PX
#Good morning, <UNK>.
(laughter)
Hi, <UNK>.
No, no.
It's very unique, and maybe I can comment a little more on that.
So we initiated this contract over eight years ago.
And we went into this arrangement with the concept of building our density as we do, and a model that we could build out and essentially establish the type of supply that we normally do.
Due to reasons unrelated to us ---+ frankly, a customer's permitting issue ---+ this delayed for seven, eight years, and our equipment essentially was in storage.
We had been receiving some progress and recovery payments to sort of help recover our lost time, value, and money.
But now the permit has finally been issued, it is modified and the scope has been changed on this project.
And basically the original project that we had signed up for is just not feasible from our perspective.
So we worked with the customer, and we felt this was in the best interest in the use of this capital ---+ was to go ahead and exercise this opportunity to sell the asset back to the customer.
So a very unique situation.
Clearly a US-based downstream energy type project is something you would want today's environment for growth; there's no doubt about that.
But I think, as you can imagine, <UNK>, we really researched this and analyzed it, thought long and hard about it over the last several years.
But we firmly are confident that this is the best use of shareholder capital ---+ was to go ahead and exercise this opportunity here the way we did.
Well, I think from a CapEx perspective, depending upon the timing of where the projects are, I still think this kind of $1.5 billion to $1.7 billion, and hence we are saying $1.6 billion number, seems to be where we are at given the backlog of projects ---+ although we are taking some actions on non-large-growth projects to maybe trim a little more.
As far as the backlog, as you know, it's lumpy.
We still have some pretty solid leads, mostly on downstream ---+ either energy or petchem type projects ---+ that we are pursuing.
They are a little bit larger.
So if they are executed and signed, they could create some lumpiness on the upside.
As far as the downside on the backlog, we've got two more projects that will be starting up here this year.
And then into next year, we have several more coming onstream.
So I think ---+ you know, all-in, I still think $1.5 billion to $2 billion on the backlog for the remainder of this year.
And then I think CapEx will probably be in the lower end of that range, just given the spend rate.
We didn't disclose that number.
But I think if you look at the dip in the project backlog ---+ there were three projects that came out this quarter.
That one was by far the largest.
In our investing cash flow, there was a divestiture line that comprised a large component of this settlement.
As I had mentioned before, there were some prior payments over the last eight years.
But at the end of the day, it was an energy project that we essentially just sold out from.
And you can kind of look at the numbers and figure it out.
Well, specific to the Gulf in the US, I expect the opportunities are still fairly strong.
When you look globally for us, clearly there will be some softening in places like China, South America.
We are just not seeing large capital projects in places like Europe, either.
So on a global basis, I would expect it to be a little bit lower.
But in the Gulf and in some other pockets of the world in downstream energy, as I mentioned earlier, we are seeing some good opportunities still.
And that's a lot of either national oil companies or independent oil companies looking to take advantage of a low-cost feedstock, whether it be oil or in the petchem side ---+ could be shale.
So I think from that perspective, it's still pretty good opportunities in the Gulf.
And I do expect projects related to US Gulf or energy and chemicals will probably make a larger percentage up of our backlog than it does today.
Yes, so really that's, as you can imagine, a macro kind of question, as the macros are really what are having Brazil struggle.
But from our just best guess at this point, and I was just down there about a month ago ---+ clearly 2015 is challenged.
The view is that there's not a lot of optimism around 2016 yet at this point.
Inflation is the big culprit they are really trying to get after.
And that's ---+ they just recently made a change here, and their fiscal deficit had to sort of step it down.
But they are going after the government balance sheet.
I think that part is positive; they are just not getting the tax revenue base.
So when you kind of add all these pieces together, I just don't think the confidence is yet there.
Clearly the confidence on the current ruling party is quite low right now.
So I think that is creating a challenge for investors to want to invest at this point.
Now, the real has gotten fairly weak here.
And so that does make exporting beneficial for those that can do it today.
So my best guess at this point is I'm not really expecting a lot out of Brazil the rest of this year or into 2016 ---+ we are kind of thinking it may just hold flat.
But if they can continue to take the actions they are taking, it should bode well for them to start stimulating the economy back into 2016, possibly.
It just remains to be seen.
But the SELIC rate is quite high right now, so they have a lot of room to stimulate.
They just are not comfortable with their inflation situation, and I agree with that.
So we're going to have to wait and see.
But we are not waiting in terms of our rightsizing the organization.
We are aligning it more with kind of the near-term outlook, which is muted.
And we are just rightsizing the organization around this.
But when things recover, we won't miss anything.
We are still very, very well positioned to capture more than our fair share when things recover.
Yes.
Yes.
I think you had to peel out the project startups, as they may be a little bit different than the underlying economic trends.
But at least what I'm seeing when I look at China ---+ you are kind of low signal digit, maybe mid-single digit in certain parts of the country right now is what we are seeing on the ground.
And I think what you've got going on there is it lot of the very large growth opportunities in either infrastructure; anything upstream, whether it's steel, mining, construction ---+ those are clearly softer.
And they were driving a lot of the growth.
Downstream is still okay, whether it's consumer-related, environmental, food, healthcare.
But those are just not as intensive in terms of gas usage.
So what I would characterize it as is we are still seeing good growth in these more consumer downstream opportunities.
And we signed that CNOOC deal last quarter, I think, as evidence.
But the upstream side is definitely softer.
And there's just, frankly, excess capacity.
I mean, that's one of the main issues is there's just too much capacity, and it needs to be soaked up.
Well, a third of our business is on-site.
So that third has to take-or-pay levels.
The other two-thirds are merchant and package.
So they would be requirements contracts, but not all of them by any means have any take-or-pay form.
But I will answer it this way: I feel quite good about our on-site protection in down environments.
And I think if you want to use history as an example, just look at 2009, when things really fell ---+ I mean really fell, and they really fell fast, as you may recall.
And we were pretty resilient.
And lot of that were the contracts.
A lot of that was the protection in the on-site.
So I feel fine on that front.
And I think you are seeing it play out in Brazil today.
We are still maintaining a pretty high-quality business in what several are calling some of the worst conditions in over two decades.
So I feel okay on that.
Now, the merchant and package, clearly that's going to be a little more exposed ---+ especially the package ---+ in terms of what's going on in the environment.
So I think ---+ I'm not sure if that answers your question, but that's about the best way I can characterize it.
Well, I think, <UNK> ---+ and that is a good question.
I think the multiplier is a function of this intensity per capita concept.
Right.
That really helps drive a higher multiplier in terms of gas pull-through on the growth.
And in the emerging markets, they still have fairly low levels of gas intensity per capita.
You just see it in the results, and you see it when you go to those countries in terms of how they're ---+ you know, the lack of application technology that's being deployed.
So I still think the multipliers are quite strong in those regions.
I just think the challenge you are seeing in a lot of emerging markets today is the investments are just simply not being made.
So people made investments in some of these markets, and the capacities are lower than they expect.
So they are just running with existing capacity ---+ or, in some cases, just not running that capacity.
And that's the bigger challenge.
But you look at certain countries that still have significant infrastructure needs, and they are just putting a lot of that on hold to try and get the government balance sheet corrected.
When they get back to a situation of addressing those infrastructure needs, I think you will see that multiple back in play.
And we should be in pretty good shape in terms of gas pull-through.
Well, I think, <UNK>, there's only been a few data points given the geographies that we participate in.
I'd say at this point there's nothing I could really point to to say in either direction I've seen anything materially different.
But we will probably just need more evidence and more time to just understand that.
Yes.
In fact, <UNK>, we are taking not just the growth in new CO2 in the US, and expanding it in other applications, and leveraging our package business to support that, but we are deploying that model in other countries.
So South America, Mexico, and some other parts of the world ---+ we are really trying to duplicate some of those efforts in leveraging our strong CO2 supply network and very strong food and beverage application technology.
So we're doing that to continue to grow.
We are seeing some opportunistic acquisitions that we've done in LatAm around food.
So I think that's been a good driver for us, and it's something that has a nice sort of resilient, non-cyclical aspect that meshes well with our portfolio and meshes well with our application expertise.
So we've been quite happy with that.
And <UNK> mentioned in the prepared remarks another CO2 supply that we've acquired here in the US.
And that will further help some of our synergies and our growth opportunities in that market.
Okay.
So first I'll talk about the base carbon steel.
Just on North America as well, while I feel a little better this quarter, we were coming off some pretty low lows in Q2.
So I think it's ---+ while the sequential I feel a little better on, whether they are at levels that we've seen or normalized levels, it remains to be seen.
But it does appear to be better so far.
I think Q2 there were just more customer outages and inventory ---+ excess inventory overhang.
Looking at South America, it's hard to say.
I think the only ---+ auto is still very weak in South America.
Infrastructure projects, as I mentioned, are just not happening.
So whether it's long steel, flat steel, there's just not very much demand.
I think one positive aspect is the way the currencies are going, especially when you look at a country like Brazil.
Their export market should start to open up a bit.
Their steel is definitely becoming more competitive.
But aside from that, the demand in South America, I think, is still a bit constrained given the end markets.
India ---+ we are still seeing some good opportunities.
We've had a few announcements here.
And we are working with some of the large steelmakers there.
So I think in balance, that one has been a good story.
China is just a story of excess capacity.
It's well known.
The government has made very explicit efforts to try and reduce that capacity.
We welcome that.
I think it's just been very slow going for that capacity to be reduced.
So until that happens, and those mills are closed that are kind of really fringe mills ---+ second and third tier ---+ I just don't think that situation will be fixed anytime soon.
And in Europe what we are seeing is if you have the mills, you are running them.
And we are seeing some customers run them fairly hard.
But I wouldn't expect much incremental investments in Europe at this point.
But that remains to be seen.
And as far as the argon ---+ I think argon always is naturally tight.
We are just not seeing the high levels of stainless that we had seen in the prior quarters for some of the production rates.
It does go up and down, but in this particular quarter we just didn't see the type of rates we've seen the past few quarters.
Sure, <UNK>.
Starting in North America, high 70s ---+ and that's a little bit down from last quarter.
And it's partly due to some of the things we had mentioned with manufacturing, argon, and just the further erosion in some of the upstream oil.
South America is still kind of those mid-80s range.
And as I mentioned last call, a lot of it is going into the non-cyclical industries.
So fairly resilient merchant supplies there.
Europe is low/mid-70s.
We are, as I mentioned, starting to see some uptick.
So while the energy business is quite down, the base underlying the manufacturing is picking up.
And we are especially seeing that more in the package side of the business.
In Asia it's a little bit different, depending upon the country.
On balance we are probably mid-70s, but Korea is still quite high.
India is low, but that's just due to some capacity that started up; we are loading that capacity as we speak.
And then China is a little low, just given ---+ partly the overcapacity and partly our concerted effort to transition from distributor sales to direct sales.
So that's kind of around the world.
Not a lot of change from last quarter, but we clearly have ample capacity to rebound when demand presents itself.
Sure.
And yes, North America is really driving that number, to your point.
And there's a couple pieces.
One, consistent with what we had said in the last call, natural gas, while we exclude the pass-through, is impacting that number a bit as we have it embedded in some of the pricing of the coproducts that we have.
So CO, methanol, certain products ---+ steam.
So that is negatively impacting that as natural gas has dropped almost 40% year over year.
There also were some outages in North America.
And it's impacting, frankly, our package business even more so than either on-site or merchant.
And that has also negatively impacted of that.
So I would say a good portion of this is temporary in terms of some of the outages in the natural gas.
But overall there might be a little bit of softening in chemicals.
As you see oil drop, I think the end products of some of these chemical customers are going to be a little squeezed ---+ their margins.
And I think you are starting to see that in some of the chemical companies' recent reports and outlooks.
So I think there is a little bit of softening happening there.
Activity is pretty low, still.
Their oil output has continued to drop.
They are still going through some belt-tightening in terms of balancing their fiscal books.
So from that perspective, not much improvement.
Now, the rest of Mexico is actually performing quite well.
Automotive is very strong.
The peso hit MXN16.30 the other day, which is making their exports extremely competitive, especially when added to their labor costs.
So certain markets continue to do quite well.
But the Pemex and oil market really just has not improved here.
And I think until there is some investments that are brought in ---+ whether it's third-party investments or partnerships that Pemex may have ---+ it's hard to find when this is going to turn.
But we have heard that there might be some budget loosening here, which would bode well for more wells to be drilled.
But at this point we are really not anticipating much of that.
Sure.
Helium is definitely looser than it was a year ago.
You had a combination of more sources coming on, coupled with customers being much more conservative in how they are using helium ---+ whether it's more helium reclamation projects, some small ---+ very limited, but small substitution where feasible.
So what you've seen is, I think, the helium market went from being very tight, to in balance, to now you've probably got a little bit more supply than demand.
And you are especially seeing that in some of the electronics vendors in Asia, so that is on a volume basis part of the Asia challenge as well.
But I think from a sourcing perspective, we're still very comfortable with our ---+ we have a very broad level of sourcing that's got a pretty good average cost that we can still be competitive in the market.
So still a very good business for us.
It just goes in these cycles of being very tight to not tight.
And I'd say right now it's more than imbalanced, and it's created a bit of a headwind year over year in volumes given that.
So first, as far as the assets, we are running them quite hard, actually.
We've been loading the assets much quicker than expected.
The two on-site ones were strict facility fee approaches, but they are both running quite well right now.
So from the perspective of, if you are in the country and you have the assets, we are actually running them quite well.
I think to your point, the geopolitical situation is challenging in the sense of ---+ we just don't know looking forward where it will go.
The country of Russia itself is facing stagflation right now.
But all in all, I'd say we are still fairly happy with what we have on the ground there.
I think the bigger question for us is incremental investments we just need to be cautious on.
But we are still looking, and we are still pursuing opportunities there.
We are just even more selective, I'd say, than we have been.
And frankly, the contracts and the way we established them coming into Russia several years ago have really played out well for us ---+ and not just protection from the ruble, but also just some of the terms and conditions around some of the uncertainties you face in this country.
So I would say while we were a bit disappointed on some of the execution costs and overruns we had in building, the actual demands have played out fairly well.
And it's still a geography that we are intensely looking at for growth.
Yes, <UNK>.
I think, first, just from the calculation itself, as you can imagine, a substantial portion of our debt is dollar-based.
We just did two euro issuances, but for the most part that debt is dollar-based.
And the EBITDA is ---+ more than half has foreign currency impact.
So right now that metric is being a little bit stressed (technical difficulty) and it is thus being inflated a bit because of foreign currencies.
So I sort of look at more retained cash flow some of my kind of coverageability and a few different metrics in addition to that one.
But all in all, I would answer your question as such that I'm fairly comfortable with our net debt levels.
We did increase debt a little bit in Q1.
We decreased debt a little bit in Q2.
But I am fairly comfortable that where we are at is not an issue either way.
And if we see some opportunities, we may raise debt a little bit, whether it's for growth or buybacks.
But nothing that material in either direction.
No.
Sorry ---+ just to clarify, no, it's not all cash.
It's about half; you will see in the Q.
We do break out cash and non-cash.
About half is cash.
No.
I think with this charge, a little over two-thirds were in the emerging markets.
So China, Brazil.
So when you do that math of the average salary, you do need to take into consideration this is a US dollar number on emerging market foreign currency salaries.
You're welcome.
