Air Products and Chemicals Inc (APD) 2004 Q3 法說會逐字稿

Good morning everyone and welcome to Air Products and Chemicals third quarter earnings release conference call.

Just a reminder that you will be in a listen-only mode until the question and answer segment of today's call.

Also, this telephone conference presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved.

Air Products will be recording this conference and may publish all or a portion of the teleconference.

No other reporting or redistribution of this telephone conference by any other party is permitted without the express written permission of Air Products.

Your participation indicates your agreement.

Beginning today's call is Mr. Alex Masetti, Director of Investor Relations.

Thank you, David.

Welcome to Air Products earnings teleconference.

Today, our CFO Paul Huck and I will review our fiscal third quarter results.

We're also joined by Phil Sproger (ph), who, as an announced in late June, will be replacing me as Director of IR.

We issued a press release this morning and it is available on our website along with the slides for this teleconference.

Please go to airproducts.com and click on the scrolling red banner to access the materials.

Like last quarter, we have included an appendix to today's slide package with additional detailed information.

Instructions for accessing the replay of this call beginning at 2:00 PM Eastern time are also available on the website.

Please turn to slide two.

As always, today's teleconference will contain forward-looking statements based on current expectations regarding important risk factors.

Please review the Safe Harbor language on this slide and at the end of today's earnings release.

Please turn to slide three, and I will turn the call over to Paul.

Thanks, Alex.

Good morning and thank you all four being able to join us today.

Last quarter was my first earnings teleconference and at that time, I told to you our top corporate priority was to improve return on capital by leveraging our existing assets, driving productivity, remaining disciplined in where we spend our capital and improving our business portfolio.

I'm pleased to report that ARONA, our return on capital measure, increased 30 basis points sequentially to 9.2 percent on a four quarter basis.

The improving ARONA trend seen in quarter two has continued into quarter three and the run rate ARONA based on our quarter three results is 10 percent.

Additionally, operating leverage in our gases business was strong this quarter as margins improved to just slightly below 16 percent, and our earnings per share this quarter exceeded street expectations by 4 cents and beat the top end of our guidance range by 3 cents.

We are very pleased with this performance.

We are making progress, but we still have a lot of work to do.

A few of our businesses are still underperforming and we're working to fix them.

Our chemicals results this quarter were a disappointment and we will cover that later.

And while we are getting productivity, we still have significant opportunities following our successful SAP implementation.

Also this quarter, we announced a 26 percent increase in our quarterly dividend, reflecting our confidence in our ability to grow earnings and cash flow in the future.

Before I turn to the quarter's results, I want to remind everyone that in last year's third quarter, we took a $96.6 million after-tax provision for a global cost reduction plan worth 43 cents per share.

My comments today in describing our results will be exclusive of this charge.

The reconciliation to GAAP as-reported numbers is detailed in the backup slides and in the press release.

Now let's turn to the quarter's results on slide four.

Today, Air Products reported net income of $163 million, or diluted earnings-per-share of 71 cents for the quarter ended June 30.

Net income increased by 32 percent and diluted EPS was up 29 percent compared with the prior year.

Strong volume gains drove results again this quarter.

Our strategies are working.

Our overall business is strong, the performance gains are reaching the bottom line and we are improving returns.

Now let me talk about the factors that affected the quarter's performance in terms of earnings-per-share.

Higher volumes broadly across the gases businesses contributed 16 cents.

Pricing and raw materials costs together were a negative 1 cent.

Other costs were higher by 6 cents, including a litigation reserve, higher pension expense, higher incentive compensation expense resulting from our increased earnings and higher manufacturing costs in the chemical segment.

Currency added 3 cents to the quarter as the dollar was weaker year-on-year against most major currencies.

Acquisitions added 2 cents, including Ashland Electronic Chemicals, Air Products healthcare bolt-ons and Sanwa (ph) Chemical.

Lower interest expense and minority interest each contributed a penny, taxes are 2 cents favorable and we have a higher diluted shares outstanding, given our 26 percent share price increase year-on-year.

Now, please turn to our financials on slide 5.

Record sales of 1.9 billion were up 16 percent from the prior year.

This was due to higher volumes across our four growth platforms and the rest of our gases businesses, along with acquisitions.

A detailed analysis is included in the appendix.

Sequentially, our revenues were up 2 percent with strong gases volumes partially offset by lower chemicals volumes.

SG&A on an absolute basis is higher than in the prior year, principally due to acquisitions, currency effects, higher incentive compensation expense, inflation and increased spending due to higher business volumes.

On a percentage of sales basis, SG&A was 12.9 percent, which is well below both prior year -- which is below both prior year and prior quarter, reflecting the impact of our cost reduction efforts.

We remain on track to achieve the savings associated with the global cost reduction plan announced in quarter three last year.

All of the actions in the plan have been completed, with the exception of the divestiture of our EM&D (ph) business, which is pending further regulatory approval.

Operating income of $234 million was up 23 percent from prior year and up 11 percent sequentially.

Both of these increases were principally driven by volume gains.

Our net income and EPS grew 32 percent and 29 percent versus prior year, respectively, and grew 15 percent sequentially.

And, most importantly, our return on capital is improving.

Our debt to debt plus equity ratio declined about 200 basis points due to continued capital discipline and strong cash flow in the quarter.

Free cash flow for the quarter was 143 million, in line with last year.

The large sequential increase is because last quarter, as you will recall, we funded the majority of our FY '04 pension plan contributions.

On the balance sheet, receivables are up about 30 percent versus prior year and 9 percent sequentially.

Our DSO increased to 71 days from 67 last quarter.

This increase was expected as we transferred a large portion of our business onto (ph) SAP this quarter.

That implementation has gone very well.

However, it has been our experience and the experience of others to see receivables increase post go-live due to process changes with the customer.

We expect that receivables will decline in the next quarter as we work to streamline our new processes and work with our customers to collect the money.

Now I will turn the call over to Alex to review our civic segment results.

Thanks, Paul.

Please turn to slide six, gases segment.

Worldwide gases sales of $1.3 billion were up 18 percent compared to prior year.

Revenue growth was driven primarily by higher volumes across our base businesses, electronics, energy and process industries and Asia, along with acquisitions in our growth platforms.

Pricing was neutral with higher liquid bulk and packaged gas prices, offset by anticipated lower average selling prices for electronic materials.

Sequentially, gases sales were up 4 percent, principally due to stronger volumes and EPI and electronics.

Gasses operating income of $213 million was up 26 percent from the prior year on higher volumes.

Sequentially, operating income increased 12 percent from volume gains and some productivity.

Segment operating margin was 15.9 percent for the quarter, up more than 1 percent year-on-year and sequentially.

The year-on-year improvement was volume-driven.

The sequential improvement was generated by better volumes and productivity.

Let me now provide a few highlights by major business.

Please turn to slide seven.

In electronics, we continue to see very strong business activity with sales up 39 percent year-on-year.

Sales were up 10 percent versus prior year, exclusive of the Ashland acquisition.

Given our leading market position, we continue to see very strong volume growth.

Volumes for several major specialty products are up about 30 percent year-on-year.

Volume gains continued to more than offset anticipated average selling price declines.

Division operating income continues on the upper trend line, which began in early FY '03.

Semiconductor capital spending is projected now to be up about 50 percent in calendar year '04 with DRAM and foundry accounting for 40 percent of the total.

These industries are concentrated in Korea and Taiwan.

Flat-panel capital spending is also increasing significantly, and again, these investments are primarily in Korea and Taiwan.

In addition to strong specialty materials growth, we're seeing this in improved orders for our gas handling equipment.

Our win rate remains strong with major supply positions at 10 of the 16 operating 300 millimeter fabs and at 60 percent of the flat-panel fabs in Taiwan and Korea.

And at the moment, there about 14 projects under construction in the industry, including all silica and flat-panel fabs, and we have a major supply position in half of them.

Recently, some have expressed concern about slowing rates of growth in the industry.

This is not having a noticeable impact on our business as underlying silica and square inch growth and flat-panel area growth remain strong and these are the drivers for our business.

Early in the quarter, we announced the expansion of our CMP venture with DuPont.

This includes incorporating additional CMP activities that that DuPont obtained from ChemFirst (ph) and that we obtained from our Ashland acquisition.

We have named the new leadership team and are now consolidating facilities for this $30 million company.

These moves should expand and strengthen our position in the rapidly growing CMP market.

Our first of two nitrogen facilities serving Samsung, Jenn 7, flat-panel fab in Tanjung, Korea is nearing completion.

We will start product supply this August.

This facility will also produce liquid products for the local industrial market.

And as you know, early in the quarter, we announced a 50 percent expansion in nitrogen trifluoride capacity to meet the projected needs of our customers.

Our expansion is on-track for a spring 2005 onstream.

On slide eight, in EPI, we saw a strong double-digit volume gains year-on-year in hypo (ph) products and in oxygen and nitrogen.

Hydrogen growth continues to be led by the ongoing trend for refiners to meet lower sulfur specifications.

And in this quarter, we saw strong spot productivity in both hydrogen and CO.

Last week, we announced a new 110 million cubic foot per day hydrogen facility in Louisiana to serve the requirements of Motiva (ph) and Marathon refineries and to supplement our pipeline system.

This additional capacity will add to our leading Gulf Coast franchise and is expected to be onstream in late 2005.

And on Monday, we announced a new 80 million cubic foot per day hydrogen facility to serve the requirements of the Suncor and Shell refineries in Sarnia, Ontario.

The plan is expected to come onstream in spring 2006 and can also be a feed source for our merchant liquid hydrogen facility located in Sarnia.

Starting from a 2001 base, we have now been awarded nine major hydrogen supply contracts for North American refineries requiring six new production facilities -- three in the Gulf Coast, two in Canada and one in Kentucky.

We were also awarded two smaller sized on-site hydrogen facilities for refineries in Europe during this period.

We are successful in this business because we offer customers a combination of plant performance, reliability, experience and services that are unmatched.

Bidding activity remains high as refiners finalize projects to meet 2006 and 2007 fuel specification.

Please turn to slide nine.

In our North American liquid bulk business, the volume index is up 4 percent year-on-year.

We see increased year-on-year volume momentum, in-line with the improving economy.

Liquid oxygen and liquid nitrogen volumes increased 5 percent.

Average U.S.

LOX/LIN (ph) pricing was essentially unchanged from last year.

Pricing performance remains strong in this period of increased business activity and volumes.

Now let's take a sequential look at this business.

The volume index has been about flat for the past three quarters.

While we are concerned about the lack of improvement in this trend during this manufacturing recovery period, we have improved the profitability of this business by successfully managing volume, price and cost.

Going forward, our new business signings and the quality of these signings indicates we're on track for improved volumes and profitability for this business.

Please turn now to slide at 10, European merchant gases.

In our European liquid bulk business, the volume index increased 3 percent year-on-year, including the impact of several customer conversions from liquid to on-site supply.

European manufacturing appears to be improving.

Based on the available April and May data, manufacturing grew year-on-year in the 2.5 to 3 percent range in the quarter, the best performance in about three years.

European LOX/LIN pricing is up 4 percent, influenced by continue pricing actions, as well as the mix effect from the conversions I mentioned earlier.

Packaged gas volumes were up 4 percent, reflecting positive manufacturing growth.

Additionally, we're benefiting from continued success with new product introductions.

Pricing remains positive here as well.

On slide 11, in our Asian liquid bulk business, volumes were up a strong 17 percent, driven mainly by solid demand across the region, particularly in China, Korea and Taiwan.

While we have experienced some slowing in steel in northern China, overall demand remains quite healthy and new business signings remain strong.

Sequentially, liquid volumes increased 7 percent.

We recently announced a doubling of our liquid capacity in Guang Zhou, Southern China.

When complete in early 2005, the facility will produce over 800 metric tons per day of liquid products, making it the largest liquid production facility in China and one of the largest that Air Products operates worldwide.

And on our health-care growth platform, strong growth in continued in the third quarter with global homecare revenues up 23 percent.

In our U.S. homecare business, we completed two more bolt-on acquisitions in the quarter -- one in Atlanta and the other in western Pennsylvania.

That makes four so far this fiscal year.

As we've said in the past, we continue to expect healthcare related acquisition spending to be in the $50 to $75 million range per year.

Our expectation for the year is in the upper part of this range.

Now let's move on to review our chemicals segment results on slide 12.

Worldwide chemical sales of $453 million were up 8 percent compared to prior year, led by higher volumes in a number of our performance materials businesses.

Volumes in our intermediates businesses were marginally lower.

Sequentially, sales decreased 6 percent, primarily due to lower volumes in intermediates, partly due to seasonality and partly due to a planned customer average.

Overall, performance materials volume was unchanged versus prior quarter.

Versus prior year, performance materials volumes were higher across emulsions, surfactins (ph) and epoxies.

Emulsions volumes were up in all regions.

Operating income of $39 million was up 3 percent versus the prior year as positive volumes were largely offset by higher manufacturing costs.

Sequentially, operating income decreased on lower volumes.

As a result, segment operating margin was a disappointing 6.6 percent for the quarter, below prior year, prior quarter and our expectations.

To address the higher raw material costs, we have implemented price increases across a number of products.

We're beginning to see success in passing these increases through and these actions need to continue to fully recover our costs.

In emulsions, we're also taking actions to shift to a simpler, lower cost business model and this includes reducing the volatility of our raw material cost sack (ph) going forward.

We also must spread margin to make this business more successful.

We announced a price increase effective late June and expect to show benefits from this next quarter.

As you know, last year, we announced our European methylamines and derivatives business was for sale.

The business was then sold subject to regulatory approval.

We have secured approval from the regulators in Spain and Germany.

In the UK, the regulators have referred the proposed sale to the Competition Commission for further discussions.

This referral has delayed the closure of the sale.

Also, regarding our domestic methylamines business, the receipt of methanol under our offshore sourcing agreement originally scheduled for this summer has been pushed back to this fall due to start-up delays at the Atlas methanol plant.

We now expect to see benefits from this sourcing arrangement starting Q1 '05.

Next, let me cover our equipment segment on slide 13.

Sales of $102 million increased on higher air separation plant sales.

Segment operating income of $5 million increased on higher air separation and LNG activity.

We received another LNG heat exchanger order in the third quarter, which is the third order we've received this fiscal year.

While the sales backlog is down slightly, the quality of our backlog continues to improve.

Now, I’ll turn the call back over to Paul.

Thanks, Alex.

Now please turn to slide 14.

To summarize, we made solid progress in this quarter.

ARONA was up 30 basis points sequentially to 9.2 percent with an underlying Q3 ARONA run rate of 10 percent.

Earnings per share, again, excluding the disclosed item in last year, were up 29 percent to 71 cents and it was up 15 percent sequentially.

We realized significant year-over-year operating leverage with sales up 16 percent, operating income up 23 percent and net income up 32 percent.

Sequentially, we also saw significant operating leverage with sales up 2 percent, operating income up 11 percent and net income up 15 percent.

Included in this leverage are productivity improvements, as shown by our SG&A performance and the continued debottlenecking of our assets.

As I said earlier, we're on track to achieve the benefits defined in last year’s global cost reduction plan.

During this past quarter, we have brought a major portion of our business onto SAP.

The implementation has gone well and we have plans in place to realize the benefits.

And as you've heard today, we have stayed focused on our growth platforms with NF3 and CMP expansions in electronics, two small acquisitions in health-care and strong gains in volumes and performance materials.

We secured over third LNG exchange or order of the year and announced the expansion of our liquid capacity in Southern China.

And this month, we announced two new major products projects in EPI.

We're pleased by the progress we made this quarter, but as I said, this is just the beginning.

Our top corporate priority remains improving return on capital and achieving our 13 percent ARONA goal in FY '07.

Now let's turn to the outlook.

Our leading positions in growth markets, combined with our operating leverage in productivity initiatives, are driving our second half improvement and will have a positive impact on our returns going forward.

If you recall, in last October, we provided EPS guidance of $2.35 to $2.65 for the full year with a base assumption of 2 to 6 percent manufacturing growth in the U.S. and a median silicon (ph) growth assumption of 10 percent.

Domestic manufacturing is now forecasted in the 4 to 5 percent range and the silicon growth is forecasted at 20 percent plus.

Currencies and taxes are more favorable than originally expected, but raw materials and our equipment outlook are not as favorable.

With his backdrop, we're comfortable with moving our EPS guidance for FY '04 to $2.60 to $2.65, which is at the top end of our original range for the year.

That has us expecting earnings-per-share within 69 to 74 cents for our fiscal fourth quarter, which compares with the Q3 earnings run rate of about 71 cents per share when adjusting for the onetime positive and negatives in the quarter.

Our range for quarter 4 takes into account a number of seasonal factors that can influence earnings.

It also builds in some very variability around customer activity levels, given the recent near-term uncertainty about slowing economic growth.

Longer-term, while a number of the people have voiced concern about industrial activity in the next quarter or two, we are not as bearish and believe the fundamentals remain strong.

Finally for the full year, our property plant and equipment capital spending should come in at about $700 million within our original guidance range.

Now please turn to slide 15 for some clothing remarks.

Again, I want to emphasize that our top corporate priority is to improve our return on capital with a goal of 13 percent in fiscal year 2007.

We will continue to load our assets as the economy grows.

We will focus capital and resources on our leading positions in our growth platforms.

We will deliver the productivity we have invested for and we're going to continuously improve our portfolio of businesses.

We're heading in the right direction.

We have positions of strength and intend to leverage them and our leadership team is committed to delivering the results.

One other point before I take your questions, as most of you know, after almost four years in investor relations, Alex is moving on to become the Regional Vice President, Refining and Process Industries in the U.S.

Alex, thanks for your outstanding service and many contributions to the investor relations functions at Air Products.

Replacing Alex is Phil Sproger, who most recently led our European tonnage gas business.

Phil has 23 years of experience with Air Products.

He moved back to the U.S. with his family last week, and I know he looks forward to getting out and meeting with our investors and analysts.

Thank you, and now, I'll turn the call over to David to take your questions.

(Operator Instructions) Robert Koort, Goldman, Sachs.

Good morning, guys.

A couple of questions.

On the North American gases business, you mentioned that you had flat volumes and I guess we're seeing different things from your competitors.

You mentioned there was a customer mix upgrade that helped profitability, but do you have any greater clarity on why you have not seen the industrial recovery in your results?

And is this just serendipitous that it moved to higher profit customers, given that your SAP implementation is ongoing?

Bob, I think -- and the thing which Alex said in the time he reviewed that, in one of the things which he said, we are being very careful here to manage our volume price and cost equation in this business.

And we've worked very hard to get the business back to exceed the cost of capital for us.

And so you can do some things, go out and chase volume in this business and hurt your returns.

And given all of the hard work, we just are not able to do that at this point in time and don't want to do that.

It's not a good thing for us.

So in going forward, we have put a good emphasis on signings and quality signings of things.

So as he said -- and we would expect volumes to improve, we also expect profits to expand here.

Okay, and if I could just follow up on the chemical side.

I guess extremely discouraging that you were not able to get any price, given extremely elevated raw material environment.

Do you think that is an Air Products issue, or do you think your competitors are also suffering there?

And then lastly, you gave some increased enthusiasm for your fourth quarter results, even though the methanol contract is not going to hit the quarter.

Should I read into that then that the methanol contract is really not such a big deal?

The answer on the last one, no, you shouldn't, it is a very important thing to improve the amines business for us in the U.S. here.

So it is a big a big deal.

And we've previously told people it's about a penny a share a quarter, and so we treat that very importantly.

But, if you go back on the chemicals business, I think a lot of people are feeling the squeeze.

And one of the things which we did at the end of the third quarter is we have gone out and raised prices again.

And so by putting those price increases out there, and we have seen some good support on those things, and so we believe our chemicals business will improve in the fourth quarter right now.

Okay, thank you.

P.J.

Juvekar, Smith Barney.

Hey, Paul.

I was glad to see that you're staying out of acquisition game.

I want to go back to the last two acquisitions that you made last year.

And they have been accretive on the EPS line, but have they been accretive to your return on capital or ARONA?

On the acquisitions, and they are a hard thing to be accretive to in ARONA in the first year, P.J., because what you do is you bring in your assets at the higher value and you write them up and so that has a mass impact on it.

But one of the things which you do is that your other assets go and they drop down during the year.

And so in the balance of those things, if we go out and don't go wild on the acquisition front and manage it, we're going to be okay.

So you could become accretive in the second year?

That's a hard-won for each of the businesses.

In the health care business, it's probably a little bit easier for things initially because the multiple which we pay is lower in those businesses typically on those things.

On the small ones, and that is especially true.

But I think the important thing is on the Ashland and the health care acquisitions is that they have not been a real drag on ARONA either and people should understand that.

That has not been our problem.

Our problem has been our chemicals squeeze which we've seen in some of those things.

And so everything which we're doing is consistent with Air Products' pursuit of the goal in FY '07 of 13 percent.

Okay.

And then quickly on electronics on MF3 -- what sort of price declines are you seeing in LCD applications, as compared to semiconductors?

Well, if you look at the whole thing overall, and the declines which we're seeing are in the midteens in prices overall on an average selling price basis.

As far as if you look at the prices on the LCD, because the customers are larger, P.J., they are going to get a bit better price, typically is what happens.

And that (indiscernible) industry, a large customer is going to get a better price.

The other thing is the spec is not the same in those two, in LCD and semiconductor.

Okay.

And then finally on MF3 again, you're manufacturing all of your MF3 in one location, you're transporting it around the globe, prices are falling.

It looks like it is getting commoditized -- that's the classic sign of commodity.

And us it gets commoditized, are your costs in line with the commodity structure?

We believe we have the best cost structure of anyone in the industry.

And we will continue to go out and lower our cost in this product in both in the manufacturing and by the work we have done to take the plants and expand it without putting capital in there.

And the other thing is in looking at the supply chain and what it costs to go in and to move that product around, to put it into the containers instead of into the individual cylinders and deliver them that way in bulk to the customer.

My question is -- are you lading your cost in your in your NF3 business?

In loading the cost, what do you mean?

Are you loading your cost either per unit cost or whatever?

Yes, yes, it is going down.

That is true.

The per-unit cost for NF3 has gone down on a steady basis for us.

Okay, thank you.

P.J., this is Alex.

Let me just add a little color to that too.

In terms of the recent investment, we announced a 50 percent expansion in our NF3 capacity, we built in average design price declines.

As we have mentioned, these are expected going forward due to the mix impact, particularly from the very large flat panel customers and the high growth in flat-panel versus silicon in our projection.

So with that pricing curve, the return on that NF3 expansion is a very, very attractive project.

So that is all built into our assumptions and the scale that we are achieving allows us to continue to drive down our costs, as Paul mentioned, and we will continue to be the leader in this product line.

Thanks, Alex.

What I was trying to get at is, if your prices are going down double-digits, are your costs going down double-digits as well?

The costs are also decreasing in that area, yes.

Peter Butler, Glenhill Investments.

Good morning.

I would like to ask about this methanol contract.

You said that you're getting a benefit once per quarter.

Yes.

Is that just on the amines business, or is that a net number for what you're doing -- you're selling them oxygen, as well I believe?

No, it is just on the amines business, Peter.

And there will be a benefit of the plant in which we are not going to -- I'm not going to give the impact of that one.

What is the basis for the price you pay on the methanol?

I'm not going to disclose that.

It's in the details of the contract and we are not able to do that.

So far in the discussion on the electronic materials, the word earnings has not come up yet.

How are the earnings in that business doing sequentially and year-to-year?

The earnings are up on a sequential and over '03, so the earnings are good.

Earnings are good -- hunky dory, thank you.

David Begleiter, Deutsche Bank.

Good morning.

Paul, on SAP cost savings going forward, when can we start seeing the benefit on the bottom line?

We should start seeing some things in the first quarter of '05, David.

Will there be a program announced in conjunction with that or a charge taken?

Regarding a charge, and this books (ph) on everything we do.

At this point in time, we're going through the operating plan and taking a look at this and the operating plant goes out a couple of years for us.

And if we need a charge, we will include one.

But right now, it is still not certain for us.

Just on HICO (ph) and Alex's new job, what is the pipeline for additional bids going forward, given the recent success?

Alex, do you want to comment on that?

Sure.

As I indicated, there's still high bidding activity.

There's quite a few refiners in the U.S. that have yet to undertake projects to meet the '06, '07 regulations.

And then of course, there's additional regulations out through the end of the decade here for off-road diesel.

So it's still a pretty significant pipeline of opportunities over the next year or so.

And then we expect the trend to increase further in Europe with additional regulations there and then longer-term, beyond 2010, we expect that there will be some growth in hydrogen for companies like Air Products in Asia and China in particular as they move to clean up their fuel.

So there is a fairly long and significant pipeline of opportunities here.

Paul, how will this in impact your CapEx spending in '05 and '06 with these recent HICO (ph) wins?

As far -- regarding on the CapEx, we are still taking a look at our plans.

But certainly, it is going to increase in '05, as far as this thing going forward.

And previously, I had said about 800 was the number, I think it is going to be a little bit above that. but let me go through the plans and give you a number in the fourth quarter call.

Thank you very much.

John Roberts, Buckingham Research.

Good morning.

I just wanted to check -- in the electronic sales in your quarter to date update back in May, it was up 13 percent excluding Ashland and the equipment sales.

For the quarter, it's only up 10 percent.

So that would imply it decelerated in June and June would've been a more heavily weighted month.

So it sounds like it decelerated meaningfully in June.

A thing which you always have to be watchful of here is on the equipment business.

And things go up and down in the electronics business and we have a long supply chain in Asia.

So I would not go out and react overly to a single month.

As I look at this and I look at the trends of the month, we still think things look strong.

In the appendix, you talk about a management change at DA Nanomaterials (ph).

Could you talk about what precipitated the change and what's better now?

It was contractual between us and our partner.

Okay, thank you.

Jeff Zekauskas, Chase Morgan.

Hi, good morning.

I have two questions.

The first is, you have shown a really nice progression in your SG&A expenses, in that if you look at them on a sequential basis, they have decreased from the second to the third quarter.

And so I was hoping that what you could do is you could expand on your sort of cost reduction opportunities and your ability to leverage your overhead.

The second question is -- it seems that the working capital you were using has sort of ballooned; that is, at least when I look at your funds plus segment, it looks like you're using about 420 million more in working capital and your cash from operating activities is lower than it was in the previous year for the nine months.

Does that reflect a temporary blip up?

That is, do you have an issue in trade receivables, or is that just an odd number having to do with your SAP implementation?

Okay.

So first, regarding the overhead equation for us.

And the overheads went down on a sequential basis for us.

Now as I told you last quarter, that was expected for us to go down and we had a few things which were some unusual costs which came in in the second quarter, and they went away.

But the news is still good on there in that they went down and we beat our goals a little bit there.

Going forward, the selling and G&A expenses are going to depend upon the cost reduction efforts and then the volume of the business going forward.

So -- and there are impressions (ph) which actually go against one another.

But on the cost reduction, those things are concentrated around trying to take advantage of the SAP system, which we turned on.

And so we should see pressures to take those costs down over time and that they should lower themselves as a percentage of sales going forward.

And that is a measure.

And so a thing which I'm trying to do here is take a look at how I spread margins.

If I spread margins, I increase returns, Jeff.

Okay on that one?

Yes, that is fine.

Good.

Regarding the trade receivables there, and I made some comment and we do believe it is onetime.

However as I think I've said before, the accounts receivable for us are too high.

And we have an opportunity here to take down our capital stack and to bring cash back into the Company by doing that.

Now in the first quarter -- well, in the fourth quarter, I expect to get some of that back.

But longer-term in using the SAP system, I expect to get even more of that back going down.

And so -- and that is a thing which we're looking to drive down.

It's $272 million over the first nine months, and that is something which we are looking to drive down.

The other thing in there is that that the line is 122 up there, that really has to do with accrued taxes and deferred taxes and some changes there.

And that really is good news in that we are not paying as much in taxes there.

And that gets at that full amount, 400, which you talked about, Jeff.

Okay, so from your point of view, were there small changes in the receivables?

It was across the board in the businesses.

And the reason why -- and you are changing the timing and the invoice and everything on customers and you have to give the customer used to that going forward.

And so you need to go out and to talk to them and work with them and get them back on schedule.

So that is something which we saw in the other releases, but the other releases were not as large.

And so it's a lot more noticeable at this point in time.

And as we go through this and take ourselves down the road a quarter or two, those things come back to us.

Okay, good luck.

Okay, thanks.

Donald Carson, Merrill Lynch.

Thank you.

A couple of questions.

You mentioned in the release that operating costs associated with portfolio management cost reduction efforts could reduce your projected earnings.

Are you signaling another major restructuring program here similar to third quarter of last year?

That language has been in our release for awhile, Don, because of the opportunities which we may have -- and as we go forward and make changes, it may have a cost associated.

And so it's there kind of to warn people that that's an opportunity.

And for some people, it could be a signal and for others, it could be -- well, it is the way our (indiscernible) to thinking about this and they just want to warn us.

Based on your review and your productivity plans, do you anticipate another major restructuring program similar to what you announced in 3Q of last year?

We're going to take out a large amount of cost in our plan and we have talked to people about that.

And that cost is spread over the whole cost stack.

It involves people to some degree, but to a larger degree, it involves the cost of the supply chain, things like on our sourcing costs on the raw materials, our cost to deliver products to people, etc.

And so we cannot comment at this point on whether we're going to have a charge in the fourth quarter or in the first quarter next year or anytime going forward.

But we want people to understand that, in the transition of the business, there could be some costs which are not in our outlook at this point in time.

Follow-up on the raw material, the methanol will be delayed somewhat.

But Alex, you mentioned about had you are working on your cost stack in emulsions.

DO you have something going on?

Obviously, you have bandaged (ph) your remaining major raw material cost in chemicals.

Are you working on anything there where you could use some of that low cost methanol you have and somehow toll it into relatively low-cost spend (ph)?

Without getting into any specifics, there's a number of different things we can do across the cost stack in emulsions and some of the other products to reduce volatility.

So, it is clearly, the volatility in that business over the past few years that you have seen has been disruptive.

So we're working on ways to try to smooth that out.

So there's a number of different programs we're working on there, Don.

And finally on the merchant business, two questions.

One, I haven't seen a price increase announcement (indiscernible) you mentioning what Praxair did last month.

Just wondered if I missed that letter to customers.

And secondly, Praxair talked about tightness in the Midwest.

Are you experiencing similar tightness in capacity?

Do you have any plans to step up capacity by maybe backing off some new on-site plans?

On the price increase, I'm not going to comment on that one for us.

We have not announced anything.

So you did -- it was not missed by you, Don.

But regarding the tightness, and we have some in the Midwest with things.

But as far as going out and adding capacity, I think in my mind, I would rather go and try to take the pricing and improve the profitability of the business and do some offload.

Our last announced North American liquid bulk increase was effective November 1st, so we're working through that.

Contracts are 3 to 5 years in duration, so we still have a lot of active actions out there across the customer base that continue to drive pricing.

Thank you.

Mark Gulley, Banc of America securities.

Hi, guys, a couple of questions.

Paul, you have talked already about the fact that the returns on capital need to move up and one of elements of that is to keep your asset base flat.

In order to serve growth, particularly for the projects you've talked about, you increase CapEx.

So can you give me some help as to how you keep the asset base flat when you can invest for growth?

One thing which you do is you can take the depreciation and put that back into the business.

And so if you look at that, our depreciation is running about 700 to 750 in the future for us.

If I look -- and the other thing which I've talked about is to take the working capital out of the business, and that's another thing for us.

That makes sense.

I wonder if you could drill down a little bit on SAP.

Again, high hopes for that process.

One, where we see the benefits to margins in SAP?

Is it gross margins, is it in SG&A?

Where will I see it?

And can you give us an indication as to how much working capital you can suck out of the system?

On the SAP changes and where you're going to see these both, Mark, and it is both in the transaction costs and it is also at our plants.

Now on the working capital, which we have talked about, you have seen the increase in this year.

And what I would like to do is go and drag that down by about that same amount.

DO you have some turn goals?

A lot of companies will talk about I want to get to six turns or seven turns over some period of time.

Do you show any specifics turn goals?

What we have is we have goals on our cash cycle for those things.

We're not going to announce those, but I do have them, by each of our businesses.

Thanks, Paul.

Thanks, Mark.

Mike Sison, Key McDonald.

Congratulations to you there, Alex.

Hey Paul, when you look at fiscal 2005, which is not too far away, what type of volume growth would you hope to see in the North American liquid bulk business a year away?

Give me a quarter on the outlook and we will provide this stuff on volumes in our assumptions going forward here.

In terms of the liquid bulk year-over-year, what was sort of the earnings growth for that business?

You said margins were better.

Was the earnings growth somewhat commensurate with the improvement in volumes?

Yes, it was, on the improvement in margin growth for us in there.

It drove the margin increase for us.

It was one thing that drove that.

And earnings growth was up, though?

Yes.

When you look on a sequential basis there North America, you commented that the volumes were flat versus the prior quarter, but your operating rate actually increased which is good.

Did you take out some capacity?

Is that what is sort of driving that improvement in operating margins versus utilization versus?

No it does not, because a thing which happens is we also have the LOX/LIN (ph) swaps with our competitors.

And so I look at that the plant level and then I go out and look at that at the individual area, go out and look at that going forward.

Now on LOX/LIN, and the LOX/LIN's up 4 percent over prior year.

(multiple speakers) by the way, is liquid bulk bargains and that has other products in there.

The operating rate we discussed is LOX/LIN, which is doing better year-on-year than the overall liquid bulk index, as I mentioned.

So LOX/LIN volumes were up sequentially?

No, they were not on that one, if you look at that.

Final question.

In terms of your LOX/LIN pricing for flat versus the prior year, are you getting hit at all by electricity costs?

Are they up a little bit here North America?

No, they are not.

Your electricity is pretty flat?

Yes.

Okay, thanks guys.

Robert Ottenstein, Morgan Stanley.

Hey, guys.

A couple of questions.

One, you mentioned in the call that you had a fair amount of spot hydrogen.

Can you quantify the volume and EPS impact of that?

We're not going to go and give that out at this point and time, but the spot volumes are good it's an indication of our ability to operate our plants really.

Do you see that going through the next quarter and the rest of next year?

Well, a good portion on the spot business results from other people having problems in their plants.

And so it is our customers and also the Air Products competitors -- if they have problems, and we are called into back them up.

So you see this as more of a onetime nature?

We always have some spot business and it was good this quarter.

It could be good in the next quarter also.

Could it have been over a couple pennies a share?

No.

So less than two pennies a share.

Can you -- what kind of confidence can you give us, in terms of the likely return on capital, these two new hydrogen projects?

And what about Air Products' infrastructure maybe as attractive contracts for you, in the sense that you're getting this?

I know you've talked in the past about looking to strategically lower your market share in hydrogen because the business was getting so competitive.

So can you talk a little bit about these two projects and why you were able to win them at what you think will be attractive returns on capital?

On the last comment, we're not looking to take and to lower our share of the market.

What we are doing is we are not going to take a bad project.

And the thing which helps on Air Products is that -- and we're the ones who have positions in Texas and Louisiana across the Gulf Coast.

We're also the one who operates in the most plants.

And so we have the confidence of our customers and our customers come out and we're able to get a win with those things.

And so -- and they're good project, they're done at good returns for us and that is the way we bid them.

And if we win them, when we're going to win them, and (indiscernible).

We are also, and this is the first part of your question, we don't discuss specific returns on these projects.

But clearly, we are exceeding our cost of capital for these projects and adding shareholder value.

And we can do that and while winning the business, the contracts that we've announced because of the strengths we have, both with our relationship with technique (ph) and plant supply and also our operating reliability which customers value and are willing to pay for.

So we can earn premiums over cost of capital, win these accounts.

As Paul said, we don't have a share goal and we have a return goal.

So we're not deliberately trying to manage to a certain new share; we're just managing to take business that we like from a return standpoint.

Frank Danue, Vantage Capital.

A couple of questions.

Is the reason Alex being replaced is because next, you're going to have to write a forecast with a number other than the number you've had for the last three years and you need someone capable of doing that?

No, that is not right.

On the SAP side -- just asking it a different way -- as you were implementing it during the year, the costs associated with it, were you expensing those, or were there -- were you capitalizing them, or where there costs expensed through the income statement that might not be present in 2005?

No.

The cost on SAP on '03, '04 and probably '05 are going to be about flat for us.

But, however, we need do capitalize the cost of going out and building the system, Frank.

Jeff Cianci, UBS.

Hey, Paul.

Just a quick one, first on housekeeping, corporate and other.

Is this a new run rate for your quarterly expense?

You were around 14, 15 last few quarters.

It is higher than normal -- is there any special in there (inaudible)?

And I would not say it's a run rate.

I think our run rate is still around 9 to 10 loss in there, Jeff.

And every quarter, there are some pluses and minuses in there.

But when it's two in a row, you wonder --.

Yes, I know that.

Is there (indiscernible) some stuff something in there that you can explain here?

No, as far as that in the corporate and other, I do have the litigation reserve, but I also have some other pluses and minuses in there.

I know you're not going to forecast '05, but it does start in two months and I'm just looking for some qualitative help, if you could kind of rank swing factors?

I am looking at hydrogen, electronics and perhaps chemicals.

Is there any one of those three that stands out in your mind as a potential big swing in '05 versus the others?

Certainly on the business in chemicals, and that is under a lot of focus for us and we intend to improve that, and that has to get better for us.

So -- in going forward, and that is under a lot of scrutiny for us.

Michael Judd, Greenwich.

Good morning.

Question about operating rates and the performance materials and chemical intermediates.

Can you give us a sense of where operating rates are currently in those businesses?

In about 75 percent overall, but that is a hard number to get at on our chemicals business because it depends upon the product mixes for things.

But about the 75 percent is a good estimate.

In terms of the -- overall, the volumes were down about 4 percent versus the prior quarter.

That's a little unusual, given the volumes that they're (ph) basically picking up in the chemical industry.

Can you give us some sense as to why those were down and not up basically?

The (indiscernible) was in the intermediates business, and we had a customer outage, but that was scheduled.

The other thing is in the higher needs business is ag, and that is a seasonal factor and those are the two things -- and they were the drivers.

Lastly, with the methanol, the delayed methanol startup there, is there anything sort of unusual about that?

Are you sure -- what is the degree of the certainty that you have that it's going to start up next quarter?

It's not our plan obviously.

And so we do supply the oxygen to it and we are working with Atlas on this thing.

And so we feel hopeful that it's going to make it.

They have some stuff on the Web site.

They recently discussed this in their teleconference, so you can see that on their Web site.

Just very quickly -- what was the nature of the problem?

Normal startup issues.

They started in June, they had to take it down again to work through some other startup issues and now they're in the process of bringing it back up.

But then there's a period of time when it takes obviously to ship the product to us, which is why we're talking about Q1 fiscal '05 now as the current expectation to see the benefits.

Robert Koort, Goldman, Sachs & Co.

He must have left.

If you could check your mute button, sir.

We'll move on.

And having no further questions, I'll turn the call back over for any additional or closing remarks.

Thanks everyone for joining us today and please give us a call if you have any additional follow-up questions.

Thank you everyone for your participation in today's conference call and you may disconnect at this time.