Q4 2019 Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
2019, Lindy earnings conference call.
At this time, all participants' lines are in listen only mode.
After the speakers presentation, there will be a question and answer session.
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Now I'd like to and the Congress every speaker today.
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<unk> Investor Relations. Thank you. Please go ahead Sir.
Thank you Daniel.
Good afternoon, everyone and thank you for attending our 2019 fourth quarter earnings call and 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 Mount White, Chief Financial Officer.
Today's presentation materials are available on our website Lindy dot com in the Investor section.
Please read the forward looking statement disclosure on page two of the slides and note that it applies to all statements made during this teleconference.
The reconciliations of adjusted pro forma numbers are in the appendix this presentation.
Steven Matt will now give us an update on then this performance, including 2019 highlights and our new 2028 sustainability targets.
We will then be available to answer questions.
Let me turn the call over to Steve.
So if you had told me a year ago that this is where we would be today as a new company I would've been delight.
We had the plans in place, but we had a lot of work to do and I'm pleased to say the team executed beautifully.
A few financial highlights for the year, we saw underlying growth of 4% half price and half volume.
Operating margins climb nicely 160 basis points to 18.7% interest for sure group.
23% ex FX.
We had strong cash flow for the year, especially in the second half, which is always a good sign of a healthy at improving business.
Let Matt Maddox bad more on that.
And with that strong cash flow, we invested $4 billion back into the business in cap Capex.
Half or contracted large projects.
And returned $8 billion to shareholders between dividends share buybacks in the squeeze out of our minority shareholders.
And return on capital the single most important metric for any capital intensive business.
Rose 130 basis points to 11.6%.
We also reached a record backlog of projects 4.4 billion for our cell of gas business and 5.7 billion.
For our third party engineering business $10 billion Untold.
I'm pleased to say that we want practically every project we chose to pursue.
This provides the foundation for growth in in future years, as we bring these projects online.
And with respect to integration, it's largely done.
We conducted our first employee survey and we were pleased with the overall results.
This is a good indication of how well the team integrated two high quality companies in a relatively short period of time.
We began implementing our strategy.
Well just to build network density in core industrial gas geographies.
Leverage our significant advantage in engineering and technology to win more than our fair share of sell the gas opportunities.
And capture the full value of the merger.
Which includes cost in capex efficiencies and growth synergies.
And it is the ladder that we're getting more and more excited about every day.
Coming out of this year, we definitely expect to see additional growth for merger synergies on top of based industrial production price and project startups.
And beyond that beyond the typical three year kind of post merger phase I believe the greatest a most enduring value created from our merger.
We will come from the sharing of our collective knowledge experience and capabilities.
We also wanted to establish a strong foundation of operational excellence. Our safety performance continues to trend positively with best in class performance in many categories.
Another key priority for this year was to implement a robust productivity initiatives.
And we made a lot of progress towards that end.
Productivity initiatives need to be revitalized from time to time, and we see the expansion of our digital tools and capabilities driving continuous improvement in our company for years to count.
Let's talk about 2020.
Yes, it is uncertain world.
We gave you a chart in the back so you can understand our exposure on a country by country basis.
It's never a bad idea to have nearly a third of your sales and operating profit in the United States.
It is a good time me to remind you of the resiliency of our business model.
We generate strong cash flow through the economic cycle.
When the economy is strong we invest more in capex for growth.
And when it is weaker we return more of that cash to shareholders.
Add to that value created by our merger and you can see why I am confident in our ability to continue to generate double digit earnings growth.
Regarding climate change.
Everyone wants to know if you're a part of the problem or part of the solution.
You're at Lindy, we're definitely part of the solution.
We have a long track record of success and sustainability, having been recognized in the Dow Jones sustainability World Index chemical sector for 17 consecutive years.
The only chemical company in 2019 that could make that clay.
We're also aligned with the aspirations are the Paris climate a core.
However, this requires many parties government industry and society as a whole.
To come together in play an active role.
I can tell you that as a leading industrial company.
We will certainly continue to do our part to make our war more sustainable.
In fact that is our mission statement, making our world more productive.
Through our solutions technologies and services, we are making our customers more successful and helping to protect and sustain our planet.
<unk> lending, we make products that are beneficial to our environment and society as a whole.
In fact over 50% of ourselves today come from our sustainability portfolio.
That is products that bring environmental and social benefits.
We make high purity oxygen for medical needs and to purify water for drinking.
We produce script on that is used for insulation.
We make nitrogen that helps keep our customers operations safer.
We manufacture coatings for turbine blades that make aircraft engines more energy efficient.
And we make hydrogen to diesel for rise and Decarbonize transportation fuels.
To meet ever stricter environmental standards.
In terms of greenhouse gas impact.
The products, we provide enable our customers to avoid more than twice as much greenhouse gas emissions as lend the Mets as an entire company.
That is a track record we are proud of and we certainly want to continue to live out our mission statement of making our war more productive.
But in addition to that we want to set new sustainability goals.
By the year 2028, which marks 10 years from the date of our merger.
We will invest at least $1 billion and new de carbonization capital projects.
Examples of that would be carbon capture and sequestration.
Hydrogen mobility like agreement, we just signed to build hydrogen refueling stations in South Korea.
Green hydrogen projects for industrial customers and hydrogen to produce renewable fuels.
We will spend at least one third of our R&D annual budget on de Carbonization.
We will continue to develop industry, leading technologies like dry reforming would use as CEO to as a feedstock in lieu of steam to produce send yes. This is a technology we developed in conjunction with via yourself.
And we want to continue to advance our own carbon capture technologies to make them more economically viable.
We will continue to invest and promising green hydrogen technologies.
Like our 50 million dollar investment and I T M to scale up their electrolyzer technology for industrial and hydrogen mobility applications.
We will double our annual purchases or read of renewable power.
How much is that you might ask.
Today, we by about 16, terawatts of renewable power or about $1 billion of renewable power purchase each year.
That is enough electricity the power of 4.7 million homes here in Germany.
And our goal is to double the amount of renewable power we will purchase.
As a result, we will lower our greenhouse gas emissions intensity by 35%.
Why not more you might ask we would love to.
Well, that's going to be a function of the availability and reliability of renewable power.
Which is far from certain today and many of the countries we operate in around the world.
I can tell you that everyone at Liberty All 80000, a bus are excited and passionate about what we can do to make our world more sustainable.
And now I'll turn it over to Matt.
Thanks, Steve and good afternoon, everyone.
I'd like to start by providing a summary of the fourth quarter results, which can be found on slide five.
Sales of $7.1 billion increased 1% over both prior year Dan's third quarter.
Versus 2018 underlying sales improved 3% due to 1% more volume and 2% higher pricing.
Price improvements are broad based across every region and in line with global weighted inflation rate.
The volume increase is mostly driven by project startup activity.
Organic volumes were relatively stable due to growth in Americas in engineering, mostly offset by weaker economic conditions in Europe and South Pacific.
Furthermore, Asia volumes declined from lower activity in the electronics end markets and prior year equipment sales.
Comparing to third quarter 2019 underlying sequential sales improved 1% primarily from timing any engineering business.
Note that we continue to experience positive sequential pricing, but the rounding has resulted in zero percent.
We have included more detailed information in the appendix, including Slide 10, which provides 2019 sales by key geography.
This information is intended to clarify lindy country exposure and the overall portfolio mix.
Two points to note on slide 10 are that gases and engineering account for 84% and 10% of global sales respectively.
And that the top 12 gas geographies represent over three quarters of global sales.
These top geographies are comprised of 10 different countries and two sub regions of Continental Europe.
Referring back to slide five.
Operating profit of $1.35 billion or 19% of sales.
Increased 17% from prior year and resulted in a 250 basis point margin improvement.
This margin expansion was largely attributed to the significant productivity efforts from all employees managing local price and cost inflation.
Sequentially operating profit declined 3% and operating margin decreased 80 basis points.
This decline was anticipated due to timing of engineering project completions.
However, sequential operating margins increased in all geographic segments as management actions continue to improve business quality.
Year over year S improved 25% compared to the 17% increase in operating profit.
The difference relates to how we had been deploying the divestiture proceeds.
Hi, there to reduce net interest expense or lower share count.
The balance sheet still has significant cushion versus our target a credit rating. So we have ample dry powder for both growth investments and distributions back to shareholders.
In fact, you can see that fourth quarter operating cash flow of $2.2 billion is 16% above the third quarter and.
And represents approximately a 105% a fourth quarter EBITDA.
Obviously, a very strong cash performance, which I'll speak to more in the next slide.
Capex increased 6% sequentially due to base Capex.
This increase was primarily driven by growth investments that do not meet the backlog criteria such a small onsite plants.
And as a reminder base capex represent any capital spending that is not directly listed in the 4.4 billion dollar sales gas project backlog.
It would include maintenance replacement and other growth initiatives.
The last figure shows return on capital, which is one of the most important metrics for this industry.
It improved 40 basis points from third quarter, and 130 basis points from 2018 due to pricing cost management and project contribution over a relatively stable capital base.
Please turn to slide six for further details on 2019 full year cash flow.
The left side shows operating cash flow by quarter, summing to $6.1 billion, including a zero point $8 billion outflow related to one time merger and restructuring payments.
You can see a substantial improvement from the first half, which averaged $1 billion per quarter.
The second half, which averaged $2 billion per quarter.
There are three primary drivers to this improvement.
First as anticipated the merger related cash outflows reduced from $516 million in the first half to $287 million in the second half in fact, a fourth quarter had only $92 million as we expect this number to continued to decline.
Second there's inherent seasonality in the cash flows due to timing of cash bonus tax and interest payments were first half has more outflows then the second half.
Finally, the improved operating results and working capital management supported stronger cash flow in the back half of the year.
Looking ahead, I still anticipate full year operating cash flow to EBITDA ratios in the high 70 to low 80 percentile range after adjusting for any merger related cash outflows.
The combination of the 6.1 billion dollar operating cash flow.
5.1 billion dollar divestiture proceeds.
And 0.4 billion dollar primarily from debt.
Provide $11.6 billion a capital available for deployment in 2019.
The Pie chart to the lower light shows how we allocated that capital.
Well almost $8 billion going to shareholders in the form of dividends and share repurchases, including the one time merger squeeze out payment.
We also reinvested $4 billion back into the business with half supporting secured growth.
Overall, the very strong cash generation in 2019, coupled with a disciplined capital allocation process enabled us to pursue all opportunities that met our investment criteria.
While returning the surplus to investors.
I'd like to wrap up by reviewing earnings guidance on slide seven.
Full year 2020, EPS guidance range is $8 to $8.25.
Or 10% to 13% growth rate when excluding an assumed 1% currency headwind.
The key drivers to this range can be found in the bottom left section of the slide.
Incremental productivity initiatives are anticipated to have the greatest impact on EPS growth as we continue to see opportunities to optimize the base business.
Pricing actions net cost inflation will also deliver incremental earnings.
Furthermore, share repurchases and project backlog round up positive factors.
Recall that project backlog represents incremental sales and earnings growth underpinned by long term customer contracts, where they fixed payment structure.
Note that these top for EPS growth drivers are from either management actions or deployed capital and thus are independent of macroeconomic or geopolitical effects.
The final factor a base volume in effect would be impacted by the macroeconomic climate.
And that leads to the most of the variability.
Industrial production and the U.S. dollar average spot rate are the primary indicators.
As you can see the current guidance range assumes no help from the economy. In fact, it is currently estimated to be a headwind.
Of course this is just an assumption at this stage if the economy is better we will capture that value.
But we believe this assumption is prudent in light of recent economic trends.
For the first quarter, we're estimating E. P. S. In the range of $1.86 to $1.94 or an increase of 11% to 16%, excluding a 1% currency headwind.
This range assumes normal seasonality in addition to headwinds in our Chinese merchant and packaged volumes due to the Corona virus outbreak.
While it's still too early to assess the overall effective the virus. This range incorporates the most recent estimate of our customers impact.
In summary, 2019, Mark a successful inaugural year.
Despite only having 10 months since the effective merger date.
80000 employees worldwide came together as one and worked tirelessly to deliver on our commitment and integrate two great companies into one.
Looking ahead, we're excited about additional opportunities to create further value through business optimization technology sharing.
And the portfolio enhancements.
And while the economic outlook maybe unclear.
We have confidence in our ability to continue growing earnings per share double digit person.
I'd now like to turn the call over QNX.
As a reminder to ask your question you will need to press star one on your telephone to withdraw your question press the pound Keith.
Please standby well, we compile the Q and a roster.
Our first question comes from Duffy Fisher with Barclays. Your line is now open.
Yes, good morning.
First question just want to touch on you know some of the carbon footprint stuff that you highlighted which is admirable, but one way to think about it. If you think between now and 2020, you probably spend north of $40 billion in total capital and the capital number you put in there was you know a billion.
A little bit more than a billion can you kind of rectify those numbers. That's a relatively small percent does that signify that you don't think there's real capital investment in some of these new green technologies or that you're going to one others. So can you just talk about what that does to your footprint as you move to us lower carbon.
Yeah aspiration.
Well 40 billion, you're just taken for.
10 years of the 40 billion half of that would be large projects.
So just about everything we would be talking about ER in that billion dollar kind of number would be large projects.
I do think that there's a very good chance that the numbers going to be larger than that based on.
The projects that I'm looking at today, they're all in various stages. Some of them are very early stages, but some of the size of projects are quite significant so.
I think that's a good number just start with a and will continue to reevaluate that overtime.
Great and then would you expect the returns on a billion dollars or you know if the numbers margin a billion dollars to be in the same range is what the historic Lindy Praxair was or would they get to a different discount rate applied to them.
No I expect that need to saying.
So great. Thank you guys got to be clear about that but if you look at a higher or are we always are looking to earn a good spread above our cost.
Risk adjusted.
Terrific. Thank you.
Thank you. Our next question comes from Nicola Tang with Exane. Your line is now open.
Hi, Thanks, everyone and thanks for taking my questions and this stuff one was on the out and the some headwinds your thinking on the baseball game and FX side I was wondering on the based funding side could you be most specific in terms of the outlets by either geography or by specific end markets I think in Yoki.
I'll comment you mentioned, the Q1 headwinds in China, but perhaps you could expand across the regions.
And then the second question was also actually on the on a sustainable if he taught it and you mentioned this 35% reduction in greenhouse gases in the next 10 years and could you give us this reference point for you'll see I to prevent emissions done of EBIT dollars today.
Thank you.
So as far as you know the volume something what we're looking at is.
A week industrial production, particularly in Europe, and I think all of you.
Oh, many many people here are aware of what the December numbers were in Germany.
I'd be was down to it I think is 3% sequentially at about 7% year over year. So.
Declining industrial production certainly in Europe.
In the U.S. industrial production is quite a week today.
And then if I look at the rest of the World I think clearly the start for China is not a positive or do some very unfortunate reasons for them.
So I think you know just based on what we see the world today, that's kind of our view now.
Throw south Pacific in that two in Australia is not doing particularly well.
So no no matter where are you looking around the world. It's it's a slow IP Grove World and if it does better we'll certainly be able to capitalize on that and it will be reflected in our topline or a bottom line numbers.
With respect to the greenhouse gas was your question what is our footprint today was that your question.
Yes. It was what's the sort of based reference point sounds here to mission, but we'd be published that in our sustainability. Yes. Thank you. We publish that are sustainability report.
The number is about a 40 million metric tons of CEO to equivalents.
ER annually and a big percentage that is what you call spoke to emissions, which basically means.
You buy electricity and some of that electricity is produced by carbons.
Oh, that's just whats available on the grid that as an electrical consumer or you are penalize so to speak with that so you go to a mission. So that's why that number and so they are.
Or something of that back.
Okay, but it also includes and that's really is that correct.
No scope one is go it doesn't include okay. Thank you.
Thank you and our next question comes from Mike says on.
Wells Fargo. Your line is now open.
Hey, good morning, guys Nice nice ended the year, Steve you talked about sales synergy is is one of the areas that could accelerate in 2020, I don't see that in the P.S. drivers if you well, but you know as it part of the productivity area, where does that show up and maybe it's a little but color on on.
You know what excites you in terms of the sales synergy going forward.
Yes. It is not on that graph. So we did not a attempt to display that and I said really kind of coming out of this year, meaning 2020, I was not refer to 2019 are expected to see.
More contributions and what excites me is we just had a global leadership conference. We spent a good part of that conference talking about growth looking at the combination of applications. We have a the strength of our product line portfolio and the work that's being done to optimize that even further going forwards.
I look at de Carbonization, and what both parties bring to the equation in terms of being able to capitalize on some of the growth opportunities that will be there and I talked a little bit about that my comments.
And then you just kind of get into cross selling and and a lot of other areas that we can take advantage of so.
It is something I'm getting more excited about as I see the potential I do believe that I've said before it's hard to put a number on it but I do think we're going to start seeing it.
Coming out this year and going forward.
Right.
And then a quick follow up in terms of pricing.
No what do you looking for in 2020, and how much of that is.
Yes.
Pricing from the base.
Yes, as well as maybe improving the pricing culture on the lending side.
Had a 2020.
Well I think you know again look at that a little Christmas tree shops that are that we put together for you I mean, you could infer from that that we're looking at another 2% price.
In 2020, I think that's about the right right number at this point. This is something we'll continue to work.
It's not a.
One year on gone thing or so.
I think we're making good progress.
Great. Thank you.
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Thank you.
And our next question comes from just the caucus with Jpmorgan. Your line is now open.
Thanks very much in your fishing for 2020 do you expect volumes to grow on a consolidated basis or no.
Hi, Jeff This is Matt so right now when you look at the range a that we laid out.
On the project backlog absolutely yes.
When you look at the economic inclusive of the FX at the FX reserve, though the upper end may have negligible to slightly positive growth and again. This is just an IP look at this stage as Steve mentioned, there are actions to try and grow above IP, even on the base merchant package with some of the technology.
You May view this outlook is conservative but this is how we've looked at it at this point and that a section there is what's driving most of the range.
At this stage, but but rest assured if the economy performs better we will absolutely capture that.
Remember, it's a contractual business even in the merchant and to a large extent package.
And we obviously would also be taking appropriate actions to try to mitigate any down decline in various markets. So but right. Now. The view is is that the base would be slightly up to negative and then the project contributions will continue to come through as expected.
In terms of your I guess cost reduction in cash flows it looks like your cash outflows for restructuring will trough I don't know 400 million next year or something like that so.
So should your cash flows benefit by that another words, whatever you generated this year and operating cash flow should be you know another four or 500 because of a smaller cash outflows plus you're going to grow on top of it. It seems like your cost cutting is ahead of schedule over a three year period.
That right and so could you comment on that.
So this is Matt again, if I can answer the first part of the question absolutely you're right. You are correct. The 800 million that we had in 2019 will be much lower in 2020, I would say you know at least 500 million.
Because to your exact point the lot of the merger costs are behind us on a cash basis, they're gonna be some small ones on some of the final divestitures that occurred here in the back after the year you just have some late either income taxes or payments it invoices.
And so that part will have some effect in the first half, but then from here on out will be mostly restructuring.
And I think as it's been discussed in prior calls Asia was probably the first out of the gate a incorporate Americas. We we are in the midst of some in Europe. So I think he will still see some of that a effect going through definitely through 2020, and possibly depending upon the economy's could get extended to 2021 that'll be.
To be determined but at this stage from a cash perspective, absolutely would be a decline from 2019 to 2020.
Okay, great. Thank you so much.
Thank you. Our next question comes from Peter Clark with Societe Generale. Your line is now.
Yes. Thank you good morning, everyone here two questions on M. me, Hey, if I can overseas a healthy sequential price again.
Just wondering I'm, particularly in terms of the cylinders, how things occurring because clearly the idea about you can have through pushing on the city into site is probably pretty impressive I think when you look at the Linda portfolio that came in and then the second one on the synergies you alluded to this I think that's obviously a surface asked the case, a little dis synergies last year it's for.
The biggest kika.
Regionally would that be writing thinking maybe Europe proportionately produces move so on the synergy front in twentytwenty. Thank you.
Yeah, Thanks, Peter Yes, a 3% price a year over year, another price sequentially and as you've heard me say this before it's always good to be saying pricing trending basis.
50% of this business is packaged gases. So you don't move prices that well unless you're doing a good job on a transaction basis in a lot of.
With a lot of customers.
Yes, the of the eastern European ER business that do.
That was the Olin the AG business is now part of Lindsay I'll see is a great franchise I think you you appropriately pointed that out.
With respect to productivity mass started talking about yes Asia was out of the gates quickly corporate move pretty well Americas boom.
Pretty quickly and May is a little bit slower a in terms of.
In terms of addressing some of the personnel adjustments that.
Are part of the merger.
And we knew that coming into this Ah we need to work through the European works councils worked at the local works councils and that's something that we've been doing on a very constructive basis.
But there will be more to come as a result.
Of the negotiations that have taken place.
To date.
Hi, Thank you.
Thank you.
And our next question comes from David Begleiter with Deutsche Bank. Your line is now.
Thank you good morning, Steve just thinking balance sheet, you into the you're still under Levered, what's your thinking in that thinking on perhaps levering up the balance sheet, a little little more to a maybe a buy back little bit more stock. Thank you.
Well, let me answer [laughter], so David you're exactly right. I mean, we are looking for a target rate of a two and our current balance sheet has a significant room to go do reach there as I mentioned in the prepared remarks. So we ended the year at a net debt figure at it.
Around $11 billion.
You know clearly are we going to raise that my view is probably 2 billion is kind of a round number that I think we would a at a minimum look to raise it possibly more depends on on conditions a lot of different conditions, but I think when you look at like I'd mentioned in 2019, I mean, we were able to distribute and utilize almost.
As a capital so I think we had a good start.
And we were able to you know proceeds were higher than anticipated cash was higher than anticipated. Those are good problems to have so we probably got a little bit behind on on deploying the capital, but that's just gives us more ample dry powder an opportunity as we look forward. So nobody knows what will happen in the markets, but we will continue to have a very strong balance sheet.
That we can leverage and utilize and that's something we'll continue to do.
Perfect and Steve I'm, not just on the merger cost synergies I know there kind of embedded in productivity, but can you talk about what are the incremental merger cost synergies in 2020 versus 19.
I don't.
David I don't really try to separate those out anymore in terms of buckets I'm just looking at operating margins are larger productivity buckets I will try to distinguish as to whether it came out of a merger bucket or came out of productivity bucket. So to me it costs.
The cost savings as a cost saving and that really is the way. We're looking at the way you and everybody else, we'll know a that we're accomplishing what we hope to do coming in this mergers of operating margins continued to expand and they are.
If you get about as do the math before quarter gas margins excellent engineered 20%.
So we're starting to make some good good progress I think that's going to continue.
Thats been talking about cash flow.
This morning, a as well and and that's all that's obviously a very good side that.
That a merger is working and that a cost are coming out of the cash flow is as well.
Thank you.
Thank you. Our next question comes from Laurence Alexander with Jefferies. Your line is now.
Good morning could you touch on two things one I guess can you directly address the investor concern about Lindy his ability to pass through a carbon prices to the extent to their enacted in different parts of the world.
And secondly, as you think about the impact of a softer.
End market environment is there showing or accelerating.
Any process to rationalize the broader Lindy footprint.
As far as the footprint itself I mean, we.
We have spent a lot of time looking at the footprint. We look at all the other countries that we're in as a result of the combination we look at some of the businesses that are that we both have been.
That we brought to the merger and we have a plans around all of that some of that takes time.
Usually takes longer than I liked but we have a process. We're working through a diligently we know what we want to do.
Oh, I'm not really familiar with the point on not being able to pass through higher carbon prices I mean that is something that we have contractually.
Around the world and.
We've we've been aware that this was something that could happen I'd say going back five or six years, we started making sure that our contracts had provisions that if there is any environmental legislation of anytime that might.
Caused.
Some type of carbon tax as result of electricity consumption are making hydrogenics two as a byproduct of or what have you.
We would be able to pass that through and customers et cetera.
Okay. Thank you.
Thank you. Our next question comes from a court with Goldman Sachs. Your line is now.
Thank you very much I'm.
If you could talk Steve on slide seven.
Christmas tree you called it the the drivers of growth in 2020.
There is different than what happened in 2019, when you had the.
Hi earnings growth, where the variances year on year, there in terms of contribution.
Hey, Bob Matt I could probably answer that I think when you look at the price cost inflation productivity. Those you can look at either way do you put price net of inflation or do you put productivity net of inflation, but I would say a the combination of those two were contributing the largest them.
The if you want to call the management self help I think from a backlog perspective, we are expecting more than 2020 than in 2019 due to the startup range or share repurchases are obviously, we repurchased on that basis 2.6 billion and 29 team $2.6 billion are looking forward, we have ample capacity to do.
With that or more the base volume FX FX was quite severe at minus 4%.
But the base volumes as you saw it was actually positive it too so that would create a negative to a we are anticipating a worse or outlook in 2020 than that so if nineteens macroeconomic was a repeat in 2020, you know obviously that would be positive for us all around on this assumption, but at this stage.
You know again this is an assumption we're not projecting that we know the future. We just haven't assumption or trying to lay out the basic guidelines and we'll manage the business accordingly.
Yeah that in and Steve I think you made the comment about you're looking at your project execution on a risk adjusted basis. It your backlog, obviously is much more tilted to Asia than your current portfolio.
Can you talk about how you look at project return hurdles in Asia relative maybe to the core business, that's generating those 12% returns today.
We look at the same way I mean is it started off you know what does your cost of capital what's the expected return adjusting for risks.
And you know when I say risk I mean, I'll give you know give an example of a very large project with Samsung the restart starting to start up as we speak longstanding customer I think we all know Samsung as we've had a great relationship with them over years, we have an incumbent position.
In several other locations.
They pay at about 25 days, so [laughter], what I go through the normal assessment of risk they come out.
Very well as a low risk ER and it is a is an excellent return.
So I don't really look at projects in Asia any differently that I would look at them in other parts of the world, but you know, it's it's always important to go through.
That risk profile to make sure that what do you think is a return that you should get you'll actually get it.
Great. Thank you.
Thank you. Our next question comes from Jeff Hair would you be securities. Your line is now.
Good morning, 20 cost two quick questions first of all on the Green hydrogen comments you made at the price started the coal you've got a number of electrolyzer units at the moment as we could just how is what the average size of bodies and with the ITM par investment where you think that go in the future.
And also could you just give us a quick update on our things on China from lenders point to be just didnt listen to the Corona virus. Thank you okay.
All right. So we have about 80 electrolyzers under operation and about 40 megawatts. So you can do the math there a lot of are quite small.
A typical module size today out of ITM is about two megawatts or there are plans to grow that in terms of making larger scale.
Modules or which then can be stocked.
And you can build out the remaining ER.
Plant equipment and systems around that I think the number you know it's hard for me to put a number or would it can be.
But I think you know we're looking at much larger projects going forward, particularly with somebody industrial customers were talking to they have an interest sincere interest and moving to green hydrogen.
And Andy the connected loaded megawatt load would be quite high based on some things I'm looking at so.
It's going to grow a lot now so what are some of the her today.
Cost of electrolysis or or producing hydrogen through electrolysis, probably four times would it would it would be based on producing hydrogen from more conventional means like natural gas base steam methane before me.
So there's some work that needs to be done to bring costs down scaling up as part of it more efficient modules as part of it.
Lower cost renewable power is part of that so we're very much cognizant cognizant of that and those are things that we're working on it so that will help drive.
This marketplace the ability to bring those cost out.
Of course, you know if government steps in and provides a some of that difference that would help move more quickly.
To China and grown a virus or we have about 2600 people in China in Wuhan region, we have about 1% of our people are in Wu on.
We have very small operations are there today.
So with respect to Han were not dramatically affected no. Fortunately as of today no one of our 2600 employees.
Nor any of our employees around the world.
Have a confirmed or had been confirmed with wrote a virus. So we're very pleased to hear that.
Oh, we provide a we provided eight as a corporation or to our Chinese team and much of as flowing to move on.
We prioritize the flow of tea products that are needed to fight this virus like oxygen medical gases.
And.
Absolutely been watching the situation very very closely from a business standpoint onsite customers have not really showing much of an effect.
Not yet the merchant liquid.
To give you an example in a typical year during lunar new year.
Merchant capacity would probably dropped about 30%.
Rather than seeing one week of that this year, we saw two weeks and their slowly coming back from that and as bad explain early on we we've accounted for that.
Certainly based on what we know about the virus.
On it for that in our guidance.
So that's situation tough situation for the people there.
But they're working through it.
Okay.
Thank you. Our next question comes from Vincent Andrews with Morgan Stanley. Your line is now open.
Thank you good morning, everyone I'm just a question on backlog dynamics as you've talked about the slowing macro economic activity and I think in the past we talked about maybe a deceleration in sort of the urgency around project signing so I'm. Just curious are you seeing anything changing in terms of the opportunity set that's out there.
Or the Counterparties desire to move forward.
I would still characterize it as.
Not a lot of hurry people are not in a lot to hurry to get projects closed.
The proposal rate on large projects is low.
Most of what we're looking at is smaller range say 50 million, maybe up to 100 million, maybe a little bigger than that but nothing over 250 million.
I think Thats, just you know reflective of kind of where we are as an economy.
But if I, if I were to kind of.
Try to look downstream in terms of what I think could happen with respect.
You know to the backlog I believe that.
You know the U.S. Gulf Coast is still advantage with low cost natural gas, that's still going to continue to attract.
Especially chemical customers.
I think we could see some growth or more growth of hydrogen in places like us Gulf coast, but not restricted to that.
As a result of IMO 2020, some of the de carbonization projects that were working on a against some of them are fairly large.
Interesting to see how.
Quickly they evolve and develop but that could be additive to the backlog in that I think you have to look at electronics, though it's been in a low this past ER is during the.
Second half a 2019, especially in the fourth quarter I think the long term.
Trends are very positive so lower navigator geometry artificial intelligence fiveg.
Are you the technology that Samsung and others have been adopting and I think that will drive stronger electronics demand going forward and.
Good result, and increased adding products to the backlog.
Okay, and just a just a follow up on the Capex for 2020, if my math correct. It's it down versus 2019, and I know part of the reduction is probably the synergies or the capex synergies that you'd guided to but maybe you could just bridge bridge, the 19 and 20 Capex for us in terms of but what the differentials.
Yeah, Vincent and its Matt you're absolutely right. If you break it down between project in between the base.
These capex, we absolutely are expecting from 100 200 kind of synergies that we would anticipate to see on a year over year basis and realize that state. It you know in that base. There are small growth projects like the 30 bps A's that we had recently announced so you know when we can get those will take those all day long so they can cause some quarterly number.
Or movement, but in the end of the day, we definitely anticipate some synergies a in that line as far as the project you know frankly, the bigger that number is the happier I am because that means where I had on our project schedule. So that one is is pretty much just lockstep with our engineering project outlooks in terms of timing of construction.
Those are as you can imagine a very tightly managed on a project basis from our engineering team.
And that's something that will just continue to build to our schedules.
Thank you very much.
Thank you. Our next question comes from Kevin Mccarthy with Stifel. Your line is now.
Yes, good morning, a couple of questions sticking with the project backlog Steve in your prepared remarks, I think you made a comment that you one practically every project.
You chose to pursue and so.
You know if activity remains sufficient does that suggest that a you may have upside to push the envelope and increased returns above the current rate of 11.6%. Then my second question is more specific on your engineering backlog looks like that increased 800 million or so sequentially.
On slide 14, you referenced the a more project I Wonder if you could comment on that project, specifically and what impact.
You would expect that to have on the helium market and whether you can pull some more helium off of that yourselves. Thank you very much.
Yes, So you know all the projects that.
We're starting up are going to be accretive to return on cap. So.
It's 11 once it for somebody that's a number that you're looking at.
And of course, I'm looking at internal rate of return when I look at these projects.
Unlevered after tax.
From a rate of return above the cost to capital.
But after a few years. These projects are typically already accretive Darcy and then overtime there definitely created RSC. So.
I would say that Ah you know.
We look at just about every project in fact always encouraged by teams to bring all the projects Ford and we'll take a look at it will decide whether or not we think they're worth participating.
But the criteria, we use is pretty straightforward it has to fit our strategy as a company and it has had a good return above cost of capital as I described earlier and you know we're going to maintain that twin criteria, but we do want to look at a practically everything that that's out there.
With respect to the Lindy engineering, yes, the backlog numbers are up for sure via more project is not related to helium to more project is a mix.
Oh mixed feed cracker.
For some more and so that's not related to two what you're thinking about but there is there our natural gas plants for Gazprom that are being built in.
Started and starting up that will be.
Well have helium online I would say the second half of next year is when you would start to see the impact from that.
Thank you very much.
Thank you.
Our next question comes from John Mcnulty BMO capital markets. Your line is now open.
Yes. Thanks for taking my question with regard to the to the base Capex what portion of that is actually tied to revenue generating projects first kind of the more normal maintenance or efficiency type projects.
Hey, John This is Matt that's not a number we disclosed.
But but I can tell you it it's it's a meaningful part of that number and that's something we evaluate but but as you can imagine when you get into things like transportation cylinder storage equipment tanks, a it gets a very fine line what is growth what his replacement. So this is something internally we spend a lot of time on but it's just not a number externally that we that we disclose but.
I can probably on like Vps A's and those type plants that we've announced they are under 5 million to spend but they're in the upper end. So there are four to 5 million or sometimes they could be a little lower.
So those would be included in this number as well.
Got it and I guess, when you think about it the returns on those projects versus kind of the more base or the more kind of big project pipeline, how did the returns compare.
Well, they're very solid the the.
The configuration of the typical small onsite project is it's 100% facility fee.
So and they're easy to construct.
So I've always liked a these small onsite projects.
The excited about the the capability that.
We now have between the two companies we have.
Every offering covered now in small onsite and that's something that that were very much focused on as a company.
Very strong a 100% kind of take or pay commercial contracts they are easier to construct.
Much simpler configuration. So all you write all you have to do really is you select the right customer.
Got it thanks for the color.
Thank you. Our next question comes from Martin Roediger Kepler.
Your line is now open.
[noise], Oh, Hello de SMET, one actually.
Two minor questions on me.
So if you go Petrus do you feel upping the means disposing noncore activities is that's public also which is on your agenda I referred to was the logistics company just.
That's my first question.
Uh huh.
Specifics about.
Companies.
We're looking at divesting.
And you will.
Oh I missed it really.
Pretty active as we look good.
Add businesses and geographies that we don't think the longer portfolio long term.
Standpoint, and you'll hear more about that is as the year progresses.
And my second question is on.
The sustainability topics.
Can you help us to understand how much short you are in terms of studies indicate when it comes to the European trading scheme and do you think your actions to reduce.
The greenhouse gas intensity will help you to be better prepared for the fees for in the European trading scheme I eat that you're not fourth anymore in a emission certificates.
Well I don't know exactly how the trading scheme.
At this point.
I believe that these are management targets. So we decided as a team. These are things that we wanted to go after.
As I said earlier.
Renewable power has a lot to do the availability of renewable power has a lot to do with what our.
Emissions profile, ultimately looks like and Oh, well converts to reveal who are the best better off we will be we're going to be very active in terms of going out and contracting for renewable power.
And that's how you are able to increased purchases from a billion to 2 billion, but as far as.
You know, reaching carbon you probably at some point in the future. There are other things that would need to happen beyond the upset renewable power.
I think a very strong carbon tax around the world, we need advancements in technology.
All things that can be achieved but they just take a longer time.
Okay. Thanks.
Thank you and our final question comes from Mike Harrison with Seaport Global Securities. Your line is now open.
Hi, good morning.
Steve You noted some slowing in electronics markets in Asia, I think that a number players in the semiconductor space are encouraged that we're starting to see recovery.
So can you just talk about what you were seeing a kind of in the second happened, particularly in Q4 and maybe comment on your outlook for 2020 in electronics.
Yes so.
As you know there are big inventory builds in memory chips as prices dropped precipitously Samsung.
Did not have best quarter, they've ever had.
Now here recently.
That is whats that's really been in the news I think the last several quarters in 2019, most people think that it will be better that this bottom is that it's going to improve.
2020, and it's going to improve based on a lot of the trends that that Oh I mentioned earlier. So I don't have a number for you, but I think it should be better in 2020, and certainly when we start up.
Some of these big projects that will be.
Right additive.
And then one of the also ask you about the Americas you commented that manufacturing in metals markets were weaker talk about what you're seeing in a hard goods or versus packaged gases and also maybe comment on the new trade agreements that are in.
Place any sense that those could have saw some positive impact on manufacturing and metals in the U.S. during 2020.
Yeah, so hard goods a year over year down double digits.
Gas is flat hard goods sequentially Q3 to Q4 is down high single digits.
Whereas gas is flat, so clearly hard goods feeling the effect.
I guess not nearly so much so.
You know looking forward to the with respect to trade agreements I think you know to the extent that we supply large capital equipment.
Export companies.
That will have some positive effect I quite frankly don't think it's going to be a huge number but it could have some boston sorry [noise].
And just Mike. This is Matt as a reminder, you know we have a very strong Canadian and Mexican franchise as well, so I think regardless of which side of the border and where that goes.
We feel quite confident our ability to capture the business.
Thanks very much.
Thank you ladies and gentlemen, this concludes todays conference call. Thank.
Thank you for participating you may now disconnect.
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