Air Products and Chemicals Inc (APD) 2005 Q4 法說會逐字稿

Good morning.

Welcome to Air Products & Chemicals fourth-quarter earnings release conference call.

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

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

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

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

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

Mr. Sproger, you may begin.

Thank you, Regina.

Good morning and good afternoon to our European colleagues.

Welcome to Air Products' fourth-quarter earnings teleconference.

I'm Phil Sproger, Director of Investor Relations.

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

Please turn to Slide 3, and I will turn the call over to Paul.

Thank you, Phil.

Good morning and thank you for everyone joining us today.

We ended fiscal 2004 saying we would drive topline growth and return on capital in fiscal 2005, and that's what we did.

We posted significant improvements in sales, earnings, and return on capital this year, despite the impact of many hurricanes, both at the beginning and end of the year, and soaring energy and raw material costs.

Specifically, we achieved record sales of $8.1 billion (ph), up 10% with underlying growth of 6%, driven by volume.

Net income of $712 million, up 18%; diluted earnings per share of $3.08, up 17%.

We turned around our chemicals and equipment businesses.

This is strong performance, driven by higher gases volumes, improved chemicals pricing and strong equipment performance, particularly in our LNG business.

Most importantly, we also continued to improve our return on capital, increasing it 80 basis points to 10.3%.

This is significant progress, and we are above our 9.5% cost of capital; and this is our seventh consecutive quarter of return on capital increases.

Reflecting our strong financial position, we completed a $500 million share buyback program and increased our dividend by 10% for our 23rd consecutive year of increases for our shareholders.

A brief note on our productivity improvements as well -- in the beginning of the year, we noted that we needed to have a step change in our productivity now that we have a significant portion of our businesses on SAP.

We did that by completing over 1,000 productivity projects during the year and producing about $115 million -- (technical difficulty) -- savings.

So, fiscal 2005 was a year of significant improvement for Air Products.

We accomplished a great deal in spite of the many challenges we faced.

Let me now review the quarter's highlights.

We saw continued improvement in sales, earnings and return on capital again this quarter.

Sales grew by 5% to $2.1 billion, driven by higher raw material and energy cost contractual pass-throughs and improved chemicals pricing.

Overall, the impact of hurricanes reduced our revenues by approximately 2%.

Earnings per share this quarter of $0.79 increased 8% versus prior year, due to improved chemicals margins and higher equipment activity.

Our performance gains are reaching the bottom line as we execute our strategy.

However, impacts occurred from three hurricanes -- from the three hurricanes (indiscernible) some of our gains this quarter.

The impact from hurricanes was approximately $20 million or $0.06 per share.

From a business segment standpoint, two-thirds of the impact is in gases with the remaining one-third in chemicals.

The losses are directly attributable to property damage, lost sales, customer and supplier interruptions, and higher feedstock, product sourcing and distribution costs.

In accordance with our accounting policies, these impacts only reflect expected insurance recovery for certain property damage costs and do not reflect any expected insurance recovery for business interruption.

In fiscal 2006, insurance recoveries will be seen for business interruption and property claims in excess of the carrying value of assets damaged as proceeds are received.

Timing of these insurance proceeds will influence our results in this next year and will make our quarterly EPS guidance a bit more challenging.

As a quick business update, we have three pipeline systems that were impacted by the hurricanes.

Two are located in Louisiana and one in Texas.

The two Louisiana systems are referred to as upriver and downriver.

The downriver system, which is the smaller of the two, received substantial damage from Hurricane Katrina and is still not operational.

It serves two refineries and is expected to be ready for operation in late November, before the refineries come back on stream.

The upriver system resumed operation a short while after Katrina and is currently operating at about 90% of pre-Katrina volumes.

The third pipeline system is located in Texas.

While not substantially damaged during Hurricane Rita, it is operating at reduced rates, as some of our customers are still not fully operational.

We expect the Texas and Louisiana upriver systems to the back at full rates within the current quarter.

As you are aware, our liquid hydrogen production facility in New Orleans was damaged by Hurricane Katrina and remains down.

Power and natural gas are in the process of being restored, and we're making significant progress with the repairs.

Liquid hydrogen production should start by mid to late November.

We expect the facility to return to full operation by the end of the calendar year.

The force majeure we've declared in liquid hydrogen remains in effect, and we will continue to evaluate our situation.

In addition, we expect to resume full operation at our Canadian liquid hydrogen plant during November.

Three other items in this quarter include a $16 million gain from the polyurethane intermediates contract termination with Rubicon and an $8 million asset realization charge for our fertilizer business that we plan to sell in fiscal year 2006.

Further details can be found in our earnings release footnotes.

Both of these items together net to an $8 million gain, which is reflected in our Chemicals segment results.

Also, this quarter, our corporate and other segment includes a $5 million litigation settlement charge.

These three items net to about $3 million or a $0.01 per share gain.

Now, let's turn to our quarter results on Slide 5.

Today, we reported net income of 179 million or diluted earnings per share of $0.79 for the quarter ended September 30.

When compared with the prior year, our net income increased by 6% and diluted earnings per share was up 8%.

Improved chemicals margins and higher equipment activities drove the results.

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

Higher volumes broadly across our gases and equipment businesses contributed $0.12.

Higher pricing and raw material costs together were net $0.01 unfavorable.

Electronics price declines were mostly offset by Chemicals increases.

Other costs, which includes the hurricane impacts, were higher by $0.07.

All other items net to a $0.01 positive variance.

Now, please to turn to our financials on Slide 6.

As I said earlier, sales of $2.1 billion were up 5% from prior year.

Adjusting for currency, natural gas and acquisitions and divestitures, we generated underlying sales growth of 2%.

This was mainly due to higher gases volumes and electronics, our base gas businesses in Asia and North America and higher pricing in Chemicals, partially offset by lower Chemicals volumes.

A detailed sales analysis is included in the appendix.

SG&A costs decreased by $13 million or 5%, due to acquisitions, productivity implementation costs, and inflation.

Sequentially, SG&A declined by $4 million or 2%.

Operating income of $249 million was up 5% from prior year.

Principally, this was driven by continued improvements in chemicals and equipment.

Free cash flow for the quarter of $176 million was essentially flat to prior year.

On the balance sheet, Accounts Receivable increased slightly versus prior year, due to a higher level of business activity.

We did reduce our DSO to 65 days at the end of the quarter, down 2 days versus prior year.

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

Thanks, Paul.

Please turn to Slide 7, Gases segment.

Worldwide Gases sales of $1.5 billion were up 7% compared to prior year with underlying growth accounting for 2%.

Hurricane impacts reduced sales by 3%.

Strong volume gains in electronics in Asian and North American based gases were partially offset by lower pipeline hydrogen volumes in our energy and process industries business, or EPI, caused by recent hurricanes.

Price declines in electronics were primarily offset by increased pricing in North American and European-based gases.

Acquisitions, primarily in our healthcare business, accounted for 1% of the growth, while natural gas and currency totaled 4%.

Sequentially, gases sales were 1% higher.

Gases operating income of $205 million was down 5% from the prior year, as higher volumes were offset by lower pricing in electronics, specialty materials, higher operating costs, and impacts incurred from the hurricanes.

Segment operating margin of 13.7% was down 1.8% from prior year.

Hurricane impacts of 0.6% and higher natural gas contractual pass-throughs of 0.5% and additional operating costs of 0.6% accounted for the bulk of this decline.

Let me now provide a few highlights on major business.

Please turn to Slide 8.

In electronics, sales were down 1% year-on-year.

Strong volume gains in most products, including electronics, specialty materials, tonnage and bulk chemicals, were offset by lower equipment sales and price erosion.

On the profit side, volume gains in specialty materials kept pace with pricing declines.

Sequentially, revenue increased 4% as fab utilization rates picked up and major LCD facilities continued to ramp.

Our major specialty materials sales grew about 9% sequentially.

Our NF3 expansion is complete and we have increased our capacity by almost 50% to over 2,000 metric tons per year, almost double the capacity of our closest competitor.

This expansion, which incorporates our latest direct fluorination technology, should continue to reduce our cost of making NF3 and help maintain our position as the world's lowest-cost NF3 producer.

We continue to see a high level of bidding activity in the electronics market and expect to announce several new deals in the near future.

Now, turning to Slide 9, in our Energy and Process Industries, or EPI business, volumes decreased 9% when compared to last year.

Sequentially, volumes were also lower by 8%.

Volumes tailed off notably at the end of August as refineries and petrochemical plants -- (technical difficulty) -- prepared for Hurricane Katrina.

Volumes have continued to be below average during the month of September and into October.

During the quarter -- (technical difficulty) refineries.

This facility will utilize refinery-off (ph) gas as a fuel source and supply additional steam to Exxon.

Startup is scheduled for May, 2006.

This brings the total number of new hydrogen plants that are expected to start up next year to six, representing approximately 460 million standard cubic feet of new capacity.

Three of the new plants are located in the Gulf Coast region.

We expect a slight delay in onstream dates due to the shortage of local labor and infrastructure issues in the area.

Our employees have been doing an outstanding job minimizing hurricane-related schedule impacts while working through some very difficult situations.

The hydrogen business continues to be one of our strong growth stories and we expect revenue growth in FY '06 to be in excess of 20%.

Please turn to Slide 10.

In our North American liquid bulk business, volumes were up 2% year-on-year as volume gains in most products were partially offset by lower liquid hydrogen volumes tied to the hurricanes.

Demands for liquid oxygen, nitrogen and argon remain high.

Excluding liquid hydrogen, volumes were up 6%.

Sequentially volumes were off by 1% as liquid hydrogen volumes were lower due to the hurricane impact at our New Orleans facility.

Overall capacity utilization increased to 86%.

Average U.S.

LOX/LIN pricing increased 2% year-on-year, primarily due to surcharges.

In addition, during September, we implemented surcharges to recover uninsured hurricane-related costs on liquid hydrogen, oxygen and nitrogen and bulk helium.

Across all North American liquid products, our pricing is up 7% versus last year's quarter.

Please turn now to Slide 11, European merchant gases.

In our European liquid bulk business, volumes increased 1% year-on-year, primarily as a result of increased liquid nitrogen and argon sales.

Sequentially, volumes were flat.

European LOX/LIN pricing improved 4% versus last year, due to successful surcharging for increased energy costs.

Packaged gas volumes were down 2% year-on-year and 3% sequentially.

On Slide 12, you can see we continue to deliver strong growth in our Asian liquid bulk business.

LOX/LIN volumes were up 26%, driven by continued solid demand, particularly in Korea, Taiwan and China.

Sequentially, liquid volumes increased 6%.

In China and broadly across Asia, new business signings remain strong.

As a result, we expect to see continued strong growth during FY '06 and beyond.

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

Worldwide chemical sales of $476 million were 2% lower compared to prior year, largely due to lower volumes and divestitures.

These results include the revenue from the contract termination discussed earlier.

Sequentially, sales dropped 1%.

We continue to implement price increases to offset increased raw material costs, primarily in our emulsions and amines businesses.

Year-on-year, we have offset raw material cost increases.

Operating income of $43 million was significantly higher than last year.

About half of this increase results from the contract termination in our polyurethane intermediates business, partially offset by an asset write-down.

Increased pricing offset by the hurricane impact contributed the other half.

In our performance materials businesses, emulsions volumes were down slightly but profitability improved versus last year due to price increases to recover higher raw material costs.

Our epoxies, polyurethane additive and surfactant products saw volumes decline by about 6%, as the automotive and specialty coatings markets were slow this quarter.

In intermediate chemicals, amines volumes declined on soft agricultural demand and polyurethane intermediates volumes were down on the Rubicon contract termination and Lyondell shutdown.

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

Sales of $104 million and operating income of $20 million increased mainly due to higher LNG activity.

We continue to experience higher order activity broadly across our equipment business.

During the fourth quarter, we received an order for two traditional LNG heat exchangers destined for Yemen.

The sales backlog, at $652 million, is up significantly versus prior year and at a record level for us.

It now includes 11 LNG heat exchangers.

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

Thanks, Phil.

Now, before we turn to our outlook, you need to be aware of an accounting change, as we will adopt Financial Accounting Standard 123R and begin expensing options for fiscal year 2006.

Please turn to Slide 15.

As you can see, we've summarized the impact on our financials for the past few years.

In fiscal year 2005, the impact was roughly $0.13 per share.

In fiscal year 2006, our forecast is approximately $0.13 per share, or about $0.03 per quarter.

This change also affects our returns and our targets for them.

The impact on our Arona (ph) is 50 basis points and the impact on our ROE is about 1%.

For those of you who run financial models, we will provide pro forma financials, including the details by business segment and by quarter, for fiscal years 2002 through 2005 on our Web site.

Now, turning to our full-year outlook on Slide 16, based on the progress we've made this year, we forecast full-year earnings per share of between $3.25 to $3.45, a gain of 10 to 17% over fiscal year 2005 after correcting for a stock-option expensing.

Another year of solid earnings growth and improved returns is on the horizon.

Fiscal year 2006 will have its economic challenges as we see the impact of hurricanes, budget and trade deficits, higher energy prices, and interest rate increases on the U.S. economy.

Here are our key assumptions -- we expect lower manufacturing growth in the U.S. in this next year in the range of 2 to 3%.

Fiscal year 2005 growth came in around 4%.

For the rest of the world, we expect Europe's growth to continue to be slow while Asian growth will continue but at a slower rate.

For the countries we operate in across the world, we expect an aggregate manufacturing growth of about 3% overall, which compares to fiscal year 2005 growth of slightly above 4%.

Regarding the impact of the hurricanes, we expect them to have a near-term negative impact on quarter one and quarter two economic performance in the U.S.

However, we are also expecting the impact of the rebuilding efforts to make up for most of that near-term shortfall in the last half of the year.

Of course, the hurricanes have produced higher energy prices and we forecast natural gas to be over $10 per million BTUs, on average, for fiscal year 2006 with the first quarter being even higher.

Our gases operating results should experience good growth in 2006, benefiting from the six hydrogen plants we are scheduled to bring onstream throughout the year.

These plants expand our capacity by over 35% with over 85% of this capacity already sold under long-term, costs pass-through contracts with minimums.

Gasses results should also improve from new contracts and investments in our two other gasses growth platforms, electronics and healthcare.

We expect the electronics markets will continue to grow in 2006.

We are forecasting silicone square inches growth to be around 5% with flat-panel growth in the strong double digits.

Our electronics business improved its profitability in 2005 and we are expecting further improvements in 2006.

In 2006, we have seven new facilities scheduled to come onstream to serve the growing electronics market in Asia.

Specialty materials volumes growth should continue to be greater than industry growth, and it should overcome price pressures due to the greater use of our products in the new technologies.

In healthcare, we also expect continuing strong growth.

We have a new major contract for serving homecare patients in the UK and expect to start serving customers toward the end of the second quarter, which should add about $20 million in revenues in fiscal 2006.

Also in healthcare, we should see improved volumes from the underlying market growth in our 2005 and planned 2006 acquisitions.

We also continue to grow in Asia.

We expect to bring onstream six major facilities in 2006 to serve the strong underlying growth that is occurring across the region.

We continue to seek opportunities in Asia, where we are advantaged and where we can build on our strong market position and technology capabilities.

Shifting to equipment, fiscal year 2006 profit should increase to approximately 70 to $80 million, due to the high level of LNG orders in-house.

As Phil said, our sales backlog is at a record level.

Going forward, we expect to see broader opportunities in this business, driven from higher energy costs and the development of stranded energy resources around the world.

While we made progress improving our Chemicals business in fiscal year 2005 and returns on capital exceeded our cost of capital, we continue to be faced with significant challenges.

Overall, we are forecasting our Chemicals profits to be slightly below fiscal 2005.

This is principally due to the loss of two major contract in our polyurethane intermediates business.

In this business, the Rubicon termination and Lyondell's announcement of last week that they are permanently suspending TDI production will significantly lower volumes and impact our operating results next year.

Natural gas and oil prices are also presenting challenges for our emulsions and higher amines businesses, where we have been steadily raising prices.

While we are committed to getting and maintaining the margins we need in these businesses, we are also seeing some demand destruction occurring from the continued energy price increases.

Our growth segments in Chemicals, epoxies, polyurethane additives, and surfactants, are forecasted to carry over their good performance and growth in fiscal 2005 to further growth in 2006.

We will continue to increase our productivity efforts across all our businesses next year.

For 2006, we expect the benefits from SAP and our continuous improvement tools to continue to expand and spread our margins and increase returns.

With declining interest rates, pension expense will be higher next year by approximately $40 million.

For 2006, one of our key goals is to expand our gasses margins.

In 2005, gasses margins did contract throughout the year as higher energy prices and the impact of hurricanes drove our margins lower.

Actions we have taken already to recover the energy price increases, plus the growth of volume and the contributions from increased productivity, should return our gasses margins to about 15% by year-end.

Please note that the impact of stock-option expensing will lower our gasses margins by about 60 basis points.

Finally, our Arona (ph) for 2006 should continue to expand and -- (technical difficulty) -- to 11.5% as we continue to make progress to achieving our 12.5% target in 2007.

Additionally, for next year, we will continue to invest in our growth businesses and we expect full-year property, plant and equipment expenditures to be in the 1.2 billion to $1.3 billion range.

Note -- this includes $300 million for repurchasing the tank lease we currently have outstanding.

Excluding this impact, fiscal 2006 capital expenditure will be about the same as last year's spending level.

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

Based on our quarter four 2005 results, the lingering hurricane impacts and taking into account that our fiscal quarter one has some seasonal factors that tend to lower income in a few businesses, we expect our first-quarter earnings in the range of $0.75 to $0.79 per share, which includes the $0.03 a share drag added by option expensing.

Factors we forecast to lower earnings sequentially include ongoing hurricane impacts due to the combination of production outages, higher cost and reduced customer demand.

Margins will be further pressured by higher fuel, power and transportation costs.

Seasonally lower volumes in a few businesses, including emulsions -- (technical difficulty) -- also as we discussed before, we will see lower polyurethane intermediates volumes due to the customer terminations.

We also take advantage of this seasonal dip to schedule maintenance outages, which does increase our maintenance cost.

While we expect operating income in the equipment segment to increase significantly next year, sequentially we expect a slightly lower quarter one than quarter four fiscal 2005.

Our fiscal quarter one is impacted by fewer hours worked during the holiday season and therefore a lower percent complete is booked on our projects in the first quarter.

Factors we forecast to increase earnings sequentially include the insurance recoveries on our property damage claims should help offset some of the negative impact of the hurricanes; we should see the benefit of many pricing actions we have taken to offset higher raw material and energy prices; continued volume growth across most of our gasses businesses, as we continue to load our asset base.

Finally, given the uncertainty in the economy in the near-term, we are reinforcing our productivity efforts to be extra vigilant, and are keeping an eye on all discretionary expenses to keep spending in line.

Please turn to Slide 18.

In closing, we believe that our results speak for our progress and that gives us the confidence that we are on the right path going forward.

We have achieved solid topline growth, growing earnings per share by strong, double digits for the last two years, increased our Arona our cost of capital, continue to invest in our growth businesses, and it increased our equipment backlog to a record level.

Our whole team is excited about the tremendous opportunities ahead in our businesses.

We remain committed to increasing shareholder value next year and beyond and to deliver our 12.5% Arona goal in fiscal 2007.

To do this, we will continue to load our asset base with profitable business, build on the productivity accomplishments this past year to deliver even greater results, continue our capital discipline, and deliver the 2006 goals I have laid out to you today.

Thank you.

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

Thank you.

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

David Begleiter with Deutsche Bank.

Paul, in chemicals in '06, if you were to ex out the loss of the two customers, where would chemical and the impacts of the termination payment in '05 -- where would chemical profits be, year-over-year?

In the profits -- and they would be up by a large, a good amount, Dave.

Because, if you take a look at going forward in our Chemicals business, some of the things which we've talked about -- we made a lot of good progress in this current year of getting above our cost of capital and things like that, but we still see good opportunities.

We see growth in volume in emulsions; we see growth in volume in our growth businesses -- polyurethane additives, epoxies, and surfactants; we still see continued progress in amines; and we had great results on the -- (technical difficulty) -- and which we forecast to -- (technical difficulty).

The polyurethane intermediates, it is a significant impact to us and we're going to have to work our work through it.

It's not going to be something which we're going to be able to take -- to be able to offset in one year.

One of the things you should know is we already are out trying to resell some of the volumes, especially on the Rubicon contract, because we've had a longer time to deal with that.

We've already had some volume coming on in the next year to take up some of that slack.

One more question -- just on the productivity front, can you quantify the productivity benefits and savings in '06?

What's the delta versus '05?

We would expect that our productivity for next year would step up considerably.

You know, currently have, you know, we have $150 million in gross benefits.

Our targets are to take that above $200 million in gross benefits in this next year for us.

Thank you very much.

Peter Butler with Glenhill Investments.

I was wondering, in your emulsions and amines business, what's the reaction of your customers to your latest price initiatives?

How much room, more room do you have to raise prices?

Do you give these guys price protection?

If so, how much and does this result in some buying ahead, benefiting your volume?

As far as on the question here, the general reaction, which I will address first here, Peter, is that I think everyone sees the energy prices going up; they see the impact -- (technical difficulty) -- so in general, the pricing environment of getting the price increases through -- and they don't have a lot of better options -- has been pretty good.

Our bigger concern with this, obviously, is on demand destruction for things, and so that is -- of people shutting down and cutting back on volumes.

But as far as being able to pass our price increases through, we've done well as far as that is concerned.

Now, going forward with this thing, and we try to get out in front of our price increases, and so we forecast out in front; we announce price increases early.

You certainly have a warning period for people.

You announce and they are effective and certain people do have delays.

We also have certain customers on formula-based contracts which pass those results through fairly quick.

But as you can see from our results in Chemicals, our results are very good on the pricing front, and that has been a hallmark of us being able to turn that business around.

I hear you.

I'm still wondering how much of your volume that you have currently is due to borrowing from future periods because people are loading up before the effectiveness of your price increases.

We don't think that there is a whole lot.

I mean, obviously some of that does go on for people to build inventories of raw materials, but we haven't seen any real, large takes in volumes or surges in volumes for people, which would lead me to believe that goes on.

Certainly, if you announced a price increase for October 15, as an example, Peter, someone's going -- you're going to have larger volumes in the first two weeks of the month than in the last two weeks of the month, but that pretty much works its way through.

I don't think people go and horde volumes to a large extent.

This weakness you speak of in ag chemical-related demand, where does that come from?

We saw that in 2005.

Latin America, which is a big region for us -- and we did see it and mostly in there -- but we saw it pretty much across all or we did see across all our products.

But down in Latin America, demand was down for us.

Okay, thanks for your help.

From First Analysis, Ray Kramer.

A question for you with Chemicals, especially in some of the areas where you've lost business, because of contracts, if you are unable to fill that in a reasonable time frame, is that a candidate for some portfolio adjustment?

We certainly have to make sure -- and we do the right things on our shareholders -- for our shareholders.

This something which we're currently working through a lot of options for, Ray, and we will make the right decisions long-term for our shareholders in this area.

Just out of curiosity, is that an asset that could sort of be redeployed to produce something else, or is it pretty specific for the current product it produces?

The options are not large on this (indiscernible) redeploying this for other products.

There are a few things, but I don't think -- we're going to look at some of those things, but I don't think they're going to hold a lot of volume there.

Okay.

Looking at North America in particular with obviously input costs going through the roof, can you comment at all on what sort of level magnitude of price increases you're going to need, going into the first quarter, to sort of offset that?

And any sense of traction you're seeing there?

We've done a good job here as far as our pricing increases are concerned.

If you go back and you look at our results from a quarterly basis, from the third quarter into the fourth quarter, we have seen very good traction on our price increases.

We're going to continue to put them out and continue to surcharge.

Those things are -- those things have stuck for us, so we think we are on the right track; we think that the progress, which we demonstrated in the fourth quarter, will carryover into the first quarter for us.

We've put a number of the increases out already on that and we will continue to watch it.

Like I said before, we're going to stay in front of it.

Okay.

Lastly, on the LNG equipment business, orders are continuing to jump at least faster than external expectations.

Is there any need at this point for further capacity expansion?

We do not believe, at this point in time, and that we would have to.

But we always keep our options open and we will be responsive to the market on that.

This is a very good business for us.

We have a very nice marketshare; we intend to defend it.

We've invested in the technology; our new Apex technology has given us a real leap up on the competition.

We will go out and do the things which are needed to serve our customers.

All right, thanks a lot, Paul.

Sergey Vasnetsov with Lehman Brothers

Good morning.

A couple of questions on the hurricane impact.

Could you please break it for us what the impact might be in the fourth quarter?

Also I'm sorry, in the first quarter for you, and also what would be cumulative for insurance recovery as a percentage of your costs?

Okay, and I think I've tried to keep it at a high level and if you need a little bit more, I can break this down for you a little bit further.

But if I look at the fourth quarter, you know, we had a 600 (ph) share drag, two-thirds in gases, a third in chemicals.

Going forward, I would expect that drag to be about $0.03 to $0.05 in the first quarter.

Now, the offset is included in there on insurance recovery for us, so I don't get completely - for the first quarter, I have a slight negative.

Then as I go out into the second, third and fourth quarter, I think the insurance recoveries on the BI side will -- and they will come and make up for that.

So for the year, I think the impact will be about even to slightly -- a slight positive for us.

Okay, that's very hopeful.

Secondly, on the healthcare business, with customer reimbursements, do you see some shakeouts in space which might allow you for some acquisitions in the forthcoming year?

We continue to look on the acquisition front in this business, and you can see we just closed one recently in Indiana, you know, and we do believe that the cost pressures on the Medicare side are going to drive people out of the business.

So we think that gives us an advantage, longer-term, as we bring our productivity efforts to bear in that business to get this to be a great growth platform for us.

So yes, I do think those opportunities are going to present themselves.

Realize that we look at a lot of opportunities in this business, so as we go forward here, our team turns down acquisitions all the time because they don't meet our criteria.

So, they've got a strict set of criteria to meet, which they have to meet to get through the siv (ph) here.

P.J.

Juvekar with Citigroup.

Yes, good morning, Paul.

You know, your Chemicals business held up quite well, despite these rising feedstocks.

How much of that improvement would you attribute to your methanol contract in Trinidad and your low exposure to U.S. natural gas?

Yes, well, certainly -- and that has been a big thing for us.

As we said, we think that the benefits in this year and from the prior year is about $15 million on that contract for us -- year-over-year benefit.

(multiple speakers) -- today's prices?

Excuse me?

At today's natural gas prices?

Yes.

Well, on the gas prices, but actually on the contract there in Trinidad has saved us about that over prior years, so that's my year-on-year improvement.

Okay.

Then second question I had was about NF3 capacity in Hometown.

The growth for NF3 in Asia, you're adding capacity in Hometown in somewhat an over-supplied market.

I mean, it just seems like it's growth for growth's sake, or can you just talk about that?

What sort of hurdle rate are you using on that project?

Phil, take that question.

P.J., let me answer that.

First of all, I just want to kind of remind you that NF3 is less than 4% of the Company's total revenue, so it's not what drives the Company at all.

It's a big portion of our electronics portfolio.

What we do there, P.J., is we're continuing to look at lowering our costs and growing volumes to keep pace with any pricing pressure there.

We just expanded the Hometown plant, as you mentioned, by 50% and that's to keep pace with the demand that we see in the market and the contracts that we have in-hand for the LCD manufacturers, which are ramping up right now.

We had a very strong year-on-year growth on NF3 and as we look out in the future in this business, we're going to continue to keep our hand -- or our eye on the market and look at where the lowest-cost source of supply is for us.

Right now, with this expansion in Hometown and our proprietary direct fluorination technology, we believe that we are the lowest-cost producer in the world.

We are twice as large as our nearest competitor in this market, and between that and the driving forces in the industry, we look at this as a very good long-term growth business for us.

We are very happy with the business, and it made the most sense for us to expand in Hometown.

It doesn't preclude us from expanding at some point in time in the future in Asia, if the business conditions warrant that, but believe me, rest assured we're going to take a very close look at the volumes required in the business before we make any kind of investment.

Thank you.

Jeffrey Zekauskas with JP Morgan.

Good morning.

I guess I just have I guess a couple of puzzles that I want you to solve if you can.

In the earnings analysis that you had, the volume benefit for the Company as a whole was $0.12.

It seems that the volume growth for the Company as a whole was about 2%, so 2% is about 40 million in sales, pretax.

So, to get to $0.12, if you tax it at 25%, your margin has to be about 100%.

So, is it the case that the volume number really shows the cost improvements that you've made and that the $0.12 is something like the net cost benefits that you had from your cost-improvement program, or how do we think about that $0.12 number?

Okay, Jeff, and it's something -- and I looked at this also, because what you get on this thing when you'll work through this is that we did well on the higher-margin products, and we grew the volumes there, and we didn't grow the volumes on the products which have lower margins, or even individually with certain customers within product lines.

In so doing that, when you do that and you manage the business in that way, what you produce is a very high, good volume impact, a favorable volume impact for you.

So it gets down to the basic things, which we've been doing and saying which we're going to do, we are going to grow in the business in which we are advantaged, and we're going to build those businesses, and that's what you're seeing.

You're seeing that stuff come through to the bottom line as far as the volume impact.

It gets down to the asset-loading activities which we've talked about and all of those things.

So is there a net cost savings number that you have for the year?

You know, when you looked at your cost-cutting programs, sort of what you really achieved this year?

Yes, we looked through and looked at the whole thing -- is $150 million in gross benefits, which we have.

We think our inflation overall is about a 90 number or so on that.

Then we had some implementation costs and some other things, so about $50 million as we've looked at that to what we brought to the bottom line over this past year.

My second puzzle is, when I look at the electronic statistics that you published, I guess my general impression, which may be false, is that your volumes are up in fiscal 2005 somewhere between 5 and 10%.

From the commentary, it sounds like your operating profits are lower, year-over-year, maybe not by a lot, but by some.

You know, this has been a good year for the electronics industry; it has been a good cyclically strong year, so it does seem or one wonders whether you are on some kind of electronics treadmill where --.

Jeff, just a point here -- as I said in the thing, in 2005, year-over-year our electronics profits are up, year-over-year.

So, we did make progress in that thing.

I mean, obviously the concept of the price decreases, which as we've said, we have to learn to live those things; those things happen to us.

But we've got very good volume growth on things, and so our margins increased a little bit here and our profits are up, year-on-year.

So, we did make good progress here, and we continue to look at this and think we have lots of things to make good progress in the future.

So this is sort of single-digit volume growth, single-digit profit growth, or mid single digit?

Is that the right --?

It's above that but it was a good year in electronics for us as far as us going forward, year-on-year, above the mid singles.

From Goldman Sachs, Bob Koort.

Good morning, guys.

I was wondering if you could talk a little bit on the contract terminations.

You got paid for one contract and it sounds like the Lyondell shutdown you didn't get paid they're.

So what was the difference in the contract terms?

Is that business historically -- I believe has been -- (technical difficulty) -- volatile than your overall Chemicals segment, so what can you do to replace that stable margin business?

Yes, and you are right about -- it has been a very good -- a good, a stable business for us.

It's built upon long-term contracts like we have in our gasses business.

We have not had a termination from Lyondell at this point in time.

So they have a payment which they have to make to us every year as far as that is concerned.

I can't really go any further as far as saying that because we're going to talk to them and negotiate with them going forward.

But the contract does assure that I will recover my assets, I will have -- I do get those recovery on the minimum takes, which they are obligated to take and which I was selling them.

So they've got to officially shut down the asset before they would be obligated to make some sort of termination payment?

What they have to do is, well, they're going to make -- what they have to do is terminate the contract.

What I will do is continue to build them for this, and they will have to continue to pay even though they don't take product.

That's the way our contracts work -- if they terminate and then I get a termination payment.

But they have not done that yet.

Then in terms of Rubicon not wanting your TDA any more, is it a function of they want somebody else's and it's game of musical chairs, where you can go find whoever that other supplier is and grab their customer, or can you tell me what's happened in the market that has made that change?

They shutdown the facility and sold the business.

Do you know if someone else will operate that business and you can get a future contract with them?

We believe -- we will benefit from the volumes of that person as they take over the customer list of that.

They are not going to operate the facility; the facility is shutdown, and so other people will pick up the volume, which was in there, and we should get the benefit of that.

We also have additional product now to sell, and that's what we're out trying to do already.

But you' already service the buyer of those -- that customer list?

Yes.

Don Carson with Merrill Lynch.

Looking at the chemical or Gasses margin forecasts, rather, if you back out options, you're running about 13.9% operating margin this year.

You're talking about getting above 15 next year.

What is the biggest part of that recovery?

Is it volume growth in hydrogen and electronic materials?

How much comes from productivity?

On electronic materials, I know that you have gotten down to single-digit margins.

Where are you today in terms of margins?

As you load up the NF3 plant, do you see that as getting back to double-digit margin levels?

Okay, on the margins, going forward, yes, let me cover that one first here.

If we look at that, certainly the things which we have coming onstream, we have a lot of investment which we've been putting money in the ground in the EPI business, in our electronics and hydrogen plants, the electronics plants coming onstream and they will come onstream at a good margin.

They should help us.

The other thing which we have here is that we have productivity efforts going forward.

Those productivity efforts are across all of the gasses businesses, but particularly we have a large business in Europe and the U.S. in which we can leverage our productivity in there.

So, you know, you have the combination of volume in the growth businesses and productivity across the board, which drives the margin improvement, Don.

Just to be clear on that, that target is after the drag of the option expensing.

Right, because that's about 100 basis points or so, but can you sort of -- how much from volumes, how much from productivity?

Would it be more volume-driven?

I think, in the end, it's going to be more on the productivity end for us for the year, because when I bring the volume, I obviously bring in sales with it, too, so you get a nice impact but $1 in productivity is $1 to the bottom line.

Okay.

How about on electronic materials margins and the recovery there, as you load up NF3?

As we load up NF3, one of the things in which the investment has done here is it has taken the absolute cost of making NF3 and driven it down for us.

So, that is a big impact for us, so our average cost overall is lower for us going forward here based upon that investment.

So that helps the margins.

The other thing which helps the margins, obviously, is the volume growth in this business, which we do think is still going to be in the strong double-digits in electronics/specialty materials as far as volume is concerned.

The LCD fabs are ramping.

We continue to see new fabs in Asia coming onstream, so we do think the volume growth is going to be strong.

Does that mean you'll be back to double-digit margins in that business in fiscal '06?

It will be hard to say, and stay tuned on that.

You know, for right now, I would hope so but I would expected it to be, yes; by the end '06, yes, for the year.

You mentioned that there is a lot of bidding activity in electronic materials.

My understanding was that Samsung would pretty much fill up the Hometown expansion.

Would you have to spend some more money if you want some of these incremental bids?

Samsung does not completely fill up the Hometown expansion.

Samsung and some other customers go out and fill that up.

As we go forward, sometimes in the next year or so, we're going to have to make some decisions as far as our capacity is concerned and how we continue to grow it, so 12 to 18, two years out.

But I think, as far as our current capacity is concerned, we do have the ability to absorb the growth in the market.

Plus, the other thing is, we're going to continue to look and look for ways to increase that capacity internally without adding capital to it by better going out and run the facility.

This is an area which continuous improvement has really help us up at our Hometown plant, so I would expect that our engineers will find ways to get even more out of our plant.

Finally, just one clarification -- on the insurance recoveries, you say you're going to get business interruption insurance.

Is that included in your guidance, an assumption of a recovery?

Yes, the assumption of a recovery on the property damage and the BI is included in there, Don.

Like I said, I think, overall, for the year, it will be even to a slight gain for us.

Mark Gulley with Soleil Securities.

I've got a couple of questions.

First of all, can you refresh our memory on the basis for the sharp decline in volumes in ETI?

That's clearly one of your best businesses, and yet recent volume peaked several quarters ago, and I know the hurricanes have affected volumes recently but volumes declined sharply before that.

Phil?

Yes, Mark, just to go through that, we had some plant outages earlier this year, and then that ran into the hurricane this quarter, as you pointed out.

But I just wanted to remind you that it's a long-term contract business with minimums, so volumes aren't the primary driver in this business.

With '06 coming up, we again see very strong growth in this business with the six plants coming onstream.

You should see that start to show up in Q1, as the first two out of those six should be onstream.

So again, I wouldn't look at the business as being volume-driven;

I would look at it more as being driven by the amount of capital and the returns that we get, that we put in the ground.

Thanks for that clarification.

Then secondly, I am going to beat the dead horse;

I'm going to beat the dead horse of NF3.

How would today's pricing compared to the price forecasts that was in the original capital request?

We are hearing from some of our sources that pricing in this quarter might be down strong double-digits versus the average for last year.

Yes, Mark, I wouldn't -- I would say pricing in NF3 is pretty much in line with where we thought it was going to be.

We do you see price declines; we also see volume increases in the business going forward.

Again, with the size of the volume increase that we have going on in the business, we are keeping pace with any price declines.

I just want to remind you again that electronics was up sequentially, or excuse me, year-on-year, and we have expanded margins.

So yes, there's pricing pressure but the name of the game here is to cut your costs, which is what we've been doing.

We've tripled our productivity in electronics; we have over $30 million of productivity in electronics this year.

We're going to try and get that up to a much higher level next year as we continue down this path, and it's no magic to us, Mark.

We need to cut our costs in this business; we are doing that and we will continue to do that in the future.

We're very pleased with the position the business is in right now.

Mike Sison with KeyBanc.

Nice to see LOX/LIN pricing up 2%.

Do you see that accelerating with the price increases in place?

Yes, we do.

We've got three surcharges that are in place during the month of September.

You know, one of the things that we've really driven in this business is to increase the speed at which we do surcharges.

If you would have talked to us a year or so ago, it may have taken us three or four months to put the surcharges through.

Now, with SAP, we have made a lot of progress on understanding what the surcharges precisely need to be, very quickly, as well as getting those out to customers as quickly as we can.

So we're down two weeks now rather than months with surcharges.

So we would expect to see that come through pretty quickly next quarter.

Right.

You know, Paul, when you look at liquid bulk this year for North America had a nice improvement in volumes.

I know your outlook for manufacturing is a little bit lower than this year, but can you get volumes next year at the same level as this year?

We would not probably see the same in growth because I don't have the capacity, Mike.

So the things which we're turning to in this business is we're looking at conversions in which we take customers and we move onto an on-site plant, which secures the revenue secures the customer for a longer period of time -- a good decision for us, for those people who use product continuously, and then go out and resell the product.

So, the capacity in this business is at pretty good rates.

We are at 86% utilization.

That process won't be to add capacity, just move them into the more -- (multiple speakers) -- on-site -- (multiple speakers)?

Yes, and we think the right decision here is to take and targets (indiscernible) customers go out and sell them at on-site and it changes the economics for them a little bit, but it's the right decision for us.

It's the best deployment of our capital in this business.

Last question -- in China, we are hearing that there's still some pricing pressure liquid bulk over there with some overcapacity.

Are you seeing similar types of pricing pressure in that region for liquid bulk?

It depends on which region you look in, in China, Mike.

We operate in three different regions.

We do see some pricing pressure in the south, probably more than we see in the other regions.

But remind you, we saw 26% growth in the region.

We brought on a few new plants, and probably our overall capacity in the Asian region, our capacity utilization, is right around 80 to 85%.

So, continuing to grow real strong -- yes, a little bit of pricing pressure here and there, but we're having a lot of success at loading our plants profitably as we go forward and we would continue to expect to see that in the future.

Robert Ottenstein with Morgan Stanley.

In terms of the outlook for next year, can you give us a sense of the EPS impact from the six new hydrogen plants?

If you take a look those hydrogen plants, they certainly are responsible for a very nice portion of that increase.

You know, as I look at that, our best guess is that they'd probably add somewhere in the -- depending on the time they come onstream for us -- is $0.06 to $0.07 a share.

$0.06 to $0.07?

Yes.

In terms of incremental impact the following year, do you have a sense just -- because obviously this is the timing part -- would it be another $0.06 to $0.07 in '07?

Yes, it's about that.

It could be even a little bit more in the next year.

Okay, that's great.

Do you have the industry number for 2005 for the growth in silicon processed -- (multiple speakers) -- kind of your benchmark?

Do you know what that was?

Yes, for us on fiscal 2005, it is pretty close to flat.

So it was flat?

It isn't final yet, but our thing would be flat right now.

Okay, in terms of the industry?

In terms of the industry, right.

Your volume growth for materials would have been, like, -- (multiple speakers)?

It was (ph) substantial, right. (multiple speakers).

Can you give us a number?

It's hard because I don't have an index over those products.

But I think, in your number there, 10 to 15% would not be a bad number for us.

I don't have an index, but when I look at our growth --.

That would be more a function of the just the products that you're in, or market-share gains, or can you --?

Well, I think it's certainly the product in which we are in, and the customers who we serve, plus there is a trend in this thing -- the square inches -- what we've always said is we grow at a rate which is larger than that, a multiple of square inches -- roughly 2 times that because as the square inches (sic) -- you know, they actually fit a lot more chip onto a square inch of that because they are making them smaller, and they're also making them taller as they build up the layers.

So, as that has happened for us, the product intensity of Air Products' products over that has risen considerably.

So that's why we grow a lot faster than the square-inch number.

The other thing which is in there is we have a very good position on the LCD, and that's in there and that is starting to ramp.

It did ramp later, as people have noted, but it has ramped there very well during this summer and we continue to expect it to ramp through the fall and the winter.

Jeffrey Cianci with UBS.

Just a quick one on maybe solving for X for gasses next year.

I'm looking at your forecast, Paul, and obviously Chemicals could be down a bit.

You've already talked about equipment being up significantly, and so the real variable would be, if you look at your range for next year of earnings, perhaps it implies something like 10 to 18% profit growth in the Gasses.

Maybe I'm wrong, but if I just follow that logic, I'm coming up with a couple of quarters of really tough comparisons.

I've got a hurricane hangover continuing here.

I am just wondering what those variables are that will drive that.

Are we going to focus on electronics?

Are we going to focus on energy hydrogen?

How would you rank what the variables would be in Gasses' profit growth?

Well, as far as the outlook on gasses is that as we look at this -- and we are very encouraged, and we've said this all along -- that, starting in 2006, with the capacity which we're bringing onstream in the hydrogen business and with the wins which I had in our electronics business, with my continued growth in Asia, where I continue to invest -- I still have a number of plants coming onstream in this next year in Asia also -- is that our volumes should grow very well.

They will grow, and this is good business; these are good margins in which will bring this stuff in at.

That's what brings the growth in our Gasses business to the fore.

Plus, the underlying aspect across the whole Company on productivity -- we've spent money putting SAP in.

You've seen results in this current year from SAP.

You've seen our productivity at $150 million is a substantial increase from 2004.

We expect another substantial increase in 2006, going forward, here for that.

So, those are the hallmarks of what drive that.

Gasses is 70% of our business, so they're going to enjoy a good portion of that productivity and (indiscernible) a lot of the focus of the productivity efforts over the next year.

That's a good answer.

If I could follow-up, just the variability part of that question -- from low-end to high-end, is it an economic one?

Economy is bad, we go low-end?

If the economy is good, we go high-end?

Because most of these projects are pretty predictable.

Yes, that's right.

I do think, as far as the economy is concerned -- and that's something which is in there.

You know, you go high-end to low-end; there's things -- there's also, on our tax rate, in the insurance recoveries, on the hurricanes, etc., and those things are in there.

That gives -- it gives a rise to why I have a large range going out there.

I got it.

Thank you, Paul.

There are no further questions.

Mr. Sproger, I will turn the call to you for your closing remarks.

Thank you, Regina.

Thanks for joining us today.

Please go to our Web site to access a replay of the call beginning at 2:00 today.

Goodbye.

That does conclude today's teleconference.

We thank you all for your participation.

Have a great day.