Simon R. Moore - Air Products & Chemicals, Inc. Seifollah Ghasemi - Air Products & Chemicals, Inc. Michael Scott Crocco - Air Products & Chemicals, Inc. Corning F. Painter - Air Products & Chemicals, Inc..

P.J. Juvekar - Citigroup Global Markets, Inc. John Roberts - UBS Securities LLC Robert Andrew Koort - Goldman Sachs & Co. Christopher S. Parkinson - Credit Suisse Securities (USA) LLC James Sheehan - SunTrust Robinson Humphrey, Inc. Kevin W. McCarthy - Vertical Research Partners, LLC. Emily Wagner - Susquehanna Financial Group LLLP Jeffrey J.

Zekauskas - JPMorgan Securities LLC David I. Begleiter - Deutsche Bank Securities, Inc. Michael J. Harrison - Seaport Global Securities LLC Vincent Stephen Andrews - Morgan Stanley & Co. LLC Laurence Alexander - Jefferies LLC.

Good morning and welcome to Air Products & Chemicals' Second Quarter Earnings Release Conference Call. Today's call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Mr.

Simon Moore, Vice President of Investor Relations..

Thank you, Camille. Good morning, everyone. Welcome to Air Products second quarter 2017 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations.

I am pleased to be joined today by Seifi Ghasemi, our Chairman, President & CEO; Scott Crocco, our Executive Vice President and Chief Financial Officer; and Corning Painter, Air Products' Executive Vice President, responsible for Industrial Gases. After our comments, we'll be pleased to take your questions.

Our earnings release and the slides for this call are available on our website at airproducts.com. Please refer to the forward-looking statement disclosure on page 2 of the slides and in today's earnings release.

Just for your information, in May, we plan to file an 8-K with the SEC that will provide revised historical annual financial statements excluding the impacts of the now separated Versum and PMD businesses. You'll recall we moved these businesses to discontinued operations starting last quarter.

The updated annual statements will reflect our FY 2016 non-GAAP continuing operations EPS of $5.64 per share. We do not expect this filing to provide any new material information for investors. Now, I'm pleased to turn the call over to Seifi..

Thank you, Simon, and good morning, everyone. Thank you for taking time from your busy schedule to be on our call today. We do appreciate your interest in Air Products. I am very pleased to report that our team at Air Products delivered very strong performance this quarter.

This is the result of the hard work and commitment of our people and their continued focus on executing our strategic Five-Point Plan. For our second quarter, we delivered earnings per share of $1.43, up $0.06 over last year and $0.03 above the top of our guidance range for the quarter.

Please note that this is the 12th consecutive quarter that we are reporting year-on-year EPS growth. Now please turn to slide number 3 related to our very strong safety performance. Talking about safety, I think it is appropriate at this point to take a moment to remember Mr. Ed Donley, who passed away earlier this month.

Ed was Chairman of Air Products from 1978 to 1986, and CEO from 1973 to 1986. He led Air Products through some challenging times and positioned the company in several areas for the success we continue to have today. But for Ed, safety was the foundation. He emphasized that it required everyone's total commitment.

I am very pleased to say that his idea carries on. Today at Air Products, nothing is more important than the safety of our people and our safety results demonstrate this commitment and I'm very pleased with the progress that the company has made in the last few years.

Please turn to slide number 4, which is the reconfirmation of our overall goal for the company. We are determined to be the safest and most profitable industrial gas company in the world, providing excellent service to our customers. Now please turn to slide number 5, our overall management philosophy.

We believe strongly that cash generation is what drives long-term value. We believe that what counts in the long term is the increase in per share value of our stock, not the size of our company or growth rate.

As you know, Air Products has a significant amount of cash and the effective deployment of that cash is one of my most important responsibilities as the CEO of the company, something that I take very seriously. I do want to take a moment and expand on the opportunities and the discipline required for the effective deployment of our cash.

First, let's talk about how much capacity we do have to invest. Scott will go through the details later, but today we have about $2.5 billion of cash to invest and, in addition, we have the capacity to borrow an additional amount in the range of $2.5 billion while maintaining our targeted A and A2 rating.

So, that gives us about $5 billion that we can invest today. In addition, we expect to generate over $1 billion a year in investable cash, that is after we pay taxes, interest, maintenance CapEx, and dividends. So over the next three years, we expect to have at least an additional $3 billion and therefore a total of $8 billion to invest.

We do remain confident, and I like to stress the word confident, that we can deploy the $8 billion into high return value-creating investments in our core Industrial Gases business. Our three key areas of focus for the investments are, first, acquisition of small and medium-sized industrial gas companies.

As you know, in January, we indicated our interest in acquiring Yingde Gases, a Hong Kong listed company and a major industrial gas company in China. In March, we decided that we were no longer interested in purchasing the company at this time. This is a great example of the discipline required to effectively deploy the capital.

We do our homework and then based on that homework, we decide what is the right thing to do. We are not just enamored with spending money to become bigger. We are about carefully evaluating the risk of investing and making sure we have good returns for our shareholders.

The second area of opportunity is to purchase existing industrial gas facilities from customers and create long-term contracts where we own and operate the plant and sell industrial gases to the customers based on a fixed fee. We see opportunities for oxygen and hydrogen plants around the world in this category.

We also see the opportunity to expand our scope of supply to include the operation of existing gasification units and sale of syngas to customers under long-term agreements.

Essentially, these opportunities are the same as the traditional onsite business model, something that we do every day, so we are not reinventing the wheel, but with existing rather than new production assets.

And the third area of opportunity for us to invest is the very, very large industrial gas projects around the world driven by demand for more energy, cleaner energy and emerging market growth. The Jazan project in Saudi Arabia is a great example of how big these projects can be.

The plant that we are building in Jazan is the largest project in the history of industrial gas industry, with close to $2 billion of capital investment. Some of these new large projects could also include gasification and syngas. So we remain optimistic we can create significant shareholder value by investing in our core Industrial Gases business.

But as I have always said, if for some reason we cannot find enough good projects, we will stay disciplined and return the cash to our shareholders. We will still have the cash, and after all, it is your money. And I know everyone is very interested for us to give them a timeline for how fast we can deploy the cash.

But as I said, we are not in a hurry and we will take our time to make sure that we are investing in value creating projects. Now, please turn to slide number 6, there you can see our Five-Point Plan that continues to provide the framework for our success.

We have already completed four of these steps, and we continue to work on changing the culture of Air Products by focusing on safety, simplicity, speed and self-confidence. Now, kindly turn to page number 7, there you can see the results for our three key metrics.

We remain committed to our goal to become the most profitable industrial gas company in the world, as measured by each of these three key metrics. We remain focused on driving further improvement as we move forward. Now, please turn to my favorite slide, which is slide number 8.

I think it is appropriate to comment on the decline that you see on the reported EBITDA margins this quarter. First, we had a negative mix effect in our sales of equipment business.

We are recognizing substantially higher sale of equipment to the Jazan joint venture in the big project we are building in Saudi Arabia, which is at lower margins than 35%. In addition, we are seeing, as mentioned last quarter, significantly lower sales of LNG equipment, which carry a higher margin than 35%.

Second, due to the higher price of natural gas, we report higher sales with no profit, since the costs are passed through to our customers. If we adjust for the effect of these factors, our underlying margins are down less than 50 basis points and is still above 35%.

And even if you look at the 32.9%, I'm happy to say that we are still the most profitable industrial gas company in the world with a higher EBITDA margin than anybody else even at 32.9%. Now, I would like to turn the call over to Mr. Scott Crocco, our Executive Vice President and Chief Financial Officer, to discuss our results in detail.

Then I will come back after comments from Corning and Simon to make some closing remarks, and then, as always, we will be delighted to answer your questions.

Scott?.

Thank you very much, Seifi. Now, please turn to slide 9 for a more detailed review of our Q2 results. Sales of almost $2 billion increased 11% versus last year on 7% higher volumes and 5% higher energy pass-through, slightly offset by a 1% unfavorable currency impact. Volumes were higher across Asia, North America and Europe.

Latin America continues to be challenged by a weak economy. Taken together, the industrial gas regions increased overall volumes by 2%. In our sale of equipment businesses, continued progress on our Jazan project more than offset the expected weakness in LNG. Jazan and LNG, taken together, increased volumes by 5%.

Corning and Simon will provide additional comments later. Pricing remains largely unchanged across our businesses. EBITDA of $652 million improved by 2% and operating income of $406 million improved by 4%. EBITDA margin of 32.9% and operating margin of 20.5% decreased by 300 basis points and 150 basis points, respectively.

The EBITDA margin was negatively impacted by 140 basis points from higher energy pass-through costs in the Americas and EMEA, and by 120 basis points due to the different business mix in our sale of equipment businesses. As Seifi said, our ASU sales are up significantly with the Jazan project, and our LNG sales are down significantly.

LNG margins are typically higher than ASU sale of equipment margins. So, this different business mix reduces margins. Excluding these two impacts, the underlying EBITDA margin was down 40 basis points, impacted in part by the ramp-up of zero margin utility cost pass-through in Asia and higher power and fuel costs in our liquid/bulk business.

In addition, our productivity efforts this quarter were offset by higher maintenance costs. Sequential operating margin is down 120 basis points, 30 basis points of the decline is due to higher energy cost pass-through, while the rest is from cost, including higher maintenance expenses.

Versus prior year, net income increased by 5%, and adjusted earnings per share increased by 4%. ROCE of 12.3% improved by 70 basis points versus last year. Now please turn to slide 10. You know that Air Products continues to be very focused on cash flow.

Our distributable cash flow was over $300 million this quarter, while our free cash flow was negative $46 million. Free cash flow was down $156 million versus last year despite higher EBITDA, mainly due to higher cash taxes and higher maintenance capital spending due to plant replacement projects.

As I've said in the past, these items move around quarter-to-quarter. And to be clear, this does not include any of the $3.8 billion we received this quarter from the sale of our PMD business. Now turning to slide 11, you can see an overview of this quarter's performance in terms of earnings per share.

Before I discuss our continuing operations results, I want to mention that in discontinued operations, we recorded a large $1.8 billion after-tax gain associated with the PMD divestiture that was finalized in early January.

In continuing operations, we had non-GAAP items that totaled $0.04 per share or about $14 million pre-tax for both cost actions and pension settlement costs.

We expect these to continue through the year as we take further actions as part of the second $300 million of operational improvements and to offset stranded costs from our decision to divest Materials Technologies. Further details on all non-GAAP items can be found in the appendix slide and the footnotes to our earnings release.

Excluding these items, our Q2 continuing operations EPS of $1.43 increased $0.06 per share or 4% versus last year. Higher volumes increased EPS by $0.08 per share. Pricing, energy and raw material taken together decreased EPS by $0.03.

This was driven in part by higher power costs in our Europe business and we will be working hard to recover these costs. Net cost performance was unchanged as our productivity actions and the TSA income were roughly offset by higher maintenance costs, inflation and cost associated with pursuing Yingde.

As a reminder, included in the cost major factor is the other income (expense) line on the consolidated P&L. As I shared last quarter, we are providing services via transition service agreements, or TSAs, to both Versum and Evonik. The cost to provide these services are primarily are primarily in SG&A.

The payment we received for these services was about $10 million this quarter, and is shown in the other income (expense) line. We would expect these TSAs to wind down in 2018, and are committed to taking actions to reduce the resulting stranded costs. For the quarter, currency and foreign exchange gains and losses netted to a zero impact.

Equity affiliate income increased by $0.01 per share. Interest expense was $0.02 higher, primarily due to lower capitalized interest as the benefit from our lower debt balance was offset by higher rates. We've added a new line to our income statement this quarter called other non-operating income (expense).

This is where we are reporting the interest income from our cash and short-term investments. Historically, interest income was a very modest amount. So, we included it in our other income (expense) line, and therefore it was in our operating income.

Since, we now have more than $3 billion in cash and short-term investments, and are generating more interest income, we've begun reporting interest income as non-operating income. Interest income contributed $0.03 this quarter. And since it is non-operating, it is not included in our EBITDA or operating income results.

Our effective tax rate this quarter was 23.7%, basically unchanged from last year. We still expect our FY 2017 tax rate to be approximately 23%. Turning to slide 12, I would also like to expand on Seifi's comments regarding our capital deployment capacity. We have about $3.3 billion of cash and short-term investments as of March 31.

After we pay the rest of the taxes due on the PMD gain and maintain a modest operating cash balance, we have about $2.5 billion of cash available to invest. Our debt balance as of March 31 is about $3.8 billion. As you know, we are committed to managing our debt balance to maintain our current targeted A/A2 rating.

We expect this would enable a debt level in the range of approximately 2.0 to 2.5 times EBITDA. Based on a trailing 12 months EBITDA of $2.7 billion, this would support a debt level of about $6 billion. So in total, between available cash and additional debt capacity, we have about $5 billion we can deploy today, while maintaining our A/A2 rating.

As Seifi mentioned, we also expect to generate over $1 billion per year of investable cash, that is after paying taxes, interest, maintenance CapEx, and dividend. So, over the next three years, we see a total of over $8 billion available to invest. Now to begin the review of our business segment results, I'll turn the call over to Corning..

Thanks, Scott. In recent quarters, we've driven our results more by productivity than by growth. In this quarter, I'm pleased to report that our commercial efforts have paid off in positive growth pretty much across the board. At the same time, I am disappointed that our underlying productivity did not fully translate to the bottom line.

There are reasons for this, including higher planned maintenance this quarter, and we have a lot of cost progress behind us. But we continue to be excited by the opportunity ahead of us. There is more to come in productivity.

I would like to thank our people around the world for staying focused on our goals, notably safety, excellent customer service and our Taking the Lead productivity projects.

Some examples of what we're doing right now include piloting new third-party routing software in China, introducing a new e-commerce platform for mobility, and replicating our European e-tactical planning system in North America. These actions will improve customer experience, sales, and efficiency.

Now, please turn to slide 13 for a review of our Gases Americas results. Underlying sales were up 2% but pass-through of higher energy prices, with Houston Ship Channel natural gas prices up over 50%, significantly diluted our margins.

Specifically, sales of $890 million were up 12% versus last year with volume and price both up 1%, and higher energy cost pass-through up 9%. North American volumes increased Americas volumes by 1% as we saw positive volumes across almost all product lines.

Latin American volumes were down 3% versus last year, but the contribution to overall Americas volumes rounded to zero. Although not as drastic as in previous quarters, weak Latin American packaged gases demand continued. In contrast, liquid/bulk continues to rebound on new signings and improved demand.

There are no substantial new onstreams for us in Latin America in our P&L. So, the movements here are purely merchant. EBITDA of $354 million was up 4% and operating income of $225 million was flat versus last year.

EBITDA was up more than operating income, in part due to stronger equity affiliate income this year, due to higher maintenance costs at one of our joint ventures last year. Equity affiliate income impacts EBITDA but not operating income.

EBITDA and operating margins were each down about 300 basis points, with higher energy cost pass-through accounting for all the EBITDA margin movement, and 190 basis points of the operating margin movement. So, the underlying EBITDA margin was flat, and the underlying operating margin was down 90 basis points.

This was primarily driven by higher maintenance costs, due to customer planned maintenance outages, more than offsetting our Take the Lead cost reduction program. We do expect to see additional outages impacting cost during Q3.

It was good to see the 1% price impact on sales, but from a margin perspective, this put us just slightly ahead of diesel and power cost increases. Finally, we anticipate a reduction of about $70 million in North American sales in FY 2018, with the end of our supply contract for liquid/bulk products to Airgas.

As you would expect, we are working hard to replace this volume. We were pleased to be awarded an expansion of our hydrogen supply to Marathon Petroleum in Garyville, Louisiana. We expect the new 300 million (sic) [30 million] standard cubic foot a day expansion of our existing relationship to commence later this year.

The additional hydrogen will be provided from our Gulf Coast pipeline system, the world's largest hydrogen plant and pipeline network, spanning more than 600 miles from the Houston Ship Channel to New Orleans with 22 hydrogen production facilities. Now, please turn to slide 14 for our Europe, Middle East and Africa business.

Volume strengthened and profits were up on a constant currency basis. Versus last year, sales of $414 million were down 2%, with currency more than offsetting higher underlying volumes and higher energy cost pass-through.

Our volumes were up 1%, as stronger packaged gases and retail liquid/bulk sales more than overcame lost hydrogen sales during a major planned outage. We were also very pleased to bring onstream the first phase of our new hydrogen and ASU project for BPCL in India.

This first phase came onstream late in the quarter and additional phases are expected to come onstream in the third quarter. This 100% Air Products-owned facility will be reported in EMEA segment, while the rest of our India business continues to be reported in Asia equity affiliate income.

Reported pricing was flat but was positive, excluded a negative customer mix, as we began recovering the higher power cost from the first half of the year in our merchant business. Higher energy cost pass-through contributed 3% and currency had a negative 6% impact, primarily due to the British pound.

Other than the continued currency impact, we don't believe the Brexit vote had much impact on our business this quarter. Volumes were up 2% sequentially, primarily on stronger merchant sales.

Operating income of $87 million was down 4% and EBITDA of $136 million was down 6%, but both would have been up on a constant currency basis, as our productivity actions and volume growth offset the impact from higher power costs and planned maintenance outages.

The EBITDA margin of 32.9% was down $160 basis points, with almost two-thirds of the decrease due to higher energy pass-through, with the balance due to planned maintenance outages and higher power costs. Operating margin of 20.9% was down 40 basis points, and would have been up slightly excluding the impact of higher energy cost pass-through.

Please turn to slide 15, Gases Asia, where you can see that the strength in our merchant business and the ramp-up of our new plants continue to deliver growth. Sales of $436 million were up 7%, driven 8% by volume growth.

The volume growth was roughly 50-50 split between underlying sales growth and utility pass-through volume, as our onsite customers ramp up their gasifiers. Our merchant business was up mid to high single-digits across Asia, and our China LOX/LIN business was up high single-digits, with particular strength in the retail portion of the business.

Sequential volumes were down slightly on Lunar New Year seasonality. Overall, China pricing was flat, as helium price headwinds were offset by positive pricing for other products. China LOX/LIN pricing was again slightly positive versus prior year. Operating income of $112 million was up 7%, and EBITDA of $174 million was up 2%.

Equity affiliate income was down due to a one-time benefit last year associated with exiting a small joint venture. This impacts EBITDA but not operating income. Operating margin of 25.7% was flat versus last year, as the increased utility pass-through volume, which is by definition at zero margin, diluted the increased operating income.

Similarly, the EBITDA margin of 40% was down 200 basis points versus last year, due to the utility pass-through volume dilution impact and the lower equity affiliate income. We continue to successfully execute projects throughout Asia. In China, we recently brought on stream two plants.

The first in Guangdong, supports a leading supplier to the high-tech display industry; the second supplies Chongqing HKC Optoelectronics, who are building China's leading LCD panel fab in western China.

Both of these are examples of how we are positioned to win in China's push for high-end manufacturing for the 13th Five-Year Plan and the Made in China 2025 strategy. In Korea, we were pleased to bring on stream the first phase of our facilities, which supply a new semiconductor fab in Pyeongtaek.

This past January, we announced the second phase to support increased demand of the same customer. Our business in India continues to show strong results. To support the strong demand growth, we have announced last week that our INOX Air Products equity joint venture will build six new plants to serve the onsite and merchant business.

These investments will further strengthen our leadership position in India's merchant industrial gases market. Finally, please turn to slide 16 for a brief comment on our Global Gases segment, which includes most of our air separation unit sale of equipment business as well as central industrial gas business costs.

Sales and profits were up versus prior year driven by progress on the Jazan ASU sale of equipment project this quarter, which more than offset weakness in small equipment and other ASU sales. Now, I'll turn the call back over to Simon for a comment on our Corporate segment..

Thank you, Corning. Please turn to slide 17. Our Corporate segment includes our LNG business, our helium container business and our corporate costs. Sales and profits were down versus last year on continued significantly lower LNG project activity.

As we have said, the lack of customer decisions on new LNG projects is having a significant impact on our business, and we continue to expect at least a $0.30 headwind in LNG for FY 2017 versus FY 2016. We did see a positive impact from the TSAs with Evonik and Versum.

Now, please turn to slide 18, and I'll turn the call back over to Seifi for a discussion of our outlook..

Thank you, again, Simon. Before we take your questions, I would like to make a few comments about our outlook. As we move forward, I want to remind our shareholders that Air Products is in a very strong position. Our safety and operating performance continue to be strong.

We have taken action to deliver our $100 million of operational improvements this year and are focused on additional action to offset the stranded cost from the separation of Materials Technologies business. We remain committed and confident in our ability to deliver on our cost savings and our EPS commitments.

Our portfolio actions and the strong cash flow generation of our company provides us with almost $5 billion of capacity to invest now and over $1 billion per year in addition for the future. So over the next three years, we expect to have at least $8 billion to deploy and we certainly intend to deploy that.

We are committed to staying disciplined and won't invest our money unless we are confident the risk-return profile will create significant value for our shareholders. And we see exciting opportunities to invest in M&A, asset buybacks and large industrial gas projects. However, we do continue to be cautious about the future.

That was the investment we made in January and we have seen no significant reason to change our view. We continue to be concerned about the lack of concrete economic policy in the United States, the effect of Brexit on the UK and European economies, and overall geopolitical tensions in the Far and Middle East.

I would like to stress that the fact that we are cautious is not in any way, shape or form related to specific issues at Air Products. Air Products is doing well and you see that in the numbers and we continue to believe that Air Products by itself will continue to do well.

But we cannot ignore the overall economic and geopolitical situation around the world and that is the reason for our cautious approach. With this background, we are maintaining our guidance for full year 2017 at EPS of $6 to $6.25 per share with the (sic) [which at] midpoint, which is a substantial increase, of 9% over the previous year.

And our guidance for the third quarter fiscal year 2017 EPS is $1.55 to $1.60 per share, which is also up 9% versus last year at midpoint. At this point, again, I want to thank all of the employees of Air Products for their continued hard work and commitment in delivering another strong quarter of results in safety and financial performance.

I am very proud to be a member of this winning team. Now, we will be delighted to answer your questions..

And thank you. We do have our first question from P.J. Juvekar with Citi..

Yes. Good morning, Seifi..

Good morning, P.J.

How are you doing this morning?.

Doing good. Couple of questions on M&A.

First on your Yingde acquisition, was that an opportunistic move on your part or was it more strategic? And if it was strategic, can you drill down more into that, why China, why now? And the second question is on, any potential to get into packaged gases, which is more fragmented area, so maybe it's easier to get in, and would you consider that in Latin America, where you already have Indura assets? Thank you..

Thank you very much, P.J. Our decision to pursue Yingde is definitely strategic. When you look at the projections of the GDP at purchase prosperity, by 2030, it is projected that China will have a GDP of about $33 billion, by far the largest economy in the world. That is where the growth is right now.

The growth is in China and in India by any kind of a measure. Therefore it was strategic and that we will continue to be focused on China. There are a lot of other opportunities other than Yingde and we are pursuing those, and I hope in the not too distant a future, we have some more news on that.

With respect to packaged gases, we are in the packaged gases business everywhere except the United States. So, the places that we are in packaged gases like in Latin America, like in Europe, like in China, we definitely are interested in expanding our packaged gases business. We continue to look at acquisitions in that area.

The only area that we are not and we don't intend to be in packaged gases business is in the United States, because we believe that just the competition makes it very difficult to make money..

Thank you..

Thank you, sir..

Our next question comes from John Roberts with UBS..

Thank you. I was at the Annual IHS Conference recently and it sounded like China had worked out some of the early problems with their coal-to-MEG processes and were going forward with a number of projects. I assume those are going to be new oxygen for gasification for the glycol units there.

Are you seeing activity there pick up at all?.

First of all, good morning, John. Yes, we are. This is why in the past call on, say, two years, we have been saying that we don't see any slowdown in coal gasification in China. We actually see opportunities. We do see opportunities. We are very well-positioned there.

We already have three gigantic coal gasification plants operational, where we are supplying oxygen successfully to our customers. Those plants are running well. We are getting paid and we will be pursuing those from a good pole position..

And could you talk about the complexities that are trying to de-captivate more hydrogen from the refining industry. I think that was, early on, one of the key opportunities that you envisioned, but it seems like it's taking a fair amount of time..

Those opportunities are still there. It is going to take a fair amount of time because this is not a quick process, we have to demonstrate to people that we can create value, but we have a lot of projects underway and we are talking to customers and hopefully in time we will have appropriate news for you..

Okay. Thank you..

Thank you, sir..

Our next question comes from Robert Koort with Goldman Sachs..

Thank you. Good morning, Seifi..

Good morning.

How are you?.

I'm well. I'm trying to reconcile maybe some competitor commentary and maybe broader industrial end market commentary in the U.S. with the still fairly anemic volume growth.

Is there something particular to your asset base or chassis relative to where the growth is coming from in North America or do you think there really isn't much industrial growth in North America at the moment?.

Well, I'd like Corning to comment more on this, but first of all, there isn't anything unique about our portfolio that would prevent us from participating in economic growth if there is some. But the economic growth in the U.S. is not that much.

It is – when you look at industrial production and all of that, so it is not that positive, but we have seen growth in the – actually when you look at gases volumes in the U.S. – I'm sure Corning will comment on this – but this is the first time in about six quarters that we're actually seeing growth.

So, there is some, but we don't have any competitive disadvantage there.

Corning, would you like to expand on this?.

Yes. So, thank you, Bob, for the opportunity. So, we feel good about our volume growth that we had. You see the headline looking at overall Americas, obviously, that's impacted heavily on LOX/LIN, and there's also some HyCO sales in that, and that's impacted when we have outages.

But if we were going to look at some of the core products, liquid hydrogen, helium, argon, our growth rates are substantially higher in those areas, and I think that's particularly important to us..

That's helpful and for my follow-up.

Seifi, we're not used to referencing raw material problems in Gases margins, is this specifically to some shorter duration business or you have some contracts that don't have escalators in for energy pass-throughs?.

Bob, we call it raw materials, but it is all power. I mean, obviously air is free, but the power cost, that is what is driving that line. And we mentioned this thing last quarter, that significant number of the nuclear power plants in France were down, that pushed up their power prices.

That has subsided, so in the future quarters you wouldn't see that, but that is what is driving that number..

Okay. Thank you..

Thank you, sir..

And if I could, that's obviously in our merchant business, right. We continue to have very robust pass-through of energy costs in our tonnage and onsite business..

Okay. Next question..

Sorry about that. And our next question comes from Chris Parkinson with Credit Suisse..

Thank you. Can you just walk us through the puts and takes on some of the other various drivers in your merchant businesses across both developed and emerging markets? I know you mentioned France on the former, but also if you could hit on China on the latter.

And then also, maybe just what you're seeing in terms of operating rates in the Chinese market as well, especially your longer term assumptions. Thank you..

Sure, Chris. Corning, I think, will address that..

Yeah. So let's start with the operating rates. So operating rates for us are in the 70s around the world. Actually our highest rates are in Asia, where they're in the upper 70s and that would include China.

The merchant business, by its virtue, is one that sees a wide range of customers, so that's what I would say is the driver for us, no specific one industry but a wide range of opportunities. And in general, throughout the world, but particularly in China, we've driven a lot of strength in moving from retail to wholesale.

So that's at a ratio really where it should be – I'm sorry, from wholesale to retail, and that's now at a ratio that's sort of at a global world-class for us. So all in all, I'd say the merchant business is positive for us. Even in South America, the liquid/bulk business for us has been a positive last quarter and this quarter..

And actually, if I may, just on Brazil, a few different companies this morning have actually highlighted continued sluggishness, I'd say actually at best, outside of a few select consumer and healthcare-driven markets.

Can you just walk us through a few key end markets there and just comment on what you're seeing on a sequential basis? And then even what you're hearing from some of your industrial customers. Thank you..

Yeah. So let me start. First of all, when you look at our results in South America, again you're really just seeing a pure merchant play. And in Latin America, where largely, in terms of 100% owned and reported results, is for us Chile, Brazil and Colombia for the most part, different economies who have different issues in them.

So in the Chilean economy, very much related to mining, and I would say there had been strengthening earlier, but the Chilean economy still remains somewhat weak. I think the political situation there is a drag on the economy until the next election. On the positive side, the big strike at one of the copper mines is behind us now.

In Brazil, of course, you've got Carnival effect in this particular quarter, which is always a large impact for us.

I'd say the strength that we see there in the liquid/bulk versus in the packaged gas business, you could read that larger companies, more likely to be in an export sort of an industry, are doing better for us than perhaps people who are just serving the local market.

Does that help?.

Yes, it's great detail. Thank you..

And now for our next question from Steve Byrne of Bank of America. Steve, if you could check your mute function, please..

Why don't you move on to the next question..

I'll do that. We've got Jim Sheehan with SunTrust Robinson Humphrey..

Thank you. Seifi, regarding your cautiousness on the geopolitical outlook, aside from that, we are seeing a little bit of a pickup here in some of your organic volumes and maybe some pricing in various regions of the world, North America and Europe.

What would you have to see, what would have to occur to make you less cautious on the geopolitical side?.

Very simply, a very concrete economic policy that has passed Congress and it is enacted into law, so that we can make an assessment of what is happening in the United States. The second one is a concrete indication of what Brexit actually is going to mean.

And the third thing is going to be hopefully a lessening of tensions in Far East and in the Middle East, that we are not going to get into another war. Those would be the three things. Please, Jim, we are cautious about the future because we don't know what is going to happen in the future, so we need to be cautious about that.

But as I said, Air Products is doing fine and we are very confident about what Air Products does, but if something significant happens, we need to be prepared for that. But right now, everything about the U.S. economy is a guess.

Nothing has passed Congress into law, whether it is taxes, whether it is infrastructure projects, nothing has passed into law, so we don't know what to expect and that's why we are being cautious. And Brexit, there is a lot of discussion about what's going to happen.

One day it's going to be a hard negotiation, one day it's going to be soft negotiation. Now we are going to have election in UK. So, those are the ones that makes us a little bit cautious. Well, maybe we are too cautious, but that's usually not a bad thing..

Okay. Great. And then regarding your $8 billion capital deployment figure. You talked about a three-year timeframe for deploying that capital.

And could you just elaborate a little further on how you think about deploying that capital internally through growth versus returning cash to shareholders? Do you stop every year or so and decide how you separate those two goals, or would you start to remunerate shareholders only after the three-year time period is up for assessing M&A opportunities?.

Jim, first of all, I'd just like to clarify, I didn't give you a three-year timeline. So, the timeline is open. Number two, currently, we don't have any plans to return money to the shareholders because we think we can deploy the money. As time goes by, we'll see how well we are doing.

I mean, if in the first year and the second year, we have deployed zero, then I think the strategy will change. But overall, as I said before, considering what we are working on, we continue to be confident that we can put that money to work in good returns and create value for our shareholders.

That is what distinguishes Air Products from the other companies. That is our future. That is why we are not interested in big mergers and acquisitions. That's why, we are not running after buying another big company, because we do have the capability and a clear vision of what we are going to do.

Air Products is going to do very well [as a] standalone, we don't need anybody's help..

Thank you..

Thank you..

Our next question is from Kevin McCarthy with Vertical Research Partners..

Yes, good morning. Seifi.

How are you?.

I'm very fine, Kevin, and yourself?.

Well, thank you. I wanted to ask you about the capital deployment and specifically, the category of DCAPs that you mentioned versus acquisitions in large projects.

Just wondering if you could educate us a little bit more on how you see the opportunity set there? For example, I imagine, it would take quite a lot of a DCAP deals to go about one by one and address individual oxygen or hydrogen units.

And so, I'm wondering, if you see larger collections of assets and counterparties that would be, perhaps interested in doing a more wholesale a deal.

And also why is it that things are apparently moving a bit slowly? For example, is there a dearth of interested counterparties at this particular juncture, or is that not the case and maybe there's just a wide bid-ask on the economics? Any color there would be appreciated..

Sure. Kevin, we are chasing pretty sizable projects. In order to deploy the $8 billion, it sounds like a lot of money, if we just had another four Jazan projects, that deploys all of the cash.

We are pursuing very big projects and, as a result, it's going to take time, it's going to be more difficult, it's going to be more complicated, but that is the reason that we remain confident.

There are people who are very interested in talking to us about gasification, about expanding our scope of supply to syngas, those projects are all $2 billion, $3 billion projects.

And in addition with the hydrogen, yes, we are looking at, sometimes, kind of making a wholesale deal with people in terms of acquiring many plants rather than just one or two plants.

And in addition to that, there is a possibility that some assets will come available as a result of the merger of some other companies, so we are looking at all of that. So, putting all of that together, again at this stage, we believe we can deploy the cash, but time – thank you, Kevin..

Thank you very much..

Sure, sir..

Our next question comes from Don Carson with Susquehanna International Group..

Good morning. This is Emily Wagner on for Don. Just a question on EMEA. I noticed you mentioned you were gaining positive pricing but this was offset by customer mix.

Can you just describe the dynamic there and is there an opportunity to increase pricing to help offset the currency headwinds?.

Sure.

Corning?.

Yeah. The issue for us in pricing has, to date, really been around the power cost that Seifi referred to earlier that incurred in the first half. What's happened is we have made moves to recover those power cost increases. We've actually recovered about 50% of it so far.

You don't see that when you look at that slide right now, because at the same time, we had a mix in our customers where large customers took more product. And typically, with a large customer, our cost of supply is less, and therefore the pricing is less.

So, for example, the person who takes a large container or a large load of helium in liquid phase versus in gaseous phase, lower cost of supply per molecule, lower molecule price to them. So, that's what's going on.

If we were going to look at, let's just say, March, where power rates were more where we expect them to run for the rest of the year and the overall gains we've made in pricing, we see ourselves well on track to recover the remaining 50%. So, we're quite confident on that.

I'd rather not go into a timing discussion of that because I think that has some commercial implications for us in negotiations, but we think we're in a good position there..

Thank you..

Our next question comes from Jeff Zekauskas with JPMorgan..

Hi, thanks very much. Seifi, you indicated that you were no longer pursuing Yingde. I was wondering how you came to the decision to no longer pursue it. And then in the way you termed it at the beginning of the call, you said that we're choosing no longer to pursue Yingde at this time.

So, does that mean that under a different set of circumstances you might pursue it again?.

Jeff, first of all, good morning. And as usual, you've always asked very good questions. I did use my words very carefully when I said at this time, because you never know what happens in terms of how the events turn out. There were many reasons that we decided to stop.

And what did stop mean? If we wanted to pursue it, it means that we would have had to offer more than $6 a share. We decided that this is not the time to do that. At some future time, it might be the time to do that. So, I just wanted to not close the door there..

And when we look across your businesses, there's very slow growth for the industrial gas company and pricing is roughly zero or close to zero.

So, does that mean that your products might have to reassess its cost initiatives again to see whether it can lift returns by another means?.

Well, the thing is that – there is no question that the pricing is flat and the volume growth in the merchant business is nothing to write home about. We fully understand that.

And that is why Air Products has chosen not to significantly expand our merchant business and our packaged gases business, and you know very well that that's why we didn't pursue some opportunities in that area. We are focused on the large onsite projects and there are plenty of those projects to pursue.

So, we believe that we will be able – by pursuing those projects, we will continue to be able to maintain our margins. Our goal is to maintain our margins at around 35%.

And if because of the circumstances or certain events in the world, we would need to take a look at improving our productivity and our cost position in order to maintain our margins, we certainly will do that..

Okay. Good. Thank you so much..

Thank you, sir..

Our next question comes from David Begleiter with Deutsche Bank..

Thank you. Good morning, Seifi..

Good morning.

How are you, Dave?.

Good. Thank you.

Just on pricing in North America, Seifi, I know it remains challenging right now, but what's the potential, do you think, over the next two to three years for some pricing traction to be gained here in North America?.

Dave, you do know that it will be very difficult for us to make any comments about prices. So, I would like to take a rain check on that, if you don't mind, Dave..

Understood. Just lastly on the maintenance costs that we're seeing, a little bit elevated currently.

Can you quantify the impact and how that might benefit perhaps Q4 or even next year?.

I think Corning should address that. I obviously don't like it, but Corning will have comments on that..

So, I'd say we're in the neighborhood of $0.03 for us on maintenance in this quarter. We'll see a slightly higher – also we'll see, relative to last year, higher costs next quarter, fourth quarter we'll be a little less.

Let me just stress though, these are maintenance costs, and we're talking about hydrogen SMRs largely being what swings the numbers around. These are plants that come down every three years, four years for maintenance. And so it's, by its nature, lumpy. I think we have made great progress in this area.

And the outage that we took this last quarter in Europe, that plant had been operating for over 1,300 days, right. And we're going to push and push with regulatory people, the right to continue to operate that plant longer, as we've gotten smarter and better in how we operate and maintain these plants on the fly.

So, I think there's a positive story there, but we're always going to have this up and down as when this project is scheduled..

Thank you very much..

Thank you, Dave..

Next question comes from Mike Harrison with Seaport Global Securities..

Hi. Good morning..

Good morning, Mike.

How are you? You have another difficult question for me, huh?.

Doing well. Thank you. Yes, I'll try.

Looking for some color on replacing the $70 million of lost revenue to Airgas, do you have efforts underway already to find the new customers to replace that? And how much of a headwind could that loss be to your capacity utilization? In other words, trying to get to an idea of what the decremental margin could look like on that $70 million..

Corning, will answer the question, but I just want to say that we were not making a lot of money selling anything to Airgas, so that's why we have stopped, but – Corning?.

Yeah. So, you can imagine, we have known for quite a long time where this contract – when it was going to terminate. We're on it. We've got people focused on filling in the volumes.

I'd rather not talk a lot about particular progress or margins just because I think that gives one competitor, in particular, a pretty good ability to calculate into our economics..

All right. And then, was also hoping that you could comment on the Jazan project in the Global Gases segment.

The $24.5 million in EBITDA for this quarter, can we model a similar EBITDA number for Q3 and Q4? Can you give us any guidance on that?.

Well, we don't want to give you any numbers, but I would like to say that the Jazan project is making good progress. We are on schedule. We are on plan. So I don't see any reason why the number – why we would have any kind of a significant change there.

But overall, I'd rather not break it down because then you have to break down what is the negative effect of LNG and all of that. But overall, for Jazan, we are doing fine..

Thank you very much..

Thank you, sir..

Next question is from Vincent Andrews with Morgan Stanley..

Thank you, and good morning, everyone..

Good morning..

I just have one question left and I'm just hoping, Scott, you can maybe boil down all the moving parts on the margin, we x-out the pass-through. Just give us some guidance on how we should be modeling underlying margins for the balance of the fiscal year sequentially would be helpful..

Okay.

Scott, do you want to comment?.

Absolutely. So, maybe just let me reiterate here for this quarter versus last year. So, we have a 140 basis point decline from the higher energy pass-through and then a 120 impact from the SOE mix as was described, which leaves an underlying margin down of about 40 basis points.

Then as we move forward, and we don't know where natural gas is going to go, we've given you the sensitivity in the past that for every change in natural gas, $1 per MMbtu, is about $250 million per year in revenue. So, you can put it in whatever you think for natural gas on that.

In terms of [what] Seifi just mentioned, we'll continue to execute on Jazan and that project is going well. And also as we've talked about, the LNG business continues to be down towards the bottom. And so we don't see a lot of change in either one of those.

I would say though, just kind of all else equal and keeping natural gas where it is, maybe it's in the 33-type of range, and we were just short of that this past quarter, and for the year maybe it's something in that area.

But again, I'd ask you to go back and plug in what you assume the natural gas is going be, okay?.

Thanks very much. That was very helpful..

Thank you, Vincent..

Our next question comes from Laurence Alexander with Jefferies..

Good morning, two quick ones.

First, how much of a tailwind, if any, is your HyCO business going to see from refiners gearing up to deal with the new marine fuel regulations starting in 2020? And secondly, as you look at your pursuit of larger projects in gasification, are you going to see sort of a longer ramp-up for those projects, as they become larger in size? Are we looking at more like three to four-year ramps as opposed to two-year ramps?.

Well, I'll answer your second question and I'll have Corning answer your first question. Yes, as the projects become bigger and so on, you're right. Instead of a two-year turnaround for an ASU, it will be a four-year, five-year, that is very correct assumption.

And on your first question, Corning?.

Yeah, I'm sorry to confirm for you, when you look at the crude light's blend and everything else, the split, how they run it, we don't see a huge impact for us in terms of incremental demand with the new marine regs. I think that's not going to be a huge impact..

Okay. Thank you..

Okay. With that then, I think that we would like to – we have gone over the time, but no problem. I just like to thank everybody for being on the call, we do appreciate that. Thanks for taking time from your 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, have a nice day and all the best to all of you. Thanks again..

Once again, that does concludes today's call. We appreciate your participation..