Air Products and Chemicals Inc (APD) 2005 Q2 法說會逐字稿

Good morning and welcome to Air Products and Chemicals' second 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.

Airports 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 is permitted without the expressed written permission of Air Products.

Your participation indicates your agreement.

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

Mr. Sproger, please go ahead.

Thank you, Susan.

Welcome to Air Products earnings teleconference.

I'm Phil Sproger, Director of Investor Relations.

Today, our CFO, Paul Huck, and I will review our first -- our fiscal second-quarter results.

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

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

As in the past, 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 PM Eastern time, are also available on the Web site.

Please turn to Slide 2.

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 3 and I'll turn the call over to Paul.

Thank you, Phil.

Good morning and thank you for joining us today.

Let me first review the quarter's highlights.

We had another good quarter.

Earnings per share this quarter of $0.75 increased 21% versus prior year.

This is the fifth consecutive quarter we have posted 20%-plus earnings per share increases.

ORONA (ph), our return on capital measure, again improved to 10%.

This is 110 basis points higher than it was a year ago and up 30 basis points sequentially.

Sales grew by 8% and exceeded $2 billion, driven principally by higher volumes in gases, higher prices in chemicals, and favorable currency.

These results show that our strategy is working.

We continue to make solid progress in loading our production facilities, achieving our productivity goals and maintaining our capital discipline.

We generated strong operating leverage this quarter with operating income up 20%.

Our productivity initiatives are driving margin improvement.

Operating results in our gases business were solid with total sales up 10% on higher volumes in North America and Asia.

Despite maintenance outages, hydrogen volumes were higher year-on-year and while we continued to experience sequential slowing in electronics, volumes were higher year-on-year as well.

Last quarter, we told you to expect significant improvement in our chemicals business, and we delivered that improvement.

Seasonal volume recoveries, improved pricing and our productivity initiatives produced that result.

Margins improved significantly and our chemicals business earned its cost of capital in this quarter for the first time since 2002.

In equipment, profits grew and our backlog continued to grow.

Last Wednesday, we announced two additional LNG heat-exchanger orders for our new AP-X technology.

Our investment in technology in this area is producing results.

Our operating and free cash flows remain strong.

Our cash balance exceeded $400 million at quarter and, after making a majority of our planned pension contributions for fiscal '05.

We will soon begin repurchasing stock, and we anticipate, subject to market conditions, completing this $500 million program this calendar year.

We also increased dividends this quarter.

This is our 23rd consecutive year of increases.

Last week, we announced we won another integrated hydrogen project in our Texas hydrogen franchise.

I want to assure you we will remain disciplined in our capital spending while exercising our financial strength and flexibility to find growth opportunities where we can further build on our leadership positions.

Now let's turn to the quarter results on Slide 4.

Today, we reported net income of $175 million or diluted earnings per share of $0.75 for the quarter ended March 31.

Net income increased by 24% and diluted earnings per share was up 21% when compared with the prior year -- once again, solid proof that performance gains are reaching the bottom line as we execute our strategy.

Strong volume gains in gases, higher equipment activity and improved chemicals margins drove results this quarter.

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

Higher volumes broadly, across gases and equipment, contributed $0.09.

Pricing and raw material costs together were a negative $0.02.

Electronic prices were unfavorable and were partially offset by higher merchant gas pricing in Europe and higher pricing in chemicals.

Other costs were lower by $0.02.

Productivity gains, including the impact of implementation costs, more than offset the impact of inflation.

In functional areas like finance and Information Technology, our costs continue to decline as a percent of sales.

For the first half of this year versus 2004, we have seen considerable progress in both our finance and IT costs.

Together, we have reduced the cost of these two areas by about 50 basis points as a percent of sales.

This is solid evidence that our SAP system is working and delivering value.

To date, we have shut down about 300 IP systems and have started up our European shared-services accounting center at the beginning of April.

Equity affiliates continue to perform well, broadly contributing $0.01 to our overall increase.

Currency added $0.02 to the quarter, as the dollar was weaker year-on-year against most of the major currencies.

All other factors were small.

The total is a $0.13 increase over the second quarter of fiscal 2004.

Now, please turn to our financials on Slide 5.

As I said earlier, record sales of $2 billion were up 8% from prior year.

Adjusting for currency, natural gas and acquisitions and divestitures, we generated underlying sales growth of 5%.

This is mainly due to higher gases volumes across our growth businesses.

Higher prices in chemicals contributed approximately 1% to overall sales growth.

A detailed sales analysis is included in the appendix.

SG&A costs increased by $7 million, or 3%, due to acquisitions.

Productivity gains offset inflation, productivity implementation costs and currency increases -- once again, another sign of progress.

On a percentage-of-sales basis, SG&A was 12.8%, 70 basis points lower than last year.

Operating income of $252 million was up 20% from prior year, principally driven by volume gains and lower costs.

Versus prior year, our net income and EPS grew 24% and 21% respectively and, most importantly, we continue to improve our return on capital.

ORONA (ph) stands at 10% versus 8.9% last year.

On the balance sheet, receivables are up 10% versus prior year, due to the higher level of business activity.

Our DSO was 68 days at the end of the quarter, up 1 day versus prior year but down 1 day sequentially.

Receivables remain an area of focus for improvement as we continue to make our processes more efficient and drive down DSO.

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

Thanks, Paul.

Please turn to Slide 6, Gases segment.

Worldwide Gases sales of $1.4 billion were up 10% compared to prior year with volume accounting for 6% of this growth, primarily in North America and Asia.

Refinery hydrogen volumes increased in spite of maintenance turnarounds.

Electronic volumes were higher year-on-year as well.

Sequentially, Gases sales were 2% lower, principally due to outages in our energy and process industries business.

Gases' operating income of $207 million was up 9% from the prior year on higher volumes broadly.

Segment operating margin of 14.6% was down slightly from prior year, mainly due to EPI maintenance costs and lower electronics specialty materials pricing, partially offset by higher volumes.

Sequentially, the operating margin was lower due to maintenance costs and operating performance bonus timing in EPI.

As a reminder, we continue to incur productivity implementation costs.

These costs depress margins by about one-half of 1% when compared to the prior year.

Now, let me provide a few highlights by major businesses.

Please turn to Slide 7.

In electronics, sales were up 6% year-on-year, driven by higher equipment sales.

Excluding equipment, sales were essentially flat.

Volume gains in specialty materials were more than offset by pricing declines.

Sequentially, revenue declined 2% on lower specialty material sales, as fab utilization was lower, particularly at foundries.

Our specialty materials capacity utilization remains in the 80 to 85% range.

There has been a lot in the news lately about the LCD market.

Our sales into this market are not ramping as quickly as we had originally expected.

We have seen some start-up delays at some LCD manufacturing facilities.

Our Hometown NF3 expansion will be completed later this year.

We need this capacity to serve the business we have won in the growing LCD market.

Specialty materials pricing is about where we forecasted it to be.

However, volumes are soft.

Our expectations are that, when our LCD customers begin ramping and when semi manufacturing picks up later this year, volume growth will again outpace pricing pressure.

Now turning to Slide 8, in EPI, we again saw volume gains year-on-year on Heiko (ph) products up 9% in spite of a number of maintenance outages.

Stocks and volumes were lower in Europe due to high spot demand in 2004.

Sequentially, volumes decline as expected.

System-wide hydrogen capacity utilization came in at 87% for the quarter.

Last week, we announced that we signed a Letter of Intent to construct a new hydrogen production plant in Port Arthur, Texas to supply 110 million standard cubic feet per day of hydrogen to Premcor's refinery and to additional customers on our Gulf Coast pipeline system.

This is an integrated facility which will include a cogeneration plant producing 100 megawatts of power for use by both companies and 1.2 million pounds per day of steam for Premcor's operation.

This plant is expected to be onstream in the summer of 2006.

We continue to see great success in our energy business, especially with integrated facilities where our strengths really stand out.

This is the second integrated Air Products hydrogen facility to serve Premcor's Texas oil refinery.

Our first facility has been supplying Premcor with hydrogen, steam and electricity at the Port Arthur refinery since 2001.

The growth prospects for EPI business remain strong.

We now have five facilities under construction and scheduled to come onstream next fiscal year.

This represents approximately 450 million standard cubic feet per day of additional hydrogen, a 35% increase to system capacity.

Please turn to Slide 9, our homecare business.

Strong growth continued in the second quarter with global homecare revenues up 29%.

Acquisitions accounted for about 18% of this growth.

In our U.S. homecare business, we completed two additional small bolt-on acquisitions since our last teleconference.

In March, we closed on our first location in Florida and on April 1, we closed on another one located in Tennessee.

Our FY forecast for acquisition spending in healthcare remains unchanged.

On U.S.

Medicare reform, reductions in option reimbursements were announced at the end of March.

The impact of approximately $3 million per year is included in our guidance.

Please turn to Slide 10.

In our North American liquid bulk business, the volume index is up 6% year-on-year with good growth across all product lines this quarter.

New business signings indicate we are on track for higher volumes.

Sequentially, volumes were seasonally stronger and overall capacity utilization increased to 82%.

Average U.S.

LOX/LIN pricing decreased 2% year-on-year, primarily as a result of prior-period adjustment.

On a year-to-date basis, our LOX/LIN price is flat.

We continued to see higher energy costs in the second quarter and in addition to our November price increase, we are aggressively implementing surcharges.

Please turn now to Slide 11, European merchant gases.

In our European liquid bulk business, the volume index decreased 2% year-on-year as a number of large customers have reduced demand.

We commented on several of them last quarter.

Unfortunately, new customer additions did not fully offset lost business.

Sequentially, volumes were soft, partially due to continued weak European manufacturing.

European LOX/LIN pricing improved 4% versus last year due to pricing programs and favorable mix.

Performance in liquid bulk business is below our expectations.

We are focusing on pricing first and after improving pricing to an acceptable level, we will then focus on improving volumes, much like we have done in North America.

Packaged gas volumes were down 2%, reflecting a weak manufacturing environment and fewer work days.

Volume was flat after adjusting for work days.

Packaged gas pricing was 2% higher for the quarter.

Slide 12 shows our Asian liquid bulk business.

LOX/LIN volumes were up 17%, driven by solid demand growth across the region, particularly in Korea and Taiwan.

Sequentially, liquid volumes were unchanged where capacity constrained in some areas, but as we mentioned last quarter, we have three new liquid sources coming onstream in China in 2005.

We expect to see strong year-on-year growth in Asia for the remainder of fiscal 2005 and beyond.

Now, let's move on to review our Chemical segment results on Slide 13.

Worldwide Chemical sales of $499 million were 3% higher compared to prior year with underlying growth of 4% driven by higher prices in emulsions and higher amines.

Overall volumes were essentially unchanged.

Sequentially, sales increased 8%, primarily due to seasonally higher volumes up 8%.

Higher prices up (ph) 3% were offset by divestitures, a negative 3% impact.

You can reference Slide 21 in the appendix for a complete sales analysis.

In our Performance Materials business, volumes decreased 2% as gains in epoxy additives were more than offset by lower emulsions volumes across all regions.

Worldwide emulsions volumes decreased 10% as we are aggressively raising prices on all products in this business.

In our intermediates businesses, volumes increased 2% due to higher polyurethane intermediate volumes.

Volumes in our merchant higher amines business were lower.

We've increased prices significantly in this business and also saw a poor growing season in South America.

Operating income of $45 million was significantly higher, the best quarter we posted since 2002, on improved cost performance and higher pricing.

As a result, segment operating margin came in at 9%, up 180 basis points versus prior year, due mainly to improved cost performance.

Versus prior quarter, our margin increased significantly, up 470 basis points.

Sequentially, about half this margin improvement was driven by seasonally higher volumes.

About one-third of the improvement came from higher pricing and raw material recovery.

The remaining improvement came from better cost performance and divestitures.

Raw material costs were approximately $30 million higher than last year and through a combination of higher prices and contract terms, we recovered all of this increase.

Next, let me cover our equipment segment on Slide 14.

Sales of $93 million and operating income of $8 million increased mainly due to higher LNG activity.

We are also experiencing higher activity in small air-separation units and helium containers.

We received two new AP-X LNG heat-exchanger orders in the second quarter, one each for Qatargas III and Qatargas IV.

That's a total of four AP-X orders this fiscal year.

The sales backlog at $489 million is up significantly versus prior year and prior quarter, and the quality of the backlog continues to improve.

The backlog now includes nine LNG heat-exchangers, five AP-X and four traditional.

Now, I will turn the call back over to Paul.

Thanks, Phil.

Turning to our third-quarter outlook on Slide 15, based on our quarter two 2005 results, we expect third-quarter earnings in the range of $0.77 to $0.82 per share, or about 8 to 15% growth year-on-year.

Let me give you some of our assumptions that should drive this sequential improvement.

First, the maintenance outages in EPI this quarter were significant but we don't expect these outages to repeat.

Therefore, we expect that volumes will increase and costs will decrease in this coming quarter.

We also expect our profits in equipment to continue growing.

The backlog of LNG orders has increased, and our activity level is very high.

We expect electronics to be about flat sequentially.

This is due to the slower activity in semiconductors, which we now see as flat to down 5% for our fiscal year, and a slower loading of the LCD facilities we are serving.

In chemicals, we expect our results to be approximately equal to this quarter, as profits in our intermediates business hit a seasonal high in the second quarter with the agricultural sector and amines.

Higher amines volumes normally dip somewhat in the third and fourth quarters.

Also, a scheduled customer outage in polymer (ph) intermediates will occur during the third quarter.

This should be offset by favorable volume performance and continued favorable price/margin trends in performance materials, especially in our emulsions business.

Finally, we expect continued volume growth in line with manufacturing for our regional-based gas businesses and in line with demographic growth for our regional healthcare businesses.

Overall, this leads to our $0.77 to $0.82 per share range for our third quarter.

Now let's turn to our full year.

Please turn to Slide 16.

We are forecasting fiscal year 2005 earnings per share in the range of $3 to $3.15 per share, a year-on-year growth rate of between 14 and 19%.

This raises the bottom end of our range by $0.05 and leaves the top end unchanged.

Also, the SEC has changed the effective date for stock option expensing to have companies adopt the beginning of their fiscal year, starting after June 15, 2005 instead of midyear.

Therefore, we will adopt FAS 123-R starting in our fiscal year 2006 and will restate prior years for comparability.

We have seen excellent volume performance in our EPI, North American-based gases, Asian-based gases, and homecare businesses to date.

Our electronics business has been slower, but that is a result of a lower growth forecast for the market.

As Phil mentioned earlier, our gases margins were down sequentially to 14.6%.

We do not expect our margin in Q3 -- excuse me, we do expect our margin in Q3 and Q4 to recover.

We expect Q3 margins to be greater than 15%, based on improved volumes and lower costs in EPI and continued growth in volumes in our other businesses.

One factor that is depressing margins is higher gas prices.

We are forecasting gas to be up about $1 per million BTUs in quarter three from quarter two.

Each dollar in gas cost lowers our margin by about 25 basis points for us.

Equipment has been stronger than originally thought with the outstanding success we have had with our proprietary AP-X technology.

We now expect full-year equipment profits of 35 to $40 million.

Chemicals, after a disappointing start in the first fiscal quarter, has achieved a cost of capital return in this past quarter.

We will continue to manage this business to balance the volume and price-recovery actions we need to take during the rest of the year.

In 2005, we are forecasting to spend 950 million to $1 billion on property, plant and equipment and 75 to $100 million on homecare acquisitions.

This higher PT&E guidance is driven by refinery hydrogen and Asian electronics opportunities.

Our growth prospects remain bright.

Also impacting the full year is the $500 million share repurchase program we announced in March.

We expect to open our trading window on Friday and begin the program them.

We expect to complete the program before the end of the calendar year.

For this year's results, we expect that it will increase our EPS by about $0.02 per share, with most of that impact in the fourth quarter.

We believe that our results are proof of our progress and give us confidence going forward.

We have grown EPS by 23%, increased ORONA by 110 basis points, focused capital spending on growth by investing 75% of our capital in our growth businesses, turned around our chemicals business and achieved solid productivity improvements.

We still have a lot to do and our management team and people are excited by the opportunity to do it.

In closing, we had a good first half of fiscal 2005.

We are financially strong, and we remain focused on delivering on our commitments to you, our shareholders.

Thank you.

Now, I will turn the call over to Susan to take your questions.

Thank you.

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

Sergey Vasnetsov with Lehman.

Good morning.

I want to ask you a few quick questions on business segments.

You have achieved quite significant recovery in the Chemicals business already so far.

Could you talk about the further price outlook, if there was some further price action in April and what do you expect in the next few months?

Excuse me, a price on what, did you say, Sergey?

A price on Chemicals.

Prices in Chemicals.

We continue our price increases going forward here.

We are also balancing them with going after some volume in certain areas.

One of the things which Phil mentioned, when he talked about it, is that emulsions volumes were down 10%.

Well, our emulsions margins have -- they are in fairly good shape on a product-by-product basis, at this point in time.

Now, as gas prices go up, we are going to have to pass the additional costs through, so we will be taking price-increased actions in response to our higher gas forecast.

But the other thing which we're doing is we believe that a good portion of the recovery, which Air Products needed, has been in place by pricing actions we have continued to take in January, February, March and the beginning of April here.

Now, we believe that one of the things which we need to do is get back some of that volume.

Okay.

Secondly, you saw declines both in the UK and South America.

Was this the result of, at least partially, your divestiture of European businesses, or if not, what are the other reasons and possible outlook for the next couple of quarters?

Well, as far as the declines in the UK, from what we've seen there, is we have seen sales declines there because of the sale of the amines business there.

As far as the gas business in the UK is concerned, the UK economy has been relatively flat for us on the gas -- (multiple speakers).

North America?

In North America --.

Not North America, Latin America.

Latin America.

In Latin America, our business continues to grow fairly well in Brazil.

We do get ups and downs in that business.

It's relatively small for us, as you can tell there.

Lastly, what was the amount of sales and purchase costs of the two homecare bolt-on acquisitions you just finished?

What you can see in our cash-flow statement, if you turn to that, you can see the year-to-date, the spending on acquisitions has been about $58 million, and most of that has gone into the homecare business.

The sales?

The sales for that are less than that.

The sales for that are probably in total for the year around $50 million.

Very good.

Thank you.

Michael Judd with Greenwich Consultants.

Yes, thanks for taking my question.

On the SG&A side, can we expect some additional cost-cutting there, or can you just give us a sense for that?

I notice there was a little blip up in terms of that number.

As far as SG&A, what you're going to see is I think we had very good performance in our SG&A, if you look at it, and we look at it as a percent of sales, Michael.

So, it was 12.8 as a percent of sales in this quarter.

In last year, it was 13.5%, so we continue to drive that down, because we continue to grow the business.

So you might see some small increases as that goes -- as the business grows.

However, we are trying to take that percent of sales down further.

One of the things which is an offset to that is the homecare business.

A number of times we've talked about that.

The SG&A in that business is much larger than in our gas business, or in our Chemicals business, so that will increase it.

So the real principle reason which we had there is we went -- as I went through the factors -- was that most of the SG&A increase year-to-year was acquisitions and divestiture impact, so that produced most of the going up from the 250 to 257.

But we offset the impacts of inflation, the productivity implementation costs and higher currency and with productivity coming through to the bottom line.

So, we are very happy with our SG&A costs this quarter.

We think we did a great job.

Okay, great.

On the Chemical business, I think you mentioned you're going after some additional volumes in part of the business.

But can you talk specifically about how is the second quarter or your fiscal third quarter sort of gotten off to a start?

How do things look in April?

Well -- and we're not going to comment specifically on any of those businesses as far as the start.

I mean, our volumes will be published all in due time.

I think it's important to note, though, if you look at our Chemicals business, is that our volume trends were not all that strong for us.

The reason why was that we were determined to get our prices up, and we did that.

So we have gotten the price recovery which we needed, and I think that's an important aspect which people need to understand.

Now, we are going out balancing price and volume going forward to continue to improve this business.

I mean, the guidance which we issued is we expect the business to be about flat, you know, within those guidelines, on a quarter-to-quarter basis.

There are some factors, which I went over as we walked from quarter-to-quarter there, but we believe that the performance of this business has been significant.

It was above the expectations which I laid out for everyone in last quarter's call, and so the people who run this business have done a fine job in getting this business back up in its profitability, so we are -- so right now, it comes up and say, how can we make this even better for us?

Okay.

Lastly, just on the balance sheet, your inventory numbers -- how do you feel about the level of inventory that you have now versus last year?

Well, I think our inventories are in fine shape.

There is obviously an opportunity for us, as we utilize the SAP system and manage our supply chains better, to take that inventory number down a little bit.

I don't think there's a couple hundred million dollars in there, but I think there might be about 50 or so for us as we optimize that going forward and run, especially our export business, our supply chains, which extend over the globe in both our Chemicals and our Electronics business, to run that a little bit better for us.

Peter Butler with Glenhill has our next question.

Good morning.

Good day.

Could you tell us how many LNG projects you have now under discussion and how big a business this could become?

If it's going to expand, do you need CapEx to increase your capacity?

Okay, as far as that's concerned, Peter, the number under discussion, we're not going to comment on how many projects which we are currently contemplating.

We have nine projects which are currently in-house which sit in that backlog number.

Some are coming forward and will be completed this year, but as far as looking forward to this, we think the market is going to continue to be very good in this business.

We think that it depends upon taking LNG into the United States, which we believe that they're going to get permits for receiving terminals, taking it into -- taking LNG further to the European countries, which some of these projects have already announced they are taking their products there, so those will continue.

Now, as far as capacity expansions for those, we don't -- the cost of expanding capacity for us, should we choose to do that, is not all that great.

It will not be a burden on our returns, and we will certainly work with our customers to do that.

Obviously, the thing which we want to do is serve this market.

Okay.

Could you comment, then, on how many potential projects are you aware of, and can we make the assumption that your new technology is so good that you would be involved in all of these projects, or if there some places you just can't be involved in like Iran (ph).

Well, certainly, (indiscernible) places like Iran (ph) and we're not going to be involved with because of the laws of the United States, so there's -- so there are countries in which that is not going to work.

They are not going to sell LNG into the United States from there, so a large area of the world is going to be cut off for them.

However, I'm not going to comment on how many projects are out there (indiscernible).

It is safe to say that Air Products, with the market share, is involved in every one of them, is at least talking with them.

We believe our technology is a winner, has been -- has allowed -- the new technology has allowed people to take significant capital costs to achieve significant economies of scale that lower the delivered cost of LNG, which has always been a problem for getting into the United States, and so that is a key factor for us.

We also are going to sell some of the smaller units.

They're some of existing facilities out that which are still going to buy from us the existing type of unit which we have traditionally sold throughout the past 20 years.

Just the last thing -- when I asked about how big a business it could become, you said that you see continued very good growth, I guess.

Does that imply that you could go beyond the previous peak in yearly earnings in this business?

I think it does imply that the guidance for this year, which we've given 35 to 40, is that we believe, with the growth in this business, that it could exceed that in the future.

Well, no, I asked how it compares to the previous peak, which I think is out of my -- (multiple speakers).

Yes, the previous peak is around 60, and that depends a lot upon timing of it, Peter, and the length of those things, so it's hard for me to go out.

What I don't want is to give any guidance for 2006 or 2007 at this point in time.

We will give that at an appropriate time.

Thank you.

David Begleiter with Deutsche Bank.

Good morning, Paul and Phil.

Paul, on your LOX/LIN pricing, it was down 2% during this quarter.

Your other -- you U.S. competitor posted a 2% increase in the quarter.

Just comment on those two metrics.

Yes, I can.

If you take on the LOX/LIN pricing, one of the things which Phil mentioned is that we did have -- there was an adjustment to LOX/LIN pricing.

If you look at it year-to-date, I am about flat, and so my competitor is up 2% in this quarter.

You know, one of the things which they have had very good growth in has been on the oilfield services business out there.

They have a number of plants which are out there and they are probably hauling things a fairly large distance and driving -- and getting a fairly nice price for those things.

They have a good market in that area.

As far as for my business -- and we're pleased with our balance of volume and price at this point in time.

One of the things which we said is we added sales capacity, our signings continue to be very good, our utilization is up, and our return is above our cost of capital, so the business is performing well for us.

Paul, just on Europe, are you losing share in that region?

Can you comment on what you can do to reverse that trend?

Well, the economy obviously in Europe and as we see it, it is flat to down, especially in some of the markets which are going to use industrial gases for us, and so it is possible that Air Products could -- and we certainly have a number of large customers who have disappeared for us, so as a percent and in looking at share, I have lost some share based upon those large customers, but when I look at some of my other underlying business, I feel fairly good.

As Phil said, we've got to get the pricing up in that business, and once we get the pricing to an acceptable level and to levels which are going to support the reinvestment, same as we did North America, and then we'll go harder after volume.

Last, given Chemicals' strong results this quarter, has your view on the margin potential changed, i.e., as it got higher?

No, it has not for us.

In fact, one of the things as we look at this and when I was looking at this at the beginning of the year, I thought I would need like a 10% margin to get the cost of capital.

Well, I can get there at a 9% margin, because of the increase in raw materials which I have to pass through, and so that has taken that down.

But I still would say, I'm still shooting -- you know, would I like to get up into the 11 or 13% range?

Yes, I would.

P.J.

Juvekar with Smith Barney.

Paul, you said that LCD is not ramping up quickly.

You had volume growth of 20%-plus in the past few quarters.

Can you tell us where you stand now?

What has changed?

Is it lower demand?

Is it technical difficulties at startup?

Well, as far as on the LCD thing, the thing which has changed is there probably are a number of factors.

I'm not going to comment as far as the customers are concerned from there, but they have stretched out for us.

But we do not expect the stretch here to be years; we measure this in months, as far as what things have happened.

We still expect that the basic things behind here and all the signs which we see are still very good on the LCD market.

So that 20% volume growth, where does that stand today roughly?

Well, certainly, if I look at this in our -- in my electronics business, I had a good growth, as I reported; the revenues were up 6%.

We had good growth in NF3, which is one of the principle products, and in the specialty materials.

We saw good year-on-year growth.

Sequentially, what -- and what we have seen are volumes which are flat to down, very much in line with the market.

Our revenues are down 2% on a sequential basis.

Okay.

If this slowness continues, would you delay your Hometown expansion?

No, the Hometown expansion is proceeding along, as Phil mentioned in there, as we need it.

The volume growth has been in there.

There are certain phases of that expansion which are already onstream and working, and we will bring it pretty much fully onstream in the early summer or so.

Just quickly on your return on capital focus, you know, you've talked about that for a while.

Have you changed how you compensate your line managers and your salespeople to align incentives?

As far as on the return on capital, we have always gone after and tried to have that as a large component of people's compensation.

On the senior managers, they have a program which rewards them on return on capital.

If you take that down further into the organization, people are paid on goals which are specific to their objectives within the business.

Okay, so return on capital mostly for top managers?

The top managers, the top 50 or so people in the Company.

Jeffrey Zekauskas with JP Morgan.

Hi, good morning.

I was looking on the funds flow statement, and there's proceeds from sale of assets and investments of 34 million.

If my memory serves me correctly, at the end of the first quarter, it was 2.6 million.

So what's that, you know, $32 million difference?

Is there a taxable gain or something that's flowing through the income statement?

Well, one of the things if you go through there, Jeff, if you go up on the cash-flow statement, you'll see a gain on the sale of assets and investments of seven, which correlates to that -- to the 34 -- for those things.

So that is the gain year-to-date, there.

What it is it we have -- and part of the return on capital is to take and to shed assets for our things, so it's not necessarily businesses, but it's things of selling warehouses, selling land, etc., which is an ongoing thing.

We've always had some portion of this in the Company, and so it sits there and most of the results of this flow through the other income and expense line, you know.

I'm sorry for missing it.

So what's the after-tax effect?

Well, if you go and apply -- and take the tax rate on it, Jeff, but the thing is that we always have some portion of the things out there for us.

Really, the place to look is on the Other Income and Expense line of the P&L is where I would direct you to, and that's where it flows through.

You can see a slight gain for this quarter over prior year.

The real gain on that is about -- is really on the interest income aspect of things, because my cash balances are much higher.

So, it doesn't have a major impact on the Company as a one-time item when I put all the one-time items together, Jeff.

So is the right calculation that it's about $0.03 a share?

Am I doing that right?

No, that's too high.

On the seven? (multiple speakers) -- million dollars?

Seven, is that it?

Yes, the $7 million, that would be about $0.02 a share for me.

Second, when you adopt SFAS 123-R, what is the -- so if you adopted it at the beginning of this year, how would your earnings per share change?

$0.12.

$0.12 negative?

$0.12 negative.

So that's the sort of number that we would expect for next year, all things being equal?

Yes, but I think you have to go and you have to take what the program, what the stock price is, how many options get granted, you know, our board has to work through all that stuff so -- and those things haven't happened at this point in time.

I guess just the last question is, is your operating income in electronics going up or down?

We don't comment on that as far as -- because it's not disclosed as a segment.

I think the thing which we have said before it Electronics is an area in which we need to focus our improvement.

We've got productivity initiatives going there very strongly, and the loading of our assets is important in this thing.

So as we get to our return on capitals goals, Electronics is a principle area of focus for us.

So you just said down, is that what you just said?

No, I said -- no.

What I said to you is I'm not going to comment on that but I will tell you that, as far as going forward here, Electronics is an area in which we have a number of improvements to make.

As we've said before, loading opportunities exist in that business and productivity is a way of life in that business.

A lot of the productivity gains which we saw in this year have come in the electronics business for us.

Don Carson with Merrill Lynch.

Good morning.

A couple of questions, and John seemed to make some comments somewhat cautionary on the manufacturing outlook is -- and I know you've taken out your equipment guidance;

Chemicals recovered a little better and yet you haven't taken up your full-year guidance.

Is it industrial gases outlook that you're concerned about and where you are seeing this slowdown in manufacturing, or was that just a concern for the second half?

Well, certainly, I think it's a concern more for the second half.

I think the growth through -- and through the first two quarters has been good in our manufacturing-related business.

In the gas business in the U.S., we've done very well; in Asia we've done very well and Europe, as we've said, has been flattish to down and that's what our volume trends has been (sic) there.

But if you look at -- the concern for us is on the Electronics side, in that we've seen a flattening.

We expect that flattening to proceed probably another quarter, as Phil mentioned, and then a pick-up hopefully in the summer time frame for us.

So it's more of an Electronics issue then a slowdown in -- (multiple speakers) -- production -- (multiple speakers)?

Well, as far as on the industrial production, we do expect that industrial production will be more towards the lower end of our range, which we originally gave you, which was kind of the three to six, so we are probably saying three to four right now as far as industrial production for the fiscal year for us.

Okay.

Then moving back to Chemicals, I know, at one time, you had a target of getting to a 10% segment margin by the fiscal fourth quarter.

You are already at 9% and you're saying you see a flat Q3.

Two questions -- one, is that 10% target still valid?

Two, you talked about now going more for volume than for price in emulsion.

Is that a comment on the competitive nature of that market?

Because I thought that Celanese was a more disciplined player than the previous owner of that business.

Well, as far as chemicals are concerned, first, as far as the target on the margins, the eventual target for us is to get to the 11 into 13, so to take it above 10.

As far as on the rest of the year, you know, a good portion of our margin improvement is going to come from our ability to continue to pass through on the raw materials side and to gain some share-back in emulsions, in higher amines, etc., in which we've taken a lot of price actions.

So as successful as Air Products can be there, and we're going to be.

So we're taking some different (ph).

As far as your comment on and your question on the emulsions business is that the volumes are down 10%, so the plants are not loaded to the level to which we would like them to be.

As we go forward and we look at that, and we're going to be selective about this but there are accounts in which we think we would earn a good return and go after that.

We have programs to go after that.

The hard thing is to get -- is to do -- is to get the prices up first, and we needed to do that and the good news is we did that.

Now going after the volume is the next phase of this, to drive improvements and profits further, Don.

You said you're earning your cost of capital now in chemicals.

Are you earning your cost of capital in emulsions and do you think you can earn your cost of capital in emulsions without having some more producer-like economics in VAM?

The answer the second question is yes -- is that we do believe we can get our -- (indiscernible) our cost of capital without being a back-integrated type of person in there.

We think there are ways to purchase and things like that.

We've done those types of things before, to go after that.

Right now, if I'm (indiscernible) for the group, I'm earning my cost of capital.

In emulsions, I'm not earning my cost of capital.

So, I'm unloaded to -- it isn't huge, but I do have loading opportunities in that business.

Okay, thank you.

Robert Koort with Goldman Sachs.

Thank you very much.

Well, I guess to beat you up a little further on this on the -- I guess the trade-off between volumes and pricing in Chemicals, I'm just curious.

You know, you obviously got prices up but you lost volume; you're happy with your price and you hope to regain the volume.

But if you lost some volume, I don't imagine the market shrank by 10%, so obviously somebody else out there has got a higher threshold for margin pain than Air Products does.

Is the reason you get volumes back because you see your competitors matching your price hikes and therefore you don't have to give concessions, or will it require pricing concessions on your part?

Well, Bob, and that spreads into an area of talking with my -- about the pricing in my competition, which I'm not going to do, because of -- on the legal side with those things.

But I just want to tell you, the thing which we're not going to do to get volume is to give up price, okay?

We work hard to get there, and we are going to keep our price.

Well, I guess you mentioned raw materials continue to escalate, so (indiscernible) even have to get additional price this year?

Yes!

Absolutely, absolutely.

If the costs go up, we're going to pass them through.

I think what you've seen is the resolve of Air Products to do that.

That's -- and so, we are determined that we're not going to operate and fund the people below us on this thing.

We are going to take our prices up.

Then two questions are on raw materials through the Chemicals business.

Can you just highlight -- I might have missed it -- the methanol contract and what level of benefit -- are you fully accruing the benefit of that or is it partially -- (multiple speakers)?

It's all in there; it's all in there. (multiple speakers).

Also, we have seen a little bit of rollover here in some of the commodity chemicals.

To what extent do your procurement guys -- are they able to beat down now and get some pricing relief or, because of the whole structural issue in energy, is that just impossible?

We see that also, and we will be out trying to beat that down.

Do you expect any success?

Sure!

I hope for some success, absolutely.

Tim McKeno (ph) with Key/McDonald.

Good morning, gentlemen.

Just to sort of springboard off of Bob's previous questions here, maybe approach them at a different angle, you had mentioned that you are looking to define balance between pricing and volume, but you're not going to sacrifice pricing to gain volume.

Maybe at a different angle here, do you have any comments or any indication as to how that price cost spread is going to look in your fiscal third quarter?

I mean, do you think you'll be able to continue the trend of offsetting the higher raw material costs with pricing increases?

That is what our intent is to do, absolutely.

Okay, one final question here I guess regarding your liquid bulk volume of 6% year-on-year increase for your fiscal second quarter.

Do you see this accelerating through '05 or is that 6% a fairly good run-rate to use going forward?

The 6% has been a good -- and we're pleased by that.

It's hard to project.

You know, it could go up a little bit; it could go down a little bit.

It depends upon customer takes; it depends upon the manufacturing production.

But we are pleased by the signings which we have had and the signings which we continue to have.

Okay, great.

Thank you very much.

Nina Scheller with Morgan Stanley.

Yes, hi.

You mentioned that, in Chemicals, your pricing overcame the $30 million higher raw materials and yet, on the EPS line, you had a $0.02 hit from price/ raw materials.

Is that I guess all coming from electronics, then?

Yes, I said that.

Okay.

Then, in Electronics also for NF3, are these pricing declines accelerating?

We've seen a number of competitors announce capacity expansions.

You know, and we're not going to comment about that as far as the individual pricing on that product.

As far as on the Specialty Materials overall, the thing which we said is that the volume increases did not offset the pricing declines this quarter.

That concerns us.

So, as the market grows, we expect that to bounce back in the next couple of quarters and have us -- have the volume decline -- the volume increases exceed the price declines for us.

Okay, thank you.

Jeff Cianci with UBS.

A couple of the questions to finish up.

Corporate items were down.

Are they going to say down at this level for the year with the segments?

The guidance on corporate is about 8 to 10 (ph) of the loss normally, Jeff, for us -- (multiple speakers) -- on average.

Great.

In Europe, Gases saw down volume, but the UK number regionally looked way down.

Is that particularly where your customers are out?

I missed that.

That is not all gas.

There's the Chemicals business.

We got out of the amines business.

That's where it was.

Okay.

That's it.

There's probably a little bit on the equipment segment.

We sell air plants (ph) out of there.

Finally, in the past, equipment has had not a whole lot of seasonality other than the first being weaker.

I mean, if we're going to ramp up to the new range of income this year, even without capacity expansion, do we have a jumping-off point for another strong gain in fiscal '06, A?

B, is there a pricing component here -- (multiple speakers)?

On the equipment, you know, as far as the answer to the question on pricing is these are large exchanges and they are done on a negotiation, so pricing is going to be project-by-project for us.

As far as the ramp-up in equipment, I think yes, we're seeing a ramp-up in our equipment; we're seeing good order intake.

Our backlog is at a very high level, as we talked about, and so that, as far as being a good place for us to be for '06, yes, right now, we believe that.

Now, the AP-X units are bigger, so I suppose they cost more.

I'm just wondering on a unit basis --.

Yes, they do.

-- would they be higher margin to you as well, do you think?

We don't comment on the margin for these products.

All right, well, thanks, Paul.

John McNulty with Credit Suisse First Boston.

Yes, hi, Paul.

On the LNG equipment business, I know back in, I believe it was '98, this business earned about $60 million of income.

I think, at that point, you were actually working on roughly nine pieces of equipment that year as well.

So I'm wondering why, if you've got nine that you are kind of in the process working on now, why the profitability may be a third lighter to almost a half lighter in '05 versus, say, the '98 period.

Well, the other thing is that we have just taken in -- you know, the orders on the last two have just come in, and so we have just started to work on them.

So you go back to the '98 timeframe, we actually had nine in for the full year there.

Okay, so that -- (multiple speakers).

That is not the full year.

So I would assume that bodes pretty well for '06 at this point.

It does set us up well.

Okay.

Then on the acquisitions that you made in the healthcare area, I know you don't like to comment too much on price of these things but I know when Praxair made their big healthcare acquisition last year, it kind of jacked up the prices for these things, at least temporarily.

Have you seen the price that you have to pay for healthcare acquisitions subside a little bit or are we at a new level here?

We never saw the prices for the acquisitions which Air Products do go up.

You know?

If they did, we would not have done them.

Okay, great.

We have a limit on price in this business.

Okay.

Now, with the new healthcare reimbursement rates official out there, have you started to see the prices come down or was that already being factored into kind of the price -- (multiple speakers)?

We factored it in.

That's what I was looking for.

Thanks a lot.

Robert Reitzes (ph) with Bear Stearns.

I would like to go back to the question that Koort asked about pricing and the Chemicals.

The question I have is just taking the -- can you just pick off a few of the major products you buy, the commodities, and just tell us what you see for this quarter, or for -- or just the last month in pricing trends?

Can you be specific as opposed to general?

Yes.

If you look at the things and the prices in which we buy is VAM, and VAM is based on a formula from our supplier, we think.

So we don't comment about -- on VAM going up or down for us.

We would give you a look at the -- if you would take a look at the index for that one for us.

But it's not something for which I'm allowed to comment on.

That's our biggest one.

If we take some of the other ones, some of the other ones, the pressure has relieved.

I -- propanol has gotten a lot more available for us of things.

But the pricing situation in chemicals, as far as for a lot of these products, it moves up-and-down as you know, Bob, and there's a balance in which people are trying to strike right now.

As long as there's the volatility in the energy markets, I think we're going to see that.

So we have to get -- I mean the key for us is passing these prices through.

Then the one follow-up on that, if I could?

In terms of raising your prices, are you seeing some elasticity of demand as instead of foregoing a customer, are you finding resistance just in general to higher prices and therefore people just coming back on demand as just something systematic of higher prices?

We have found it a better environment over the past six months or so, or not nine months or so, for us to go out and raise prices in.

The reason for that is gas and oil have both moved up and gas principally, which was a lot of our -- a lot for us -- was the only one and that was higher than oil.

As oil has gone up, it has put a lot more pressure in there and substitution on some of our products has become a lot harder.

So, we have seen a better environment for us in pricing.

Okay, thank you.

A follow-up from Jeffrey Zekauskas with JP Morgan.

Just to follow-up on the asset sales, where does that 7 million ripple through on the line of business?

Is that chemicals or gases or how does it split?

On that, it flows through on the Other Income line.

If you look at that, some flows through Corporate, Jeff, some flows through Gases, and a little bit flows through Chemicals for us, so it's across our businesses.

But I think you're going at it the wrong way, because the place where you have to look at this is go to the Other Income line on my P&L, because that contains the one-time items essentially for me, and to take the interest income, foreign exchange stuff, and in this quarter, $8 million in income; last year, I had 6, so it's not a big deal year-on-year.

Mr. Sproger, that concludes the question-and-answer session.

I will turn the conference back over to you for any closing or additional remarks.

Thanks, Susan.

With the opportunities ahead in our growth businesses and our focus on productivity, we are confident we can deliver throughout fiscal 2005.

Thanks for joining us today and please go to our Web site to access a replay of this call beginning at 2 PM today.

Good-bye.

That includes today's conference.

Thank you for your participation.