thank you so much. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you.

And we'll go to Mike Harrison with Seaport Global Securities.

Hi. Good morning. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Good morning, Mike. How are you doing?

Doing well. Thank you, Seifi. A couple of questions on the Lu'An JV and just kind of modeling-related question. 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? Seifollah Ghasemi - Air Products & Chemicals, Inc.: We do not take any ownership of the raw material.

Okay. So it's more of a tolling rate. Okay. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Kind of, yes.

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. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Yes.

Is that due to some startup headwinds and how much should we think of those startup headwinds as costing you in the third and fourth fiscal quarters? Seifollah Ghasemi - Air Products & Chemicals, Inc.: No. It's not a startup headwind, Mike. It is – there are four gasifiers, my friend. And we get paid the monthly fee based on these gasifiers coming onstream. So, obviously, they are not starting out of the four gasifiers at the same time. So when the first gasifier comes onstream, we get a certain amount. The second, the third and the fourth and we expect to have all of the four gasifiers onstream by 2019, which is in October and then we will get there, but we will get on an annual basis.

All right. 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. Seifollah Ghasemi - Air Products & Chemicals, Inc.: 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. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you, Mike.

And now we'll go to Mike Sison with KeyBanc.

Hey, good morning. Nice quarter. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you, Mike.

Seifi, when you – Lu'An is going to be a nice contributor here in 2019. You have other projects. When 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, yeah – so that's the question. Seifollah Ghasemi - Air Products & Chemicals, Inc.: We don't disclose that specifically, but I have said that we expect 2019 that we increase our EPS by at least 10%, so some of that will come from those. But if you don't mind, we don't want to disclose the specific contribution from new projects because then it makes it very easy for people to calculate exactly what our returns are and we don't want to do that.

Okay. And then as a follow-up, your electronics market on that project slide has 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? Seifollah Ghasemi - Air Products & Chemicals, Inc.: Well, that market is growing very fast right now. I think this year if you add up, we probably have contributed more than $300 million of new projects in there. And what will happen next year, it depends on the new fabs that people build and all of that. But I love Corning to make a little bit more comment on this. Corning? Corning F. Painter - Air Products & Chemicals, Inc.: Yeah. I was just in China meeting with the team, which is where a lot of this activity is – China, Korea, and Taiwan right now. And I would say the prospect list is still quite robust for us, so we expect another good year of hunting. Seifollah Ghasemi - Air Products & Chemicals, Inc.: And I like to add that we are very, very well-positioned by the way on that one. It depends on...

Thank you. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you.

We'll go to Laurence Alexander with Jefferies.

Good morning. Could you clarify two things. My impression with the traditional onsites 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 or if that's a slightly different model? Seifollah Ghasemi - Air Products & Chemicals, Inc.: No, no, no.

And secondly – go ahead. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Sorry to interrupt you. That is not the case. The reason that we are getting the fee is we are getting the fee right now for the startup. Once we get – we have all of the four gasifiers running, then in 2020, if because of the customers' demand only two gasifiers are needed to run, we still get our full BFC. So the model is exactly the same, it's adjusted during the startup period.

Okay. And then a second one I guess just to flog one of the previous horses again, I think you have 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. You get about a $0.04 or $0.05 from the JV 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 squishiness 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... Seifollah Ghasemi - Air Products & Chemicals, Inc.: No, it's...

...is are you ramping up growth investments to take advantage of the tailwinds? Seifollah Ghasemi - Air Products & Chemicals, Inc.: I think I don't want to confirm or not confirm the exact numbers that you quoted, but we do see the positive effects of the FX, we do see the positive effect of Lu'An coming onstream right now. But as we have been saying, we do see higher maintenance cost because of the turnaround of some of the hydrogen facilities and we do see higher cost in terms of pursuing other opportunities. I mean, like – during the last year, it cost us $5 million that they had to absorb in our results. So those are the two principal reasons that we haven't increased our guidance by more than $0.10.

Perfect. Okay. Thank you. Seifollah Ghasemi - Air Products & Chemicals, Inc.: Thank you.

And gentlemen, there are no other questions at this time. Seifollah Ghasemi - Air Products & Chemicals, Inc.: 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 would like to thank everyone for your participation and you may now disconnect.