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

Beginning today's call is Mr. Simon Moore, Vice President of Investor Relations. Please go ahead, sir..

Thank you, Alan. Good morning, everyone. Welcome to Air Products second quarter 2019 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations.

I'm pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Scott Crocco, our Executive Vice President and Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel and Secretary. After our comments, we'll be pleased to take your questions.

Our earnings release and the slides for this call are available on our Web site at airproducts.com. Please refer to the forward-looking statement disclosure that can be found in our earnings release and on Slide Number 2. Now, I'm pleased to turn the call over to Seifi..

Thank you, Simon, and good morning to everyone. We appreciate your interest in Air Products and thank you for joining us on our call today. At Air Products, we have a talented, committed and motivated team who stays focused on serving our customers and creating value for our shareholders every day of the year.

This team delivered yet another quarter of very strong safety and financial results. I want to thank all of our 16,000 employees for their hard work, dedication and contribution.

Our quarterly adjusted earnings per share of $1.92 is up 12% and represents the 20th consecutive quarter, I like to stress that, the 20th consecutive quarter that we have reported year-on-year quarterly EPS growth. This strong result overcame a negative $0.08 currency impact. Our EPS is up 17% on a constant currency basis.

We continue to be the safest and most profitable industrial gas company in the world with a record quarterly dividend margin above 37%. We remain in a very strong financial and technological position with a business that generates significant cash flow.

I remain extremely confident of our ability to deploy this capital into high return industrial gas projects that does generate significant value for our shareholders, while also continuing to return cash through our dividend. Now, please turn to Slide Number 3. All our employees around the world are focused on safety.

And as a result, we have improved our loss time injury rate by 83% and our recordable injury rate by 45% since 2014. Slide number 4 states our long standing goal. Five years ago, we set the goal be the safest and most profitable industrial gas company in the world, providing excellent service to our customers.

I am very happy and proud to say that we have achieved this goal and are committed to maintaining our position in the years to come. We expanded the goal to include being the most diverse and that is part of our continuing journey to create a work environment that everyone can achieve their true potential.

Slide Number 5 is my management philosophy that I have followed throughout my business career. And we have talked about this many times before, so I don’t want to dwell on it. Slide Number 6 shows our 5 point plan for Air Products as we move forward.

We are committed to have best-in-class performance to maintain our current leadership position, grow the company by expanding our offering related to our core competencies, continue to change the culture of the company and most important, to achieve our higher purpose.

That higher purpose is to create a company that people feel they belong and their contributions are recognized and valued; a company that is committed to sustainability and supportive of the communities in which we operate; a company that our people want to work for where they are proud to be a part of an innovative process to solve the energy and environmental challenges facing the human race.

That is our higher purpose and we are committed to it. Please turn to Slide Number 7, which shows the key milestones in our gasification strategy. Let me take the opportunity to provide an update on a few of these exciting projects. As I said last quarter, the Lu'An project continues to run very well and is contributing to our results as we expected.

The Jazan ASU, the main air separation units, they are built on budget and on time and they are in the process of being commissioned as we speak. The definitive contract for the Jazan gasifier and power plants, which are very complex contracts and many of them are being negotiated with Saudi Aramco.

And we expect the conclusion of those discussions by the end of calendar 2019. We are continuing our discussion with YK Group for the very large coal to syngas project. This project is a still underway. And there are some issues related to the allocation of coal, which is very important for us but the project has the support of central government.

And we are optimistic that we will have more definitive announcements about the project as we move forward. And for the Juitai project, that project is under construction with expected on stream in 2022.

In addition to these announced projects, as we have said before we continue to work on a significant number of very large new gasification opportunities around the world. Now please go to Slide Number 8, where you can see the results of our key profitability metrics.

We remain committed to our goal of continuing to be the most profitable industrial gas company in the world as measured by each of these metrics. Now please go to a Slide Number 9, which is always my favorite slide and particularly this quarter.

You can see our record quarterly EBITDA margin up 37.7%, which is up over 1,200 basis points from five years ago. This is a great achievement by the people of Air Products and all of us are very proud of it. Now, I would like to turn the call over to Mr.

Scott Crocco, our Executive Vice President and Chief Financial Officer to discuss the results in detail.

Scott?.

Thank you very much, Seifi. Now please turn to Slide 10 for a summary of our Q2 results. As Seifi said, our team delivered another impressive quarter. Volume added 3%, demonstrating the success of our growth strategy. Price was also up 3%, which is our best performance in over four years.

Sales of $2.2 billion were up 1% as the better volume and price was roughly offset by 4% negative currency and 2% due to a contract change in India. As a reminder, we agreed with a customer in India to convert our hydrogen supply agreement into a tolling arrangement.

This change has no impact on our profits but reduces sales for the company and for our EMEA segment but we are showing the sales impact in the other line. This change began in December, so the second quarter includes the full quarterly effect. We saw lower sales as we near the end of our successful Jazan sales equipment project.

Excluding this impact, volumes grew 5% due to positive base volumes and additional new plant on-streams, including Lu'An in Asia. Price was particularly strong across all three regions and across our merchant product lines. Great job by our team as we stay focused on pricing.

Currency was again a headwind as the dollar strengthened against all major currencies. EBITDA of $825 million and adjusted earnings per share of $1.92 both improved 12%, driven by the higher volumes and positive pricing, partially offset by unfavorable currency and higher cost.

EBITDA margin reached a record 37.7%, up 340 basis points compared to prior year as a result of higher volume and price, as well as the India contract modification. ROCE of 12.6% improved 80 basis points versus last year, primarily due to higher profits.

Sequentially EBITDA increased 4% as better results in Americas and EMEA more than offset reduced Jazan sales equipment and lower volumes due to the lunar New Year holidays in Asia. Please turn to Slide 11. Our second quarter GAAP EPS was $1.90, and includes a $5 million one-time pension settlement cost.

Our second quarter adjusted EPS of $1.92 was up 12% or $0.21 per share, driven by strong operating performance. Volume, price and costs together contributed $0.30.

As you see on this slide, the impact of price increases is shown net of the impact of variable cost rate increases, primarily variable production costs, such as power and distribution costs in our merchant business. The other cost line refers to fixed cost increases, such as personnel and plant maintenance costs.

The other cost increase this quarter was driven in part by labor inflation and higher maintenance. And as we've said previously, we continue to see cost associated with investment and our capabilities to successfully win and execute our growth strategy. Currency and foreign exchange was $0.08 unfavorable, primarily due to the Chinese RMB and the euro.

Excluding the unfavorable currency, EPS increased $0.29 or 17% over last year. Non-operating items, including interest expense, non-controlling interest and non-operating income, combined for a negative $0.01. Our effective tax rate for the quarter was 19.9%, roughly flat compared to prior year.

For FY19, we expect an effective tax rate of approximately 20%. Now please turn to Slide 12. We continue to generate strong cash flow. During the last 12 months, we generated almost $11 per share or over $2.4 billion of distributable cash flow.

This distributable cash flow allowed us to pay almost $1 billion or about 40% as dividends to our shareholders and still have nearly $1.5 billion available for high return investments in our core industrial gas business. This strong cash flow enables us to create shareholder value through increasing dividends and capital deployment.

Slide Number 13 updates our capital deployment progress and we have reformatted the information to hopefully make it more clear for you. As you can see, we now show just over $16 billion of investment capacity available over the five-year period from FY2018 through FY2022.

This is made up of the three components, first is additional debt available today. We will continue to focus on managing our debt balance to maintain our current targeted AA2 rating. If we maintain this rating at a debt level of about 3 times the last 12 months EBITDA, we have about $8.7 billion available today.

Second, based on LTM investible cash flow, we expect to over $5 billion between now and the end of FY2022. Third, we've already deployed almost $2.5 billion on M&A and growth projects. This excludes maintenance CapEx. Today, we have a total of about $7.5 billion of project and M&A commitments with about $6.8 billion remaining to spend on them.

Though, you can see we have already spent 15% and already committed well over half of our total available capacity. Now to begin the review of our business segment results, I'll turn the call back over to Seifi..

Thank you, Scott. Please turn to our Asia results on Slide Number 14. There you can see that our great team in Asia delivered yet another strong set of results. Our China base business recovered well from the Lunar New Year holiday, and continues to show positive growth. And our other strong positions throughout Asia continue to contribute.

We remain very focused on our current business and are also very positive about our long-term growth potential in this region. For the quarter, sales were up 12% from last year as a result of positive volume and price more than offsetting negative currency. Volumes increased 12%, primarily driven by new projects, mostly Lu'An.

Overall, pricing for the region was up 5% versus last year, the 8th consecutive quarter of year-over-year price improvement. The strong volume and price also favorably impacted both profits and margins. EBITDA increased by 32% and EBITDA margin improved 700 basis points to a record 47.7%, making Asia our most profitable region.

I am very proud of the performance of our team in this region. Now, I would like to turn the call back over to Scott to discuss our Americas result.

Scott?.

Thank you, Seifi. Please turn to Slide 15 for a review of our Americas results. For the quarter, sales increased 9%, primarily driven by 5% higher volume and 3% higher price. Demand for hydrogen was robust in both the Gulf Coast, which is supported by the new Baytown facility in Canada.

Our base merchant business also continued to grow in North America, while Latin America remains weak. Overall, this is the ninth consecutive quarter of volume improvement for the region. Freights contributed a positive 3%, the best performance in over four years.

Americas EBITDA of almost $400 million increased 10% and reported EBITDA margins of over 40% were up 60 basis points, primarily driven by higher volumes and pricing. EBITDA margin was up 150 basis points, excluding the impact of higher energy cost pass through.

Earlier this week, we announced a new project for our second ASU for Big River Steel in Arkansas. This new ASU will support big River Steel's expansion and the local merchant market, and it builds on the success of our first ASU that came on-stream a few years ago. Now, I would like to turn the call back over to Simon to discuss our other segments.

Simon?.

Thank you, Scott. Please turn to Slide 16 for a review of our EMEA results. Our EMEA business produced positive operational results this quarter despite limited economic growth as strong pricing offset negative currency. Compared to last year, price improved 3% while volume held firm.

We saw 7% sales impact from unfavorable currency and 9% sales reduction due to the India contract change. Price improved across all major merchant products and across all sub-regions. The 3% price increase marked the fifth consecutive quarter of year-on-year improvement.

Reported EBITDA of $182 million was up 2% and EBITDA was up 9% on a constant currency basis. Reported EBITDA margin improved 500 basis points. Excluding the India contract change, EBITDA margin was up about 200 basis points.

And although we continue to see Brexit as a potential risk to our future results, at this point, we have not seen any significant negative impacts. Now please turn to Slide 17 Global Gases, which includes our air separation unit sale of equipment business, as well as central industrial gas business cost.

Sales and EBITDA declined due to lower project activity as we approach the conclusion of our very successful Jazan ASU sale of equipment project. Please turn to Slide 18, corporate segment, which includes LNG and other businesses, as well as our corporate costs.

Although, this quarter sales and profit have yet to show improvement, we anticipate a turnaround in the LNG business. We recently announced a major project win to supply our proprietary technology and equipment to the Golden Pass LNG export project in the Gulf coast.

Since this is sale of equipments where the revenue and profit are booked based on percentage of completion, we expect this project to contribute to our earnings later in calendar 2019. Now, I'm pleased to turn the call back over to Seifi for a discussion of our outlook..

Thank you, Simon. Please turn to Slide Number 19. Almost five years ago, in July of 2014 during my first conference call with the investment community, I promised to grow the company's earnings per share by at least 10% annually. As you can see, we have done better than that and achieved 13% cumulative average growth rate over the last five years.

We have delivered what we promised and more. Thanks to the great team at Air Products. Our goal continues to be, to achieving a cumulative average growth rate of at least 10% in the coming years. Now that we are talking about the coming years, we do understand that we live in an uncertain world.

And we, at Air Products, cannot influence the world's economic or political developments. But we do have control over what Air Products can and should do as a company to react to the changing world.

We have a strong, capable and flexible organization, which remains focused on productivity and creating our own growth opportunities, which will allow us to continue to deliver on our promises to investors as we go forward. So now for what we promised this year, please turn to Slide Number 20.

We are increasing our EPS guidance for fiscal year 2019 to a range of $8.15 to $8.30. Despite currency headwinds at the midpoint, our guidance represents 10% growth over our very strong fiscal year 2018 performance. For quarter three of fiscal year 2019, our earnings per share guidance is $2.10 to $2.15, up 8% to 10% over last year.

We have also slightly increased our CapEx forecast to a range of $2.4 billion to $2.5 billion for fiscal year 2019. Our team around the world continues to be excited about Air Products' future. Our five point strategic plan provides the framework to drive our success going forward.

And our safety, productivity and operating performance continue to provide the foundation of our continued growth. We have the financial capacity, the technological knowhow and the talent to successfully pursue the exciting opportunities that we see ahead. And finally, please turn to Slide Number 21.

As always, our real competitive advantage is the commitment and motivation of the great team we have at Air Products. This is what allows us to continue to generate our superior safety and operational performance.

I want to again thank all of our 16,000 employees around the world for their commitment and hard work, and for embracing the opportunities in front of us with energy and a spirit of winning together. I am very proud to be part of this winning team. Now, we will be delighted to answer your questions..

Thank you, sir [Operator Instructions]. We'll take our first question from John McNulty with BMO Capital..

It seems like there's a lot of opportunities in the coal gasification arena. You're certainly highlighting, it sounds like, a lot of projects that you're at least considering.

Can you help us to understand how you prioritize or what some of the bigger priorities are when you're picking a partner for these projects as we think about the future investment going forward?.

John, we have always said that when we look at these projects and there are many of them as we said. The very first thing that we do is make an assessment, whether the project is economically viable.

That means that if they are making diesel fuel or if they are making olefins, or whatever it is that the end part that is going to come out of this project; how is the market for that product; where is it going to be sold; what are the expected prices; and does the full project make economic sense, that's number one.

Once we have satisfied ourselves that that is the case then the second thing that we focus is on the customer that we are dealing with; who is actually doing this project; what is their financial strength; what is their expenses, what is their market position and all of that.

Then if we have passed economic test and passed the market test then quite honestly we do the project unless it is in a very, very, very difficult part of the world, and there are not that many of them.

So the basic message that I have is that we don’t look at the projects like, oh, this project is in China, we don’t want to do it or this project is in India, we don’t look at that. We look at what is the project and whom is it for.

I have said many times if you give me a project that makes economical sense and it is for Saudi Aramco, we will do it no matter where it is in the world. So those are the criterias that we follow..

And then I guess when you look at the projects out there, I think last quarter you'd highlighted there were 50-plus projects out there that you were at least evaluating.

What portion of those are projects that are already up and running where the actual producer is saying, "You know what, we'd rather outsource this," similar to what we saw with the refining industry back, I don't know, 20, 30 years ago as they started kind of outsourcing the business.

So how should we be thinking about that and the opportunities there?.

Probably 10% to 20% of them are in that category..

Next question comes from Christopher Parkinson of Credit Suisse..

This is Kieran on for Chris. Congratulations on the good quarter. I was wondering if you can discuss the trends that you're seeing in APAC, particularly in China. I mean, are there any key end markets that you are you seeing slower accelerate.

Then also just regarding this quarter, any impact you saw from the Lunar New Year and how we should think about volumes in the sequential basis?.

With respect in China, I've said this many times, we don’t see any particular weakening in any -- at least -- we had exposure to a lot of the businesses. And one of the interesting thing about our business that you know very well is that we don’t have any inventory.

So our performance is instantaneous whatever the economy is doing you see that in our numbers. China is going very well. And a Lunar New Year, China this year we were very concerned about that and that's why we were conservative in our guidance for the quarter.

The Chinese New Year, although, it fell in between these, it went down and came back exactly like every other year and the economy is doing very well and we continue to be very optimist. We are very bullish on China..

And then just when I look at your full-year guidance, it implies a very strong fourth quarter, little bit stronger I think than like the third quarter. Maybe can you just discuss the key elements that are driving that positive outlook for the fourth quarter and then for the back half of the year? I appreciate it thank you..

First of all, we expect that the pricing momentum that we have seen would continue and actually might become even better than what we have seen before. So that is one thing that keeps us optimistic. The other thing is that Brexit is delayed until October, so we don’t expect any significant negative effects on that.

The other thing is that our LNG project business, as you know, this is not contributing anything. But we did win a very big project, Golden Pass in Texas. And since with that project, we have start getting paid as soon as we started working on it, we expect some contribution from that.

And the fourth thing is that we expect that the effect of negative currency to be a little bit better. And you put all of that together that is what makes us optimistic that we would be able to meet the higher end of, or at least our goal is to meet the higher end of our forecast, which is [indiscernible].

The next question comes from line of David Begleiter with Deutsche Bank..

Just on the merchant pricing, can you go through the merchant price gains you realized in each of the three major regions?.

Well, David, you know our business better than anybody and you know that half of our business is on site and there is not a lot of price increase in there. So as a rule of thumb, you can take the numbers that we have given you for each region, multiply it by two and you end-up with what we achieved in the merchant business.

And you see that it is a strong -- it’s a 7%, 8%, 11% in the different regions..

And just on YK projects, Seifi, any concerns on your part given the elongated timeline to finalize the details here?.

No, I don’t have any concern. That project is a project that has a strong support of the central government. The central government wants that to happen. The issue is the allocation of coal to that project. That is a very important issue for us, because we don't want to do any big gasification project when the source of coal is not 100% guaranteed.

I mean YK is a big coal company but they need to get allocation of the coal. So the negotiation with that is taking longer than what we expected, but I fully expect that project to go forward. The timing might be a little bit different than what we expect today.

But I think that that is a good project, it makes a lot of sense and it will eventually happen..

Next we'll go to Duffy Fischer with Barclays..

This is actually Mike Leithead on for Duffy this morning. I guess to follow-up on the pricing dynamics. Nice acceleration this quarter.

I was hoping you can maybe give a sense of where you think merchant operating rates are today, particularly in North America and Asia?.

Sure. North America operating rates are in about mid-70s. The operating rates in Europe are around in the low 80s. And the operating rate in the areas that we operate in Asia is about in mid-80s..

And then on the LNG market. It seems like activity and optimism is starting to pick-up in that area.

I was hoping you could maybe characterize outside of the project you just signed, where do you think overall market dynamics will start to be a tailwind as we get to the back of this year or maybe that's closer to a 2020 event?.

Well, in 2019, our fiscal year ends at the end of September. So we did have a positive impact from the Golden Pass project, but that's not going to be huge. But as we go forward, we are very optimistic about that business. As you know that business use to make us $50 million of EBITDA a year, and today it's making nothing.

So we think that in time we will get to that $150 million rate in the next three, four years. We are very optimistic about the LNG business that's why we never considered divesting of it. We have a huge technological advantage. Almost 70% -- 75% of all the large LNG projects use our technology, and we see many of them happening in the U.S.

and around the world. So we continue to -- we expect a very positive future for that business..

Your next question comes from the line of Jeff Zekauskas with JPMorgan..

The EBITDA margin in Asia is now roughly 48%, and maybe a year-ago it was 38%.

Is the difference in the margin, the Lu'An project essentially?.

No, the fact is a significant amount of that is also, Lu'An is obviously affecting it. But there is obviously the fact that we have gotten significant pricing. I mean, our mission pricing in last quarter was 11% ahead of last year. So that is a very positive contributor.

And beside that our people there are doing a good job in productivity and keeping the cost under control. So overall, as I said I'm very proud of what they have done. And I'm optimistic that we have been eager to maintain that kind of a margin as we go forward..

For the Jazan gasifier in the power JV, I think you said earlier in the call that you're trying to negotiate the final terms by the end of the year.

If you successfully negotiate those terms, when would that project begin to affect your income statement?.

If we successfully complete the negotiations by the end of the year and financially close that project will contribute in 2019 and then obviously in 2020, and then the big impact will be in 2021. But it will definitely impact 2019 it'd be completed by the end of fiscal year this year..

And we'll go to John Roberts with UBS..

Pricing was largely offset by foreign exchange. I guess in once sense you could say that pricing in dollar terms was roughly flat year-over-year.

Do you think pricing in currency are completely unrelated, or do think the exchange rates are giving you a little bit more ability to price in local currency?.

The currency has nothing to do with it our business is absolutely low cost. And whether the dollar is up or down, it has no effect on our ability to increase the lower prices in different parts of the board. This is not like crude oil or anything like that. So it is totally independent, John..

And then I know it's too early to have a CapEx budget for 2020, but since we're halfway through fiscal '19.

At this point, do you know whether 2020 will be up or stable with the 2019 CapEx budget?.

No, I expect our 2020 CapEx will be probably north of $2 billion..

Now we'll next go to Jim Sheehan with SunTrust..

Can you comment on the ACP Europe acquisition, about how much did you pay for that and how much earnings contribution will it represent?.

The amount that we take for that, I think we have disclosed that. It's about more than $100 million. And obviously the rule of thumb that we always tell you is if you spend $100 million that should give us operating income of $10 million..

Now we'll next go to Robert Koort with Goldman Sachs..

Seifi, you talked about gasification business about prioritize your project load there. And I guess if we look at breakeven levels for maybe making glycol or olefins, or fertilizer we're easily there. When Brent starts to get up in the $75 range then maybe coal to fuels or coal to synthetic natural gas comes in play.

In that project portfolio that you're pursuing, are you seeing greater interest in those, maybe higher breakeven type applications to gasification?.

Yes..

And are those exclusively in China, or are they more broad globally?.

As the price of oil goes up, the number of projects that we come by obviously becomes big. So you are right on that..

Can I ask you on the de-cap side, Seifi, I think there has been over the last couple of years, there has been some shareholder frustration expressed about deploying that capital and now you're starting to do that more aggressively.

Is there a de-cap opportunity here in gasification? I know Shell, when they own the business, certainly advertise the process improvements they've made overtime -- the history and portfolio of gasifiers they have in operation gave them an advantage.

Is there an ability to go to speak to existing gasifiers and suggest you can operate them better with improvements in technology? Or how would you -- what will be the selling points that you'd make to an existing gasification customer to maybe let you take that off their hands and operate it?.

Well, Bob, I mean you are exactly accurate in terms of the argument we will use. And quite frankly, the very best example of what you just said is the IGCC project in Saudi Arabia, the Jazan project that we are talking about. We went to Saudi Aramco and that we have improvements in the Shell technology.

And they are all using shale technology for gasifying the bottom of the refinery, and that is asset buyback. So that is an ideal example of what you're talking about. And there are others like that that obviously we are pursuing..

Now we'll go to Vincent Andrews with Morgan Stanley..

This is [indiscernible] on for Vincent. So just a quick question around the gasification projects. So with the explosion that happened in the fertilizer plant in China, I was wondering has anything changed in terms of the number of projects you are seeing. Obviously, you're very bullish on that.

But maybe you can give us an update on the 50 plus project number that you mentioned earlier, and just how that explosion is impacting that number?.

Well, first of all that explosion has nothing to do what we are doing. It has no impact..

I guess, I mean just more from a regulatory perspective in terms of -- I guess, new projects, whether it's in olefins or anything else.

I guess you are not seeing any impact from that is what you are saying?.

That's correct..

And then maybe just as a quick follow-up just on CapEx. I was wondering if you could give us some color as to what drove that, increasing the CapEx for 2019..

In 2019, I think that Scott can answer that..

I think you are referring to taking up the bottom of the range from [Multiple Speakers], it's just that we're half way through the year, better estimates of the spending and some other smaller projects that we're spending on..

And then if I may just one quick follow-up as well. You have volumes obviously. You had tough comps there last year.

But as I look at the next couple of quarters just curious as to your -- what will you view volume there going for the next couple of quarters?.

I'm not sure quite honestly I understood the question..

Just what your expectations and volume are for your -- it's actually for the coming quarters..

For just Europe or for everywhere else in general….

For Europe….

For Europe, we expect the run rate to continue. We are not, as I said, the Brexit delayed, we are not concerned about volumes in Europe and we remain positive about pricing in Europe..

Next question comes from line of Don Carson with Susquehanna Financial..

I want to go to your favorite slide, Slide Number 9, new record on EBITDA margin 37.7%. How much of that was due to -- what's the impact to that India conversion the tolling on that? And I assume that most of your upward momentum in EBITDA margins due to price.

So are we at an inflection point in pricing here? Traditionally, you didn’t get pricing in this industry till you're well into the 80s, but you seem to be getting pricing earlier. So I guess the final question is you used to think 35% of EBITDA margin was a normalized level.

So is 37%, 38% the new normal?.

The number one is that the effect of the -- it's about 80 basis points in terms of India, that’s number. The second thing is that with respect to where would the EBITDA margin be, I've always told people from way back that when you're modeling Air Products, model an EBITDA margin of 35% to 36%. And I would still suggest that.

We did do very well this quarter. We will see what the next quarter brings. But I don’t want to start predicting that we will hit 37.7% every quarter. But I think it is safe to assume that we will be around 35% on average..

And on pricing, do you think we're at an inflection point here where the improvements you've seen in merchant pricing is sustainable? Again, you seem to be getting the pricing at lower rates than you historically needed to get pricing?.

Don, I heard your question and I was trying to maybe not answering it. You know that we don’t like to make any comments on pricing considering the nature of our industry. So you need to let me off the hook of that..

Now we'll go to Steve Byrne with Bank of America..

For these large coal gasification projects that are now in your backlogs.

What fraction of that total installed equipment would you say is going to be fabricated at one of your locations versus field fabrication? And do you expect that shift change overtime as you get more and more of these projects under your belt and be able to develop more of a capability to fabricate at a central location and lower your capital costs, time to erect and competitiveness?.

Let me answer them one at a time. With respect to -- with these coal gasifications, the part that we make ourselves is the air separation unit, the main coal boxes. Those coal boxes are manufactured right now exclusively mostly in China. So as we expand, we have expanded our operation in China, in Caojing, south of Shanghai.

As we expand, we continue to expand that facility. And if we get to a stage that we need additional capacity, we know where to go. So that is -- with the rest of these coal gasification facilities, we do not manufacture them ourselves, a lot of them are engineered and designed and built at the drop site.

And they are prefabricated at different locations and brought together and assembled together like an electro set. So there is no constraint on our ability to manufacture these..

Just like some furnaces are fabricated and then shipped to a job site.

Could you anticipate the gasifier units being moved in that direction and ultimately reducing the total capital costs for these projects?.

The capital costs for these projects, depending on where they are, can significantly be reduced if you break down the projects like we did in Jazan, and pre-fabricate them at the most cost effective area. When you look at Jazan, and hopefully we can show you a movie of it on time. You see that it was like an erector set.

We had 450 ton unit of all of the piping manufactured actually in China, which was the lowest cost, and then it was shipped and then put together with the rest of the plan. So we did a lot -- we did not do a lot of the cutting and building and all of that in Jazan, which would have been very expensive.

So that is what you do in terms of trying to reduce the cost. There air separation part, which is about usually on these big project is, separation part is about 10% of the cost that one we manufacture it in several pieces in Caojing and then ship to the job site and put it together..

And just lastly out of your 16,000 employees, what fraction would you say are involved in engineering and construction?.

About more than 20% on engineering, the construction, the actual construction when we are building a plant like Jazan, we have construction supervision people. And just to give you a number for Jazan when we were building it, we had about 200 of our people supervising it but the number of people who are actually building the plant they're 6,000.

Those people, we hired locally for the project. They are not permanent employees. Out of the 16,000, about 20% are dedicated engineering and project management people that we have and they are long-term employees of Air Products and we are very proud of it..

Next we go to Kevin McCarthy with Vertical Research Partners..

Seifi, I was wondering if you could comment on the nature and level of competitive intensity in the gasification arena, specifically and anecdotally it would seem that some of your competitors have a different strategy in terms of their focus. Curious if you survey your 50 plus projects there.

How often are you running into the other global majors? And to what degree is the customer source of competition in a sense for you?.

Well, you are asking me a very difficult question, I don’t know how to answer that, because I obviously am in no position to speak for our competitors. If their strategy is that they are not optimistic about these projects, I hope they continue to follow that strategy.

I really cannot comment on behalf of our customers that when they are dealing with us, how many other people they are talking and all of that. We always behave as if we have competition, and we try to give the very best offer that we can to our customers. So that's the extent that I want to comment on this..

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

So my question on crude to chemicals projects that are being discussed around the world. Do you have any technology there similar to your gasification technology? And if not, they will still consume lot of gases.

So what are you seeing or hearing about request of bids for ASUs for those projects?.

Well, I think on all of those projects, people would be looking for this for ASUs. We are trying to differentiate ourselves, but making an offer to the customers that we provide you, not only the ASU but also the gasification.

And therefore, a different package rather than just competing for the ASU, which most of the time if the customer want to buy the ASUs by themselves, they usually do sale of equipment rather than sale of gas. And as you see, most of the current existing gasifiers in China, which there are many, have all been sale of equipment.

So we are trying to differentiate ourselves by getting a bigger package. But if the customer insist that no, I just want a bit for the air separation unit, we usually -- depending on who the customer is, we usually give them a bid, because I'll be happy to build air separation unit.

But we are trying to differentiate ourselves by giving the bigger package to the customer..

And then a question on Europe, your pricing has lagged there in the past. Now you are getting some solid 6% merchant pricing. And I know in the past you walked away from some low margin businesses in Europe.

What are you seeing from new players that were created recently in merchant business in Europe? And there is also a new merchant player in the U.S.

What kind of behavior are you seeing from them?.

It's too soon for us to comment on that. Quite honestly, we usually don’t comment on that anyway, but these people have been in business for a few months. So it's very difficult to make an assessment on that. But you said the key thing, P. J. and I said this publicly in February at a conference.

The reason we are getting the pricing is because we are willing to walk away from volume, that is the key thing that we are saying that our costs have gone up and all of that, this is the price of our product, if the customer wants to go buy from somebody else, they can.

And the willingness to walk away from low margin business is what is giving us the ability to increase the prices. Otherwise, we will never increase prices. So that is a different strategy for us. That's exactly right..

We'll next go to Mike Sison with KeyBanc..

When you think about your 10% growth, EPS growth goal, you've got Jazan gasifier coming on next year and looks like four projects on that one slide.

Could 2020 be -- given those projects coming on, could 2020 be a year where you maybe outpace that goal?.

We always say that -- we always promise them what we can deliver and usually deliver more than what we promise. So, I don’t want to get ahead of myself. But I hope what you're saying would turn out to be true..

And then just one quick one on Asia again, margins very good, actually pretty sweet.

If you think about the second half of the year, do you think that you can sustain that level? And then what impacts that margin going forward given 48% is pretty impressive level?.

I expect our EBITDA margins in Asia to continue to be at around those numbers..

[Operator Instructions] We'll next go to Mike Harrison with Seaport Global Securities..

I wanted to go at the pricing question a little bit differently. I wanted ask specifically about China.

Can you comment on what you're seeing in LOX/LIN supply and demand dynamics in the areas that you play in China? Just trying to get a sense of how sustainable the pricing momentum could be there?.

Mike, as I mentioned before, the operating rates in the regions that we operate in China is getting to around mid-80s. And when you get to mid-80s then you do have pricing power. So our loss in pricing has been going up.

And if the economy stays the way and the operating rates stays the way it is, which I think it will, because nobody is building a brand new plant right away. So I expect that we would continue to have good momentum..

And then I was also wondering about -- in your appendix there, you have a number of projects that were listed as starting-up during the first quarter of fiscal '19, two of them in Korea, two of them in the U.S.

I was just wondering, did we see a full contribution from all four of those projects during the fiscal second quarter or are some of them still ramping-up?.

Yes, we do..

The next question comes from the line of Jonas Oxgaard with Bernstein..

I was wondering, you had some pretty hefty currency headwinds there.

But do you get any currency tailwinds on the CapEx side from this?.

Well, you are there, I guess to some extent we do. I mean the dollar content of a lot of the projects that we make is not that huge but, we do get a tailwind from that, you are right..

And is that reflected in your guidance? Can you help me size the impact and how that's reflected in your guidance?.

The fact that the capital cost of the projects will go down, and that is minutiae, it's not material to our numbers. As we go forward, we expect the headwind on the currency to subside a little bit than you go quarter-by-quarter.

So as Scott was telling me before the call, we expect that for next quarter the headwind will be less than $0.08 and hopefully for the quarter after that less than that. Obviously, none of us can predict what will happen to the currencies and all of that.

But if the currency rates stay about the same, we should have not as much of a headwind in the third quarter. But Scott can amplify on that..

If you just want to build on and see as we've said we've got $0.08 unfavorable here in this quarter. For the year, our projection is maybe $0.15 to $0.20 headwind. And just as a reminder, the way that we look at this is when we come out of the quarter, we don't try to project where rates are going to go, we just hold them steady to where they are.

And when you compare them the third quarter versus prior year third quarter and the fourth quarter versus prior fourth quarter, we don't see -- as Seifi just mentioned, we don't see the third quarter to be as much as $0.08, down a little bit.

And then even less in the fourth quarter, not because we're projecting a change in exchange rate, but rather just where were rates last year, so just want to get on that. And again, as we've mentioned earlier in the call, we're talking all translation. There is no economic impact, it's just math bringing it back. So just figured I take it through.

And lastly since I'm on this subject, given sensitivities in the past around swings in currencies of 10% for the R&D on an annual basis, a swing of 10% would be about $0.12. For the euro, swing of 10% would be about $0.09. And then there is a basket of other currencies, like the pound, Korean won, Taiwanese dollar and the Canadian dollar.

Each it just move them by 10%, it's about $0.03 to $0.04 each. And what I've just given you there is roughly when you throw in the U.S. dollar sales approach at 85% to 90% of the company. So I just figured I take it through some of those numbers..

As a follow-up -- so the take or pays that you're signing.

Do you usually sign them in dollars or local currency?.

It depends -- in some countries, it’s in local currencies; in some countries, it’s in dollar terms' depending on the country and how we feel about the customer and their expectation of currency..

And if you take China coal as the biggest one, that sways the future?.

In China, the contracts that we have are in Reminbi in local Chinese..

Our next question comes from the line of Laurence Alexander with Jefferies..

This is Dan Rizzo on for Laurence. I'm sorry if I missed this.

But did you quantify the backlog and how it has changed this quarter?.

Simon, you want to -- since you prepared the slide, do you want to make any comment?.

As we said, our total project commitments are about $7.5 billion. I think that's up from around $7 billion last time. And again just to be clear on that that's the total value of the commitments we have. What we have remaining to spend on those is about $6.8 billion..

And then just one other question.

Could the gasification evolve to where we see large take-or-pay arrangements rather than JVs in some regions?.

Well, right now the gasification project, some of them is JVs and some of them is 100% ourselves like [indiscernible]….

If I could just add, they are all take-or-pay, so just to be clear about that….

Yes, whether it's JV or not, it's all take-or-pay..

[Operator Instructions].

Well, we have run over the time. And since there are no other questions, I would like to thank everybody for being on our call. 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. Have a very nice day and all the very best.

Thank you again..

And that does conclude today's call. We thank everyone again for their participation..