Q1 2020 Earnings Call
Good morning, welcome to air products in chemicals first quarter earnings release call. Today's call is being recorded at the request of air products. Please note that this presentation on the comments made on behalf of air products are subject to copyright by air products at all rights are reserved.
During today's call is Mr., Simon Moore, Vice President of Investor Relations.
Good morning, everyone.
Welcome to air products first quarter 2020 earnings results teleconference. This assignment Moore, Vice President of Investor Relations.
We used to be joined today by so I think it's I mean, our chairman president and CEO .
Scott Crocco, our executive Vice President and Chief Financial Officer, and Sean Major our executive Vice President General Counsel Secretary.
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 <unk> air products Dot com.
This discussion contains forward looking statements. Please refer to the forward looking statement disclosure that can be found in our earnings release and on slide number two.
In addition throughout todays discussion, we will refer to various financial measures.
Unless we specifically state otherwise, we're referring to adjusted non-GAAP measures, including adjusted earnings per share adjusted EBITDA and adjusted EBITDA margin on both a companywide and segment basis and our a C.
Reconciliations can be found on our website and the relevant earnings release section.
Now I'm pleased to turn the call over to safety.
Thank you Simon.
Good morning, everyone.
Thank you for taking time from your very busy is schedule to be on our call today.
I would like to tank, everybody I'd add products to again, delivering very strong quarter.
We are very pleased to meet our earning per share.
$2 up 14 cents for the first quarter.
15% over last years, a strong results.
[laughter] 22.
Not to repeat that 20 threerd consecutive quarter of you overused, earning growth.
Please now turn to slide number three.
Safety is always the most important focus for auto loss at air products.
Our goal continues to be zero accidents and incidents.
<unk> please.
To see improvement this quarter.
As our people redoubled their efforts.
So that they can move toward toward our ultimate goal of an accident free bork environment.
Slide number four chose our goal and a slide number phone five shows our management philosophy I have discussed this did your many times before so I don't want to take your time to repeated but those are slides are very important guiding principles that default.
Now please turn to slide number six or five point plan that we have discussed with you in detail before.
But I do not want to focus on our past performance, because frankly I'd like to dreams of the future more than the history of the past.
Oh Dream up the future is to make sure. They had products continue to be the safest most diverse and most profitable industrial gas company and award providing excellent service to our customers.
Oh Dream up the future is for air products to become the largest American chemical company as measured by market Capitalisation.
We did achieve dish by focusing on growth driven by our core competencies.
Oh Dream up the future is for air products to be the leader in providing solutions to divorce environment talk just a bit sustainability challenges through gasification of cool Petcoke Android phone or do they did huge developing solutions to capture she or two from gasifiers on hydrogen.
Ranch and further developing technologies and making it products the leader in Prague, providing hydrogen for transportation around award.
Oh Dream up the future is to be a company that has a higher pinfish beyond just creating value for our shareholders through improved financial performance.
Do you want to be a company that.
People from all walks of life and nationalities come together works together and feel that they'd be long and that did.
Contribution matters and ought appreciate it.
The company that is focused on innovation to show substantial environmental issues facing out humanity.
A company that is passionate and contributes to the data being up all the communities in which we operate around the award.
A global company.
That brings people from all other devote together.
Collaborate improve understanding and prevent conflicts that arise from misunderstanding.
We are committed to work very hard to realize our dreams of the future.
By executing on our five point plan.
Strategy.
Now please turn to slide number seven.
You can see our exciting guys education to strategy.
Continued to be very focused on successfully.
Executing this.
Yeah strategy and they announced projects.
We are making excellent progress and the continued to be very optimistic about this sector.
Slide number eight summarizes the Gulf Coast ammonia project, we announced earlier in January .
As I said this is the largest U.S. investment in the history of AD products and bidding. This project is a direct result of.
The value of our goal Gulf coast hydrogen pipeline.
Yeah, the competitiveness of our hydrogen plants and our expertise to develop build own operate the largest projects in the history of industrial gas industry.
As a result this project.
Our commitments intense Oh financial great chairs.
Please now turn to slide number nine.
[laughter] the I've talked extensively about the significant opportunities for capital.
Investment to generate significant shareholder value.
The same time, the cash generation strange about existing business allows us to be confident in raising our dividend for the 38 consecutive years.
More than 15% increase the announced yesterday to $1.54 per share per quarter is the largest spin share dividend increase in our history.
And then resulting in almost 1.2 billion directly to change to our shareholders in form of dividend next year.
Now please turn to my favorite slide slide number 10.
You can see that our EBITDA margin continues to be more than 40%, which is up over five to 1500 basis points from early 2014.
No I would like to a agenda called over to Mr., Scott Crocco, Our executive Vice President <unk>, Chief Financial Officer to give you the details about very good financial performance Scott.
Thank you very much safety.
Now please turn to slide 11 for our first quarter results.
Our team delivered another strong start to the year.
Volume and price together increased 9% and were up in all three regions.
We delivered double digit profit growth despite the soft economic activity around the world.
Sales grew modestly to $2.3 billion as strong underlying sales were offset by 5% lower energy pass through.
And 2% due to the India contract modification.
The India contract was modified in December 2018.
This is a last quarter, we will see a year on year impact.
Weaker foreign currencies, primarily the Chinese RMB and euro lowered sales by another 1%.
Volume growth of 6% was primarily driven by modest based business growth.
New plants acquisitions, and a short term contract in Asia.
Price was up 3% the 10th consecutive quarter of year over year price increase.
EBITDA topped $900 million up 14% and E. P. S up $2.14 was up 15%.
EBITDA margin was over 40%.
The third consecutive quarter exceeding the 40% Mark.
460 basis points, primarily driven by the higher price and the strong volumes.
Lower energy pass through and the India contract modification contributed about half of the margin increase.
Sequentially profits are down primarily on seasonality in the regions and incentive compensation adjustments, primarily in our corporate segment.
Aro CE continues to improve up 100 basis points over last year.
We're pleased with the almost 300 basis point improvement since 2015, and we anticipate further improvement as we increase earnings and deploy more of the cash on our balance sheet.
Now please turn to slide 12.
Our fourth quarter EPS of $2 in 14 cents was up 28 cents per share.
15% driven by strong operating performance.
Volume and price together contributed 40 cents.
Cost was unfavorable 12 cents as we continue to invest in business development and R&D resources to support our growth strategy.
Equity affiliate income was favorable to sense, while non controlling interest was unfavorable to since.
Then on operating factors in total have no net impact this quarter.
Our effective tax rate of 19.8% was up 80 basis points from last year.
We continue to expect an effective tax rate of 20% to 21% in fiscal year 2020.
Interest expense was seven cents lower this quarter as we paid off a bond last quarter and adopted new accounting guidance that moves about $9 million per quarter from interest expense to non operating expense.
Now please turn to slide 13.
We continue to generate strong cash flow.
The last 12 months, we generated over $2.7 billion or $12 in 30 cents per share of distributable cash flow.
Promise distributable cash flow, we paid almost 40% were $1 billion as dividends to our shareholders and still have.
$1.7 billion available for high return industrial gas investments.
As Steve mentioned this strong cash flow enables us to continue to create shareholder value through increasing dividends and capital deployment.
Slide number 14 provides an update on our capital deployment progress.
As you can see we now show over $18 billion of investment capacity available over the five year period from F. Why 2018 through F. Why 2022.
As expected our total capacity continues to grow as we increased EBITDA.
The over $18 billion includes almost $10 billion of additional debt capacity available today.
Almost $5 billion of investable cash flow between now and the end of F. why 22.
And over $3 billion already spent.
We will continue to focus on managing our debt balance to maintain our current targeted a two rating.
Today, we have a total of about $8 billion of project and M&A commitments with about $7 billion remaining to spend on them.
So you can see we've already spent 20%.
And already committed well over half of our total available capacity.
Now to begin the review of our business segment results I'll turn the call back over to safety.
Thank you as Scott.
I'm very pleased to say that the generated excellent results in all our operating geographies.
All three regions reported double digit profit growth has significant margin expansion.
They are not depending on economic growth around the world.
But our meeting our commitments do through our own actions by realizing value, we've provided to our customers and by successfully executing high return growth projects.
Now please turn to slide number 15.
Where do you can see that our team in Asia.
So again delivered another set of outstanding results.
As we have previously mentioned.
Hey, tensions have not significantly impacted our business our customers and the Chinese government.
10 used to support AD products projects, and we remain very optimistic about our long term prospects in this important region of the award.
For the quarter sales increased 11% from last year with volume and price together up 15%.
Volumes increased 9% driven by new projects base business growth and a short term supply contract.
As a reminder, the heat on you impact of land has lapse since the project has been successfully operating for more than a year.
Overall pricing for the region increased 4%.
And actually our merchant pricing increased by 10%.
11th consecutive quarter of year on year price improvement.
Price was positive in all key countries.
Profits and margins, but higher driven by the strong volume and price.
We don't increased 16% and EBITDA margin expanded 260 points to just over 50%.
Sequentially sales and profit softened as the impact of lower volumes, including less benefit from the shorten supply contracts was partially offset by productivity.
As you would expect.
We do anticipate a seasonal slowdown during 2000 lunar new year at holiday in quarter two.
No I would like to tend to call back over to Scott to discuss our Americas results Scott.
Thank you savvy.
Please turn to slide 16 for a review of our Americas results.
Americas strong pricing trend continued up 3%.
This is the six consecutive quarter of year on year improvement.
Price was better across all major product lines and an all sub regions.
Volume was up 1% driven by stronger Gulf coast hydrogen volumes with less planned customer maintenance outages than last year.
This was partially offset by persistent economic weakness in South America.
Lower energy pass through reduced sales by 8%.
EBITDA of $410 million increased 11% supported by better price higher volume and lower maintenance costs.
EBITDA margin of almost 44% was up almost 700 basis.
Primarily due to better price lower maintenance and improved productivity.
Energy pass through also contributed about 300 basis points.
Looking into next quarter, we anticipate higher and above average maintenance spending due to plant life extension work on several facilities.
We expect our full year maintenance expense to be within our normal range.
Now I'd like to turn the call back over to Simon to discuss our other segments Simon.
Thank you Scott.
Please turn to slide 17 for a review of our Europe Middle East Africa results.
Our EMEA business continue to generate strong price volume and profit growth despite the challenging economic conditions in the region.
Volume was up 6%, primarily driven by increased hydrogen volumes in our Rotterdam pipeline system and the CEO to business, we acquired last year, while based merchant business volume remained stable.
Price increased 3% with improvement across all major products and sub regions. This is the eighth consecutive quarter of year on year price improvement.
Sales were negatively impacted by 8% from the India contract change, 4% from lower energy pass through and 2% from unfavorable currency.
As Scott mentioned, the India contract was modified in December 2018. So this is the last quarter, we will see a year on year impact.
EBITDA of $188 million was up 14% supported by the strong price and volume.
And EBITDA margin of nearly 38% improved over 600 basis points.
The India contract change and lower energy pass through contributed about 400 basis points of this improvement.
Now please turn to slide 18, global gases, which includes our non LNG sale of equipment businesses as well as central industrial gas costs.
Other project activities offset the expected lower results from the successful genes and asked you sale of equipment project. However, we don't expect these other project activities to continue at this level.
Please turn to slide 19, corporate segment, which includes LNG and other businesses as well as our corporate costs.
Sales were higher this quarter supported by contributions from the Golden Pass LNG project.
Profits for flat as the improved contribution from LNG was offset by higher corporate costs as we continue to build our capabilities and strengthen our organization to successfully pursue our significant growth opportunities.
Sequentially results were down as LNG had a lower quarter on normal sale of equipment profit timing and we saw relatively higher costs, including incentive compensation.
We remain very optimistic about additional LNG orders since our technology has been selected for several major projects around the world that are awaiting final investment decisions our final agreements with our customers.
Now I'm pleased to turn the call back over to say fee for a discussion of our outlook.
Thank you again Simon.
Now please turn to slide number 20.
As you all know and it's pretty obvious the continue to live in an uncertain board that the at AD products.
Cannot control.
What do you do have control over the actions at products can take to succeed in a dynamic and changing ward.
We have a strong capable and flexible organization that remains focused on productivity and creating our own growth opportunities, which will allow us to continue to deliver on our promise to investors.
Despite this end system.
That is no change in our fiscal years 2020 EPS guidance.
935 to nine six feet, which is up 14% to 17% over our strong fiscal year 2019 performance.
As we continue to expect our fiscal and be couldn't pick continued you expect our fiscal year 2020, capex to be in the range of four to four and a half billion dollars.
For second quarter fiscal year, 2020 are earning per share to guidance is $2 and 10 to $2 and 20, which at midpoint is up 12%.
Versus last year.
Now please turn to slide number 21.
At midpoint, our fiscal year 2020 guidance represents six consecutive years of double digit earnings growth at 14% average earning per share growth over this time.
Thanks to the great team at AD products, we continue to deliver on our commitments.
Our team around the award.
Continues to be very optimistic about the future of their products.
Our five point strategic plan.
Differentiate us and drive our success going forward.
Our safety productivity and operating performance provide the foundation for our continued growth.
They have to financial capacity, the technical position and talent to take full advantage of our exciting opportunities and I'd like to stress that we see you do see a lot of exciting opportunities ahead of us.
And finally, please turn to slide number 22.
As always.
Our real competitive advantage is that commitment and motivation of the great team be have at air products.
This is about that allows us to continue to generate a strong performance.
Onto tank all of our 17000 people around the award for their commitment and hard work.
And for embracing the opportunities in front of us bid energy Anish spirit of working together.
I certainly am proud to be part of this winning team.
With that Novvi are delighted to answer any questions that you might have.
Thank you if you ask a question please pick at all by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again. Please press star one to ask a question and I'll take our first question, Jeff Secaucus with JP Morgan.
Yeah.
Thanks very much.
Can you describe your volume growth in oxygen and nitrogen in the United States in the merchant area.
Hey, Jeff Good morning, and good morning.
We would.
Okay fair enough to get into that detail Jess.
Yeah.
Because that is obviously, a very significant competitive information and they usually do not disclose that I'm, sorry about that but.
You bet, yes, that's.
They want to stick to that policy.
Okay, I'm going to spend four to 40 billion in Capex this year.
Does that amount of spending lead to some costs coming into the income statement in advance of the capital projects coming on stream in other words are your current returns being penalised at all by the large capital expenditure budget that you have for this year.
Jeff you make it very good point as you noticed from our results.
Our costs I mean, if you focus on the cost to see increasing cost that's not because they have become less efficient that is because we are building organization in anticipation of executing these projects. So you're very correct that you'll see as you are seeing some increasing costs. It is not that.
Significant but it is there and you are they if it's very appropriate for you to pointed out.
Okay. Thank you so much.
Thank you Sir.
And we'll take our next question comes Vincent Andrews with Morgan Stanley .
Thank you and good morning, everyone.
I've a follow up on the on the 12 cents of costs.
Increase in the in the quarter.
The investments, you're making to grow the business, Jeff obviously, just talked about the existing plants, how much of the spend is going towards future opportunities like hydrogen mobility or other things I just curious on the R&D side the equation what it is that sure whether this that you're driving at.
Well that day expenditures that into aspects. One is obviously R&D expenditure, which is set.
You know you kind of know about how much we are spending it is not thats huge.
But the other thing is actually hiring very high quality experience people to oversee the execution of these projects that we expect to get.
We don't want to get the projects and then look for talent to the are putting the talent in place.
Anticipation of those projects, we feel should it happen. So a significant part of the cost is the hiring and onboarding of all of these people and it is a substantial number of people.
Thats the have brought in especially to strengthen our technology section and on that project execution capability.
Okay that makes sense, if I could just ask a follow up on the dividend obviously, a very large increase your record increase.
Last year, when we talked about it you mentioned that you had.
Barclays spoken to your investors about a two and half the 3% yield. Obviously this takes about two and a quarter. My assumption is that what the increase in the share price last year to go back to 2.5% to 3% would have been.
Perhaps on attractive in terms of moving cash flow away from.
Investment projects, but I guess the question is how should we think about sort of the dividend growth algorithm going forward should we thinking more about keeping the yield it too and I had two in a quarter to two and a half or what philosophy can you help us with this year.
That's an excellent question, obviously take a lot of different factors into consideration when we decide on the dividend. It's not just 1% of this stock price for these wells on a cash flow I think you should expect that continue to give at approximately half of our free cash flow as David.
That has been kind of that one guidance and obviously percentage of the share prices I know that part.
Personally that thing that they should continue to pay at a very healthy dividend.
Something that choosing the order up to an 8% of our share price and also about half of our free cash. So at this year I mean, the are increasing at 15%.
So that means that they could us if he had to study now and they don't be can't anticipate but the share price will be so they make the decision based on a lot of different factors, it's in but overall guidance about half of our free cash flow at about two NFS under the share price.
Helpful. I appreciate it.
Thank you Sir.
And we'll take our next question from Kevin Mccarthy with vertical research partners.
Yes, good morning.
Safety, if I back out the effect of the India contract modification. It looks like your volume grew about 6% year over year and so I have a two part question first I was wondering if you could comment.
As to the effective new projects in that number versus baseline volume growth and then secondly.
Since you're one of the first chemical companies to report. This season, just wondering if you could comment on which end use markets might have trended better than expected and if there any that came in lower than your expectation. Thank you.
Thank you Kevin a excellent question in terms of breaking down between organic growth and new projects are basic cat approach has been not to disclose that detail.
But I would like to specifically answer your second question.
At the.
Obviously need to forecast the reason for that is that that economic growth.
In Asia.
Was better than the expected.
The economic growth in Europe .
You didn't become as bad as the expected because of the exit.
And in the U.S. there was not much of the change in Latin America continues to be.
These assets so.
Overall.
As the go forward.
We are now that had been more optimistic about.
Asia, obviously in the second quarter, you had the lunar new year and that Dampens the growth, but do you expect that to continue as we go forward into other quarters.
And I'm, hoping that that things were sent a kind of stabilize in Europe and in the U.S., but that's kind of how they see that thing.
Thank you very much.
Thank you Kevin.
And we'll take our next question from Christopher Parkinson with Credit Suisse.
Thank you can you give us real quick update on your various Saudi projects, primarily just in a demo use and just the future potential for our pipeline build out just any additional framework on Saudi Arabia will be appreciated. Thank you.
Hi, Chris Chris obviously, the order very honored and very proud to be given the gigantic project set of the in integrated gas.
Project in jazz and that is not only the equivalent of a 12 billion dollar acquisition, but it also is a phenomenon reference in terms of our gasification capability. It is using to shut technology and it is a gigantic projects will be a very happy that the are making a lot of progress on that and there.
Continue to be very optimistic that d., we have tried that need to be at kind of complete the financing in a this quarter.
But.
You do need to appreciate and I'm sure you do that they are going to go to the market for $7 billion of debt considering the different.
You know events in the board and all of that things might.
Not happen exactly on the date, but that the fact of the matter is that you're talking about a 25 year project. So the impact on that product for the long term is extremely positive now, but it'd be actually close in the month of March or but then it is in the month of April and we'll see but they continue they.
To be very optimistic about that project as a city a very proud of that and quite frankly, you see that they have not changed our forecast.
That means that DC believed that this will happen at the time that he taught at the beginning of these.
Okay Chris.
That's very helpful.
Just as a quick follow up and a little bit longer term on just the carbon capture was just.
Basically a clear theme at Davos this year.
Basically discuss across that pretty much every global leader Die Yan Pulitzer boil companies.
All of their own partner proprietary technology can you just update us on your own thoughts on this front, where your technologies and into the broader equation and how the investments we should at least begin.
Just thinking about this opportunity as it pertains it pertains air products. Thank you.
Chris the have recognized and made kadmon captured a priority for the company five years ago.
That is the future that is at necessity, you know that need to be the global warming and I am very happy to see that responsible people are now actually talking about it.
Hopefully that ahead of the game.
Yeah. They have been working on different technologies on this the first thing is that do you do have to technology to capture cabin from hydrogen plants and I think.
Gasifiers that's on for enhanced oil recovery, we do have at commercial scale plant operating in Port Archer. It's one of the biggest into award and the capture the CEO to and put it into pipeline there for enhanced oil recovery.
That kind of projects you should expect that even to do on a very large scale around toward.
The second thing is sequestration.
The have developed technologies on that and you are working on that and hopefully in time to be able to announce that kind of commercial projects said we are doing.
The third and most exciting thing is some new technologies that the VR developing and in respect to cabin captured in a different bay I don't want to go through the details of that because I don't think it's appropriate at this stage the our laser focus on carbon capture if you look at our annual report.
Would it be making very created we say gasification today.
Admin capture tomorrow and hydrogen for mobility the day after tomorrow. So those are the priorities of our company and the are obviously trying to be that either on that they're saying that he became the didn't gasification.
Thank you very much.
Thank you please.
And we'll take our next question kind of John Mcnulty with BMO capital markets, Yes. Thanks for taking my question.
With regard to coal gasification in China can you give us an update on the market there and what you're seeing in terms of interest and demand I know certainly over the last year. So there was a lot of a lot of demand and a lot of a lot of talk about it we haven't necessarily seen a lot of new announcements. So I guess can you give us an update on your confidence in that area.
Well good morning, John Apollo as well as we continue to be optimistic about that we did announce.
At product the coal gasification project.
As I'm sure you shop and that they expect to announce some more in the U.S Cook on the order that you know if you're working on Joey tied to Vietnam, Citibank and that there are other projects, we don't see any.
So down on that and the are very optimistic about that John .
Great. Thanks, and then and then just a question on the helium markets can you speak to kind of what you're seeing in the industry right now and how you're seeing how that plays out through 2020.
Well, John I think it is not a secret that that.
Supply demand situation in helium is challenging.
Basically that is not enough supply to meet that demand.
And obviously that has that had an effect on the commercial value of Cavium and.
And you can you and you are seeing that in dollars results.
In terms of 2020 I think that situation just continue and it is quite possible that thats insured situation to continue for a few years to comp I don't want to anticipate that because it depends on the performance of the current sources or bringing on a steam of some other sources, but haiti and as such.
That is small.
You know number of sources and sponsors very transparent about what's going on there are not that many places that produce helium. So it's very easy for investors and people like yourself to figure out what's going on.
Great. Thanks, very much for the color.
Thank you John .
And we'll take our next question, David Begleiter with Deutsche Bank.
Thank you. Thank you good morning.
Good morning.
Do you update on the Wang climb project.
The large one it's still a I guess progressing well, but slowly here.
Yes, there is no additional update I've always said nation that that project is a big projects be sign that.
Memorandum of understanding in November of 2017, then president, but visiting China.
That project is moving very slowly some of it is our fault I've explained that that we want to make sure that data is called allocation before they go and investment in that any of those of our money there.
So I think you should expect that slow progress on that project.
Got it.
You have emerged from price increases for both the Americas and it may give us the Asia price increase thank you.
And next Gen price increases ER.
They VC Americas is about 7% Europe is about 5%.
In Asia is 10%.
Thank you.
Usually don't disclose that detailed but that.
Since you asked the question David I had two.
Thank you very much.
Thank you.
And our next question comes from PJ Juvekar with Citigroup.
Yes, hi, good morning safely.
Good morning figure how are you.
I'm doing great.
Your EBITDA margins were 40% which is great.
If you take out the energy pass through.
EBITDA margins are closer to 37 at 38%.
And then there was also positive impact of India contract modification.
It seems like you're sort of same store EBITDA margins are in that mid thirtys to maybe high Thirtys range.
That's a good range going forward and how will the new coal gasification project and Youre build own operate model. So the impact those margins in the future.
Order of magnitude your math is correct.
And that we expected margins Sue.
Sorry that margins to continue.
To be in the range that you mentioned, but as we do these bigger projects.
That's the improves.
That has that did have a positive impact on those margins.
Hi, I'm, losing my voice or that EBIT by Seth.
So overall are you should expect that our margins.
The said around 30 837 to 40 49, I mean, 30 940 and on that range.
Okay.
Well I do you take a breadth let me ask the question to Scott.
Good thank you [laughter] IP.
Hey, you know working capital was a drag and I'm sure that was partly driven by new project start ups, what's your to show elsewhere down they once were up.
Can you can you sort of shed more light on working capital drag and how much of that impact is from new startups.
Yes, sure thanks to the question PJ.
Our dsos about 52 days. So we're in good shape, we constantly monitor what you're seeing this quarter is really driven by the timing between crop RSV opportunities and some of the timing difference between when we're booking earnings versus the collection of cash so nothing systemic and we'll see that bounce around so.
Thanks for the question.
Thank you.
And our next question comes from Mike Harrison with Seaport Global Securities.
Hi, good morning.
Good morning, Mike how are you doing well. Thank you Oh wanted to ask about the Asia business and you referenced the short term contracts, which I believe also contributed last quarter.
Can you just provide some additional detail on the how much that what's contributing to revenues in the quarter and how we should think about that contribution for the rest of fiscal 2000.
Oh, you mentioned that could be accurate.
Nothing material and it's.
Thanks.
All right and.
Yeah go ahead.
The the other question I had is on the hydrogen.
I believe you mentioned you called out strengths in the Gulf Coast as well is in Europe .
Just wondering if you can provide any sense of what's driving that.
And then it sounds like just looking for clarification. It sounds like the turnaround activity was maybe a little bit lower than you expected.
Maybe maintenance costs go up in Q2 and that net about about normal in terms of overall maintenance activity for the full years that do I understand that correctly.
And number one I can use calculation.
And then.
Thanks to higher maintenance costs in the second.
The timing.
For the you do you expect on maintenance cost.
Number that we have.
Discuss that you'd be forward.
Joining bins.
$60 million either.
With respect to hydrogen demand.
It is not huge but we do see some effect because of the IMO 2020 .
Keith.
If you.
All right. Thank you very much.
Thank you.
And we'll take our next question from Duffy Fisher with Barclays.
Yes, good morning Fellows.
Hi, Duffy how are you.
Good. Thanks first question is just around the capital.
It looks like you're going to increase your capital spend about 300% per quarter for your kind of rough the Q4 or the Q1 number to get to your annual number what does that end up doing to your tax rate as you shift your geographic footprint overtime.
I'd like to Scott to answer that but von he is a.
Ah kind of putting his thoughts together.
It.
Obviously, you know that the reason for that is because we expect that big chunk of capital expenditure because of just and then the close.
So that is that one of the reason that the number kind of looks set.
Hey, this quarter. It was this and suddenly it's going to go up that is because of just.
In terms of they affect intensive our taxes I don't think it isn't material, but I'd like to Scott to comment on that yes sure. Thanks Duffy So as I think I mentioned in my prepared remarks for the year, we expect it still to be in the 20% to 21% book effective tax rate, obviously, now that a move around quarter to quarter be dependent on where how much money.
We make and where we make a but even.
Going forward on the other side of the does and I would still put it and that sort of range. I will also mentioned, though so thats a a book tax rate from a cash tax perspective, we've historically seen in the and at the mid teens and similarly, it depends on where and and how much we make that I would expect it to maybe be the mid to upper teen.
On a cash tax basis okay.
Great. Thanks, and then in what was originally a good quarter. The most eye popping number to me was the 10% pricing in the merchant business in Asia can you just talk about the supply demand dynamics, how strong that market feels and how resilient that kind of pricing momentum feels going forward.
Defeat optimistic about that.
Hi.
Yeah.
You, obviously appreciate the nature of industry and you don't want to comment on pricing.
So I don't want to say too much but maybe we continue to think that that is that.
Hi, good supply demand situation that that kind of pricing continues.
Great. Thank you guys.
Thank you.
And we'll take our next question from Jim Sheehan with Suntrust Robinson Humphrey.
Morning.
On your return on capital employed number a little over 13% and and expanding where do you think that number can get to after some of the very large project start up over the next few years.
Jim That's a good question I've always said that our target is 15%.
We'd like to get into 15% and I think in time do you didn't get there.
Actually as via spend more cash that number did go up because there may be calculated return.
It includes the cash so if tomorrow via spend all the cash on projects that that number of and has other people.
I don't include the cash because sat so as a result of that I mean, you understand the dynamics of that.
Then I'd add that the line on the bottom of the line bucked that fundamentally we are looking forward to increasing that number to 15% that Scott has a comment that launched at it just want to build on that already if you take a look at our cash on hand, if you were to look at on a net debt basis net of the cash.
It's already almost 16% roughly.
Terrific and on your pricing trends.
We've been very disciplined about raising prices and it looks like the supply demand balances supporting that just curious if you're starting to see any signs of market share loss as a result of of your pricing execution.
I don't want to claim that we have not had any market share loss, but it has not been significant or material.
You might have some of that we've had very open about this thing and seven of any of last year. When he said that VR, we need to recover some of our cost as you said before do you expect them you're going to remain significant market share loss.
But the I've not seen a significant but that there might be some here and there I don't want declined the haven't lost anything but it isn't anything that would force us to change our strategy.
Thank you very much.
Thank you Jim.
And our next question will come from John Roberts, but yes.
Thank you is this sequential pricing just rounding down to zero or is it close to a half percent or so so that the year over year pricing for the overall company will stay up near 3% over the next few quarters.
Got you really do your homework I'm very impressed that youre driving that that detail and other credit do it is a rounding down it is actually up.
Sequentially.
And then.
And if you are.
If you Bill if you built a bridge between the December quarter earnings in the March quarter earnings here, you mentioned that the lunar new year will be a sequential headwind can you talk about sequentially from an earnings perspective, any other puts and takes as we go from December quarter to March quarter.
Well the thing is that been de give you the guidance obviously be needed to look at everything.
Andy debated this thing quite a bit yesterday quite honestly and that.
That is the dynamic of the lunar new year dystrophy always we don't know exactly how it didn't work out.
And then there is obviously the headline into papers that you see about these fighter same show how would that be bed up and how the effect of that that is five be decided to take the two into consideration and expand that Finch usually give you guidance within five cents is sound. They are giving you guidance for the intentions. So.
Yeah that is our thinking right now.
Our best judgment.
Okay. Thank you.
Thank you.
And we'll take our next question from Jonas Oxgaard with Bernstein.
Hi, good morning, guys.
Good morning, How're you.
Great.
I was hoping to get some help tying some numbers is a two parter. If you don't mind, but the first one is you announced a 500 million dollar project.
A few weeks ago.
And your Capex you raised by 500 million, but you had some other announcements in the quarter as well that South Korea project, So where did the capex from South Korea, and others go within some project fallout.
No I don't think anything as far out.
Simon does these numbers in detail, so somebody like to comment or Jonah sorry, if we miss communicated I think our capex guidance, our expected spending for the year has not changed quite frankly.
You could also and you could also expect that when we give you capex guidance. It may include projects that happened yet been announced but we're highly confident about I would also just add the Gulf coast ammonia, we just announced that there wouldn't be a huge amount of spending in this fiscal year anyway.
Oh, sorry, I meant that long term committed spend Steve as a 10.3 billion.
Sure.
So obviously, we continue to spend money on projects. They continue to come on stream and so that numbers come up a little bit.
Yeah, but the question is the number came up $500 million, which is six actually the project you announced in the Gulf Coast stride.
Yes, there were other announcements in that same quarter that apparently didn't make it into the sum total.
Because some of the projects have come on stream and then they come on stream they are taking off of that.
Okay.
Yeah, awful, but that we say as backlog.
Joining us I would guess I would just point to the fact that when we give you a backlog number. It may include at times projects that we haven't announced yet or if we're highly certain of them.
Oh, Okay that makes that the other thing is trying to tie was the.
The guidance for the year Didnt change, even though you beat pretty handily. The is the difference the slipping of John or how should I think about that.
Hi, this is because they need to put everything together obviously.
This quarter and our results are better than expectations. Obviously, you had told you.
You are five to 10 and 11 to 14, so as it is all be fit that about our base business.
And therefore, but there are you know the timing of the just hanting. So at the end of the Navy made the judgment that overall, we should be able to meet our commitment.
Okay. Thank you very much.
Thank you John .
And we'll take our next question from Mike Sison with Wells Fargo.
Hey, guys nice quarter.
I think that Luann is Ah has anniversary the I think it's your first sort of major gasification project can you maybe talk about what you've learned from running it for year any any positive surprises negative surprises obviously, it's done well just kind of wanted your thoughts on on how that how that has done over the over the last year.
Well. Thank you for asking that question because I wanted to brag about it a little bit.
Wow that [laughter], we have that.
We have had a very positive experience number one.
Our expectation of.
The amount of time that we can keep the project online than via started and chief of the Ted you gasifiers or something like 85% 86%.
We have had those gasifiers on line for more than 95% of the time. So that is very good news.
The second thing is that intends a financial performance is exactly as we taught.
And at 13 is that we have learned a lot.
Operating these share gasifiers.
First hand.
And then they are seeing some positive impacts that de view that.
In corporate in the future projects.
And I'm also very proud of our people that we gave them this and they had to put in something by 500, new people on this thing. They have operated this thing knocking on board they safely and very efficiently. So it has been a very positive experience and its significantly has increased our comp.
He then it's in taking on new projects.
Got it. Thank you and then just one quick one on the range for the year, but just just curious at the high end, what do you think needs to happen to sort of be close to that end versus sort of the midpoint or the lower end.
Then we need to get Lucky day economy.
[laughter] and closed just that in time so.
Okay. Thank you.
Thank you.
Okay.
And we'll take our next question from Steve Byrne with Bank of America.
Yeah. So for you if a partner were to come to you and offer you either an excess supply of energy or maybe a renewable energy supply do you have the capability of producing hydrogen from electrolysis.
Yes, we do.
And the already do that you have the capability and.
At the Arthur Su and project and that of that nature.
And and when you look out longer term set for you in your in this pursuit of hydrogen for transportation, how how would you how would you rank that technology versus.
The standard of methane reforming versus this more recent project with using ammonia as a as a carrier of hydrogen.
I think that that their board is moving to our green hydrogen.
And green hydrogen is obviously using solar and intellectual Genesis of order to produce hydrogen beating that is the future and a significant number of projects will be down in that phase and that is very VR building our capability.
You are they died that is the future.
We definitely think that is the future.
Yes, and no ammonia thing is obviously, especially it at issue which is transportational hydrogen.
But.
You should take that people would use solar.
Order to make green hydrogen and then take that green hydrogen converted to ammonia and then send it to Japan.
And with respect to.
Carbon sequestration is that Gulf coast ammonia project of yours have any requirements on you to sequester the CEO too.
No.
In the Gulf Coast.
You got the permit or.
We are not the covering two at that plant at this time.
Yeah, I was really referring to to the long term contracts for this ammonia is there any any component of that that is expecting not at the carbon to be sequestered.
No that is there is no such requirement.
Okay. Thank you.
Thank you.
And our next question comes from Laurence Alexander with Jefferies.
Good morning, guys. Two quick ones can you help us with the.
Effective tailwind for next year or from the projects.
That are coming that are lapping next year and then the new projects coming on just we didn't get a sense for how much of a deceleration compared to this year is implied by the backlog and secondly on carbon sequestration I think a lot of the environmental debate focuses on the relative cost versus mitigation coming out at about five to 10 times.
The cost of mitigating through for example tree planting.
But obviously carbon sequestration has the virtue that was a project you control can you give us a sense for how you're thinking about sequestration versus mitigation and how quickly you can bring down the cost of the sequestration technology.
I think it all of these cushion that question that you are at.
Asking in terms of the carbon capture so it depends on the location that the youre and each part of the ward you are and but are the incentives and all that so I couldn't be difficult to give you a general answer with respect to your first question with respect to I do not see any drag on our results.
Next sees as a result of the project so I'm not sure I fully understood. Your question because we expect that for 2021 hour S will grow another 10% there since 2020.
We don't expect any deceleration.
Okay great.
Thank you very much.
With that I think that was the last question that the people had signed up for so I would like to thank everybody for being on our call.
Thanks for taking charge from your very busy schedule to listen to our presentation.
We appreciate your interest and we look forward to discussing our results with you again next quarter in the meantime had a great day and have a nice quarter.
And expect some good results from their products Wendy and also results next quarter. Thanks, again have a nice day.
And that does conclude today's conference. Thank you for your participation you may now disconnect.