Q3 2019 Earnings Call

2019, Lennon earnings conference call.

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The conference over to your speaker for today Mr. one Chris. Please go ahead.

Thanks, Michelle good morning, everyone and thank you for attending our third quarter earnings call webcast.

Once again, it's just want belies head of Investor Relations and I'm joined this morning by Steve Angel, Chief Executive Officer, and met White Chief Financial Officer.

Today's presentation materials are available on our website Lindy dot com any investor section.

Please read the forward looking statement disclosure on page two the slides and not that it applies to all statements made during this teleconference.

The reconciliations of the pro forma numbers are in the appendix this presentation.

Steven Matt will not give us an update on Mindy will that be able to answer questions. Let me turn the call over to Steve.

Got you won.

The team delivered very strong results for the quarter.

We saw operating profit and operating profit margins improved both sequentially and year over year in every segment.

S improved substantially year over year and sequentially.

Cash flow came through nicely as we had expected.

Project Capex grew while base Capex shrike, which reflects spend against our large project backlog.

And Capex efficiencies.

Oh see percent the single most important metric and a capital intensive business continued to improve.

The sour gas backlog remains strong at $5 billion, which gives us a nice foundation for future growth.

We raised our guidance again, which reflects our positive momentum.

Opportunities, we see to 'cause it to continue to improve.

The quality of our business and the resiliency of our business model.

And of course this is against a backdrop of softening worldwide demand.

A few comments on the segments in the Americas, which represents nearly 40% of our total sales and nearly half of our overall operating profit.

We saw good organic sales year over year driven by price.

But flat sequentially, but flat sales sequentially.

Strengthen food and beverage and health care is offsetting weakness in metals and manufacturing.

Operating margins continued to improve as we drive efficiencies across the region.

In Europe , we saw evidence of better execution is operating margins reached 20.5%.

Despite a weaker macro.

The weakness we saw in the quarter continue through September and October .

In Asia Pac operating margins are climbing nicely.

450 basis points year over year, and 70 basis points sequentially.

The team continues to do an excellent job delivering on merger efficiencies.

Volumes are impacted by slowing China.

Australia.

And turnarounds in Southeast Asia.

In linear generic we saw record margins driven by excellent execution.

Cost absorption.

And timing as we're able to close out key projects during the quarter.

Though backlogs remain strong I don't see this level of operating margin as sustainable.

This is a business that should trend closer.

To low double digit percentage through the cycle.

The global the global other segment reflects ongoing merger efficiencies as you would expect.

Our focus successful integration.

Improve the quality of each and every business.

Optimize our portfolio around core sell of gas regions and businesses.

And then drive network density.

Facilitate growth synergies.

And drive operational excellence and everything we do.

Final comment before I turn it over to Matt.

We have a resilient business model, which generates strong cash flow through the economic cycle.

In periods of expansion, we invest for growth.

And when the macro weekends, we were turned that cash to shareholders.

You add to that the value created by our merger and you can see why we aren't investment for all seasons.

And why wouldn't trade places with anyone.

Matt Thanks, Steve Good morning, everyone.

Third quarter adjusted pro forma results are shown on slide three.

Consistent with prior quarters. These figures have been adjusted to best demonstrate underlying trends and performance of the combined business.

You'll find the required reconciliations to U.S. gap in the appendix.

Sales of $7 billion are 1% higher than prior year, 3% below the second quarter of this year.

Foreign currency translation continues to be a headwind.

As the U.S. dollar strengthened across the board.

Excluding FX and cost pass through underlying sales increased 4% from 2018, but decreased 1% sequentially.

Versus prior year prices rose 2%.

And the 2% volume increase was split between organic growth and project contribution.

Well the more resilient end markets of food beverage and health care continue to grow we are seeing declining to negative growth rates across most industrial markets.

Specialty metals and manufacturing.

The slowing industrial activity is primarily driven by North America, China, and Australia, which is consistent with our expectations.

Versus the second quarter. This year price increased 1% from broad based actions, but volume declined 2% from engineering project timing and some seasonality and weaker industrial activity in EMEA.

Despite the softening economic conditions operating profit grew 16% versus prior year and 5% sequentially.

Or 19% and 6% when excluding currency translation.

The combination of price attainment and cost efficiencies across all segments, enabling operating margins to expand 270 basis points versus 2018, and a 140 basis points versus Q2.

The company reached 19.8% operating margin this quarter.

As employees around the world continue to coordinate efforts to improve productivity and operational excellence.

Net income increased 24% from prior year or 27% when excluding FX translation.

The reason for greater profit leverage is due to lower net interest expense from a combination of excess cash flow and FX impact.

As stated before we are recapitalizing, the balance sheet to better align with our target single a credit rating.

But this will take a little more time as we refine our cash forecasting.

Until then we are actively deploying excess cash and managing the capital structure to deliver value to the shareholders.

S of $1.94 was 26% higher than prior year and 6% higher sequentially.

Excluding FX those figures improved to 29% and 7% respectively.

This result is somewhat higher than anticipated since favorable impact from cost management actions more than offset worse than expected FX rates.

In addition to delivering strong profit leverage this quarter.

A large majority of earnings pulled through to cash as operating cash flow increased 86% sequentially to $1.9 billion.

While we would normally expect some seasonal improvement most of the sequential increase is driven by better working capital management.

Along with higher EBITDA and less merger related outflows.

Capex increased 11% from Q2.

But you can see that was driven by project Capex, which represents a customer projects under construction and secured by long term contracts that lead to incremental growth.

The sale of gas backlog associated with project Capex remains strong at $4.7 billion.

And we'll be executed over the next three years, although that spend pattern will be somewhat lumpy.

Base, Capex, which represents all other capital spend not associated with our project backlog such a small growth.

Cost reduction and maintenance.

Declined 7% sequentially as we continue to find more opportunities for cash synergies.

Well when this all together results in a return on capital of 11.2% or a 60 basis points sequential increase.

This improvement is driven by higher after tax profit over a capital base that declined due to prudent cash management across the organization.

We firmly believe that return on capital is one of the most important metrics for this industry in light of the capital intensity and long term contractual structure.

Given these cash and capital trends.

Felt it may be helpful to provide a little more detail, which you can find on slide four.

So less side shows operating cash flow trends by quarter.

The first two quarters, where each around $1 billion, but subsequently increased almost $1.9 billion in the third quarter.

As I mentioned earlier the key drivers include declining merger related outflows higher earnings and better working capital performance.

In addition, the first half tends to be seasonally lower from timing of cash incentives in taxes.

The year to date figure of $3.9 billion includes zero point $7 billion, a one time merger related outflows.

This zero point $7 billion, primarily relates to taxes and fees, which supported by $11 billion of divestiture proceeds in addition to legal and adviser payments.

These merger outflows will be significantly lower in 2020.

The Pie chart in the lower right represents how the year to date operating cash flow has been allocated.

Overall, it's a balanced approach with roughly half invested in the business and a half returned to shareholders in the form of dividends and stock repurchases.

Oh, the half invested in the business, it's evenly split between investments in secured growth and base Capex.

Secured growth represents accretive acquisitions.

And project Capex for the backlog.

Base Capex is important to support non backlog growth.

A cheap cost reduction targets.

And maintain high levels of plant safety reliability and efficiency.

Overall, the priority is to invest in high quality projects the growth projects that meet our investment criteria, while continuously generating excess free cash flow to distribute back to shareholders.

Please turn to slide five for an update on full year guidance.

We are raising full year EPS guidance to $7 in 25 cents to $7 in 30 cents, which represents an increase of 17% 18% from prior year.

Were 21% to 22% when excluding 4% currency headwind.

The guidance is above last quarter due to favorable Q3 results and continued confidence and opportunities to improve the cost structure.

However, this range also implies that Q4 EPS will be below the $1.94 from Q3.

Part of the sequential decline relates to the timing of project completions for the engineering business.

Engineering is a long cycle business with projects that takes several years, so the quarter to quarter results can vary, but we fully expect to maintain high levels of execution.

Another driver of the anticipated Q3 to Q4 decline relates to projections of a weaker macro.

Lower manufacturing levels and longer customer outages continue to point to decreasing industrial activity.

In summary.

Despite the macroeconomic headwinds we continue to improve the quality of the business and grow earnings double digit percentage over last year.

This is only possible from the collective efforts a ball 80000 employees executing as one team.

And while geopolitical forces will likely result in more uncertainty for 2020 and beyond.

We maintain a high degree of confidence in our ability to leverage opportunities that not only overcome these challenges, but will also create substantial value for our owners.

I'd now like to turn the call over to QNX.

[noise]. Thank you as a reminder, ladies and gentlemen, if you asked a question at this time. Please press Star then one to withdraw your question. Please press the pound Keith.

Our first question comes from the line of Mikes as.

Well if I go your line is open. Please go ahead.

Hi, guys Nice corridor.

Steve You know when you think about the macro environment being.

Weak as it is and the earnings growth pretty strong.

How do you frame up the leverage potential if if if demand gets better particularly longer term you know given you're doing 17, 18% growth.

How much better can your earnings calls Catlin, let a better economic environments.

Well.

I think clearly there was a leverage.

The massive volumes improve above.

What we're looking at you know going forward into next year, we certainly have a backlog that.

That we've talked about in the past that will be additive to our E. B S. We have pricing expectations as well we have ongoing cost efficiencies, we have the impact of share buybacks et cetera. So anything that happens on the volume lied would be additive to that but I think we have to be realistic based on the trends were.

Seeing a which are not particularly positive or around the world. So that's why we frame.

Or why I framed by my view of going forward because I'm looking at.

As I, just said that positive.

Got it and then just curious on on your engineering backlog of 5 billion, how does that overtime translate the earnings growth.

Given year or or given couple of years.

Well it is its third party sales and so if you you kind of assume you know a certain level of sales that are that were.

Seeing now on a quarterly basis, and if you assume operating margins again or something closer to what I said in my opening comments, which you're kind of low double digits. So call. It like a 11 12, maybe 13% kind of range through the cycle. That's what we should be able to extract and the strong backlog just gives us.

Competence that going forward into next year, we're going to have that to work against and certainly into part of the following year. It will come a point, where we're going to need to add new projects to sustain that level of profitability going forward.

And I think Mike. This is Matt one thing to add just as a reminder, I mean this is primarily a negative working capital business.

It's highly accretive it's not capital intensive like the remainder of the industrial gas business. So it is a highly complementary from a financial perspective.

In addition.

Great. Thank you.

[noise]. Thank you and our next question comes from the line of.

[noise] Mark as mayor with.

Line is open. Please go ahead.

Yeah. Good morning settlement Mcus my about a via a three crusher from my side first one is this on the guidance maybe you can help us understand what when you look at the guidance raise what was triggered by the shift Fibrek effect, what was the negative effect from Forex and what was what affects came from the different to kinda CRO. Some.

No other different.

Efficiency effect that will do my first question.

Okay markets. This is Matt I can I can handle that.

I think from a share buyback perspective, I'd say little to no effect, that's not really having a any effect in fact.

I would say, we were probably little bit behind on our program on the last quarter. So that's really not not having much of an effect, but the offset to that would be slightly better interest. So I would think about interested buyback really it's kinda offsetting each other as I have favorable interest I'll be behind on the buyback program, but as I work towards a single a then I'll probably have a low.

Our share count FX definitely had a negative effect when we looked and gave guidance a quarter ago I would say the FX got worse by one to almost 2% than what we had anticipated we'll have to see what it means going forward, but that is something that got a little worse as the dollar strength and pretty much.

Across the board as far as the growth I think the easier way to probably think about it is sequentially as we mentioned or thinking about Q3 to Q4 a at this stage. This guidance implies probably about a percent kind of erosion on base volumes will have to see.

If that occurs or not obviously anything better than that she'd be upside, but right now that's that's our assumption and we'll we'll see what ultimately comes out.

Okay understood. The second question would be what was the helium effect on your price increase system this quarter.

Uh huh.

The helium if you if you look at year over year. It was probably about a quarter of the price effect of the 2%, maybe slightly higher but something around that facility and sequentially no effect.

Okay.

And then last question would be how much of this very strong cash flow generation came from the engineering prepayments as it has recently signed seven pro checked.

Yeah, Hi markets I think the best way to look at that is when you look at our statement of cash flows you'll see a line called contract assets and liabilities net that essentially represents a customer deposits.

And what the changes of that so for this quarter, we did have a favorable a amount of 68 million.

But that's a number that goes up and down prior quarter. It was negative just due to lapping from prior years. So I think that that number we gave out for you to be able to track independently.

Okay, I think as much.

Welcome.

Thank you and our next question comes from the line of Jeff Zekauskas with JP Morgan.

Line is open. Please go ahead.

Hi, Thanks very much.

If we look at the pro forma.

Cost of goods default.

Year over year, it's down about 125 million.

So if you annualize that.

You know that that's about 500 million.

And if you look at your question a year over year, it's down about a little bit more than 30 million. So if you annualize that that's 125.

So you know isn't the case that order of magnitude your run rate cost reductions heart I don't know the country and 25 million something like that.

That's fair characterization.

Hey, Jeff This is Matt I think the challenge on looking solely at pro forma not pro forma adjusted is that all of the effects of purchase accounting are going to be ER in those results and as you can imagine we had to step up the inventory as part of purchase accounting, which would have a disproportionate effect on cogs in the.

Beginning and then that would rapidly decline. So there are lots of different lives of assets that had to be stepped up that are anywhere from month to infinite life. So pro forma as you know under article 11 assay see still has all purchase price accounting effects in it. So that's why we think looking solely yet.

Format is going to be are they tricky because of the purchase price accounting effects and what I still firmly believe is the numbers that we represented here on a pro forma adjusted best represent and as we stated in the last call we.

We fully believe were on full track now obviously as you can see and the results. We did do a little better than expected on costing I think timing was a little more favorable than we anticipated, but we are fully in line with the 900 million a target that was given and the promise that was given.

At the 300 million per year, so we feel quite confident on that and from here on out everything we're looking for just overall efficiencies and opportunity exists as one operating company.

Okay and then.

Your your Hey pack self didnt really grow very fast.

And.

You know if it turns out that youre. Some of your competitors are growing pretty quickly in China, and they're growing pretty quickly in the mid east how.

That's something you feel that you need to do anything about like do you feel like you're growing up the appropriate crate and those two regions.

So when you look at a back I think we set the outset that.

You know you have all we have Australia position that we are addressing.

China, certainly slowing global some turnarounds during the quarter that had some effect.

But Jeff when you look at where we are today, there's very little contribution from a large projects and those numbers and it. So happens if you go look at the seller gas backlog Asia represents nearly 3 billion.

That backlog.

We have some very large projects and some large contributions ahead and I think if you look good.

The industry whenever one of US reports, if theres a big number usually it has something to do with a large project.

Projects and as the cases today.

We just don't have that contribution it's just a question of timing again the backlog is ahead of us.

If I look at the long term trends the place like Asia Pacific.

Clearly electronics is going to be strong going forward. However, I talked about the backlog I think as these emerging markets develop the applications that both legacy companies that brought to the combined company.

Going to have a positive effect.

You know the pricing equation as something that we look at it very carefully and continue to work you know regarding other parts of the world. We look at many things, but then again it all has to pass the screen of.

Is this a strategic geography is this a geography that we think we can build density Gcgs. Our strategy is all about but we see on core joc fees that we can build network density and then as we look at individual projects there is a.

We just versus return assessment that we go through very thoroughly and that has to pass that screen as well.

So that's the answer that question okay, great. Thank you so much.

Thank you and our next question comes online.

With keep Sir.

Your line is open. Please go ahead.

Thank you no, Steve Matt and fun two questions.

This is on.

Actually pulled off from that.

The P. P eight related amortization charges dropped by 18% sequentially compared to Q2, why do you have self can five cents only mobile the other intangible assets you Bennett. She has been sequentially stable can you explain that massive change into P.A. amortization.

Yes.

Secondly, kinda back to the.

Operating cash flow.

And you mentioned, how you had the D.A. better working capital and less merger related outflows, but I see that you also had some.

Well the proceeds of one then 71 million you told US are there any other funny items included in that cash flow figure. Thanks.

Martin So we'll start with P.A. I think it's a bit of.

Consistent with what I had mentioned to Jeff. So as you can imagine in purchase price accounting or you are required to assign a valuations across a whole spread of different assets that have various lives. So there are a significant portion that is assigned to shorter live inventory and that those fall off you have.

A significant amortization and then they obviously are go through your cost of goods and then they're sold so any inventory would've fallen off in the first the second quarter and you would have a larger amount of recognition amortization as the years go on and you start losing more of the shorter lives. The amortization number will continue to decline so that.

As a normal pattern in any type of a gap purchase price accounted effect that your amortization is at its peak at the beginning a and then it rapidly declines on short lived assets such as inventory a software things that might be three year life five year light vehicles, and then over time you get in.

And machinery buildings that get the 10 20 years. So this isn't normal pattern a of any kind of amortization, but again back to my earlier point. This is why we wanted to focus on adjusted figures because this amortization can create a lot of confusion and it's really noncash and given our scenario was.

Merger of equals there really was no capital component of this a merger. So that's why we really are focusing on the on the adjusted figures as far as the operating cash flow just to make sure you understand any disposable proceed gains are part of divestitures, which relates to investing.

Cash flow not operating cash flow I'm. So there wouldn't be none of those gains related in fact, it's the opposite what happens the gain is in European now it is completely wiped out in your operating cash flow to make it a zero effect and then the full proceeds are put in investing cash flow. That's how GAAP accounting works our cash flow statements are.

Her GAAP accounting, so hopefully that that answer makes sense.

Thanks.

Thank you and our next question comes from the line of Fisher with Barclays. Your line is open. Please go ahead.

Yeah, good morning Fellas.

Just wanted to go back to your slide format.

On the cash flow bar charts, I'm trying to understand.

Its current levels of profitability was your intention to kind of guy this more to what the Q3 looks like going forward that we've taken a step change up or did that have some one time working capital benefits. It may be can't repeat so maybe at the midpoint for Q4, and then going forward, what's the better bar to think about as cash.

Conversion from an earnings level.

Yeah, Duffy I think it from my perspective, right now probably the best way to think about is on a year to date basis were 3.9 and within that are these $700 million of merger related costs and as I mentioned in the transcript that's going to drastically fall off in 2020, it will be quite small there'll be a little bit a hangover of.

Our final divestitures, which will be pretty minimal and then they'll just be some ongoing cash restructuring, which should be a fairly small to achieve the synergies. So the way I would think about it is if you take that 3.9, an add back almost all of that 0.7, you know you could say 0.6 somewhere in that neighborhood.

Looking at mid fours is where we probably should be on a no normal ongoing basis through three quarters I do think the seasonality was a little overly skewed in this first half partly because of the merger outflows, partly also because of the two legacy companies, having independent compensation schemes that that paid out in the beginning of the quarter going forward will.

Have one compensation scheme, so that should also help.

Reduce some of that component, but I would still think about it as I've mentioned in earlier calls just to think about EBITDA kind of <unk> and O C. F. As it relationship. So what is your O C F. As a percent of EBITDA and as you may recall, we've said in prior calls that you know you look at the five year average of the too.

Legacy companies and it's a high Seventys and that's something we absolutely expect to continue to deliver on and when you look at year to date. After you adjust for the merger outflows through three quarters were little bit ahead of that we're probably a couple of percent ahead of that number right now so that's how we think about it.

But I still think we should be continuously on a full year basis converting at least three quarters or more of our EBITDA into operating cash flow and then obviously any areas, where we can enhance that the working capital management dividends from non consolidated affiliates or other areas above and beyond EBITDA, we're going.

To continue to work towards that.

Great and then Steve maybe a question for you just Latin America, it's a smaller business for you now, but still quite large and your bigger than most of our company's down there perona spec in Argentina, loulo picking a fight out of jail Morales gone riots in Chile.

You know when you looked at Latin America from investment standpoint does it feel riskier and does it feel like we have the danger of a meaningful leg down, whereas most of that just headline and the underlying business is still just grinding along I see a lot of its headline I mean, I you can't look at Latin American store Clay and say, it's a real estate will play.

Yes.

So we've always said to contend with that again three quarters of our business still is pretty much Brazil, and if anything Brazil is taking a turn for the better.

You've read about pension reforms other things are trying to do to shrink the size of the government privatization is theres a big push on that.

And we have an excellent team on the ground and of course I've been watching that their performance very closely.

And they've been working up the operating margins nicely over the last couple of years and they're very stable. So despite all the headline news I'm looking at results that are very stable and have been trending up positively.

Especially with respect to operating margin quality, which was always been the objective and I was pleased to see again.

Close to where it was.

Great. Thank you guys Yep.

Thank you.

Next question comes online.

Hang with extreme your line is open. Please go ahead.

Oh, hi, everyone. Thanks for taking my question on the supposed to be on the but the base Capex and you talked about that being down some sent you and yeah I think originally guided to.

200 million of Capex related synergies I was wondering you could update us on when we're tracking on that and then on the piano synergies I think you're pointing to the 75 million a run rate by the end of Q food can you give us an update on where we often any early indications on 2020 . Thank you.

Well, so with respect to the base Capex.

On your correct, it's down 7%.

Q2 to Q3, we had said $200 million about $200 million will cap ex efficiency as a result of the merger that will be over a three year time brain.

And based on what we're seeing and the plans that we have going forward I feel confident that that number certainly achievable.

With respect to the cost synergies.

You know certainly with the operating margin quality improving across the board you could surmise that the synergies are taking hold.

To be very honest as I as I look at these numbers I pay less attention to what's called a synergy cost savings.

And I'm, just looking for improving the quality of our businesses across the board which means.

Better operating performance cost productivity programs efficiency programs, all the things that improves the overall quality of the business. So that really is where I'm focused but coming back to the too.

The basis of your question I would say you know the number that we laid out there in the beginning the 900 million dollar kind of.

Cost synergy over three years that number still very realistic in my mind.

Okay. Thank you.

Thank you and our next question comes from the line of John Mcnulty with BMO capital markets. Your line is open. Please go ahead.

Good morning, Thanks for taking my question, So I guess, the personal to be with the with the pricing having been a strong as its in for the last few quarters I guess I'd be curious if you feel like you're losing any business at all at this point or if it's really just look you're catching up on the pricing side I'm too to match some of the inflation and its and its holding holding well and your Nazi merged customer.

Migration, so I guess, a little color that would be helpful.

Sure.

So as you.

You know, it's kind of as you said, John really pricing is very much a granular game, meaning.

You don't really manage pricing out of extremely high level, yet to manage pricing at a very granular level.

And that's also where you get the biggest bang for the Buck in terms of.

Improving pricing in the value you receive for your for your products and services.

And so we pay very close attention to that obviously each individual business pays close attention to that I review 20 of them every month.

And so I get to hear first hand in terms of what's going on with respect to pricing and volume broken down by channel by product by country and we go through that with a fine tooth comb, but as I sit here today I don't feel like we're losing business that we don't want to loans as a result of pushing price too hard.

And again, that's something we track very carefully so.

I'm pleased with the progress, we're making I look at pricing sequentially I don't really looked at it that much year over year.

Okay, much more attention to sequential price improvement as long as we're moving into right direction.

And managing it appropriately.

At a business level at a granular level than than I'm happy.

Great. Thanks, and then and then maybe with regard to a longer term opportunity I guess I'd be curious your thoughts on on the opportunity around Seo too I know there.

Like some of your peers or at least starting to show some interest there, but curious your thoughts on on the market and the opportunities there for Wendy Okay. So I assume your question prefer more to the cost of carbon and would that means from an environment standpoint, but I'll just answer both pieces that first of all we've had a big focus on on built.

Being out our CEO to infrastructure, we had.

Seen over the years that that's a very important product to have four.

Carbonated products for food freezing.

For other applications and so that's a focus we've had for several years like it look at the growth of our CEO two products.

In places like the United States, and it's going very nicely.

Which would be consistent with our comments about growth in food and beverage.

If I think about the price of carbon that is we are seeing more projects today than we have seen.

In the last several years and there's a list of things while I'm looking at.

Couple of them do pertain to.

All the cost of carbon steel to capture and I think those are going to be opportunities that are going to grow going forward. It really has to be a function of legislation you've heard about this 45, Chew, which is IRS ruling that provides a credit.

For CEO to that credit grows over time, I think thats certainly a step in the right direction is creating some interest but you look around the world. Those are the types of things that we're seeing.

And I think it's going to be.

The opportunity for growth going forward.

Great. Thanks, very much the color.

Thank you. Our next question comes from the line of Peter Clark with Societe Generale. Your line is open. Please go ahead.

Yeah, Hi, everyone.

Just two two questions first one also with its the.

Obviously, you've pointed to the synergy run rate et cetera, but in Europe .

That's for execution being a key part and I see the sequential price is up there again, just wondering if you're starting to see the benefits of some other cost cutting too or is that something we really expect going forward. So it just doing things better. This is the main thing.

Movements in Europe , and then the second question I keep beating when they open up new website still over 100 countries I noticed the second daughter thing sorting out the density in terms of the number of countries and the exposure there but.

Just if we should expect anything to happen on that front as we go through 2020 . Thank you.

Okay. So the.

The first question, let me clearly without a focus on improving operating margins across the board not just a may have that everywhere.

And again, it's a country by country, it's a business by business look it's a product by product look pricing clearly is a piece of that.

We have been taking the appropriate cost actions in Europe .

We will continue to do that because quite frankly, the macro environment is not that favorable today and so it's something that we need to do.

And as it relates to people. This is a discussion that we have to have enterprise and want to have had a European works council level and also at the local works councils.

And so those discussions are are sort of ongoing and they will continue.

We clearly look at in Europe , as an opportunity to continue to expand operating margins and that is our attention.

Part of that is looking at certain businesses that really don't belong in the portfolio and.

If you go back to my earlier comment about optimizing the portfolio and that gets to your.

To your second question, we have gone through that we just did a concluded a bottoms up review that we happened to review.

With our board of directors as well in October .

And we have.

A list of I'll call. It countries and also businesses that we think.

We need to take action on.

How do we come to that conclusion, we look at the risk of being in some of these.

Businesses and countries, we look at the quality of the business, we look at opportunities to scale it up and build density and then that really drives our.

Evaluation, but we do have a list that we're working on.

As we speak and then there is another list that we are monitoring evaluating watching.

And may lead to some action later on but but we're clearly that's clearly something that.

We're focused on.

Thank you.

Thank you and our next question comes from the line at different Ballenger with.

Thank you Bank. Your line is open. Please go ahead.

Thank you Steve just on the U.S. package business did those volumes get worse in Q3 versus Q2, I think I recall hard goods was negative in Q2, but I'm not sure gases was negative in Q2.

Yes, David so.

The gas and hard goods.

Both declined low single digits.

You too to Q3, so they both declined low single digits and they're also happened to be.

Down year over year, low single digits, and I'll add a little a little more color to that we looked at October and hard goods is down about 6%, 6% versus September sequentially, and that's all capital equipment or driven largely by capital equipment. So.

The trend that we have been describing with respect to a weakening macro.

In the U.S. appears to be taking hold.

Very good and just on the list the countries and a business as you need to take action on what percent of sales or E. But does that comprise assume it's pretty small may be sub 5% or in that range.

I'd say you're correct. It's it's in about the 5% maybe little less range.

And there's a lot there was a lot of small countries and again some businesses are part of that as well.

Makeup that number.

Thank you very much.

Thank you and your next question comes from the line of Laurence Alexander with Jefferies. Your line is open. Please go ahead.

Hi, This is Adam give us on for Laurence Alexander Today I was wondering how do you think about the risk of carbon capture and secondly, sequestration projects compared to traditional thing gas.

[noise], although I think about the risk yes.

If you look at in terms of let's say, let's start with conventional.

Reduction of hydrogen through steam methane reforming Seo too is a byproduct of that.

When we structure, our contracts with our customers who want that hydrogen.

If there is a cost of CEO to that is.

Passed through contractually to the customer.

So I don't see that particularly as a risk for US now having said that we do look at.

Means and technologies.

To reduce the C or two emissions and there are technologies that exist.

That we will be implementing that will allow us to do that.

In terms of the opportunity aspect of that.

We are seeing examples where people are asking us to look at CEO to capture projects.

And that provides an additional opportunity for us. So that's the opportunity side of it is with respect to.

Syn gas.

You know clearly syn gas has a certain composition of hydrogen.

And CEO .

Send gas opportunities are more driven by the chemical chemical industry, Dallas downstream chemical products.

And.

Our subsea to emissions as part of that process, but there's an opportunity to bring that CEO to back into the feed.

And produce more Seo and emit less emissions. So that is a technology that we have and something that we're looking to deploy more and more.

Okay, great. Thank you that's very helpful. And then my last question I believe the going engineering is to start to shift the business toward more over the fence projects versus third party sales I was wondering could you give it some color on progress here and.

How might we think about display developing over the next several quarters yeah.

Well I think about what I, what we have said is that we wanted to all the good third party projects that are out there and it so happens at Lindy engineering and as a very strong track record of executing very complex projects.

And that is the reason why we were successful as we work with a project like Exxon Mobil, where Exxon Mobil had confidence of Lindy ungenerous capabilities to to execute a project like that so we want to do all the third party business. That's out there and there certainly are some opportunities that are in front of us today, we want to capitalize on by the same tone.

Can we want to do all the good solid gas projects that we can find and we truly believe that between our product line capability.

Lindy Lindy legacies product line capability, we have a full complement up every plant product line that that we could ever want.

And we want to utilize the.

Engineering and technology skills linear generic brings to be more competitive and over the fence projects more traditional over the fence projects and also look at opportunities to kind of broad dollar seller gas footprint as the opportunities arise. So I think probably something on the order. A 50 50 is a good place to be with respect to third party sales and sell again.

So again, it will be kind of a function.

The opportunities in front of us, but everybody understands and the company that the seller gas is the sweet spot at the industry, It's where we want to focus.

And we're making good progress without objective.

Okay. Thank you very much.

Thank you and our next question comes in the line as Kevin Mccarthy with vertical Research partners. Your line is open. Please go ahead.

Yes, good morning on slide number seven regarding the Americas I think you referenced some turnarounds on the U.S. Gulf Coast.

Was that significant and how do you look at the for Q volume opportunity overall.

Relative to the three Q level, Steve I think you commented on hard goods, a little bit, but just more broadly what is your crystal ball say for the Americas and for Q.

Well, we saw some turnarounds.

In Q3 on the Gulf Coast, and some of that continued until October as well so.

It just so happens there were quite a few group together, they're all now pretty much out of turned around so they're all running.

And refining refining capacity utilization is quite high and the three to one.

Crack spreads are favorable so they want to run at this point I think generally speaking, though whenever you have weakening demand a weakening macro what we tend to see are more shutdowns and you can call and planned or unplanned I don't really the how you want to characterize it but we tend to.

I see more companies start to take shutdowns in that demand related for sure sometimes its pricing related their pricing.

So I think thats just kind of.

Something you should expect when you're at them by a really a weaker environment overall globally and.

You know I would like to be able to say where it all these turnarounds at Q3, they're all back up and running therefore, that's additive going forward I know, there's going to be another list of turnarounds I'll call unplanned.

Shutdowns for maintenance whatever that we're going to probably see.

Going towards the end of this year and perhaps into Q1 as well.

Understood and then I had a similar question regarding Asia Pac on slide eight you know there again your reference turnarounds, but also a prior years sale of equipment is contributing factors to the minus 1% that you reported year over year for volume.

Again, how do you how do you see a packet trending in the fourth quarter.

Oh I, Kevin This is Matt I could move handle that one.

So you saw in the Asia Pac of the of the minus 1% volume on a year over year and pretty much all of that.

Was due to either the combination of the turned around and the prior year sale of equipment. We do have a business in India that sells equipment. So there'll be some some lumpy ups and downs on that so ex those items volumes were relatively flat year over year and as you can imagine it's a combination of some of the factors, we talked about with with China, Australia.

And some puts and takes with some positive contribution from our project backlog.

But I think going forward.

One of those turnarounds are complete and we expect things to be better in the fourth quarter.

We are pretty confident in the customers we have they run hard they are the low cost producer. So we feel good about that but we just had a little blip here in the third quarter that we're thrilled.

Great. Thank you both.

Thank you and our next question comes from the line.

With Bank of America. Your line is open. Please go ahead.

Good morning, this is Matt to deal on for Steve.

If I look at the cadence of earnings ebay and 2018, you started one Q with EBIT on pro forma basis, 387 million and that declined to $308 million by three Q1 8. This year the cadence of earnings as much more consistent just wondering why that isn't what happened last year on a pro forma basis does not recurring this year.

Well I think you know if you look at.

Last year, it up and I didn't pay a lot of attention to last year, because I didn't really get we didn't really integrate the company until March 1st.

This year, but.

We had some higher power costs last year that we did not do a good job recovering in the end market that is behind US and you know now on a much more favorable trend.

Okay, and if I could ask about the launch of the pediatric nitrous oxide business and how that product is going what regions being rolled out and I think it's about a 600 million dollar market just kind of wondering how much you think.

Marketshare wise, you could capture there [laughter] well.

It is a business that we're rolling out I'm not going to put.

Big dollar figure on that certainly for 2020, I think it's something that we have interest in.

Clearly, we have freedom to practice, which is very important we've passed all the regulatory approvals from the F.D.A.

Et cetera. So we're in a good position it is a market that we're not in so obviously everything is upside.

I'm not expecting big numbers in 2020, but.

You know we do have hopes this can grow into something significant.

So when I came from one last question.

Hi last question comes on line.

PJ Juvekar with Citi. Your line is open. Please go ahead.

Yes. Thank you good morning, and thank you for taking my question.

So Steve.

You were talking about opportunities to raise prices in Lynn good legacy business in Europe and Asia.

And I believe that should I mean, not drop off market pricing.

So where do we stand on that relate to your expectations set at the beginning this year. Thank you.

Well.

I think we still have some opportunities to continue to work through I think we've made some very good progress.

This year I mean.

First step is to be able to calculate what your pricing is and to be able to do a variance analysis. So you separate out pricing and then you've got this and then start looking at reports and then starts to take appropriate actions.

So I think a lot of those building blocks.

I've been put in place.

As I look around the world clearly, we have very strong pricing in the Americas looking in areas that were up six 7%.

Some areas are lower yeah, I can look across Europe and see that.

Package in merchant combined.

It's up around 4% or so so some progress has been made there by just look at those pure product lines.

And that I look at Asia, we have a situation.

Currently today in China, where the year over year comparisons on favorable calls pricing was very high in the prior year period.

And that's something that we're working on.

But.

Overall, I think we clearly have some opportunity to do more and that would be my expectation rolling into 2020 as well.

And you just mentioned China.

And you said here are the Chinese volumes are down.

How much of that down and what kind of you seem to see here.

Brian is a trend improving or flat or what's going on there well I would say that.

You know if I look at Q3, it looks pretty flat to me.

If you want to.

Got to step back and look at what's going on China generally speaking, Matt talked about the trends Q3 to Q4.

Just so happens Golden week was the first week of October .

And no pun intended the Golden week was very weak and again, that's the type of thing you expect when the overall economy is not very strong.

He and GDP have been trending down overtime automotive is not return anywhere near its levels. The steel PM. Abi index has been in the mid Fortys only thing keeping that go on his infrastructure spend.

Chemicals are probably what is probably one of the more stable parts of the market. That's got in the low fiftys from a P.M.I. standpoint.

We do look forward to wave of relocations that we think will be coming as a result of environmental.

Issues and cleaned up driven by Beijing, you know electronics is probably a bright spot because the Chinese governors, focusing so heavily on that but clearly.

You know China's been on a weakening trend and again, we're not starting up large projects as we speak that can move that number fairly significantly that that will come later on.

Thank you.

[noise]. Thank you.

Kevin a question and I would like to turn conference back over to want to last for any closing remarks, Michelle. Thank you and thanks, everyone for participating on today's call. If you have any further questions. Please feel free to reach out to me directly.

Great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.