APD
#I will give you a general answer and I would like to turn it over to <UNK> to elaborate.
But, overall, we are still getting price increases in some of the markets that we operate in because of supply/demand and I would like to have <UNK> elaborate on that.
So first, just to be clear, anything that is let's say related to our onsite business or our HyCo business, where there's energy in that, you see that all in pass-through.
So when we report our pricing, you are really looking at our liquid products that we deliver to a customer and you are seeing that the average price has gone up and down and a little bit, so what is the trade-off of mix, it means customers with higher prices or lower prices.
So that's what you see in it.
And if you think of what we referred to in North America, you are seeing there the net impact we've been able to achieve in a pure price where we simply move the price up, offset by places where, in those liquid contracts, there's a formula that takes the price down or a surcharge comes down in cases where power costs come down or diesel costs come down and that is fair.
And in terms of let's say net contribution margin to us, that really holds us neutral because those costs are coming down for us at the same time.
P.
J.
, number one, with respect to maintenance costs, that obviously changes quarter by quarter based on the scheduled maintenance and all of that, but, in general, I would like to make a comment that the Company was spending ---+ talk about maintenance costs, it includes the cost of trucks, new trucks, customer stations and all of that.
We are running the Company on the basis of making sure that all of our plants operate reliably, but we were kind of I wouldn't say as tight as we should be on maintenance costs and we are very focused on that.
But I do expect that different quarters that number will go up and down.
Overall, for the Company, we have said that maintenance CapEx is something like $250 million to $300 million and that is the way we expect it to be.
With respect to the free cash, we've always said that if we have free cash, first of all, let's focus on having the cash and once we have the cash then the best thing that we can do to create value for our shareholders is to invest that in organic growth, new projects, which are at a higher return than our cost of capital.
So that is our number one priority and fortunately, we are seeing plenty of opportunities to do that whether it is on the large projects, on our HyCo projects and all of that and you have seen some examples of that already.
Now if you go beyond that, you can always increase the Company's dividend and all of that before you get to buying shares.
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Yes, there's nothing particularly unique on the way we did the calculation and if things reverse, you just expect a reversal of what you saw in the P&L here.
Are you referring to our HyCo business, or are you referring on our business in general.
Okay.
<UNK>.
So a lot of moving pieces if you look at the Gases Americas as a whole.
So there's currency because we've got South America, we've got Canada, we've got the natural gas, we have the incentive, we have seasonality in Chile and all of that.
And if you wash all of that out and you think about norming for volumes, I think we are in a similar range to where we have been.
Okay.
Very good.
Can I have your other questions and then we can answer them.
Interest expense is one.
The next one.
Okay.
Anything else.
Okay, very good.
I would like to obviously turn this over to <UNK> to go through the details for you.
So in terms of the interest, I would say the biggest driver of interest change is really driven by currency as the main item.
And then in terms of free cash flow, and I want to just reiterate an important point here.
I mean obviously we are looking at the all-in simple free cash flow metric.
We looked at a variety of other things as well, but I think the simplicity of our free cash flow metric is very key around EBITDA and then interest expense, cash taxes, maintenance and so forth.
There are some other things in terms of cash flow from operations that obviously myself and my team are looking at very closely.
Things that we have that go through there for example are severance payments.
As we reduce the size of the organization, we get it right-sized.
We are going to have severance payments that we don't have in our simple free cash flow metric, but it obviously is something that we are managing.
We are obviously managing also working capital and we've had a use of cash from a working capital perspective and we are managing that as well and trying to make improvements there.
And so there are some other things too in terms of timing of payments from equity affiliates, earnings versus dividends received and so the key point here is when we look at the free cash flow metric here for this ---+ the simple free cash flow metric for this quarter, we've turned positive.
There's other things that are beyond that, that again the people that need to be managing this are very clearly managing it and it has been a use of cash, but we are focused on improving our working capital.
Obviously, we are going to have to make the payments associated with severance, but we are looking to drive improvements in all regards.
But, obviously, <UNK>, as you realize, those are kind of one-time items that doesn't indicate our kind of operating rate on a steady-state basis, that's why we separate them.
<UNK> has that number.
Overall contributions.
So, again, you've got contributions and then there is the expense, which is non-cash, it's on the order of a net favorable, about $30 million or so inside of that and then again inside is also ---+ there's the severance.
The big item that we are seeing here in the second quarter associated with the cash flow that is not in the simple free cash flow metric is severance payments that we've incurred, of course, as well.
The severance payment is obviously significant, <UNK>, considering what we have (inaudible).
Our severance payments here for this quarter.
About $55 million, or something like that.
Okay.
First of all, <UNK>, as you say, we are 17% EPS, up versus last year despite the currency, the margin improvement of 440 basis points.
All of that is related to the cost actions that we have taken.
And most of that is on the first $300 million of so-called overhead cost reduction that we've been talking to you about.
We have made progress on the other $300 million, but that is still not significant enough to show in our bottom line.
It will, starting at the end of this year and in 2016.
So then with respect to volume growth, I would like to have <UNK> comment on that.
So I think volume growth right now in this current economic environment we are in, looking around the world is not something we want to be counting on going forward.
I think if you think about the restructuring we are doing, if we were in very high let's say economic growth, you could maybe be concerned on how you are going to keep up with it.
I think if you think about the economic environment we are in really globally today, the cost actions we are taking are perfectly timed for the environment we are in.
Yes, but in terms of specifically the question you had about what kind of a margin, with the volume growth, we will expect more than 50% leverage.
(multiple speakers) dropping more than 50% to the bottom line.
So operating growth that we reported for the US was 1% and I would say operating rates are in the high 70%s.
Well, I think, first of all, you saw one example that <UNK> mentioned.
Big River Steel is a very good example, that it would help us build density in one part.
But the other thing is that please keep in mind that most of our backlog, the capital for that backlog has been mainly spent.
So as we go forward, we don't need to spend $1.7 billion to support that backlog; that is already done.
Therefore, we would have plenty of cash in order to still maintain a reasonable CapEx level of expenditure, but we have plenty of cash to support our activities to increase density in different parts of the world on smaller projects, which is what we are going to do.
I'd like to have <UNK> add to that, please.
I think there's a path as well with your current assets to improve your density, which is simply customers who are further away.
We can think about what our cost to serve them is and what the right price should be and we can think about what that is for our opportunities who are closer to us.
These are things that don't change overnight, but with month after month of diligence this is something we can improve.
It is very difficult to quantify that right now, but obviously that would be a positive.
For us to quantify that at this stage would be a challenge, but until we know more about the details, but it certainly is in the right direction.
I would just like to make a general comment and I'll turn it over to <UNK> to elaborate on that.
But fundamentally we did see a softening of the economic activity in March.
I think everybody is seeing that and that seems to be continuing in April.
But, <UNK>, you want to elaborate on that.
Just to quantify it a little bit.
So let's say underlying oxygen, nitrogen, argon liquid volumes we would say were up in the low to mid single digits for the quarter as a whole and just to say the volumes in March and a little bit the March volumes in April, they are not quite as strong as one would have hoped.
Thank you, sure.
I will be more than happy to explain that.
You see, the incentive system that we have for 95% of our people is based on constant currency.
So in constant currency, we are increased ---+ our estimate ---+ if it was the same currency, it would be telling you that we expect another ---+ we would be saying that our estimate for the year is $7.
Therefore, we are accruing based on constant currency as an incentive for the people.
And since they are ---+ our people are delivering ahead of the plan in constant currency; therefore, we are required by accounting rules to accrue for that because they are going to get more than the 100% in terms of bonus.
We, in the second quarter, when we saw that, we had to accrue for both quarters because we haven't accrued for that in the first quarter.
That is why you see a big number of $0.15, which is really $45 million.
So our performance at constant currency is way ahead of the plan.
And as I said, 99% of our people ---+ I am obviously on an incentive basis on EPS because that's the right way, but if we have a plant manager somewhere where we are rewarding them, that has to be on constant currency because that's the only fair way of evaluating their performance.
I hope that clears the situation.
Well, it depends on how our people are performing versus their plan, but obviously in the third quarter we wouldn't have a $45 million charge, sure.
It would be a lot less than that.
Well, first of all, I would like to confirm what <UNK> said for the month of March.
With respect to hydrogen, please note that we are seeing actually an increase in the demand for hydrogen because it seems that the lower oil prices ---+ people are driving more and the refineries are running harder than ever before.
We do not expect a slowdown on hydrogen.
We actually expect it to be pretty robust.
Very good.
I'll answer the first question and the second question I will have <UNK> answer that.
On the equipment side, as you know, we do not have a very big equipment business like some of our competitors.
Obviously, the award of the Jazan project is a significant boost for our equipment business, but the rest of our equipment business is not that significant; therefore, we have not seen a significant drop and I don't expect anything material there.
But the Jazan project is going to be obviously a significant boost for our equipment business.
And then if I could, I will pick up the second part of the question in terms of pension and settlement.
We would expect to see a little bit more going forward.
It wouldn't be huge; maybe it's $10 million per quarter or so.
Again, the key point here is that we are focused on rightsizing the organization for going forward and we are going to ---+ we will point that out, we'll non-GAAP it and we will keep moving and focus on the underlying business performance, but I would say, <UNK>, it would be in that kind of a range for the next couple of quarters.
Okay, so let's start off then with Europe.
We have taken a large number of the actions we need to take in Europe.
There's always a little bit more of a delay in Europe between the action and when it shows up in the P&L, but we would expect to see a stepup in both quarters for it.
And <UNK>.
From Materials Technologies, I think we are doing well and we see opportunities for further improvement across our different businesses.
We have a broad portfolio, so it is six businesses, each one is with their own dynamics.
So we are very optimistic that we can continue to drive improvement moving all levers.
Yes, if you look at sequentially, the next two quarters tend to be the stronger quarters for us from a volume perspective.
So those are going to be ---+ they tend to be the stronger quarters that make our year.
Okay.
Can we just take one last question, please.
It would be difficult for me at this stage to speculate about 2016.
I'm sure you understand with all of the moving parts that there are in the world it would be difficult to do that, but the way you are doing the math, if nothing else changes, that is one way of coming to some kind of numbers, but I cannot really comment on that.
Okay.
Well, I would just like to ---+ before we go away - say thanks again for your questions.
Thank you for being on the call and we look forward to talking to you in the near future.
Thank you very much.
