Air Products & Chemicals Inc (APD) — Q2 2019 Earnings Call Transcript

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 website 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 EBITDA 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 in our ability to deploy this capital into high-return industrial gas projects that 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 lost 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 to 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 where everyone can achieve their true potential. Slide Number 5 is my management philosophy, which I have followed throughout my business career. 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 achieving best-in-class performance to maintain our current leadership position, grow the company by expanding our offerings related to our core competencies, continue to change the culture of the company, and most importantly, to achieve our higher purpose. That higher purpose is to create a company that people feel they belong to, where 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 and where they are proud to be 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, are being built on budget and on time and 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, is being negotiated with Saudi Aramco. 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 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 the central government. We are optimistic that we will have more definitive announcements about the project as we move forward. The Juitai project is under construction with expected on-stream in 2022. In addition to these announced projects, we continue to work on a significant number of 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. Please go to Slide Number 9, which is always my favorite slide and particularly this quarter. You can see our record quarterly EBITDA margin of 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 were roughly offset by a 4% negative currency impact and a 2% reduction 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. However, 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 new plant on-streams, including the Lu'An project 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 costs. EBITDA margin reached a record 37.7%, up 340 basis points compared to the 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 the 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 costs associated with investment in 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 the 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 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 generate 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 results. 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. Freight 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 a 7% sales impact from unfavorable currency and a 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. 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 costs. 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 a sale of equipment where the revenue and profit are booked based on the 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 a 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 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, allowing 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. Our safety, productivity, and operating performance continue to provide the foundation for our continued growth. We have the financial capacity, the technological know-how, 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.

It seems like there are a lot of opportunities in the coal gasification arena. You're certainly highlighting a lot of projects that you're at least considering. Can you help us 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 assess whether the project is economically viable. That means that if they are making diesel fuel or if they are making olefins, or whatever the end product 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 we focus on is the customer that we are dealing with; who is actually doing this project; what is their financial strength; what are their expenses, what is their market position and all of that. If we have passed the economic test and passed the market test, then quite honestly, we do the project unless it is in a very, very difficult part of the world, and there are not that many of them. 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 it is 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 criteria that we follow.

And then I guess when you look at the projects out there, I think last quarter you'd highlighted there were over 50 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 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.

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. Are there any key end markets that you're seeing slower acceleration? Then also just regarding this quarter, any impact you saw from the Lunar New Year and how we should think about volumes on a sequential basis?

With respect to China, I've said this many times, we don’t see any particular weakening in any -- at least -- we have exposure to a lot of businesses. One of the interesting things about our business 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. The Lunar New 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. We continue to be very optimistic. We are very bullish on China.

And then just when I look at your full-year guidance, it implies a very strong fourth quarter, a little bit stronger I think than 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 might actually 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. Our LNG project business, as you know, is not contributing anything; however, we did win a very big project, Golden Pass in Texas, and with that project, we start getting paid as soon as we start working on it, and we expect some contribution from that. The fourth thing is that we expect the effect of negative currency to be a little bit better. When 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.

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. 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. You see that it is 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 concerns. That project has strong support from the central government. The central government wants that to happen. The issue is the allocation of coal to that project, which is very important for us since we don't want to undertake 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. The negotiation with them 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 it is a good project that makes a lot of sense, and it will eventually happen.

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

And then on the LNG market. It seems like activity and optimism are 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?

In 2019, our fiscal year ends at the end of September. We did have a positive impact from the Golden Pass project, but that's not going to be huge. However, as we go forward, we are very optimistic about that business. As you know, that business used to generate about $50 million of EBITDA a year, and today it's making nothing. We think that in time we will get to that $150 million rate in the next three to four years. We are very optimistic about the LNG business; that's why we never considered divesting it. We have a huge technological advantage. Almost 70% to 75% of all 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 expect a very positive future for that business.

The EBITDA margin in Asia is now roughly 48%, and maybe a year ago it was 38%. Is the difference in the margin due essentially to the Lu'An project?

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 the last quarter was 11% ahead of last year. So that is a very positive contributor. Besides that, our people there are doing a good job in productivity and keeping the cost under control. 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 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 finalize the financial close of that project, it will contribute in 2019 and then obviously in 2020, and the big impact will be in 2021. But it will definitely impact 2019, it will be completed by the end of fiscal year this year.

Pricing was largely offset by foreign exchange. I guess in one sense, you could say that pricing in dollar terms was roughly flat year-over-year. Do you think pricing in currency is completely unrelated, or do you 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 low-cost. 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.

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 it. It's about more than $100 million. The rule of thumb that we always tell you is if you spend $100 million, that should give us an operating income of $10 million.

Seifi, you talked about the gasification business and about prioritizing your project load there. 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 into 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 broadly global?

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

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 a lot of gases. So what are you seeing or hearing about requests for bids for ASUs for those projects?

Well, I think on all of those projects, people will be looking for ASUs. We are trying to differentiate ourselves by making an offer to the customers that we provide not only the ASU but also the gasification. Therefore, a different package rather than just competing for the ASU, which most of the time, if the customer wants to buy the ASUs by themselves, they usually do a sale of equipment rather than a sale of gas. As you see, most of the current existing gasifiers in China, which there are many, have all been a sale of equipment. So we are trying to differentiate ourselves by getting a bigger package. However, if the customer insists, we usually give them a bid, because I'll be happy to build an 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. 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 the merchant business in Europe? 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 the key thing is that the reason we are getting the pricing is that we are willing to walk away from volume. Our costs have gone up and all of that, this is the price of our product; if the customer wants to go and buy from somebody else, they can. The willingness to walk away from low-margin business is what is giving us the ability to increase prices. Otherwise, we will never increase prices. So that is a different strategy for us.

When you think about your 10% growth EPS growth goal, you've got Jazan gasifier coming on next year, and it looks like four projects on that one slide. Given those projects coming on, 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 turns 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 a pretty impressive level?

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

I wanted to go at the pricing question a little bit differently. I wanted to 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?

As I mentioned before, the operating rates in the regions that we operate in China are getting to around the mid-80s. When you get to mid-80s, then you have pricing power. Our loss in pricing has been going up, and if the economy stays the way and the operating rates stay the way it is -- which I think it will, because nobody is building a brand new plant right away -- I expect that we would continue to have good momentum.

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 did.

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. 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 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, and you go quarter-by-quarter. 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, even 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. 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. When you compare them to the third quarter versus the 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 being as much as $0.08, and it'll be down a little bit in the fourth quarter.

As a follow-up -- so the take-or-pay agreements 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, does that sway the future?

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

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. 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 projects, some of them are JVs and some of them are 100% ourselves, like [indiscernible].

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

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