Air Products and Chemicals Inc (APD) 2006 Q3 法說會逐字稿

Good morning and welcome to the Air Products and Chemicals third quarter earnings release conference call. (OPERATOR INSTRUCTIONS).

Also, this is a telephone conference presentation.

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

Mr. Sproger, you may begin.

Good morning and welcome to Air Products' third quarter earnings teleconference.

I am Phil Sproger, Director of Investor Relations.

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

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

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

As in the past, we have included an appendix to today's slide package with additional detailed information.

Just a reminder, we adopted FAS 123R on October 1, 2005 and began expensing stock options.

We have not restated 2005 results.

For comparison purposes we have included slides in the appendix to provide pro forma 2005 results adjusted for FAS 123R.

Most of the comments that follow will reference this non-GAAP comparison.

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

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 at the end of today's earnings release.

Now I will turn the call over to Paul.

Good morning and thank you for joining us today.

Please turn to slide number 3.

We had another strong quarter (technical difficulty) continued growth in sales and earnings, while delivering operating leverage to the bottom line.

And most importantly, we continue to make progress on improving our return on capital.

Looking to our results, sales grew by 12% to $2.3 billion due to higher volumes broadly across our Gases segment and higher Equipment segment sales.

Acquisitions offset the impact of divestitures.

Natural gas pricing was modestly lower year-on-year.

And currency wasn't a factor.

In fact, the euro was unchanged from last year, averaging $1.26 in both periods.

The result is that our 12% topline growth was driven by broad-based underlying volume growth in Gases and Equipment, and improved pricing in Chemicals.

A complete sales analysis is included in the appendix.

We continue to make progress lowering our selling and G&A expenses as a percent of sales.

This quarter SG&A was 12.2% of sales, lower by 80 basis points.

Operating income of $298 million was up 18% from prior year, again, due to strong volume performance in Gases and Equipment.

For the quarter we reported net income of $210 million, or diluted earnings per share of $0.92.

When compared with the prior year, net income increased by 14%, and diluted earnings per share was up 16%.

And most importantly, our ORONA continued to improve this quarter.

We were 90 basis points over last year and up 30 basis points sequentially.

Return on capital continues to be our highest priority.

In the area of receivables we demonstrated solid improvement, as our DSO was 61 days at the end of the quarter, down four days versus prior year.

Inventory was unchanged at one month on hand.

Please now turn to slide 4.

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

Higher volumes in Gases and Equipment contributed a $0.27 improvement.

Higher pricing and raw material costs together were a net $0.02 unfavorable.

In Gases electronics price declines were mostly offset by price increases in our North American Gases.

Chemicals pricing actions were positive.

Other costs were unfavorable, as improving productivity efforts were more than offset by the impact of inflation and increased cost to serve the higher volumes.

The Tomah acquisitions is performing well, and has been accretive to earnings.

Acquisitions and [debit] divestitures contributed $0.01.

As we indicated to you on last quarter's call, hurricane impacts were smaller this quarter.

We are favorable by $0.02 on insurance recoveries.

This is all reflected in our Gases segment.

For fiscal 2006 year-to-date hurricane impacts are still slightly negative.

For the year in total we still expect a neutral to slightly positive impact.

There are more details in the appendix.

Operationally, equity affiliates are up $0.02 per share on better performance in our Gases and Chemicals joint ventures.

Also included in equity affiliate income was a $0.02 per share accrual for our Italian affiliate related to an antitrust penalty, which was imposed against all the major Italian industrial gas producers.

Interest expense increased due to higher debt balance.

We repurchased 3.2 million shares, spending approximately $200 million this quarter, and still intend to complete the first $500 million of the total $1.5 billion authorization before calendar year end.

The year-on-year unfavorable tax rate impact was offset by fewer shares outstanding and lower minority interest.

The bottom line is we had another strong quarter, and we generated 16% earnings growth, primarily on strong broad-based volumes.

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

Please turn to slide 5, Gases segment.

Worldwide Gases sales of $1.7 billion were up 14%, primarily due to strong volume growth across all of the Gases businesses.

Price, natural gas pass-through and currency impacts were negligible.

Sequentially, Gases sales grew 3% with underlying growth of 4%.

The growth was primarily driven by improved volumes in EPI, global merchant gases and European Homecare.

Lower natural gas pricing reduced sales by 2% and currency added 1%.

Gases operating income of $241 million was up 19% versus prior year, on strong underlying volume growth in most businesses.

Segment operating margin of 14.3% was up 60 basis points compared to last year.

Margin expansion in North American Gases, electronics and EPI was partially offset by lower margins in our Homecare business.

Sequentially operating margins increased 40 basis points, due to improved performance in EPI and Homecare.

Let me now provide a few highlights by major business.

Please turn to slide 6.

In electronics sales were up 10% year-on-year.

Excluding Equipment, sales were up 16%.

Strong volume growth across most major products continued to outpace pricing pressure.

Our year-on-year electronics margins and returns improved again this quarter, as volume gains across electronics specialty materials more than offset pricing declines.

Sequentially revenue declined by 3%.

Excluding Equipment, revenue was up 2% versus prior quarter.

During the quarter we started up our second on-site nitrogen plant for Samsung's Tangjeong LCD facility.

And we also commenced operation of a new on-site nitrogen plant for ProMos in Taiwan.

Both of these plans will be serving customers under long-term agreements.

We also signed major contracts with Taiwan Semiconductor Manufacturing Company, TSMC, and [Shemai Optoelectronics] to serve their facilities located in Tainan Science Industrial Park, one of the largest technology parks in the world.

We will supply nitrogen and bulk gases to both manufacturers, and build our second air separation unit in this franchise to support existing and growing customer demand.

Air Products has recently been awarded and will soon be announcing three major new bulk Gas supply contracts for key electronics customers around the world.

Our hit rate, or the percentage of bids we win, remains above 50%.

We had a strong quarter supply electronics specialty materials to our electronics customers.

Although there has been some speculation about potential inventory builds, we did not see this reflected in our performance this quarter.

We did, however, see the timing of some new LCD fab investments getting pushed out a few quarters.

This delay will not impact this fiscal year, but will most likely shift the timing of plant loadings next year.

Our total NF3 capacity utilization has now moved up into the mid 80% range.

We continue to explore opportunities for future NF3 supply, as we strongly believe in the future viability of this product.

Now turning to slide 7.

In our Energy and Process Industries, or EPI business, overall volumes increased 11% when compared to last year.

Hydrogen and (technical difficulty) volumes were up 21%, driven by new plant startups.

The difference was due to lower doc scan volumes due to scheduled plant outages.

Sequentially, overall volumes increased 8% with [Tico] volumes up 16%.

All our refinery customers have recovered from the hurricane and are now onstream and operating as expected.

During the quarter we brought onstream three new hydrogen plants to serve the refining industry.

One is located in Joliet, Illinois for ExxonMobil.

The other two are located in Canada, one in [Sarnia] supplying Shell and SunCor, and the other in Edmundson to supply Petra Canada and Imperial Oil.

All these new plans are in full operation and performing well.

And we expect our newest hydrogen facility in Port Arthur, Texas to commence operations late in Q4.

Please note that this quarter is part of a move to a global merchant organization.

We're now moving all of our non electronics large on-site plants under EPI.

Note that these tonnage plants are not yet included in the EPI volume trend that you see on the slide.

In this area we continue to see strong tonnage activity in Asia, and just last week announced the startup of a new on-site plant in eastern China to supply oxygen to the [Ushee group] under long-term contract.

We also signed two long-term contracts with two major steel companies in northern China to supply gaseous oxygen and nitrogen and argon for their steel works.

In India we announced our joint venture had signed a long-term contract with SAIL, the steel authority of Thailand -- the steel authority of India Ltd., to supply oxygen to their steel works in Bokaro Eastern India.

Now please turn to slide 8, Global Homecare.

Global Homecare has shown signs of improvement with sales up 7% compared to last year.

Sales were up strongly in Europe due to our new respiratory care contract in the UK, while North American sales were still somewhat lower year-on-year as this business starts to recover.

Sequentially sales were up 9% led by a strong European performance.

North American sales were up slightly compared to last quarter.

We believe firmly in the future success of the Homecare business and expect these businesses will fully recover over the next few quarters.

The UK business is already recovering nicely, and the U.S. business is making progress, but it will take a bit longer.

Please turn to slide nine, Global Merchant Gases.

In North America our liquid/bulk volume index was up 1% year-on-year.

Excluding liquid hydrogen, the volume index was up 2%.

Volumes were also up 1% sequentially.

Overall LOX/LIN capacity utilization came in at 89%.

We continue to manage capacity in this business by debottlenecking our plants and converting certain large customers from liquid supply to small on-site generators.

By the end of the year we will have increased our capacity by approximately 4% through debottlenecking efforts.

Average LOX/LIN pricing increased 12% year-on-year in North America.

On May 1, we implemented nationwide price increases for helium, argon and bulk hydrogen.

On June 1 we implemented surcharges on liquid oxygen and liquid nitrogen products.

These surcharges were put in place to recover increased power and distribution costs, including purchased transportation and diesel fuel.

Our European liquid/bulk volumes were up 5% due to new customer signings and higher spot requirements.

Our new signings rate continues to improve.

Through the first three quarters of this year we have already signed more new accounts in Europe than in all of last year.

Cylinder volumes were up 1% compared to last year.

On a workday adjusted basis cylinder volumes were up 5%.

Year-on-year LOX/LIN pricing in Europe was up 3% as we continue to push pricing to recover increased energy and raw material costs.

Strong volume growth in Asia continues with liquid/bulk volumes up 27% driven by continued solid demand across the region.

Sequentially liquid volumes in Asia increased 15%, as we continue to profitably load our new liquid plants.

Recall that throughout the last 18 months we have started up four new piggyback liquid plants across the Asia region.

Finally, business conditions remain strong across most regions in our merchant business.

As a result, we expect positive momentum in this business to continue.

Now please turn to slide 10, Chemicals Segment.

Worldwide Chemical sales of $480 million were equal to last year despite several customer shutdowns.

Lower volumes due to customer shutdowns in Polyurethane Intermediates were offset by improved pricing in polymers and higher volumes in performance materials.

Sequentially, sales were down 3%, primarily due to lower pricing and seasonally weaker volumes.

Operating income of $42 million was 10% lower than last year.

Stronger volumes and pricing in Performance Materials were more than offset by customer shutdowns in Polyurethane Intermediates.

Performance Materials volumes were up 6% due to the strength in most products, particularly epoxy coatings in the industrial and marine coating market.

Surfactant volumes increased from stronger demand in Asia, and polyurethane chemical volumes increased across most major productlines.

Polyurethane Intermediates, amines and polymers volumes combined were down 18% compared to last year.

In Polyurethane Intermediates underlying volumes improved, but were more than offset by customer shutdowns and the divestiture of our over Geismar facility.

In amines higher pricing partially offset lower volumes due to softer end markets in [nefalmines].

Polymer volumes fell slightly as we continue to maintain our focus on pricing to enable recovery of higher raw material and distribution costs.

Overall, the underlying performance of our Polyurethane Intermediates, amines and polymers businesses have held up well following our March announcement.

Next let me cover our Equipment segment on slide 11.

Sales of $150 million were up 28%.

Operating income of $26 million also increased significantly over last year, primarily due to higher LNG and air separation unit activity.

During the quarter we commissioned two 3,500 ton per day oxygen plants for the gas-to-liquids plant located in Ras Laffan, Qatar.

In June we announced a new contract to supply Chevron with two 3,500 ton per day air separation units for their gas-to-liquids facility in Nigeria.

We also received another traditional LNG heat exchanger order from Repsol and Gas Naturale for their LNG project in Algeria.

The sales backlog at $623 million remains strong, and we continue to see a high level of development activity in both LNG heat exchangers and air separation unit.

Now I will turn the call back over to Paul.

Turning to our full year outlook on side 12.

So far in this year we have leveraged 11% topline growth into 19% earnings growth through loading our asset base and productivity gains.

This has driven our return on capital 90 basis points higher than the prior year.

Based on this strong performance, we're raising our full year earnings guidance to between $3.49 to $3.53 per share, which represents year-on-year earnings growth of 18 to 20%.

This is our third consecutive year of strong earnings growth and improving returns on capital.

For the year our full year property, plant and Equipment capital expenditures should come in at the top end of our range at $1.3 billion.

Remember, this includes $300 million for the repurchase of our [tank] lease.

Now turning to slide 13.

In line with our full year guidance fourth quarter earnings per share should be in the range of $0.88 to $0.92 for a year-on-year growth of 17 to 23%.

While there are many factors that will impact our walk from quarter three to quarter four, let me highlight a few of the factors that will influence our next quarter's results.

Factors we forecast to increase earnings sequentially include continued volume growth in EPI and Asia merchant gases based on the new capital we have brought onstream this year.

Continued volume growth in electronics as our business continues to grow faster than the market.

Continued improvement in both volume and cost in our global Homecare business, and improved volumes in our Performance Materials business as we continue to grow.

Factors we forecast to decrease earnings sequentially include, seasonally higher operating and distribution costs in our Merchant Gas businesses, lower operating results in Chemicals, primarily due to seasonal outages for maintenance by our customers, higher interest expenses associated with the share repurchase, and our new hydrogen plant investments.

All in, we expect to post another solid quarter as we close out our fiscal year 2006.

Now let me give you an update on efforts to restructure our Chemicals business.

Last quarter we announced the sale of our Geismar Polyurethane Intermediates plant to BASF and our purchase of Tomah to add to our Performance Materials business.

This quarter we have continued our efforts to market amines and polymers and to restructure our Polyurethane Intermediates.

We are actively engaging potential buyers for amines and polymers.

These businesses are being marketed as separate packages and are on different timelines.

Although we cannot commit to precise timing, we believe the amines transaction will be completed prior to the polymers transaction due to our partnership arrangement in polymers.

Our efforts to restructure our Polyurethane Intermediates business is also going well.

Be assured we're driving hard to complete all of these actions as soon as possible.

When we announced these actions last March we told everyone that these actions, along with our efforts to simplify our business, would result in various gains and/or losses after the actions are taken.

Over the next several quarters we will have onetime gains and losses as we complete these actions.

In closing, 2006 should turn out to be another year of solid progress in delivering our results, improving our businesses, executing our strategies, and making Air Products a great investment for our shareholders.

We believe our steady record of growth and improvement over the past three years is evidenced by the results we have delivered, double-digit sales growth, double-digit earnings growth, and a meaningful improvement in return on capital for all three years.

These results demonstrate the resolve of the entire Air Products team.

We're all excited by the opportunities the future holds as we continue to load our existing asset base, drive productivity across the Company, and maintain our capital discipline by focusing the bulk of our capital investment in our growth businesses.

Again, our goal is to transform Air Products into a more focused, less cyclical, higher growth and higher return Company that delivers greater shareholder value.

Thank you.

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

(OPERATOR INSTRUCTIONS).

Don Carson with Merrill Lynch.

Paul, can you give us an update on Homecare?

You had talked last quarter about some restructuring activities going on in that business and continued earnings pressures.

And also have you changed your strategic view on Homecare, given some of the reimbursement issues?

Can you cover both of those issues?

Sure.

I will do that.

As far as the progress in which we're making.

As Phil mentioned, in the U.S. business the problems which we were experiencing really went around our volumes and the fact that we had built the cost and the infrastructure base in advance of that volume, and those volumes did not come.

We had made some management changes there.

Those management changes are starting to have an impact.

Our volumes have started to recover.

Our leading indicators, such as referrals, are encouraging.

We are seeing progress.

For all of us it is not fast enough, but hopefully as we look to the future it will start to accelerate.

We do expect that to happen.

We're also starting to see some improvement a little bit in our cost base there.

As we load that and we look toward some of the improvement, but that is in another aspect of things.

We're bringing systems onstream so that we can run that business better.

We should see steady progress in the U.S. business throughout quarter four and through the following year.

With regard to the UK, as Phil mentioned, the transition from the pharmacies to Air Products has continued.

Service levels and costs improved, but we still have more improvements to make in this area.

At the end of the month the transition period ends and we will continue to work at this business to continue to drive the cost level down.

I think Homecare represents an upside to us as we look to the future for us.

Your second question with regard to -- and the strategic aspect of this as our strategy changed or our feelings on the business -- the attractiveness of the business changed.

The answer to that quite simply is no.

When we came in to this business we fully expected that we would have to operate in a price environment where prices decline.

We have seen that happen in our European business because they had bidding activities which kept prices down.

This is an area which is really ripe for taking costs out and productivity.

One of the ways you do it is via consolidation of the industry.

The other way you do it is by applying IT.

And the basic things which Air Products does well, like on distributing products and stuff like that.

That is a very solid core competency for us, and that is something which we would look to improve going forward here.

Just to follow-up.

I see you had given a new metric on volume growth here.

Obviously you had very strong growth in '03 and '04, but much of that was acquisition driven.

What do you regard the organic growth potential in this business?

And it sounds like you are going to put additional capital in this business.

What would you see as the capital spending on acquisitions going forward?

As far as with the organic growth rate in the U.S., we think it is more around 6 to 7% in this business.

It depends upon the aging of the population, so we see similar trends in Europe also.

With regard to capital, as far as the goals -- as far as acquisition spending, we're going to fix this business and then come out and then tell you where this is.

But right now we aren't looking towards doing that.

We had a previous goal which said anywhere from 75 to $100 million of acquisition capital spending.

We have to make sure that we have a management team in place here.

And we feel confident that they can correctly take these acquisitions in, and then we will set that pace accordingly.

Mark Gulley with Soleil Securities.

A couple of questions.

First of all, on the Chemicals divestiture, Paul, you talked about the sale of amines, the sale of the other business, but you talked about restructuring of PUI.

Does that imply that business has been taken out the market in terms of divestiture?

We never announced that we were going to go out and sell that in the marketplace.

The business supplies people who have a make or buy decision to make.

It is long-term contracts.

What we're doing is taking a look, and with our customers, at what the best path forward for us in that business is.

We're obviously not looking to grow that business or to invest any further in that business.

But our strategy and what we announced in March on that business has not changed.

A housekeeping question if I may.

CapEx, 1.3 billion for the year.

Your year-to-date number is I think like 1.1%, or something like that.

Maybe I have done my math wrong, but does that and suggest a big slowdown in the fourth fiscal quarter?

PP&E it was -- we have about room for about $250 million in the fourth quarter if you do the math work on that -- if you look at that.

And that is what it was, if you look at PP&E for the third quarter.

I will fix that.

At (indiscernible) you said that your operating rates are mid 80s, prices continue to decline very substantially, and you are talking about new supply.

This question has the come up before, of course, but can you kind of refresh our memory as do why you are increasing supply in a price down environment?

What is happening here -- obviously is the operating rates still continue to be very high.

What is happening is that our cost to make this product continues to decline.

If you can drive your costs down, you naturally are going up passing some of that back to the customer in a competitive marketplace.

We continue to look at this.

We took an extremely hard look at the NF3 product, at whether we made money on this, whether we got a good return on this product.

And it is a very good return business, even at these prices today.

We continue to be able to drive the price -- the cost of making this down.

And consequently I think our customers, as they get larger, they are able to access some of these economies of scale.

Now we think we're the best at this.

We think we have the market leadership position.

And that as we look at these investments, as we look at the various options for supply it makes sense for us to follow that.

It is a good use of our shareholders' money.

If I may, would the next expansion perhaps occur not in Pennsylvania, but perhaps closer to the markets in Asia?

We're looking at obviously at all of our options here.

And certainly with the market moving to Asia, I do think that is something which we are going to have to look at very hard.

Ray Kramer with First Analysis.

A couple of questions for you.

I noticed in your Merchant price table you didn't mention what was going on with price in Asia.

Can you give us a sense of the trends in liquid prices there?

What is happening on the liquid price front in Asia is that it is -- it does tend to be very regional.

The one that has gotten the most press is China.

And we are seeing our prices decline in China, but they're declining from a very high level.

It also tends to be a regional market.

There tends to be three regions, the North, the East and the South.

The South has experienced the largest price declines, because the prices were the highest in there.

We are seeing price declines in China right now.

Turning for a sec for electronics, given what sounds like a greater than 50% hit rate and a lot of wins, do you view yourself as gaining share in some of those markets?

We think our share is staying relatively constant because out hits -- it could be -- and the hit rate has been pretty constant for us over a long period of time in this market.

We have the largest marketshare already.

And then just lastly, just looking broadly, can you give me any sense -- based on increase in your guidance for the full year it sounds like you got a pretty positive outlook on the overall economy.

Can you give me maybe a little more color in what you're seeing there?

And given all your comments about three year strong earnings in topline growth, is there anything that makes you think that should be any different in fiscal '07?

We continue to see a strong economy here in the United States.

We continue to see strong growth in Asia.

And as you can see from the volumes in Europe, is that the economy in that region of the world is picking up.

Those are the three areas in which we operate.

Despite some things which aren't great news, you know, the situation in the Middle East and stuff like that obviously has people worried.

But the U.S. economy and the rest of the world has adapted very well to the higher oil prices.

It has been able to swallow them -- the higher interest rates.

As we look forward, we certainly are forecasting for ourselves that the economic growth will not be as large as it is this year.

Our original guidance was somewhere in the 2 to 4% range.

We're now seeing a U.S. economy which we think on the manufacturing front is going to grow 4 to 5% for our fiscal year.

We would trim a percent or so off of that going forward here.

But that is still an area which provides for growth going forward.

We still see a very good environment out there for us.

We haven't seen any signs in our businesses which would tend to drive us in the other way.

Jeff Cianci with UBS.

Thinking about gas margin.

It looks like it was up sequentially here.

Natural gas pass-through going down may actually help you.

I was just wondering with all these new projects coming what does that due to the mix?

Do they initially hit the margin before they help margins?

Can we get the 15% next year in Gases?

Any thoughts there would be appreciated.

As far as on the gas margins, as we look forward we do see an environment in which they should increase.

You are right that gas prices going down is going to help our margins because of the pass-through impact which that has.

As we look at this quarter, that was a favorable factor for us.

The other thing though which does tends to offset that a little bit is the higher -- the pass-throughs in the merchant business where I'm out-raising prices for power.

I'm raising prices -- and surcharges on diesel fuel, etc.

So that tends to have an offsetting impact to me overall.

You can see my price as being up in Europe -- prices being up in the U.S. 12% year-on-year is one of the factors which we go -- as we look through there.

Those are the things which are operating outside of the thing.

However, we still look for continued growth in our margins.

And we would like to see -- our immediate goal is to get them to 15%.

And then how do we get there from today?

If you look at that, obviously the hurricanes have a slightly favorable impact for us.

That is going to drop off a little bit.

Natural gas though is probably going to continue to decline in our forecast, so that is going to help.

Power pass-throughs and diesel fuels are going to put a little bit of drag, as I have previously said.

But basically if I look at volumes and productivity, those are the two underlying factors which should drive improvements.

And that is across our businesses.

The new plants coming onstream are going to come onstream fairly well loaded.

At today's gas prices they really don't -- they aren't a drag.

If you took gas prices up 8, $9, they could be a drag because of the pass-through impact of it.

But that is the factors which we look for.

In the end what we're trying to do is drive to a return here.

We do expect really, outside of just watching the margin, is we really watch the return and that -- we expect our ORONA overall for the year to be above 11% as we look at this right now in the 11 to 11.5 range, as we have talked to you before.

We are still expecting our goal of 12.5% in fiscal year 2007.

When the Asian projects start up are they a coming on at 15% margin?

Is there any -- just in general can you talk?

If you take a look on the merchant side, they do not come on exactly at that because of loading impacts of those things.

Now our Asian projects have loaded.

Our Asian on the merchant side, especially in China, have loaded very quickly.

I would not come and tell you that I think I'm getting a tremendous drag on margins from the new capital aspect of things.

All of this, as we go out and we try to manage our business and look at our returns and stuff like that, we have the stuff factored into it.

The capital spending which is there, those new plants bringing them onstream, all that is there and fits within the goals which we have.

Once again, to get back, we really are looking, and not so much at margin, it is an indicator -- it is easy to watch every month probably, but we focus really on returns and improving those.

Finally, since your visibility has increased on these new projects, I am just curious, you go to '06 now almost finished fiscally, and '07 -- which I realize you're not providing forecasts yet -- are there an equivalent number of new projects in '07 or a greater number projects in '07 versus '06?

No.

If you look at '06 we had a very large number on the hydrogen side which came onstream.

We do not have that same number coming onstream in '07.

However, we do have the impact of the full year.

Jeffrey Zekauskas with JP Morgan.

A couple of questions.

The first is are your returns in anyway penalized by the new hydrogen business that you have brought on because they are lower rates of utilization at this point?

On the hydrogen side, and that is coming up in loaded, as we have said.

We have take or pay.

We have sold the bulk of this.

That is our operating model.

And that takes tremendous amounts of risk to sell this product going forward.

We have a small amount on the merchant side in any of these businesses.

But, no, it is not penalizing, dragging down my returns.

Air Products has made tremendous strides in so many areas.

But when I look at the returns for the nine months, your cash from operating activities is somewhat smaller that it was last year for the nine months.

In part because you're working capital is up a couple hundred million, and your asset growth in gases has been tremendous over the past nine months.

The operating -- there is some operating income growth, but the incremental returns are lower.

A lot of the improvements in returns comes from Equipment.

Does some of these asset trends get reversed, and what to do about your working capital?

Certainly.

And two questions there.

First on the Gases assets.

Those are the hydrogen plants.

You are seeing some of the impact in '06, but certainly not all of it.

And we have been spending all along for that and that has been driving up, and then we stopped spending and start to reap the rewards of getting the money back to us.

Going forward I'm going to get a lot more profit from those things instead of having construction in progress.

That is the answer to that.

With regard to the working capital, you have seen drops in our DSO.

You have also seen that our inventory has held relatively steady.

However, the volume-related growth in that, and also with the Equipment business, the volume-related growth in working capital around the Equipment business for our contracts in progress has driven up our working capital there.

I'm about -- the difference on the cash flow from operations is $40 million and 100 better in net income and depreciation and amortization.

But then the volume-related in inventory and contracts in progress is about 75.

Also, we continued on this new accounting on the lease receivables.

We had assets in there of 55, but that is also adding operating income in the future for us.

I guess maybe lastly, your SG&A expenses were up almost 9%.

It is true that they didn't grow as fast as your sales, but are you satisfied with that?

We continue to make progress.

I wouldn't be a good person on the finance side if I ever told you I liked the expenses going up at all.

But certainly I'm very happy with the progress which we have made, and the margin and return improvement and the productivity which we have demonstrated in SG&A as a percent of sales.

I'm happy with that.

Laurence Alexander with Jefferies.

I guess the first question on the gas side of the business.

Do you have any regions besides China where pricing is lagging higher energy costs?

In China it really isn't price and lagging the energy costs, it is much more -- what happens is that we have a competitive -- additional capacity being added there.

I would not try and take a look at that.

In Europe I'm doing well.

In U.S.

I'm doing well.

In Asia we are doing well also.

The answer to that basically is no.

Secondly on chemicals, what is the total impact from all of the customer outages this year?

The impact of losing our business really is what we have -- certainly we don't on Lyondale, so our biggest impact is in the Polyurethane Intermediates business.

It has been a fairly substantial amount.

Although the underlying business has picked up as those people have dropped out, and some of our other customers have picked up.

It is a hard number to really get at, and we haven't really tried to focus on that aspect of those things.

We try to get the returns up in the base business here.

Finely on NF3 do you have a sense for the number for how much costs -- the cash cost production has come down over the last three or five years?

And then if you did move to next generation technology in Korea, what would -- how much would the cost differential be versus Allentown, would it be comparable or significantly lower?

Certainly -- and just to jump to the answer there, our returns on doing this would be a double-digit cash on cash return on this plant, if you look at that.

If I built a plant today with the pricings and the decreases in my cash costs, and also the efficiency which I've gotten in my capital stack for making these plants.

Peter Butler with Glen Hill Investments.

Two questions.

What should Mr. Cianci be penciling in for what chemicals are going to be looking like next year?

What pieces do you think will be out the door by the end of this fiscal year?

And what are the keepers and what sort of sales and earnings might they generate in a normalized state I guess?

We're not going to go out and comment exactly on the timing of any of these transactions because I'm in negotiations, and obviously if I give myself a deadline I don't want to penalize myself in those negotiations with someone thinking I was having to meet a commitment on the investors.

We are trying to do this as quick as possible obviously.

If you look at this, the performance materials business is the one we intend to have longer term.

Today on a runrate basis that business is probably somewhere 650 to $700 million a year at a very nice double-digit return.

Next subject and last subject I guess.

How are your discussions going with potential LNG contracts?

What has been the impact of your new technology on your pricing?

What, if any, has been the competitive response to your technology?

Are you expanding capacity?

Do you think you need to expand?

Can you talk on that a little bit?

Sure.

On the LNG, and things continue -- we continue to have a lot of interest.

The new technology at on the larger fields obviously have attracted a lot of interest because of the efficiencies which it gives people.

So we do have that.

As far as on that competitive response side, and we already had a lead in this business.

And what we had done is taking the lead longer.

I think an indication of that is two of the people who have bought the new technology actually have competitive technology to us.

We continue to do very well in that business.

And we did expand our capacity in our Wilkes Barre location to do that.

It is a very cheap expansion because basically what you have is a building and training the workers.

You don't expect a problem meeting the -- I guess the demand in the next few (multiple speakers).

No, we do not.

Kevin McCarthy with Banc of America Securities.

Very impressive liquid/bulk growth once again in Asia.

Can you help us frame the profitability of that merchant business versus your analogous businesses in North America and Europe, either in terms of ORONA differentials or margin differentials?

How does that compare these days?

If I take a look at the Asian -- our [base guys within the league], the returns and the margins are similar to what I see in the U.S. in that business.

I see very solid business, good growth.

The project as we look at them, as we bring them in, they have come along very well.

The loading has happened very good, we have built a very good business over there.

Whenever price erosion there may be in China it sounds like it really hasn't compromised the overall picture in that region.

Right, no.

It has not.

A quick follow-up.

What insurance proceeds would you expect for the fourth quarter?

On the hurricane insurance, I'm in the final throes of this right now.

I may be able to finish the claim in this quarter, or it may drag over into the first year.

But it is hard to actually -- and to get at this -- if I get through all the final adjustments with the people.

I may get zero.

I may get a small amount in here.

But I would not expect to have a tremendous amount of proceeds in this next quarter.

And then finally a quick clarification on NF3, if I may.

You indicated you may expand supply, but the costs have been coming down dramatically.

Are those cost reductions to date strictly economies of scale or are there other factors at work there, and perhaps you could collaborate?

No, the cost reductions are related to -- and the yields on the plants and the utilization of our capital, the throughput into our plants, the speed with which we can run our plants, and also related to how we get the product to the customer, and basic improvements in which we have done there.

They are across the board at every cost in which we have in this business.

David Begleiter with Deutsche Bank.

On electronics you seemed to have avoided some of the issues other firms have had with supply chains being overstuffed.

Can you comment on how you had done that in both your LCD as well as your semi customers?

I think what has happened here as far as the watching of that is that the world has done it.

The industry has done a much better job of being able -- and to control themselves here.

We along with others have learned -- we have a new system obviously in SAP, which has helped us very much.

The integrated systems I think are going to help everybody going forward.

I think there are very important aspects of being able to manage a business in the future, I think if you want to manage it efficiently to get your inventories, your deliveries, your customers handled quickly.

And so those are the things in which we have done.

We have been out using SAP.

Remember our electronics business was the first one to to on.

They aren't on in Asia yet, but they are on in the U.S. and Europe.

And our deliveries into Asia are on there.

So that is important aspect for us.

Switching to Homecare, in Q2 you referenced about 18 million of additional costs from the UK and U.S.

Homecare problems.

What was the number in Q3?

If you look at that it was not as large as in Q3.

That was the comparison to the prior year if I had maintained my margins in this business.

I made progress.

I caught up by probably about one-third of that.

But in the end I have to go beyond that really.

That is the important thing.

Is that we've got to get this business to return to even higher than what they were a year ago in this business.

What has been done in the last three months in U.S.

Homecare to improve that business?

It is basically on the basics of running a business, blocking and tackling.

Making sure you're calling on the right customers.

The whole organization pulling together, working together to drive their cost down, to drive their volumes up.

A spirit of can do has come into the organization.

And we made -- and the changes in management.

Those people are obviously having a good impact on the organization there.

I'm sorry, Last thing.

You got any interest in any of the BOP properties that are being divested?

We certainly well take a look at them, but they have to fit our strategy.

Tim Aquino with KeyBanc Capital Markets.

It looks to me that North American liquid/bulk volumes looked a little light.

I was hoping you could collaborate on that a bit further.

Certainly on those volumes, the loading has been very good.

Over this past year our focus has been -- and less on the volume and more on the recovery in our pricing thing of managing that.

We have also been adding and selectively to capacity by going out and changing the plants in which we need the product in those areas.

But we had a good third quarter from a volume standpoint last year.

Our profit weren't as good last year.

Our profits have been a lot better this year in that business.

Thank you for that.

Do you have an internal forecast for how fast the electronics market is growing?

Is it 5%, is it higher?

Certainly on the semiconductor side of that we do watch that.

And we think for our fiscal year it is probably going to grow in square inches somewhere around 6 to 7%.

And if we look at on the display side on the LCD displays we think that grows greater than 30% this year.

Finally here, the European volumes looked good, up 5%.

Is Europe getting stronger going forward, and can you talk about which areas are you seeing the most strength in?

Certainly the economies have done better -- the manufacturing economies.

Our are volumes are up.

One thing which has taken our volumes up is we do have sales of liquid products in advance of an on-site customer being able to take things -- at being able to take products.

That has added probably a couple of percent or so to our volumes in Europe.

But this is a reversal of the trend.

Manufacturing has tended to grow.

And we think that some of the problems will not continue, and that we might see a better growth over the next year or so in Europe.

Thank you guys.

Good quarter.

Bob Koort with Goldman Sachs.

Good morning.

A question for you, Paul.

You guys are obviously talking tougher about return on capital and starting to show some pretty good progress.

I'm just wondering if you can cite a few specific examples of some behavioral change within the organization?

I mean what you're doing differently today than you would have done two, three, four years ago?

Certainly I think -- and the change has been for a while here, but trying -- and focusing the capital on -- the capital discipline from when John took over as CEO, I think is important aspect of those things.

And not everyone gets the same amount of capital.

The growth businesses get the bulk of that.

That has been a very important aspect of it for us.

I think the other thing is that the decisions to go out and to do -- and do the work on SAP, which really gets around converging the processes, being very serious about trying to drive transactional productivity across the system.

You can see that in the SG&A numbers for us.

And that has been an important thing.

I have given people before our finance and the IT costs are down by a lot as a percent of sales.

We expect to see continued improvement in SG&A going forward here as we utilize the SAP system, and we utilize our converged processes across the globe.

I will ask you another question.

You have been at Air Products for awhile.

You have seen plenty of business cycles.

I know you commented that you don't see a dramatic moderation of growth rates.

But if we entered an environment where growth went sort of to a 1.5, 2.5% range, can you just talk about how your business is impact and what kind of changes you would have to make in the way you ran the operations, or your capital spending plans, or those sorts of things?

Certainly I think we have been very careful as far as going out and building capacity.

We don't have today a lot of capacity which is not sold.

If I looked at the environment where the world was 1.5 or 2 let's say, it would not give us a big problem.

It would cut back on growth rates obviously for us.

It would cut back on people going out and investing capital, which drives the investment of my capital as those people build new plants.

But as far as my operations are concerned, the thing which I would do is really pull back on the costs obviously -- on the business development.

That would be self-correcting because the people -- because the opportunities would not be there.

But as far as how we're managing our system and stuff like that, I think our loadings and stuff like that are in good shape.

One last quick question.

What is the threshold to where you could start showing some of those chemical operations as discontinued and allow greater focus on the remaining business?

When we get approval of a deal from our Board, is what we have agreed to.

P.J.

Juvekar of Citigroup.

You mentioned that you're doing 4% debottlenecking (indiscernible).

And how much can you get for a year with competitors doing the same thing and --?

On the beginning of that question, I couldn't hear you.

You broke up a little bit.

Sorry.

You mentioned that you're doing 4% debottlenecking of capacity in LOX/LIN, and the competitors during the same thing.

Is there any risk that with overall CapEx going up, that we may have too much capacity?

If you look at what we're doing, and I think -- and the competitors are probably doing also -- is that we're putting in very targeted additions here on the debottlenecking.

They are relatively cheap and they are small amounts.

They are coming in in the areas in which product is needed to be sold.

It is not like I am flopping down 1,000 tons a day of capacity in a single area.

It is like I am adding 60 tons or 50 tons by doing that.

And I can absorb that quickly in those regions, especially because I'm adding in the regions in which the product is tight.

I don't think that that is going to have a bad -- it is not going to be a problem for us to manage.

So it is regional, so it is not a problem.

One quick thing I went to add is part of that number also is conversions of large on-sites tonnage customers.

You effectively get to resell that product at a higher price, and it is taking a large customer out of the system.

It is not -- that is included also.

It is not all just debottlenecking.

Quickly on your acquisitions in Chemicals you required Tomah, and then you made personal care as a focus.

This business could get comoditized.

You have so much opportunity in Gases.

Why do you want to get distracted with all these acquisitions in Chemicals?

First on the acquisitions in Chemicals, we made Tomah, that is part of our strategy on Performance Materials.

And we look at Performance Materials as having a logical and a very strong connection on the technology and to our electronics business.

We don't view it as far afield from what we do.

The thought process here is that these businesses will not get -- will not turn into commodity products because of the service and the technology in use of what we provide to our customers.

We have been able to sustain that in the existing business -- in our epoxy business, our polyurethane business, our surfactants business.

We have done very well in the coatings and adhesives markets in those areas.

Tomah gets us into the cleaning market.

On the personal care front, personal care front is really for us -- and what I am trying to do is take a look at that market.

We have not made an acquisition in there.

And what we have done is we have signed a agreement to sell certain products in there.

We're trying to learn about that to see if what looks like a good market for us in a place in which I can apply my products makes sense for me to really go forward.

And so I'm trying to walk before I run in that market.

But certainly, we think this offers a great opportunity for our shareholders to earn a very nice return on some basic skills which Air Products has in delivering Performance Materials to the customers.

They are not sold on what is contained in the molecule.

They are sold on what -- the performance which they give to the customer.

I have more questions on that but I will come back to you later.

Thanks everyone for joining us today.

Please go to our website to access a replay of this call beginning at 2 PM today.

Have a nice day.

Thank you everyone.

That does conclude today's conference.

You may now disconnect.