PX
#Sure.
I won't give a specific number, but consistent with what we've said in prior quarters, we definitely do have several steel customers that are running below and they continue to pay.
This quarter is a little more difficult, simply because you have Carnivale and you have summer holiday.
We always tend to see a few more customers, even on a normal year excluding what's going on in the ground, dip below MTOPs.
Similar to what you see in Asia with the lunar new year.
So that's more a seasonal bit.
But primarily steel customers; they are paying.
And as you've seen from our numbers, we did see some sequential improvements, especially from a very low December, so I think that aspect has been pretty good.
In fact, we had a couple that were below MTOP last quarter and now they are above MTOP in Q1.
So I will start on a high level.
I think, <UNK>, we are constantly reviewing our geographic portfolio around the world to evaluate do we have the density that we believe we need to achieve the type of returns and the quality and the reliability of a business model that we need.
So that is always an ongoing effort.
And as you stated, we entered into certain countries in the Middle East and I would say the countries that we are in we do have a fairly meaningful density model, but not where we want it to be and we're not participating in Saudi Arabia, which is the largest country in the Middle East.
So we continue to evaluate Middle East and see what options we want to take there, but that's something our portfolio will always evaluate.
Russia is another area.
We've been building some density.
Given the situation in Russia today, we've slowed that process down, but we have built some pretty strong density in the Volga region as well as out in Yekaterinburg.
And the assets that we do have on the ground there are running as expected and running fairly well.
So those are two regions that we do see some opportunity to modify our portfolio one way or the other, but we will continue to evaluate that.
As far as Iran, we will clearly work with the US situation there and what they allow with companies.
But to say the least, the Europeans will have a head start on that just given the US relationship with Iran versus I'd say the European relationships will probably soften first.
We will keep our eye on it, but it will be tough I think for American companies to get in there before any European companies.
I think, <UNK>, clearly let's remember we took out about 7% to 8% of the workforce here toward Q2, Q3 of last year, so we haven't quite even had the anniversary of that yet.
But that was a series of actions we took and, frankly, before we took that action people were asking us that same question: what can we do.
We seem to have run out of levers.
I'm not saying that we would go to another action of that nature.
We feel that the actions we have taken are well in line with the market we are seeing, but I'd also say that we continually look for productivity opportunities.
As the markets change, whether volumes go down or volumes go up, it makes new opportunities in our logistics management.
You are seeing mill rates around the world change quite differently and it makes projects, in some cases, more viable that we may not have done in prior years, whether it's an increase in mill rates or, in some cases, a decrease in mill rates.
And so as the dynamics change on these type of input costs for us, as the dynamics change in terms of the customers we serve, it can create new productivity opportunities that may not have given us a sufficient return under prior scenarios.
We're always looking at these changes.
We're always trying to evaluate how long that they will be like this and then we attempt to take prudent actions.
But we've had to have a lot of productivity just to sustain the margin levels we've had.
As you know, every time we lose volume it falls at pretty high margins, so we need to take a lot of actions in productivity and pricing to negate that effect.
And that's what we've been doing.
We look to continue to do that.
I'm not anticipating any headcount action at this point, given how we are seeing the market, but I am anticipating we will continue to push productivity the way we always have.
And we will continue to try and find some opportunities around that.
I think when we look at the growth rates from a high level, I still firmly believe it's consistent with how we've laid it out in prior years and I think how most of the industry has laid it out in prior years.
That the growth rates are really going to be a function of, I will call it, four basic things, if you are looking at the top line.
It will be price and price tends to be, in my mind, more tied towards inflation.
So if we do see some inflation here that should help.
We've seen it in prior years with inflation; we've seen it in markets with inflation.
It tends to be tied up acquisition activity.
We are seeing more rollup opportunities in this environment and were an example of some of the acquisitions we're doing.
Then it's a function of both projects and organic volume.
On the project side it's clear backlogs are going down.
Customers, or potential customers, are not making capital investments they had.
This is part of the cycle you see in the capital cycle.
That is something that if that returns or when that returns, especially in some industries that have been fairly muted for a while, like mining, heavy equipment, and areas like that, that will give growth.
But if it doesn't return anytime soon then that will be an area of growth that will still be a little sluggish.
Then finally, to your point, is this organic that we've usually used IP as a proxy.
And to your point, what we have always found is emerging market IP multiples almost always tend to be stronger than developed market IP growth multiples.
It makes logical sense, because in an emerging market it tends to be more infrastructure-related growth; you tend to have a lot more application-related growth.
That gets to that whole intensity of industrial gas per capita and that is a real thing we see.
So when the emerging markets slowed and the commodity markets slowed, you saw a portion of the backlog projects be reduced as customers didn't spend money.
You saw the highest IP multiple markets be reduced.
In fact, go negative.
And the combination of those things really did make the, call it, growth algorithm weaker.
But the question is do you believe emerging markets are out forever.
I personally don't believe that.
I think we're in cycles like any other cycle.
Some of the issues we have today are demand driven.
There are one or two that might be supply driven, but when it does rebound you get back to those multiples you have seen in prior years.
Developed markets, in my mind, tend to be more closer to IP, a little bit above IP, but that's kind of how I view it.
So those are the factors of growth and right now, yes, we are in a position where a lot of people are not making investments.
Emerging markets are struggling and that has created some dampening effect on the growth.
But I do expect that will recover and return.
When.
I don't know, but we've seen these cycles in the past.
I could maybe put it this way, because I don't want to throw a bunch of numbers out there given just the complete uncertainty.
As you know, June will be another Fed decision, so our view was basically this.
We felt, I will use the word comfortable, enough to take spot rates and some forward rates as they stood a few weeks ago to call it for Q2.
Come June, all bets are off because we just don't know what could happen with the Fed decision.
And, frankly, we don't know what will happen tomorrow, let alone come June.
But, clearly, if rates are better or if spot rates hold, holding all else equal, we will have better EPS than what the guidance says.
And that is holding all else equal.
So there clearly is some upside.
I'd rather not get into numbers because what spot rate, what day, what currency ---+ there's a lot of moving parts there.
But you could probably do the math from what you get from our 10-Q we will file.
You will see what the average rates were and then you could plug in whatever spot rate assumption you want.
It would probably be a fairly rough proxy, but it can get you close enough.
We always go around on this internally.
My opinion is this: the equipment portion of hard goods does tend to be a leading indicator.
Clearly, if people stop buying the large automated equipment, if our customers are not confident in their backlog or growth prospects, they will not invest in new capital equipment.
So we saw that drop off first over the last, I call it, nine months or so.
What we are seeing now is some of the equipment, but also just consumables.
And consumables, in my mind, tend to move with gas, to an extent, as far as how they drop.
If you need less shielding gas, you probably use less contact tips or you lose use less wire.
Those things tend to run together.
I'd say, at this point, we've already seen some of the leading indicators on equipment and now we're kind of just seeing with gas and the consumables down together.
We don't have any projects with Petrobras.
In fact, we have very, very little business direct to Petrobras.
What I would say the impact of the car wash situation and the Petrobras situation in general has just been an overall kind of paralysis on any industrial investment.
Petrobras, like [Pemex] in Mexico, is a very, very big part of the economy.
It creates a very large supplier chain network of many various industrial companies that supply Petrobras directly and indirectly.
So there are many customers that we supply that supply Petrobras and, clearly, they are not doing as well.
A perfect example, a steel company that makes tubular steel.
They are not making much anymore given Petrobras.
But in my mind, the situation on that has been baked into our results for a year now.
Their sort of negative reaction from carwash and some of the curtailment in their activity has already been reflected in several quarters.
I think, if you look at Brazil now, the question we get is what's going on with the potential impeachment.
Would that make any difference.
Right now we just don't know, we just don't know.
Clearly, the financial markets have been reacting positively, if you look at the real, if you look at the BOVESPA, but we haven't seen much industrial change yet.
What I would say on an overall basis, the fact that they are trying to root out layers of corruption is a good thing.
And that should position them well for long-term improvement in the economy.
And we are seeing some positive developments in Argentina.
With Macri coming in with his ability to resolve some of the bond situation, his ability to issue bonds is creating a positive effect and renewed interest in Argentina.
I hope with Brazil we can get over this hump, but it's still going to still take time to play out and we will have to see.
We're not anticipating much recovery in Brazil this year and we will have to reevaluate for next year based on how we see the next few quarters play out.
We've been seeing, I will call it, slow and steady improvement, but very incremental.
We have had project pick up.
On an organic volume basis, we have been seeing some good strength in Spain.
Italy has not been as strong.
But I'd say overall for Europe, it's kind of continued to improve slowly.
Where we have the biggest headwind right now has been in our upstream energy business, primarily around the North Sea.
That has been a continual headwind that is really offsetting some of the organic growth rates in the rest of Continental Europe.
So I would say, when you exclude that upstream energy, we are getting organic growth in addition to our project contribution, so that part has been good.
And you see some of it in the margins as well as we've been able to get the value of that volume contribution and capture it with some improved margins.
I would say Scandinavia in general is a little weaker, as you would imagine, given it is an oil-based economy.
We continue to see interest and investments and strong volumes in Port of Antwerp area, which would make sense given the euro is a little weaker, given oil is a little lower, and fee shipping costs are much lower.
That really helped the competitiveness of that petchem enclave.
In Southern Europe, like I mentioned, Spain has continued to improve here.
We will have to see what the election situation, where that ends up, but it has still been improving.
Our medical business, which we have a fairly large medical business, is quite strong across all of Europe.
In fact, we just did some recent acquisitions, one in Italy in the medical, and also NOxBOX, which was UK, which will serve more global.
So that has been good.
And I would say in general in Russia, the on-site assets we have are running well as our customers are globally competitive, especially at this lower ruble.
And the merchant business and package business is somewhat soft as you would expect in a stagflationary economy, which they still are today.
So, in general, the Northern in Benelux is doing well, Southern doing well.
Scandinavia is weak.
Russia on the ground is still a little weak, and anything upstream energy is quite weak.
But slow and steady improvement is the general view we have.
Yes.
So we hope to finalize that here in a few months, so we're still going through the last remaining requirement.
I don't anticipate any significant obstacles on that.
We would still consolidate it, but to your point there would be a minority interest impact with that JV structure.
So yes, that would be the way to model it.
Inversely with Yara, we would take what today is a minority interest impact and that would go away with the consolidation of the JV.
And then with the Yara CO2, that would obviously just be a brand-new consolidated acquisition.
With the Yara version, we just have one more real regulatory hurdle here that we are not overly concerned about that should be fine.
So I expect both of those by back end of Q2, hopefully, should be finalized, but you never know on the timing.
So we just need to keep it open.
In North America, I would say metals.
There are a few metals customers that will be below take-or-pay.
I will say that we are getting paid on all of them around the world, frankly, we're getting paid, but a few in metals.
And some, when you see turnarounds, in the Gulf, but again that's more seasonal.
As there are turnarounds, they fall below and we see that each turnaround season.
So there's no concern on that front.
Well, we do have double digits from food and healthcare, probably 10% to 15% growth rates.
On the metals, yes, it's dropping at a rate I would say consistent, if not more, than industrial production.
But remember we have take-or-pay structures so they will mitigate that from a contractual standpoint.
What we are seeing is, from my view, on the industrial side the customer volume levels are fairly consistent with what you are seeing in the overall results, but our contract structure helps mitigate that.
Then on the more resilient industries we continue to see very strong results.
When you add that together, plus price you're getting with some of the inflation impacts there, it is allowing the organic growth to still be fairly respectable.
But we still need more work in that area.
As I mentioned, we are still going to work more on the pricing side and we will have to see how volumes bear out in these coming quarters.
But so far with April, as expected, coming out of the March results.
I would say, in general, Yara we have encapsulated.
It's more a back half; I wouldn't anticipate much contribution in Q2 here.
But from a back-half perspective we are accounting for a general bucket of the acquisitions and I would say Yara is one of them.
So yes, it would be in there.
Okay, yes, because my first answer would've been that the pricing is more geographic dependant, on a lot of cases that you know.
So within the US, I would say ---+ and we had this discussion a little bit earlier ---+ there will be some mix effect that could influence that when you have some higher-margin sales that are going away.
And we've seen some of that, so that could negatively influence that.
But I would say pricing is still very, very regional.
It's within a couple hundred mile radius and it tends to be a function of any contracts that may be renewing and/or new opportunities that could be coming up in that region.
And it will just be a function of the product supply available for that.
But it's very, very small, transaction by transaction.
And that's why, every time we continue to look at this, what we tend to see is at the top of the house inflation tends to be a fairly good proxy for it.
There are some regional differences that could be driven either by geographic differences, even within the US, where product might be tight or a little looser.
And there could be some industry perspectives where, for example, a certain end-market may get extreme high value out of a product and the pricing might be a little better than, say, another end-market where there are alternate substitute, maybe different than industrial gas.
From that perspective I'd say it's not too different than what you may see in other industries, but given the contractual nature, given the proximity of supply, really on the top of the house inflation still tends to be a good proxy in my mind.
I'd rather not go down there, <UNK>.
How people define mix in and of itself is a whole other equation.
We tend to do straight volume on molecules and then the balance goes there, which we consider mix.
Because there's customer mix and there is product mix, right.
There's two types of mix.
So rather than getting into that on this call, let's just say it's all in there.
Sure.
Clearly, we continue to look at every market and we continue to look at it from a return perspective and an opportunity set.
Our focus on resilient markets doesn't mean we are ignoring industrial markets.
What it really means is this: when we look out, at least in the near term ---+ and it's no surprise that there is a bit of a commodity and emerging market retrenchment going on right now ---+ that some of these more cyclical markets could take some time before they will show any new growth opportunities.
A rebound of lows we are already connected to them.
Our pipe is already there; our tank is already there, so coming off of a low and rebounding we will just automatically get without focusing or without investment.
They are still under contract, so there's no worries that the rebound we wouldn't be capturing.
The focus is more on new investment.
Where is money being spent today.
There is a good amount being spent in these resilient areas.
The growth trajectories in those resilient areas are greater, excluding the rebound effect, on some of the more cyclicals.
So that's why our focus has been there.
But it doesn't mean we are not focusing on all the growth opportunities we have.
For example, in South America we still see some opportunities for decamping in some areas that would be cyclical.
We've done that in the 1990s and it was very successful for us, and we will do it again now.
So those kind of things continue to happen.
But when we look at healthcare, we look at food and beverage, we look at some consumer-related end-markets like refining and electronics, they are growing well.
We are focusing our applications technology, our salesforce, and even some of our acquisitions towards those resilient market, and they will give a nice compounded growth that is more based on either demographics or more resilient trends than kind of up-and-downs that we will see in some cycles.
So the view is if we have more focus on there, we get those compound growth rates, and cycles return, you can get a pretty strong growth and a growth rate that is a little more stable.
So that's how we've been doing it.
By no means do we regret any of the exposures we've had.
They've served us quite well and they continue to serve us well.
It's just that the growth opportunities in those areas are not as great right now in this current environment.
