Air Products and Chemicals Inc (APD) 2004 Q4 法說會逐字稿

Good morning and welcome to the Air Products and Chemicals fourth-quarter's earnings release conference call. (OPERATOR INSTRUCTIONS).

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

No other recording or redistribution of this telephone conference by any other party are permitted without express written permission of Air Products.

Your participation indicates your agreement.

Beginning today's conference is Mr. Phil Sproger, Director of Investor Relations.

Mr. Sproger, you may begin.

Thank you.

Welcome to Air Products earnings teleconference.

Today our CFO Paul Huck and I will review our fiscal fourth-quarter and year-end results.

We issued our press release this morning, and it is available on our Web site along with the slides for this teleconference.

Please go to Air Products.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 Web site.

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 the slide and at the end of today's earnings release.

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

Thank you, Phil.

Good morning and thank you all for joining us today.

Let me review the quarter's highlights.

Sales grew to almost $2 billion this quarter, driven by our growth business performance.

Over two-thirds of our revenue growth this quarter is from these businesses.

I am pleased to report that ARONA, our return on capital measure, again increased 30 basis points sequentially to 9.5 percent on a four quarter basis.

This is 60 basis points higher than fiscal year 2003 year-end.

Our earnings per share this quarter are 73 cents, which is up 26 percent versus prior year and at the high-end of our 69 to 74 cents guidance.

Operating results in our gases business were strong with total sales up 22 percent.

Operating income also improved to record levels.

Challenges in our Chemicals segment continued this quarter.

Volume growth was solid at 8 percent, but rising feedstock costs have outpaced our price increases and we had higher manufacturing costs.

This resulted in our operating income being down 9 percent.

Phil will provide more details later.

Property plant and equipment capital spending for the year came in right around the middle of our guidance range at just over $700 million, slightly more than depreciation expense.

Overall we are pleased by the progress we have made this year in loading our plants, focusing capital on our growth businesses and starting to improve our return on capital.

But we still have a lot of work to do.

We must improve our Chemicals business by recovering our raw materials cost increases, and we have to improve our productivity by reaping the benefits of our SAP investment.

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

Today Air Products reported a net income of $168 million or diluted earnings per share of 73 cents for the quarter ended September 30.

Net income increased by 28 percent and diluted EPS was up 26 percent when compared with the prior year.

Strong volume gains drove results again this quarter.

Our strategies continue to deliver, and our overall business remains 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 gases, chemicals and equipment contributed 23 cents.

Pricing and raw material costs together were a -6 cents, split evenly between gases prices and chemicals raw materials.

Other costs were higher by 6 cents, generally attributable to higher operating cost, about one-third in gases and two-thirds in chemicals.

Currency added 3 cents to the quarter as the dollar was weaker year on year against most major currencies, and all other factors are small.

Now please turn to our financials on slide five.

Record sales of $2 billion were up 20 percent from prior year.

Adjusting for currency, natural gas and acquisitions and divestitures, we generated strong underlying growth, up 12 percent.

This was due to higher volumes across our core growth businesses.

A detailed sales analysis is included in the appendix.

Sequentially our revenues were up 4 percent on higher volumes in a number of our Gases and Chemicals businesses.

SG&A was flat sequentially and 6 percent higher than last year due to acquisitions and currency effects.

On a percentage of sales basis, SG&A was 12.3 percent, which is below prior year and prior quarter.

This reflects the impact of our cost reduction efforts and some early savings from SAP.

Operating income of 237 million was up 27 percent from prior year and up 1 percent sequentially.

Both of these increases were principally driven by volume gains.

Versus prior year, our net income and EPS grew 28 percent and 26 percent respectively and each grew 3 percent sequentially.

And most importantly, these results continued to improve our return on capital.

Our debt to debt plus equity ratio declined about 450 basis points due to our continued capital discipline and strong operating cash flow and earnings through the year.

Free cash flow for the quarter is 178.5 million, up significantly versus prior year and prior quarter.

For the year, free cash flow came in at 362 million versus 414 million last year.

Pension plan contributions in 2004 were 276 million, which is 215 million more than last year.

The pension plan contributions rolled out $15 million higher than our previous guidance.

This is because our strong cash flow enabled us to prefund about $50 million of contributions for fiscal year '05 to our U.S. plans.

On the balance sheet, receivables are up about 22 percent versus prior year and down 1 percent sequentially with DSO decreasing to 67 days from 71 days last quarter.

In last quarter's call, we told you we expected that receivables would decline as we work to streamline our new processes with our customers post our Q3 SAP go live.

Receivables will remain an area of focus in fiscal year 2005 as we continue to make these processes more efficient and drive down DSO.

Now I will turn the call over to Phil to review our business segment results.

Please turn to slide six, gases segment.

Worldwide gases sales of 1.4 billion were up 22 percent compared to prior year with volume accounting for 13 percent of this growth and acquisitions adding another 5 percent.

Revenue growth was driven primarily by higher volumes in electronics, energy and process industries in Asia, along with acquisitions in electronics and healthcare.

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

Gases operating income of $216 million was up 20 percent from the prior year on higher volumes.

Sequentially operating income increased 1 percent as volume gains and favorable pricing were mostly offset by higher operating costs.

Segment operating margin was 15.5 percent for the quarter, which is slightly down versus prior year and prior quarter.

The decline versus prior year is caused by contractual pass-through of higher natural gas costs.

Sequentially the segment decline was primarily the result of higher operating costs, including higher seasonal power costs and in North American gases some plant outages which resulted in higher distribution in product dislocation costs.

Let me now provide a few highlights by major businesses.

Please turn to slide seven.

In Electronics we continued to see strong business activity broadly with sales up 50 percent year on year.

Sales were up 36 percent versus prior year exclusive of the Ashland acquisition.

Equipment sales were especially strong this quarter.

Excluding Ashland and Equipment, sales were up 14 percent.

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

Volumes for several major specialty products are up 20 percent or more year on year, and division operating results continue on their upward trend.

Semiconductor capital spending is now projected to be up about 60 percent in calendar year '4.

Flat-panel capital spending is also increasing significantly.

The bulk of these investments are primarily in Korea and Taiwan where we have a number one position.

In summary here are the highlights for the year.

Sales were $1.2 billion, 23 percent of our gases consolidated sales.

We've maintained our lead on new 300 millimeter fabs, our win rate remains strong, and we have started up eight new on sites in Asia, including our most recent air separation facility and liquefier at Samsung's newest liquid crystal display facility.

Located in Tangjung, Korea, it is the world's first generation facility seven of its kind and the largest flat-panel manufacturing site in the world.

While there's still some concern about slowing rates of growth in the industry, this is currently not having a noticeable impact on our business as underlying silicon square inch growth and flat-panel area growth have remained strong.

Now turning to slide eight.

In EPI we saw strong double-digit volume gains year on year in high coproducts.

Hydrogen growth continues to be led by the ongoing trend for refiners to meet lower sulfur fuel specifications, and we again benefited from spot activity in both hydrogen and CO.

Our results reflect solid operating performance across our hydrogen franchises.

Contractually the strong performance generates operating bonuses which typically peek in our fiscal Q4.

For the year, we started up three plants in the U.S., and in the coming months, we will start up two more in Europe.

We also announced three new plants this year in North America.

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 future fuel specifications.

Please turn to slide nine, our healthcare growth platform.

Strong growth continued in the fourth quarter with global healthcare revenues up 23 percent.

In our U.S. homecare business, we completed two more bolt-on acquisitions for the quarter -- one in New York and the other in Western Pennsylvania.

That makes six in fiscal 2004.

For the year, consolidated global healthcare sales came in at around $625 million, about 12 percent of consolidated gases sales.

Healthcare-related acquisition spending was $75 million this year.

Our strategies remain unchanged in this area.

We would expect to spend about $75 to $100 million on acquisitions next year.

Please turn to slide 10.

In our North American Liquid Bulk business, the volume index is up 2 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 4 percent.

Sequentially we also saw a nice pickup in volumes.

Average U.S.

LOX/LIN pricing was down slightly from last year.

Overall Liquid Bulk pricing across the products was 1 percent higher year on year.

Note that we have announced a national price increase over most of our products effective November 1st.

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

Please turn now to slide 11, European merchant gases.

In our European Liquid Bulk business, the volume index decreased 1 percent year on year.

This includes the impact of several customer conversions from liquid to on-site supply and lost business.

Sequentially volumes were seasonally lower.

European LOX/LIN pricing was flat.

Package gas volumes were up 2 percent, reflecting positive manufacturing growth.

Additionally we are benefiting from continued success with new product introductions, and pricing remains positive.

In the past year we have seen significant improvement in our European merchant gases business.

While volumes are down in the Liquid Bulk portion, we have raised price and lowered cost to improve our returns.

In package gases we have grown volumes via new products and offerings that have also improved returns.

On slide 12 we show our Asian Liquid Bulk business.

LOX/LIN volumes were up 16 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 1 percent as product availability was limited in some areas due to plant outages and in certain regions we are capacity constrained.

We have a new liquifier scheduled to come on stream in early 2005 in southern China, an area where we are currently capacity constrained.

We also brought on liquid capacity at our Samsung plant in Tangjung, Korea and are building liquid capacity at a new still on site in Northern China.

Now let's move on to review our Chemicals segment results on slide 13.

Worldwide chemicals sales of $483 million were up 16 percent compared to prior year led by higher volumes.

You can reference slide 25 in the appendix for more detail.

Excluding currency, acquisitions and natural gas and raw material pass-through impacts, underlying sales grew 8 percent due to higher volumes.

In our intermediates business, volumes increased 13 percent driven by strength in higher amiens North American methylene and polyurethane intermediate.

In our Performance businesses, volumes increased 6 percent on gains in epoxy and polyurethane additives and surfactants.

Emulsions volumes were flat as we are aggressively raising prices to offset higher raw materials costs.

Sequentially sales increased 7 percent, primarily due to higher volumes in polyurethane, intermediates and epoxy additives.

Operating income of $27 million was lower versus prior year and prior quarter as strong volumes were offset by higher raw material, manufacturing and distribution costs.

Most of the increased raw materials costs are in our emulsions and amiens businesses.

Our epoxy, polyurethane chemical and surfactants businesses operated well during the quarter.

As a result, segment operating margin came in at 5.6 percent for the quarter, down from both prior year and prior quarter.

Raw materials costs were approximately $36 million higher than last year.

Through a combination of higher prices and contract terms, we recovered roughly $26 million.

Raw materials, which are also higher, included isopropyl alcohol, ammonia, methanol and vinyl acetate monomer.

To address the higher raw materials costs, we've continued to implement price increases across many of our products.

We're starting to see some successes in passing these increases through, particularly in our vinyl acetate based emulsion products.

However, these actions must continue as we need to spread margins to improve these businesses.

As we mentioned, higher manufacturing and distribution costs were also a factor in the quarter.

Manufacturing costs were higher as we grew down inventories during the past quarter.

Before I move on, I would like to give you a quick update on our portfolio management activities within chemicals.

As we mentioned last year, the sale of our European methylamines and derivatives businesses has been delayed by regulatory authorities in the UK.

We have shut down production at this site, and we have preliminary approval to sell.

We hope to receive the final approval by the end of Q1.

Also this past quarter we divested our Mexican emulsions joint venture to our partner, COMEX, a leading paint manufacture.

After discussions with COMEX and a review of our performance materials growth strategy, the decision was made to exit this emulsions business.

This venture resulted in a gain of about 2 cents per share, which was largely offset by lost production and costs associated with Hurricane Ivan and an additional charge related to the EM&D divestiture.

These impacts from the latter two items were each worth about 1 cent per share.

Next let me cover the equipment segment on slide 14.

Sales of $99 million increased on higher air separation and LNG sales.

Segment operating income of $6 million increased on higher LNG activity and better performance in air separation.

We received another LNG heat exchanger order in the fourth quarter.

This one is for two trains, and it is the fourth order we have received in fiscal 2004 for a total of 5 million exchangers.

The sales backlog at just under $300 million is up versus prior year and prior quarter, and the quality of the backlog continues to improve.

Before Paul addresses the full-year, let me comment on the corporate and other segment.

Last year's fourth quarter of $20 million reflected approximately $10 million of expenses that were related to the Honeywell litigation.

Going forward we would expect this segment to average an $8 to $10 million loss per quarter.

Now I will turn the call back over to Paul.

Thanks.

If you will please turn to slide 15.

We delivered solid results in fiscal year 2004.

Our strategies are working, and our priorities and goals are unchanged.

Topline growth was 18 percent.

Half of this came from volume gains across gases, chemicals and equipment.

Acquisitions in our growth businesses and currency each contributed 4 percent to the year-on-year growth.

Operating income increased to 18 percent, in line with our sales growth.

Net income and earnings per share were higher by 22 percent and 19 percent respectively.

And most importantly, we've turned the corner on improving our return on capital.

However, we still have a lot of work ahead of us.

John Jones and his entire leadership team is committed, and we all will passionately pursue this goal.

I would now like to present our outlook for the full year.

Please turn to slide 16.

We are forecasting fiscal year 2005 earnings per share in the range of $2.90 to $3.10 per share on a year on year -- which is a year-on-year growth rate of between 10 and 17 percent.

Note that our guidance is inclusive of productivity implementation costs of 10 to 15 cents per share.

Here are our key assumptions.

We expect domestic manufacturing growth between 3 and 6 percent next year.

For natural gas, we expect the 2005 price to be comparable with 2004.

Currencies are expected to be relatively stable.

In line with external forecasts, we anticipate more modest growth in silicon, somewhere in the range of 0 to 5 percent.

Flat-panel display growth is expected to be double digits, but that is off a smaller base.

Two risks to this forecast are raw materials and energy price volatility and lower economic growth.

Both Gases and Chemicals fiscal year 2005 operating income will benefit from operating leverage on our existing assets and our increased productivity efforts.

Gases will also benefit from the new investments across EPI, electronics, and healthcare.

Equipment fiscal year 2005 profits should be almost double 2004.

We know we must fix our Chemicals business.

As we enter 2005, the profits and returns in our epoxy, polyurethane chemicals, surfactants and polyurethane intermediates business are all above our cost of capital.

However, our emulsions, high amiens and the North American methylamines business are performing poorly.

As Phil mentioned earlier, the raw materials costs in these businesses are squeezing margins significantly.

In emulsions, we have been aggressively raising prices and we saw margin improvement in quarter four.

We will continue to aggressively raise prices here.

In high amiens, we have a large proportion of the business under long-term cost pass-through contracts.

However, there is a portion sold under short-term fixed-price contracts.

We have seen significant raw materials increases over the past six months.

In the fourth quarter, we raised prices on high amiens and we have raised them again on October 1 in response to continued run-up of isopropyl alcohol.

Finally, in methylamines our offshore supply of methanol will start up in this quarter with full impact in quarter two.

This will significantly improve this business.

For all of 2005, our goal is to get the chemicals group above our cost of capital.

In addition to our focus on Chemicals, we are also determined to significantly improve our productivity.

We expect increased benefits across our supply chains and support functions as a result of our productivity initiatives, which I will address in greater detail in a few minutes.

Our leading positions in growth markets, combined with our operating leverage and productivity initiatives, are driving our fiscal year 2005 improvement.

The bottom-line is that this will have a positive impact on our returns going forward.

Additionally based upon our recent announcements and continued success in the growing hydrogen market, where we have an opportunity to expand our leading franchise positions, we expect full-year property, plant and equipment expenditures to be in the $850 to $900 million range.

Please turn now to slide 17 for our fiscal first-quarter outlook ending December 31.

Based on our quarter four 2004 results and taking into account that our fiscal Q1 has seasonal factors that tend to lower income in several of our businesses, we expect first-quarter earnings in the range of 67 to 70 cents per share or about 16 to 21 percent growth year on year.

Factors we forecast to lower earnings sequentially include seasonally lower volumes in several businesses, including emulsions and our other performance materials businesses and lower agricultural demand for amiens.

We also scheduled maintenance outages to coincide with these volume drops and take advantage of this seasonal dip, which will increase our maintenance costs.

In EPI operating bonuses peak in quarter four and are lower in quarter one.

While we expect operating income in the equipment segment to approximately double next year, sequentially we expect a lower Q1.

Our fiscal quarter one is impacted by the holiday season, which translates to fewer hours worked relative to other quarters and, therefore, a lower percent complete being booked in the first quarter.

And our effective tax rate will be slightly higher, about 29 percent next year.

Factors we forecast to increase earnings sequentially include continued loading across our plants, particularly in our growth businesses; better operating conditions in the gases business in the U.S.; some impact from chemicals price increases to recover the raw material increases that we saw in quarter four and see in quarter one.

Before I wrap it up, let me say a few words about our productivity efforts.

Please turn to slide 18.

As with most companies, we have been achieving productivity for years, while results from these efforts typically offset cost inflation.

In fiscal year 2004 our topline grew 18 percent and EPS grew 19 percent.

For FY 2005 we are forecasting high single digit topline growth and earnings growth of 10 to 17 percent.

To do this, we will drive a step change in our productivity in the next year.

Over the past few years, we have been investing in SAP to enable this change.

Over 600 IT systems will be replaced by SAP by the end of 2005.

We should have replaced half of them.

We will realize significant savings in finance, IT and customer service as a result of our standardized processes we put in place with our single instance SAP system.

We also will lower our supply chain costs.

I call this running our businesses better.

Why can we do this?

Because we now have better information about our customers, products, purchases and costs.

This will lead to improved plant operations, reduced inventories, more efficient distribution and logistics, better material sourcing and lower DSO.

We are managing a significant culture change in the organization around continuous improvement.

By the end of 2005, it is our goal to have about 2 percent of our employees devoted full-time to lead these activities.

We are using a Sigma lean approach, and we have over 500 initiatives underway in the company right now.

Combining all of these efforts, we expect to see an additional 15 to 20 cents of earnings per share in the way of productivity benefits to the bottom-line in the next year.

Now let me conclude.

Please turn to slide 19.

I want to emphasize that the top priority for John Jones and his entire leadership team is to improve our return on capital with a goal of achieving 13 percent in fiscal year 2007.

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

We will focus capital and R&D resources on our leading positions in our growth businesses.

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

We are heading in the right direction, we have positions of strength, and we intend to leverage them, and everyone on the leadership team is committed to delivering the results.

Thank you and I will now turn the call over to Amy to take your questions.

(OPERATOR INSTRUCTIONS).

Sergey Vasnetsov.

Lehman Brothers.

I want to ask you questions about the Chemicals business.

The volumes are pretty strong, and presumably if the rates are improving, you had mentioned a few factors such as longer-term contracts.

What are other factors which will allow you to get this business to perform quite better in 2005?

You mentioned your goal to achieve the cost of capital in line with the rest of the business.

Yes, good morning.

The major plus which we need right now is that we've gotten good volumes in our Chemicals business.

We need get our prices up in merchant elements of the business as we talked about that.

The one thing we have is the offshore and the methanol, and that will come in late in the first quarter.

We will get the full effect in the second quarter, and that as we have said previously has a fairly substantial impact on the Chemicals group, which will help both margins and returns.

The other thing is that the Chemicals group is going to also benefit in the productivity area.

The productivity is not confined to one area in the company.

It is broadly based across every area, and that is what will move us up.

And those longer-term contract that you mentioned without going into too much specifics, would you be able to assess them sometime over the next six months, or is this a longer-term problem?

No, the long-term contracts are not a problem.

The long-term contracts are there and we have the cost pass-through.

The real problem comes around some of the shorter-term contracts that we have.

You know the things which are sold for requirements, and we need to get out and raise our prices with our customers in those areas.

P.J. Juvekar.

Smith Barney.

The 36 percent growth in electronics, can you break that down between semiconductors and TFT-LCDs?

We don't really take a look at it along those exact lines.

I think the thing which we can say is that our growth on the specialty materials end is certainly a lot stronger than it is along the base gases end.

We also had a good quarter in the equipment sales there, because as Phil said the capital spending is up there.

If we look at it just on a percentage basis, the LCD going out is going to have the higher -- the growth is going to be a lot higher in those areas (multiple speakers) is a bigger base.

If we look out next year, we are expecting to see LCD, the area growth in those areas to be in excess of 50 percent for LCDs.

Semiconductors are lower double digits?

Right now they are, of course, yes.

But the thing which we are looking to sell-through for this pressure is we've had very good growth.

As we look for next year, as I said in the outlook, is 0 to 5 percent.

So we looking for a little plateauing in that area.

And in LCDs, your prices were declining 10 to 15 percent.

Is that still the case? (inaudible)

A thing about pricing, one of the things which we have talked about, and I don't like to talk about it really like our prices are declining, because the thing which we are bringing in here is this is a new business.

And so these people come in and we price that according to the amount of business which they take.

The LCD as you know uses a lot of our specialty materials, and so the sales into an LCD fab are larger.

They are more concentrated around a few products there, also in the specialty materials area.

So we get efficiencies in supplying them, and they are going to get a lower price.

But we're not out actively trying to cut our prices to protect our volume in certain accounts here.

It's more the impact which you will see in almost any business of someone going out and getting a good price -- you know a lower price because they have a much larger volume.

So it's not like we're going out and the LCD price continues here to erode for us.

And just quickly on Europe, you said your revenues were down.

You lost some business.

Can you just talk about what is going on and how do you turn that around in '05 among?

Well, one of the things which Phil talked about is we were paying a lot of attention to trying to improve our business, and as the business goes, we have three regions really in Europe -- the UK, the Southern continent and the Northern continent there.

And we've been paying a lot of attention to getting our returns up in that business.

And so through the year, we have seen pricing increase.

Now in this quarter both volume and pricing were pretty close to about flat as we looked at it year on year.

But for the full year we have actually gone up and we have improved our returns in this business.

So we have pushed price throughout the year, and so we have lost some volume where we have walked away from customers on price.

Now we have the issue of conversions there also, where we have converted some customers and some large customers onto on-sites, which is a good thing on net for us because we get that customer secure for a lot longer period of time.

Fred Zimmer.

Zimmer Company.

We have long thought you have one of the best investment gas portfolios in the industry and the results show it, but it continues to be disappointing.

You see the Chemicals sector dragging or diluting that fine performance.

About two or three years ago I think you had a conference out in Allentown and you raised the issue of backward integration in Chemicals, and I think at the time you ruled out the use of an equity participation in that (inaudible) basic petrochemical producer to kind of solve that problem.

Would you still rule that out, and how are you going to fix the chemical business in terms of raw materials?

We see you're finally recognizing the selling price and you have underperformed on raising selling prices, but it looks like you're starting to turn that around.

But how are you going to deal with a raw material integration?

Well, I think on the raw material, the way which we have dealt with it, the area of greatest concern with us was in the methanol for the amiens business.

And we have dealt with that in our supply contract.

Now unfortunately our supplier has been delayed in his plant.

But the plant, it is up and running, and so we should start getting supply from that late in this first quarter.

That is good news for us.

That gives us economics, which makes us look like we are integrated back into that.

So that is a way for us to do it without putting our investor's capital really at risk to do that.

I don't think -- well, I will tell you as far as I am concerned going back and back integrating into the base products, I don't think is a good thing.

I would rather do that contractually rather than putting capital out the door to do that.

In the number of the businesses, we have been successful in touching on the raw material costs.

And so the biggest challenge for us in the raw material areas is in our emulsions business and we're dealing with that now as we go out there.

We also think we have to change on the pricing model as far as getting our price increases out to the marketplace quicker and faster in response to changes in the raw materials.

I think that is something which the whole industry really needs to do.

There can't be a shock absorber guy in the intermediates between the end customer and the basic suppliers of those things.

Those costs have to pass through faster to the marketplace.

You see what Dow is doing, it works.

It agree with you.

It does work.

Thank you, Fred.

Peter Butler.

Glenhill Research.

I'm a bit confused on your arrangement with Methanex.

My understanding is that plant has been up and running for I guess several months, an you are saying that you're not going to get supplies until late this quarter.

Is that the reason being that you are delaying the shutdown of your plant, or what is going on there?

The Air Products plant has been shut down.

We have an arrangement in the contract for when we get this following the performance tests for these people, and the performance test has been passed in recent days.

So as we go forward, it is all according to our contract.

Right?

Thanks, Peter.

Okay.

And then how is October looking and the trends in November?

What are your lead indicator businesses presumably electronic materials telling you?

As far as commenting on October, I cannot really comment on October at this point in time, and we will publish the volumes according to our schedule.

But if you look at everything for the fourth quarter, I think we had strong volumes.

I think that bears out the results which we had.

I think everyone is nervous about the impact of prices in the energy area of oil and gas on the economy and what would happen.

And we will see what happens, whether this is temporary or this continues throughout the year.

But the high energy prices and volatility in energy prices are not good for the economy and would push us down into the lower end of our range as far as the manufacturing environment is concerned.

Well, I mean DuPont yesterday reported that their domestic volume was flat in the third quarter, raising everybody's sensitivity to this combination of high oil and weakening GDP.

Presumably their fourth quarter will be even weaker than the third domestically, and I just wondered how you thought it would be?

Our products do not serve the same areas.

So a good portion of our volumes, a good portion of our business, has been other things which are really tied that much to the economy.

Our hydrogen business in the U.S. where we are the number one supplier, our health care business in the U.S., which is a large growing business for us, those are not tried to the economy directly.

And so we would expect to see continued growth from those areas.

Robert Koort.

Goldman Sachs.

Two questions.

Firstly, you talk about having some of your chemical businesses that are attractive, and I'm assuming when you say your cost of capital returns, capital intensity is close to one, so double-digit margins.

I am wondering if that is true.

And then secondly, if you go back a decade for the last decade or so Air Products has always been quite boastful of its competitive positioning in Chemicals.

Number one or number two positions.

Global reach.

All those nice buzzwords.

Yet obviously the profitability is pretty miserable.

I'm wondering if you have benchmarked against your competitors to isolate whether this is an Air Products self-inflicted wounds, or is this just a market problem?

And if it is a market issue, a secular decline, what conclusion should we expect you to reach in terms of improving or keeping these assets in the portfolio long-term?

Yes.

Well, I think I gave you a pretty good breakdown of our Chemicals business, the ones which are performing and the ones which are not, which we have the problems in.

When you look at the problems, it is not a problem of volume in these businesses as far as trying to be able to achieve the growth which we like to say in them.

It is one of getting the costs down in the business of running the plants, and also of going out and getting the prices up in some of these businesses, and that is what we are attempting to do right now.

We've got price increases out there.

We have had a number of announcements in the fourth quarter.

A number of announcements in October as we have gone forward here to go out and to do that.

We do watch our competition obviously as far as how they -- of what they are doing, of the struggles which they have in things.

It is an unprecedented time as far as the increases in raw materials.

I have been around this business for a long period of time.

I have never seen a run-up in raw material costs as I have seen.

There are also some products which are in short supply, which we use which is also putting pressure on prices.

But that's no excuse.

We have to get our prices up.

So that is what we intend to do.

We intend to make every business in our portfolio successful.

If we cannot make the businesses successful, we will take other actions over time to do that.

Our patience is not forever on any of these businesses.

I think you have seen that.

We sold the PVOH business; we sold the package gas business in the U.S..

Paul, I'm just curious then, do you think the glory years in the specialty chemical industry of five and 10 years ago, were those just sort of anomalous heady times when the customers did not really recognize how much more negotiating power they could assert on you guys?

Or is it just the more recent times where maybe the specialty chemical industry has failed to recognize how much value-add their products really contain and have been fearful of raising prices?

I think it is more of the latter of things as we go through here rather than the former of things because if we look at the businesses, which are doing well and those are our specialty businesses where we can go out and sell our value, we've done well in those businesses.

As you get into some of our other businesses, the amiens business as an example, it is not does not have the performance aspects.

It is not in our performance chemicals business, and we've got to go out and get the prices up.

The key there is that you are a key supplier to somebody and you can provide them value through the way in which you serve them.

So I think as I look at this, I think these things can be managed.

There has been a lot of change in the industry.

There has been a lot of movement over to Asia of certain things.

It is certainly not going to be the same prospects on volume growth going forward in the U.S. for the chemical industry as it was 10 years ago.

David Begleiter.

Deutsche Bank.

Thank you, Paul.

On productivity, why are you taking any onetime charge for these new costs, and are there any layoffs associated with this program?

The reason why we're not going to take a onetime charge is we view this as a continuing effort as were going to need to transform our business over a period of time.

It is not any single thing.

It's a number of actions taken, and we want to view this as a cost of going out and doing business.

And so we're going to have these costs built into us for a while.

They maybe there forever.

Business continues to constantly change.

To continue to go out and transform them.

But the other thing is that these costs are not all people-related costs.

They are costs related to how I purchase better, so I may need some help from a consultant or somebody.

I may go out and buy a certain study to do certain things, so there are other costs associated.

But there are costs to go out and to get people out of the organization over time, yes.

And looking into '06, will these productivity benefits accelerate, flatten out, and how will the costs play out as well?

Our intention here is to build up our rate of productivity, and that is what our goal is, so the productivity would increase going into '06 and get higher for us.

We also will continue to have the implementation costs which I talked about.

But we would not think that those implementation costs would have to kick up.

And just lastly in Chemicals in Q4 given the sequential increase in volumes, why were you taking down -- why are you shutting your capacity or curtailing manufacturing?

One of the things which we did is we built the inventory in quarter two, quarter three a little bit because the SAP implementation in a number of the businesses.

And so we then adjusted the inventories back down for year-end because as you look at that we have successfully gotten through and gotten through the year.

So we did not need to hold the level of inventory.

Jeff Zekauskas.

J.P. Morgan.

In general, the electronics business has performed very well for you this year.

So order of magnitude, sort of what is the operating margin improvement from the beginning of the year until now?

Is it 100 basis points or 300 basis points?

Sort of how well are you doing?

We look at this business more on our -- I can speak better to the returns progress in this business, and we have made substantial progress on the returns in our electronics business and that obviously is reflected also in margins as we go here.

But I don't disclose the amount of that since we don't take out and track that.

But it is safe to say that the returns have improved substantially from the electronics business.

Now the returns in electronics took a hit because of the decline in the industry overall.

So this is one of our areas of focus, and as we talk about going out and making and getting a fix into a business, this is an example.

People in electronics have done a fine job of securing the volume and also of lowering their cost going out here as we move forward.

Is there still a wide gap between your average margins for industrial gases as a whole in the electronics margins?

Electronics margins are going to tend to be lower because they are more of a chemicals type business because we have the raw materials component in there.

Wherein our highest margin type businesses are things like the liquid bulk business there because it is so capital intense.

So it's not nearly as capital intense, so the margins tend to be higher in our electronics -- or the margins tend to be lower, excuse me, in our electronics business on average.

But then again the thing we should really go for here is looking at what the return is as opposed to what the margins actually are.

An example of that is our hydrogen business, I mean if you look at that.

So in other words you've made a lot of progress in return on assets in electronics?

Yes, we have.

Yes, we have.

Just as a final (multiple speakers)

One of the things people talk about is the asset loading.

We have done a fine job of loading our assets in that business this year.

Just a final question.

If you cut out roughly 20 cents in costs for next year at 60 million pretax, of the 60 million how much is headcount reduction and how much is other cost reduction?

I'm not going to give that to you.

But if we look at this, I will tell you the three sources in which we are looking to save and get our productivity.

We look to get it from plant efficiency, running our plants better, capital efficiency, getting more product out of them or getting the yields of the plants up so I don't use as many raw materials or as much power etc. from there.

I also look towards driving down the purchase cost of things that I buy.

So I buy maintenance services, I buy materials, I buy valves, I buy capital equipment, etc. which goes into the plant.

And then we have a labor component of our cost.

We are looking at all three components of this cost.

This is not just a headcount reduction exercise.

What we're trying to drive is to get the most efficient ways in which we can do things.

So we have focused on different things across different areas.

Michael Judd.

Greenwich Consultants.

A question about (multiple speakers) chemicals again.

You gave us an indication of the aforementioned materials and chemical intermediates, you know the volume is up, which is nice.

Can you give us a little bit more detail in terms of the actual operating rates in those businesses so we have a sense of what kind of pricing power you have?

Yes, the operating rates in our Chemicals business increased slightly as we look at that, so we had previously set our Chemicals business operating around, let's say, 75 percent.

It is probably closer to 80 or so in this quarter.

Okay.

Given that this is a difficult operating environment not only for you but also for your competitors, is there anybody out there that is looking to perhaps rationalize capacity or anything like that that you've heard in the industry?

No.

Not at this time.

Okay?

Donald Carson.

Merrill Lynch.

A couple of questions.

One, I just want to get back to this link between your Liquid Bulk growth in the U.S. and overall manufacturing.

And the overall manufacturing has grown at about 6 percent over the quarter, yet your Liquid Bulk is only up 2 percent.

And you have been lagging that for quite some time.

So I just wondered if you could explain that link and how you see it going forward?

Secondly, I don't think you commented on the tax rate, but your tax rate seemed unusually low this quarter.

I was just wondering what you are expecting for '05?

On the link between the manufacturing and Liquid Bulk, I think one of the things which we continue to see is we continue to see some customers leaving some of the basic industries which use a lot more of industrial gases in shutting down.

So we still are saying shutdowns.

We are also seeing some conversions there, and that holds down the growth in that area for us as we look at it.

The other thing which we have paid a lot of attention to -- we have said this before, we paid a lot of attention to price in this area.

We signed long-term contracts of five years with these people, and we intend to maintain our price.

Our signings rates have been pretty good, so we are seeing some growth in those areas, which I think should help us going forward.

Regarding the tax rate.

At year-end we have the same thing last year.

As we go through and we take our final look at everything, our tax rate for this quarter was about the same, a little bit lower than last year.

But we do our final estimate of what all our credits and adjustments are, and we book them.

We have a number of year-end planning items which are either going to get in this year or not in this year depending upon actions which we take ending with dividends overseas, etc..

So it is a complicated answer, but a lot of things come out at the year-end is where we do our final adjustments.

So what tax rate would you project for next year?

Also, do you have any comments on pensions about what your estimate on pension is?

If we look at that in the next year, we think about a 29 percent tax rate for next year is what I said.

The other thing is pension expense we would expect to see fall slightly in this next year, and that is due to the contributions in which we have made and the better performance in the market.

Although we have not had the valuation, which seems to be final on our plan and everything, so right now we are planning on that falling.

The other thing which we see to offset that is the incentive compensation expenses probably going up because we're predicting a lot better performance, so we ought to be able to share more of that with our employees.

John McNulty.

Credit Suisse First Boston.

Just two quick questions.

The first one is your debt to cap is definitely trending toward the lower part of where you have been historically.

I know recently you guys had raised your dividend pretty significantly.

I'm wondering like with the free cash you are expecting to generate in '05 and the low debt ratios that you have got right now, if we can expect another significant increase in dividend instead of the typical one that you guys have been putting through in the past, or if we can expect maybe a greater share repurchase program?

And then the second question is with regards to the 15 to 20 cents of cost savings that you think you're going to get in 2005, how much of that would you say is in the bag already, and how much of it is where you're really going to have to dig in to get it?

Regarding the debt to total cap ratio, you're right.

It has been coming down.

And if you take our projections, which we gave you, we continue to go down.

We're not done with all our planning for next year as far as what is going to happen on the dividend.

So I cannot tell you anything with regard to that.

I think the only thing which I can tell you is we're going to make sure that we are a good steward of this money for our shareholders going forward here.

We will do the right thing with that.

And your second question was what?

I forgot it.

With the 15 to 20 cents that you're going to be getting in cost savings --?

How much of that is in the bag?

I think as you look at that, and these are continuous efforts which we go forward here and work towards.

So I think as you have seen some of our SG&A expenses have been flattening, so some portion of that maybe a third to a half of it has been realized in efforts in which we have taken within the year.

Mark Gulley.

Banc of America.

One housekeeping question first.

You were giving some of the sales numbers for some of the key business segments, but I don't think I heard the one for EPI.

Do you have a sales number for that for fiscal '04?

Yes, the EPI business is about $1 billion.

A more substantive question.

First of all, if I do own the map, what will I end up with in ARONA for next year, fiscal '05?

Mark, I just checked on that.

The EPI is 1.4 billion to just correct you on that.

I misspoke.

ARONA, If I roll all the numbers up that we talked about in terms of the outlook for next year, what kind of ARONA will I end up with?

Our ARONA goal for next year is about 10.5 to 11 percent.

Okay.

And a key part of that will be, of course, one of the elements of your plan is to keep more or less a flat PPE on a net basis.

With the CapEx numbers you have talked about, are you going to go with a PPE flat so the improvements in EBITs really do drive improvements in ARONA?

The PPE obviously is going to add to that because the depreciation is not going to be at that level for us.

So we are also taking efforts.

We are taking actions to lower the Accounts Receivable, and that will offset some of that.

I don't know if it's going to offset that entirely, but these investments also will go out and contribute income.

In the end, the goal is unchanged.

So as we look at this and as we have done our projections, we have put the PPE in here.

We have put the increase, which is not that great, for that into our calculations.

So that will not be an excuse as to why we did not make it.

We are going to make this goal.

The whole team is committed to this.

John Roberts.

Buckingham Research.

The intermediates business, if I look at the monthly update that you gave before, it was up I think 23 percent in the first couple of months of the quarter, and then it was only up 6 percent in volume for the whole quarter.

So was it actually down September '04 over September '03?

I think the intermediates business was up more than 6 percent.

Let me just check.

It was up 23 percent --

No, no, but for the quarter as a whole.

Here let me just get my numbers in front of me.

The intermediates business for the quarter was up 13 percent. (multiple speakers) and it was the performance business, which was up 6.

Yes, 13 is lower.

One of the things which this business has as we've done in (inaudible) and higher amiens we have very large customers.

And so they take outages and sometimes they go from one month to another month in the year-to-year comparison.

So looking at our volumes in those businesses sometimes in the intermediate months can give you a strange strange comparison there.

And so that is due with outages, timings in the years being not quite the same.

And similarly if I looked at the monthly update on electronics, excluding Ashland, it was only up 24 percent in the first couple months, and then you finished for the quarter with 36 percent.

So it sounded like it accelerated, and September was up, I don't know, maybe 40 percent over September a year ago?

Yes, and that is another one which has the -- we have the equipment business in that, and that can cause some movement as we ship the gas cabinets out to people.

And so I can get some large changes in electronics caused by the equipment.

But I think as Phil said our volumes throughout the month in May were good, in the traffic quarter were good.

Robert Ottenstein.

Morgan Stanley.

This is Nina Scheller for Robert.

Two questions.

First, the other income came in 12.5 million, which is higher than the quarterly like 4 to 5 million run-rate.

What accounted for that increase?

If you look at the -- the run-rate is probably a little bit higher than that.

We think for both years '03 and '04 I think the other income is up $27 to $28 million on that, and we have some things which normally go in and book in their interest income, technical (inaudible) from our subsidiaries and things like that, which creates a natural bias to having things.

But the year-on-year change which was different here in other income was the fact that we had in the last year the Honeywell costs.

Okay and then -- (multiple speakers)

We had asset sales in there, too.

So you know some of the asset sales tended to move that up in this quarter.

The sale in Mexico, but then we had the write-off, further write-off in the European amiens business.

And then secondly, industrial gases.

If you look sequentially, your sales were up 57 million, but operating profit is only up about 3 million.

Why is there no real operating leverage here?

If you look at that, that is one of the things which Phil commented on, and we had a few things which caused us some issues that in the 4 percent to the 1 percent gain.

One of them is in the U.S. we had dislocation of product.

We had some outages in some plants, which tended to move some things -- tended to increase our distribution costs.

The other thing which happens, and you will see this every year in going from the third quarter to the fourth quarter, is that the power rates go higher.

Not the power rates, but the usage of power is not -- the plants are not as efficient in the higher temperatures.

So we have some seasonal power increases which are caused there.

Jeff Cianci.

UBS.

Just following up on that last question first on the leverage.

Was there a hit from mix here with electronics getting stronger with perhaps energy pipe lines of hydrogen getting stronger, and have you ever segmented that out?

Yes.

We have not tried to take a hard look at the mix aspect of this, Jeff.

I think one of the things is that certainly, as I said before, the Liquid Bulk business has the higher margins for us.

And so as we get more hydrogen business, as we get more electronics business, that is going to tend to move our margins lower. (multiple speakers)

And as the first year of an on-site conversion from liquid to on-site, does the margin go down in the first year?

Well on a conversion from liquid to on-site, we are probably pretty good as far as margin is concerned because we don't pay the power typically in those conversions.

So the conversions tend to be capital intensive.

Sales tend to drop, but the profits are still there.

And the other thing is that our comment was really on a quarter basis, so you don't see a lot in the mix elements of the quarter as you look at that.

You will see that more over a longer period of time as you see the changes.

Okay, great.

And finally just the last question or comment on chemicals (inaudible), the raw materials tend to shoot up when demand is good and demand is good when you get your volumes.

So you are either stuck with a condition of great volume growth getting killed by raw materials, or raw materials is easing and you've got weak volume growth.

With the variability of this business year-to-year and what that might mean for your equity evaluation, I'm really just wondering if there is a better way to smooth the curve?

It took you -- not you -- but it took the Company eight years to sell vinyl and another eight years to sell derivatives.

You know, how much pain and what are we doing?

Well, I think as we said before, I said our patience is not forever on this thing.

We're going to take steps to make this work.

I think you've seen out of John Jones and the leadership team here is that we are not going to sit forever with these things.

We are going to make them perform.

We are going to get those prices up, and I think part of the question is we have to change the pricing model in these areas, too.

I think that is something for the industry as a whole to go out and to address (multiple speakers) shock absorber (multiple speakers) for anybody.

You are smart guys.

I presume you said this all to yourself four years ago as well.

But nothing really changed in the four years.

I'm just --

Well, we have done some things.

You will start to see some changes on the offshore in the methanol business.

I think you'll see (multiple speakers).

Okay.

That is for another time.

Thanks, Paul.

Allan Cohen.

First Analysis.

Hello, Paul.

This is Dan Leonard here for Allan.

One specific question which I don't think anyone touched on yet was in health care.

It looks like the oxygen reimbursement rates should be coming down 15 percent in 2005.

What I'm wondering is, does that have any impact on how you view the medical gases business?

And do you think that will have any impact on consolidation within that space?

Okay.

It does not changed our (inaudible) view of this business as being a great opportunity for us.

We think overall, in fact, we think some of these price pressures will actually help us as a large company toward going out and getting economies of scale for going out and making those things happen for us.

Okay?

So that is important for us.

The second portion of your question was what?

Do you think that will have any impact on consolidation we have been seeing in the medical gases arena?

Yes, I do think it will.

I think what you will see is I think the smaller suppliers as they get pressed on cost here and they get pressed on the reimbursement aspect of things are going to find it tough to continue.

That does conclude the question-and-answer session.

Mr. Sproger, I would like to turn the conference back over to you for any additional or closing remarks.

Amy, thank you.

I just wanted to thank everyone out there for joining us today and have a great day.

Good-bye.

Good-bye.

Thank you.

That does conclude today's conference.

You may now disconnect.