Air Products & Chemicals Inc (APD) — Q4 2019 Earnings Call Transcript

Thank you, Leanne, and good morning, everyone. Welcome to Air Products fourth quarter 2019 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 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 will be pleased to take your questions. Our earnings release and the slides for this call are available on our website at airproducts.com. This discussion contains forward-looking statements. Please refer to the forward-looking statement disclosure that can be found in our earnings release and on slide number two. In addition, throughout today's discussion, we will refer to various financial measures. Unless we specifically state otherwise, we are referring to adjusted non-GAAP measures, including adjusted earnings per share, adjusted EBITDA, and adjusted EBITDA margin on both the company-wide and segment basis, and ROCE. Reconciliations can be found on our website in the relevant earnings release section. Now, I am 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 are very pleased that our record fiscal year earnings per share of $8.21 represents our fifth consecutive year of double-digit earnings growth, and our earnings per share of $2.27 for the quarter also represents another record, up 14% over last year's strong results, and is the 22nd, and I’d like to stress 22nd consecutive quarter of year-over-year earnings growth. Scott will comment on our financial results in more detail. So I'm going to focus my comments on safety, our higher purpose as a company, the very large acquisition in Saudi Arabia that we announced last week, and the press release we issued yesterday. Now please turn to Slide #3. Safety without question is job number one for all of us at Air Products. Our goal has always been zero accidents and zero incidents. Although you can see our good progress versus 2014, our safety performance in 2019 was not acceptable as we did not show improvement versus 2018. Our people are certainly redoubling their efforts in this area so that we can move toward our ultimate goal of an accident-free work environment. Now, please turn to Slide #6, our Five-Point Plan. I want to comment on point number five on the right-hand side, which describes our higher purpose. We believe that in addition to creating value for our shareholders through strong financial results, we do have a responsibility as a public company to define the higher purpose in what we do. Our higher purpose at Air Products is to create a diverse company that people from all around the world and from all sections of society feel they belong and are treated as an equal part of the team, a company whose people's contributions are recognized and appropriately rewarded, a company that people want to work for, where they are proud to be part of the innovative process to solve the world's energy and environmental challenges, a company that is absolutely committed to sustainability and to the environment, and a company that is supportive of the local communities where we live and work. That is our higher purpose and we are committed to it. Now, please turn to Slide #9 to discuss our very large $11.5 billion acquisition in Saudi Arabia. You have seen this picture before, but it has been updated to reflect the latest information. Saudi Aramco is close to completing the construction of a 400,000 barrel per day refinery in Jazan, Saudi Arabia. The highest sulfur vacuum resid from this refinery can no longer be used to fuel ships due to the new IMO 2020 regulation. Therefore, this liquid resid will be mixed with oxygen and gasified to produce synthetic gas. This same gas is almost equivalent to natural gas and it will be used to drive turbines to produce 3,900 megawatts of power. The joint venture is acquiring all of the assets, including air separation units, the gasifiers, power generation, and the related utilities for almost $11.5 billion. The joint venture will own an operating facility and deliver power and hydrogen to Saudi Aramco for a monthly fee. This, of course, is the same business model as our traditional onsite business. Now please turn to Slide #10. This very large acquisition will be owned by a new joint venture company called The Jazan Integrated Gasification Company. The joint venture will be owned 20% by Saudi Aramco, 25% by Aqua Power, the largest independent power producer in the Middle East, 46% directly by Air Products, and 9% by Air Products Qudra, which we call APQ, which is a joint venture of Air Products and Qudra Energy, where Air Products owns 51%, so Air Products’ total ownership will be just over 50%. Now please turn to Slide #11. The acquisition will be funded by 40% equity from the shareholders and 60% debt. In terms of timing, we had expected the transaction to be closed by the end of calendar 2019. But recently we have been informed that, due to the extensive documentation required to launch the financing, the closing is now expected to be in the first quarter of calendar year 2020. In terms of accounting, at this point, we are not expecting to consolidate the full financial results of this entity in Air Products, so that results will be reflected in equity affiliated income. Based on the ownership percentage and the debt-to-equity split, Air Products’ cash contribution to this project will be $2.3 billion. We do not – and I’d like to stress, we do not plan to disclose the details of this project in terms of profitability. But I do want to confirm for you that the return on this investment will be better than the general guidance for investment that we have given to our investors in the past. As for the press release we issued last night, that is related to our plan to build an industrial gas pipeline system in Jubail, Saudi Arabia, which could be similar to our hydrogen, oxygen, and nitrogen pipeline system in the U.S. Gulf Coast to serve all of the refineries and chemical plants in that part of the world. The press release confirms that The Royal Commission has given us permission to proceed with the project, and we will update you about this project every quarter in terms of what we are doing. This is a major step forward for us in Saudi Arabia in addition to the acquisition. Now, please turn to my favorite Slide #13. You can see our record EBITDA margin of almost 42%, which is up almost 1,700 basis points from early 2014. Now, I would like to turn the call over to Mr. Scott Crocco, our Executive Vice President and Chief Financial Officer, to give you the details of our financial performance. Scott?

Thank you very much, Seifi. Now please turn to Slide 14 for our full year results. We delivered another strong year of underlying sales growth and very strong profit growth despite modest economic activity around the world. Sales of almost $9 billion were flat versus last year, as 2% volume growth and 3% price were offset by non-operational factors. Specifically, weaker foreign currencies, primarily the Chinese RMB, euro, and British pound lowered sales by 3%, and the India contract modification, which had no profit impact, reduced sales by another 2% compared to the prior year. The volume growth was primarily driven by new plants, particularly, Lu'An, and supported by positive base volume. Sales from the very successful Jazan sales equipment project were lower as the project nears completion, negatively impacting volumes by 2%. We saw price improvement in all three regions and across major product lines. Strong price and volume led to another year of double-digit profit growth despite currency headwinds. EBITDA improved 11% to nearly $3.5 billion. EBITDA margin of 38.9% was up 400 basis points, primarily due to the better price and volume. The India contract modification contributed 80 basis points. Record earnings per share of $8.21, was up 10% versus prior year. Our FY '19 CapEx of $2.1 billion was lower than we had forecasted on project and M&A timing, and ROCE improved 70 basis points to 13.1%. Now please turn to Slide 15. Our full year EPS from continuing operations of $8.21 increased by $0.76 per share, driven by our strong operating performance. Price, volume, and costs combined contributed over $1 per share, and excluding the impact of negative currency, EPS in total was up nearly $1 or 13% compared to the prior year, while a slightly higher tax rate of 19.4% reduced EPS by $0.09, and other items together added $0.01. This includes higher non-controlling interest, primarily due to the Lu'An project. We expect an effective tax rate of 20% to 21% in fiscal year 2020. Now please turn to Slide 16. We continue to generate strong cash flow. For the full fiscal year 2019, we generated almost $2.7 billion or over $12 per share of distributable cash flow. This is an increase of almost 20% or close to $2 per share from 2018. From this distributable cash flow, we paid almost 40% or $1 billion as dividends to our shareholders and still have nearly $1.7 billion available for high-return industrial gas investments. This strong cash flow enables us to continue to create shareholder value through increasing dividends and capital deployment. Slide #17 provides an update on our capital deployment progress. As you can see, we now show almost $18 billion of investment capacity available over the five-year period from FY 2018 through FY 2022. As expected, our total capacity continues to grow as we increased EBITDA. The almost $18 billion includes about $9.5 billion of additional debt capacity available today, $5 billion of investable cash flow between now and the end of FY '22, and over $3 billion already spent. We will continue to focus on managing our debt balance to maintain our current targeted AA2 rating. Today we have a total of about $7.6 billion of project and M&A commitments with about $6.6 billion remaining to spend on them. So you can see we've already spent 18% and have already committed well over half of our total available capacity. Now please turn to Slide 18 for a few comments on our fourth quarter results. Sales of $2.3 billion were roughly flat as 8% volume and price growth were offset by lower energy pass-through, the India contract modification, and negative currency impact. Volume added 5% due to new plants, base growth, acquisitions, and a short-term contract in Asia. Lower Jazan sales equipment activity reduced sales by 2%. Price was up 3% with strong performance in all three regions, continuing the positive trend from prior quarters. Although unfavorable currency persisted, EBITDA of almost $1 billion improved 16%, and EPS of $2.27 was up 14%. EBITDA margin of almost 42% is up over 600 basis points, primarily driven by a higher price and the strong volumes. Lower energy pass-through and the India contract modification contributed about 200 basis points. Sequentially, EBITDA increased 7%, as all segments improved, particularly Asia, driven by strong volume performance. Please turn to Slide 19. Our fourth-quarter EPS of $2.27 was up 14%, or $0.27 per share. Volume, price, and costs together contributed almost $0.40, extending the strong operating performance from prior quarters. Currency and foreign exchange was $0.03 unfavorable, primarily due to the Chinese RMB, the euro, and the British Pound. Our effective tax rate of 20.2% was 260 basis points higher than last year's lower-than-typical rate, which reduced EPS by $0.08. Non-controlling interest, primarily due to Lu'An, reduced EPS by $0.04. Now, to begin the review of our business segment results, I'll turn the call back over to Seifi.

Thank you, Scott. Before I get into the segment results for this quarter, please turn to Slide #20, where you can see the regional EBITDA margins for the year. Our teams have worked very hard to make significant improvements, especially with modest economic growth globally. Now please turn to Slide #21, where you can see the impressive results generated by our business in Asia. This strong performance reinforces that our business has not been materially affected by trade tensions. Furthermore, our customers and the Chinese government continue to be excited about how Air Products is helping China meet its goals. They are very supportive. We are successfully executing projects and remain very optimistic about our long-term prospects in this region of the world. For the quarter, sales increased 16% from last year with volume and price together up nearly 20%. Volumes increased 16%, driven by new projects, a short-term supply contract, and base business growth. As a reminder, Lu'An came fully on stream during the fourth quarter last year. So the year-on-year benefit was more modest this quarter. Merchant volume was impacted by China's moderating economic growth and some industrial production curtailments in preparation for the country's 70th anniversary celebrations. Overall, pricing for the region increased 3%, marking the 10th consecutive quarter of year-on-year price improvement. Price was positive in all key countries. Profit and margins were highest, driven by strong volume, price, and productivity that more than offset negative currency. EBITDA increased 31% and the EBITDA margin expanded 550 basis points to over 48%. Sequentially, profit growth lagged volume growth as we saw higher costs, including plant maintenance and annual value of composition. In terms of projects, we are continuing our discussions with the YK Group for the very large coal-to-syngas project and are being told that the project is still expected to proceed, but we do not expect it to be on stream before 2023. Now I would like to turn the call back to Scott to discuss our Americas results. Scott?

Thank you, Seifi. Please turn to Slide 22 for a review of our Americas results. Americas' strong pricing trend continued, up 3%. This is the fifth consecutive quarter of year-on-year improvement. Price was better across all major product lines and in all sub-regions. Overall, sales were down 5%, as higher price was more than offset by 2% lower volume, 5% lower energy pass-through, and 1% weaker currency. Volume was weaker this quarter due to planned Gulf Coast customer outages and continued difficult economic conditions in South America. EBITDA of $412 million increased 3% as strong price overcame the negative impact of lower volume and higher maintenance costs. The EBITDA margin of 44% was up 350 basis points. Energy pass-through contributed about 180 basis points. 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 23 for a review of our EMEA results. Our EMEA business overcame the challenging economic conditions in the region and continued to deliver strong results. Price increased 4% with improvement across all major products and sub-regions. This marks the seventh consecutive quarter of year-on-year price improvement. Volume was up 5%, primarily driven by increased demand for hydrogen in our Rotterdam Pipeline System, and our previously announced CO2 business acquisition, while base merchant business volume remained stable. Sales were negatively impacted by 5% lower energy pass-through, 4% unfavorable currency, and 12% from the India contract change. EBITDA of $193 million was up 11%, and was up 16% on a constant currency basis, supported by the strong volume and pricing. The EBITDA margin reached almost 40%, an improvement of over 800 basis points. The India contract change and lower energy pass-through contributed about 600 basis points. Now please turn to Slide 24, Global Gases, which includes our air separation unit, sale of equipment business as well as central industrial gas business costs. Our results declined due to lower project activity as we approach the successful conclusion of our Jazan ASU sale of equipment project. Please turn to Slide 25, Corporate segment, which includes LNG and other businesses as well as our corporate costs. Sales and profits were higher this quarter supported by contributions from the Golden Pass LNG project and lower corporate costs. Although the profit shown in this quarter is still modest, we expect the performance of this segment to improve. We remain optimistic about additional LNG orders since our technology has been selected for several major projects around the world that are awaiting final investment decisions or final agreements with our customers. 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 #26. As you all know, we continue to live in an uncertain world that we at Air Products cannot control. But we do have control over the actions Air Products can take to succeed in such a dynamic and changing world. We have a strong, capable, and flexible organization that remains focused on productivity and creating our own growth opportunities, which will allow us to continue to deliver on our promises to our investors. Consistent with our goal to achieve an average annual growth rate of at least 10%, we are extremely pleased to provide EPS guidance for fiscal year 2020 of $9.35 to $9.60, up 14% or 17% over our strong fiscal year 2019 performance. This includes our expected contribution from the Jazan project. We expect our fiscal year 2020 capital expenditure to be in the range of $4 billion to $4.5 billion, which includes the expected spending for the Jazan project. For quarter one of fiscal year 2020, our earnings per share guidance is $2.05 to $2.10, up 10% to 15% over last year. Now please turn to Slide #27. At midpoint, our fiscal year 2020 guidance represents six consecutive years of double-digit earnings growth and 14% average cumulative earnings growth per share over this six-year timeframe. Thanks to the great team of Air Products, we continue to deliver on our commitments to our shareholders 5.5 years ago that we would grow Air Products EPS at least 10% a year. Our team, worldwide, continues to be very optimistic about the future of Air Products. Our five-point strategic plan will differentiate us and drive our success going forward. Our safety, productivity, and operating performance provide the foundation for our continued growth. We have the financial capacity, technical position, know-how, and the talented people to take full advantage of the exciting opportunities ahead of us. And finally, please turn to Slide #28. 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 strong performance. I want to thank all our 16,000 people around the world for their commitment and hard work and for embracing the opportunities in front of us with energy and a spirit of working together. I am certainly proud to be part of this winning team. Now, we are delighted to answer your questions.

Thanks very much. Your sequential prices in China were flat. Is there a flattening out of price in that market or is it some kind of pause? What are the price dynamics in China?

Good morning, Jeff. I would not characterize that as a slowing down of the price increases. In the fourth quarter, in China, there was a very interesting dynamic because a lot of the industries around Beijing were ordered to shut down so that there would be clean air for their celebrations on October 1st. Obviously, if that happens, demand goes down and the leverage on pricing goes down. I think that once we get back to normal, which is where we are, that trend will continue.

And could you also comment on price trends in Europe and in the United States for 2020 for the industry generally, and there has obviously been an industrial slowdown. Is that something that you think would put pressure on industry prices or do you think that -- there is -- or do you think that bonus is not significant enough to deter the underlying trend?

Well, Jeff, that's a very interesting question, because everything depends on the level of activity and the economic activity, supply demand, and all of that. What I can tell you is that in the guidance that we have given you, we have assumed modest price increases, not significant price increases. So we have been conservative on pricing.

Okay. Thank you.

Thank you. Can you talk a little more about the MOUs that both you and Saudi announced last week and some additional color last night? There still seemed to be a few constructive moving parts. So just sitting on some of the potentially at least the timing regarding Jazan understanding you can't exclusively quantify as well as the opportunities love to come just anything you'd like to share and that would be appreciated. Thank you.

Thank you, Chris. First of all, can I just comment on Jazan. We are trying to raise more than $7 billion of debt. The banks and our advisors have told us that, look, this cannot be done overnight, Seifi. It's too optimistic. It's going to take time, not only to raise the money at a fixed interest rate, but also all of the documentation that is required to actually get to an absolute closing. So we are in the estimate that we have given you; we have assumed that this transaction will close in the first quarter of calendar 2020, and we have included an appropriate amount of profit in our guidance. Then with respect to the announcement that we made last night, that is pretty significant because that allows us -- that the Royal Commission has approved that Air Products can build facilities and then connect them by a pipeline to serve and optimize all of the requirements of hydrogen, oxygen, and nitrogen in the Jubail area, which I'm sure you're very familiar with, where most of the refineries and chemical plants are. Nobody can lay a pipeline without the permission of The Royal Commission. So this is going to give us the capability to build a steam methane reformer, new coal gasification in that part of the world and convey the hydrogen, and then optimize the hydrogen consumption in that part of the world. It can create significant opportunities for investment, but the key, and that is why we’ve made the announcement, was having the permission from The Royal Commission to lay the pipeline. We are going to move on this quickly. We have identified a significant number of projects that can be done. The customers in that part of the world are very excited because, if we do this and build this hydrogen pipeline, it will be similar to the other hydrogen pipelines in the U.S. Gulf Coast. It gives you the ability to connect these different plants and increases reliability of operation. This is a very, very positive development for us, and it gives us an ability to actually go and pursue a lot of projects. Because if we had built a steam methane reformer or had built a gasification unit to gasify petcoke without the ability to connect them, it wouldn’t have been as interesting. So this is pretty significant, and we are very proud of it and we are very thankful to the Saudi Government to allow us to do this, which is a totally separate project from Jazan. Okay, Chris?

Yes, that's very helpful. Also in your press release you explicitly called carbon capture, and there's also recently one of the few highlights within your sustainability report, I think it’s like 55 million tons in ‘18 or so. You also hit on a lot of 2020 goals regarding energy, water conservation, etc., etc. Can you just hit on the opportunity longer term for Air Products on the carbon capture front, again, some of the rhetoric in the U.S., California, Europe, and just how some of these sustainability factors should ultimately help profitability? Just anything to help us conceptualize the longer-term financial opportunity on some of these GST factors would be appreciated? Thank you.

Chris, thanks for the question. We have always said at Air Products that we are focused on energy, which is gasification, and there's a huge amount of opportunity there, particularly gasification of coal, petcoke, vacuum resid, and you see examples of that. But when you are doing gasification, the CO2 is captured readily. So there is a significant opportunity to capture that CO2 and work towards achieving totally clean coal gasification, where you gasify the material, capture the CO2, and therefore, you don’t release anything into the atmosphere. We have the technologies to capture CO2 and use it for enhanced oil recovery. We are already doing this in Texas at Port Arthur. We have developed technologies to capture CO2 and perform sequestration, which means injecting it into the ground, and we have done a lot of good work on trying to capture the CO2 and achieve what is called dry reforming, which means recycling it by breaking it back into CO and hydrogen. So these are the projects that we have. Some of these projects are longer-term projects, Chris. They are not going to provide EPS in 2020 or 2021, but definitely, they are the future. I believe very strongly that the future is about carbon capture, hydrogen for mobility, and gasification. The amount of opportunities we see is significant, even more than what I talked about last quarter or in the quarter before. The entire world is focused on this. We, by acquiring the Shell and GE technology, are in a uniquely favorable position to provide the gasification technology. We are already working on their hydrogen for mobility technologies and we are the world leader in that as we are developing our carbon capture solutions. So these combined factors will transform Air Products into a company that is solving urgent environmental issues, and we expect to be properly rewarded for that. I think people will be excited about it when we reach 2023, 2024, and 2025 with several projects presented. But we need to start, and we are starting right now. As I said, I can’t provide specific EPS projections for 2021. Still, I assure you these developments will catch up in time. Remember the five years ago when we started gasification; now we have the promising Jazan project to present. We are embarking on these initiatives now, and over time we will showcase very exciting projects for our investors.

So clinically, given the industrial slowdown, I was trying to figure out what are your volume same-store sales, if you exclude the start – volume from the new project startups? Can you talk about your organic volume growth in three regions?

Our organic volume growth is nothing to write home about because the economies in the world are not performing, P.J. I mean, in the United States, everybody is excited and looks at the stock market, and it looks pretty good, but the real economy is going nowhere. Industrial production is down, and that is what drives our business, the same thing in Europe. Even in China, they are growing at 6.5%, but year-over-year, they are not growing. If you look at our base business, there is no growth. That’s why we have tried to transform the company into generating our own growth. If we hadn't done that, we would not be in a position today to sit down and provide a forecast for next year of 17% EPS growth. We would have been contracted and our costs would have increased and probably resulted in negative performance. That is the issue facing most people. Our underlying volumes definitely reflect the economic state, meaning relatively, they’re going nowhere – no growth in the U.S., no growth in Europe, and China is flat despite the 6.5% growth; so you're right, our base business is not moving forward. If we had been dependent on that, we would be in a difficult position right now.

Thank you for that explanation. And then on the Jazan JV, you decided to buy the assets, which makes it capital intensive, but maybe that’s what was needed to make the deal happen. Should we think about this as the model for future projects in China?

P.J., by buying air separation units as part of the whole thing, it will significantly enhance our return because the return on the air separation unit by itself was less profitable than including it as part of the new acquisition. Therefore, we actually did something to enhance our returns on that. In terms of the business model, yes, wherever we are supplying oxygen to a gasifier, we are interested in buying the gasifiers. That is our business model, and there are plenty of opportunities for doing that and over time, we will appropriately announce projects in that regard.

I’m sorry, I know about gasifier, I just was talking about the power plant and the other ancillary units? Thank you.

P.J., the power plant is something unique in Jazan. They usually wouldn't want to be buying power plants. However, in Jazan, the only day that Saudi Aramco would agree to part with their assets was if they had one person to go to, in case they struggled. They didn't want to separate it and let us buy the gasifiers and somebody else would buy the rest. So that is why the combined forces were formed and we bought the whole package, but that is not a business model that we want to adopt everywhere in the world. They may want to stay with the gasifiers. However, there might be unique situations where they must do that, but we will do what is best in terms of returns and what’s best for our shareholders.

So if we are just looking at 2020, how much will new projects contribute to EPS growth next year versus this year?

Well, we obviously don’t give that detail because people could infer the productivity of all of our projects. But considering what I was saying in response to P.J.’s question regarding the world not progressing economically, you can almost think that any growth we get next year is tied to pricing and new projects, as the very basis of our business needs productivity to account for cost increases.

Very helpful. Can you go through merchant pricing by region in the quarter and quantify how much was up?

Yes, merchant pricing was up in the Americas by approximately 8%, in Europe by about 7%, and in Asia by about 7%, for a total of about 7%.

With regard to the $6 billion to $7 billion that you still have to spend in terms of capital deployment, I guess, how should we be thinking about how that’s allocated towards some of the new Saudi opportunities with the MOU that you’re talking about for some of the other opportunities around coal gasification? And I guess, maybe an update us to how the coal gasification project pipeline is looking at this point given kind of the time since we heard last on that?

The coal gasification project pipeline is actually looking promising. There are more opportunities than we can quote honestly, and possibly keep up with them. But in terms of providing a breakdown of the $6 billion or $7 billion or $8 billion that we still have to spend, John, it will be difficult because it depends on which projects come first. I can see us making significant additional investments in Saudi, hopeful significant investments in the U.S. because we really want to invest in the U.S., and we are pursuing opportunities there. Of course, we see opportunities in China, Indonesia, and probably significant opportunities in India, as India has finally come to the realization that they should follow China's example and use coal to gasify to achieve independence.

Got it. Thanks for the color. And then just a little bit of housekeeping. On the Americas business, how much of that of the volume weakness was tied to the one-offs around outages versus just general macro weakness?

Not a lot of it. It reflects the general macroeconomic conditions, primarily in Latin America.

If I can just follow up on the -- and, well thank you. On the South American volume issue you’ve referenced in the press release. Was that actually worse than you anticipated, and with some of it due to -- some of the civil unrest that's taking place in certain regions down there?

Well, the civil unrest has started after we closed the fiscal year, so that has had, unfortunately, a negative effect in the first quarter. However, it's just a general slowdown; things are not that exciting in that part of the world.

Okay. And then if I could, yeah, now I understand. And then just on depreciation and amortization for next year, given obviously a big step-up in CapEx, what's the round number we should be using for that?

I mean, we don't disclose that, but it will be …

I would say, Vincent, just in general, that's going to continue to go up as we deploy the capital, recognizing that it’s also going to move around for things like currency as we translate back into U.S. dollars. We don't give guidance, but generally speaking, as we deploy more capital, we would expect G&A to increase.

Another one of the Saudi projects that you listed in your press -- in your slide deck is the hydrogen fuel cell vehicle program in Saudi. I just wanted to ask you what you see as really limiting the development of such a program there. You mentioned this pipeline that you're starting to work on is having a hydrogen pipeline and enabling infrastructure for such a development and also just want to ask whether you had any IP associated with such a program.

Well, we do have the IP, and I think that that opportunity is going to be significant because one of the reasons that we want to build the pipeline is to establish a hydrogen corridor that would excite people about driving hydrogen cars. The Saudi Government is very supportive of this initiative. They want to see it happen. And you're right; there are a lot of opportunities. I don't want to get ahead of ourselves in terms of numbers and so on, but we certainly are on the right path in developing these opportunities in that part of the world and quite honestly in other parts as well.

And Seifi, you mentioned the challenges of raising the $7 billion of debt associated with Jazan; I just wondered if any of that is a fallout of the Saudi Aramco attacks from a couple of months ago. Is that raising any additional hurdles for you?

I'd like to clarify. We don't see any issues with raising the debt. I mentioned that it's a matter of how much time it will take. It is one thing to go to the market and raise the debt and get the commitment of the banks. But afterward, you have to prepare a significant amount of documentation to reach a closing, and that is going to take time. Obviously, you won't receive any fees until after the legal closure. That's what I was mentioning. But in terms of raising the funds, I believe demand is strong and banks are optimistic that we will secure very attractive interest rates.

This is actually Mike Leithead on for Duffy this morning. I guess first, Seifi, if I look at Slide 13 on margin improvement, there was a big jump in the first two years when you got Air Products, and things leveled off for two years or so. Now it seems to have taken another material leg up in the past year on margin. So I was hoping you would lay out some of the drivers of this recent move up, whether it's cost reduction or the benefits from energy pass-through, and just whether a 40% plus margin is the new normal fair products moving forward.

The first jump that you saw was all the productivity and the $400 million, $500 million of costs that we took out of the system, so that happened. After that, it remained constant because we were working on growth projects. Now, what is happening is that all these things we were discussing are coming to fruition; we have Lu'An running, and we're going to have Jazan running, and we have many other projects that are successful and profitable now reflecting on the results. Whether our EBITDA margins for the long-term hold at around 38%, 39%, 40%, or 41%, depends on the projects; however, I am confident that they will stay in the high 30s rather than being at 32% or 33%; I predict they will be around 38%, 39%, 40%.

Got it. That's really helpful. Following up on the Jazan project, I appreciate that you’re not going to provide detailed financials. But when you compare the earnings contribution internally today versus when you announced the project back in last August, are the project economics, or is the IRR better today than they originally seemed when you announced the JV or roughly the same?

They're better, and I don’t want to provide specific numbers as our customers don’t want us to do that. However, we are giving guidance that for every dollar of cash we invest, we receive a certain percentage of operating profit. It’s not too difficult to deduce and we are confirming that this is better than our previous estimates. So you can make a good estimate of its impact on us.

Want to talk – I know you talked about creating your own growth because there are obviously not many opportunities in the industrial economy these days. Last year, I think onsite and pipeline were 52% of sales; where did you come out in '19? And by the time you make all these additional capital commitments in new projects by '23, where do you see the mix of onsite business going versus where it is now?

Well, my goal is for that mix to get to 70%, 75% of our sales over time. Right now, once Jazan comes on stream, it will notably enhance our position compared to the current situation, alongside other upcoming projects. Therefore, our goal is to significantly increase our onsite business as it provides more stability in earnings.

Yeah, Don, if I could -- I think absolutely, over the long run, as Seifi said, our onsite business is indeed increasing. Just remember that the new launch for '19 will be primarily due to the India contract change, which will modify that revenue but does not changes the fundamental concept of our onsite business as it continues to grow.

And just as a follow-up on gasification. Obviously, Jazan has been driven by IMO, and they need to do something else with the backend residuals. What's the pipeline for other similar opportunities in the refining sector?

Significant. We have always stated that every refinery in the world must address this situation because they have to figure out what to do with the bottom of the barrel residues. What happens is exactly what you indicated about petcoke, which contains 6.5% sulfur and is banned or rejected in places like India and China. Every refinery over time will need to determine what to do with their petcoke; and the only viable solution for that is gasification. Hence, we are optimistic about this area and aim to present significant opportunities. We are excited about ensuring we acquire the GE technology for this very reason.

On Slide 32, you’re essentially doubling your capital expenditure budget for 2020. I was wondering if you could disaggregate some of the major buckets in terms of Jazan? How much have you earmarked for that in the year relative to other growth projects and maintenance that you anticipate?

Our maintenance CapEx, as Scott has already disclosed, is about $400 million. Regarding Jazan, I don't want to disclose the specific expected amounts, but the total cash outlay is $2.5 billion, and most of it will happen in 2020 depending on the actual closing of the transaction. The remainder is devoted to our other growth CapEx, which is also quite robust. Our fundamentals – if you exclude Jazan, our expenditures on other projects are actually quite promising.

And sticking with the subject of capital deployment, Seifi, I think you’ve indicated that the project pipeline looks quite robust. What are you seeing these days in the M&A pipeline? Is there anything of interest that could be brewing on that front?

The M&A pipeline, in terms of us acquiring another industrial gas company around the globe, doesn't present many prospects mainly due to antitrust issues. However, Jazan at $12 billion is, in fact, really an M&A endeavor because we are purchasing existing assets; it depends on how you categorize it. Overall, though, I don’t see many opportunities for us in purchasing other industrial gas firms.

What's the rationale for the Qudra JV? Why not just own this business outright?

The rationale for the joint venture with ACWA Qudra, which we call APQ, is that we plan to initiate a lot more with them than just the Jazan project. They possess immense competence and we aim to pursue many ventures beyond just Jazan in Saudi Arabia, but also additional projects in the Middle East. As such, the rationale for that partnership exceeds solely the Jazan project.

Thank you. And regarding your comments on carbon capture, you demonstrated the ability to capture CO2 in your steam methane reformers in Texas several years ago. It was a $400 million pilot project, and I think a majority of the project cost was covered by a Department of Energy grant. Are you expecting the federal government to grant you more money or do you plan to fund it yourself? Also, how much are refinery customers willing to pay for your ability to capture CO2?

In terms of federal support, as you know, there’s a program that provides up to $45 per ton of captured CO2. On the other hand, California has a program that provides $200 per ton bonus when you demonstrate sequestration for an extended period. I believe this trend will be adopted by additional states, and we're observing similar incentives emerge globally. Currently, we are engaged in a project for CO2 sequestration in Europe, in a port area, aiming to construct a pipeline to transport CO2 to that location for sequestration. Ultimately, these developments will be driven by substantial incentives from different governments to promote carbon capture, which is an important global issue.

Thanks. Congrats on a nice quarter and good outlook, guys.

Thank you, John. I appreciate that.

Seifi, you mentioned India waking up to their coal opportunity. How far away are we from something parallel to your China projects? Is it two or three or five years away for having something big in India?

I think that in India, once the government decides to proceed, you will need to identify opportunities, piece the project together, and perform feasibility analyses. Thus, I believe it’s about a five or six-year process from today before you get to something equivalent to the Jazan project. That’s the timeframe I foresee. Just as we started gasification in China around 2005 or 2006, the units didn’t commence operation until around 2011 or 2012.

Good morning. This is Don on Bob. I'd say I had to jump on in that with I’ll just start. You owned that GE and Shell technology. Is there an opportunity to get to go into, I guess, dozens of operating gasifiers within China, so utilizing that technology and trying to gasify those assets?

That's exactly what we are trying to do. That is an opportunity. I don't know in how many of them we will succeed, but that is exactly our aim.

Got it. And then, I guess, since maybe the technology has evolved, are we seeing opportunities, I guess, to operate those more efficiently?

Yes.

Looking at hydrogen, you talked a little bit about outages of your customers. I was wondering if you could give us a range for how much that depressed your sales. Also, on the flip side, as far as you can tell every refiner we've heard has said they are prepping for IMO, and there are going to be no outages next year. Is that a material uplift for your volumes next year?

If that materializes, it will certainly be an uplift; however, these refineries have shutdown cycles which they must adhere to, some will shut down prior to the year end, and that could strain operations. This situation is difficult to predict. We have factored in some shutdowns; if they don’t occur, that will be an upside. But I fully expect shutdowns will take place, and they are significant events in refinery operations to mitigate risk.

Okay. And it looks like you pushed the project out about a year, is that right? And if so, why?

It is the same situation we’ve mentioned before; there are many internal struggles about coal allocation for this project, hindering our progress. Therefore, we've extended it by a year, but we plan to provide you updates about this project every quarter. We are not overly enthusiastic about the current developments, as I can assume you aren't either.

Yeah, and, obviously, Seifi's comments refer to the overall project that is ongoing, this isn't a situation where the customers are proceeding, and we have a problem.

Hi, good morning. Thanks for squeezing me in here. I wanted to ask about the global gases and the corporate segments. Curious what drove the results there to be so much better in Q4 than they were in the other quarters of fiscal '19? And could you possibly give us some guidance for what we should expect in fiscal '20 versus fiscal '19?

On that front, the key factors, I think, Simon is the expert on the corporate sector, so I invite Simon to comment.

Sure. It's a great question Mike. Thanks. I mean, obviously, as we've stated for a few quarters now, we are excited about the LNG business, and we've announced one order and we believe there we're poised for others. So that's been a key factor. But I'd also say that there were a couple of one-time earnings in the corporate sector as the profit recognition on equipment sales is somewhat variable. Expect lumpiness going forward but significant improvements in our LNG business over the next two years.

Alright. And then the other question I had was on the acquisition -- the CO2 acquisition in Europe in the Jinmei asset buyback. Can you breakout what the contribution to revenue was either on a full company basis or in the Europe gases and Asia gases region?

Well, it’s just a small contribution because they have just begun operations. So we don't provide that kind of detail, but it will be better next year, however, it was not significant for the quarter.

I just have two very quick ones. First on the Q-45, is your impression that is the IRS will make a clear ruling on implementation, we should expect Air Products to follow with a flurry of announcements in the near-term or will there be a multi-year lag for projects to be developed? Secondly, given the way you're describing long-term opportunity sets, from the carbon capture, the gasification, and carbon sequestration, if negative rates continue, how long or is there a point at which the merchant gas becomes non-core sell products?

Regarding your second question, merchant gas will never become non-core. This is an integral part of our business. Despite the abundance of opportunities, we remain focused on that; such as helium and liquid hydrogen – they will always form a core part of our offerings. Now, for your first question about CO2 and the tax situation, I'll defer to Scott for further clarification.

Well, just to clarify on your question regarding CO2 and the tax situation on it, Laurence, there's a myriad of circumstances that will play out regarding local state or provincial programs across various regions that are supportive of CO2 capture projects. We’re enthusiastic about such developments.

It’s very difficult to predict what will transpire without the legislation and so on. However, many programs are being introduced, and I believe this trend will persist as we move forward.