Air Products and Chemicals Inc (APD) 2006 Q4 法說會逐字稿

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

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 proportion of this teleconference.

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

Good morning and welcome to Air Products fourth quarter earnings teleconference.

I'm Phil Sproger, and today our CFO, Paul Huck, along with Nelson Squires and I, will review our fiscal fourth quarter and year-end results.

Nelson is succeeding me as Director of Investor Relations.

Nelson brings commercial experience from both our Electronics and Merchant Gases organizations.

And he's looking forward to meeting many of you in the near future.

I have truly enjoyed working with you over the last two plus years, and I look forward to my new challenges managing our U.S.

Healthcare business.

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

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

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

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

In the appendix you will find reconciliations for any non-GAAP information.

As many of you are aware with our Chemicals restructuring and management reorganization, we are now reporting six business segments.

We issued historical data on October 16.

I want to point out that as we have progressed through our year-end audits there have been some minor reclassifications.

The revised numbers are shown in the appendix and on our website.

Just a few more housekeeping items before I turn the call over to Paul.

Most of our comments today will exclude the effects of the cumulative accounting charge and the impacts of our amines business sale and restructuring charge announced on October 2.

Paul will provide more color on our restructuring actions later.

One last 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 these non-GAAP comparisons.

Further details are included in the footnotes to our earnings release.

Please turn to slide 2.

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

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

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 solid quarter.

A fitting end to another strong year in 2006, with continued growth in sales and earnings, while delivering operating leverage to the bottom line.

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

We entered the year forecasting double-digit earnings per share growth and improvement in our return on capital to the 11% to 11.5% range, and I am glad to report we delivered on these commitments.

Looking to our results, sales grew by 14%, or more than $1 billion to $8.9 billion due to higher volumes broadly across our Merchant Gases, Tonnage Gases, Electronics and Performance Materials and Equipment and Energy businesses.

Operating income was up 20%, and earnings per share increased by 19%.

ORONA improved by 130 basis points to 11.3%.

We've also made significant progress since our March reorganization announcement.

Since then we completed the first $500 million tranche of our $1.5 billion share repurchase program, completed the Tomah acquisition, and divested our Geismar DNT facility and our amines business.

Please turn to slide 4.

This quarter, in addition to announcing our new business segments, we had a number of items that occurred.

Let me clarify the impact of these items.

The slide isolates them to arrive at our underlying performance.

First, we sold our amines business to Taminco.

Second, we have reclassified the results from amines for the entire year to discontinued operations.

Third, we recorded a restructuring charge related to actions taken to simplify our businesses.

And forth, we recorded the cumulative impact of an accounting change for FIN 47, Accounting for Conditional Asset Retirement Obligations.

Our guidance, as we told you last quarter, exclude the earnings impact of these items.

This slide shows the impact of these items on various financial measures, so you can see what our continuing operations would have been, excluding them.

The amines discontinued operations results in a charge of $0.13, principally due to the retention of environmental obligations at our Pace, Florida plant and a contract termination.

The restructuring charge of $0.21 is for actions we are taking to simplify our businesses and reduce our cost of doing business.

The three areas of focus are moving our European operations further into Shared Services, rationalization of products and assets in Electronics to continue to improve our returns, and reduction in management and corporate services to continue to simplify our businesses.

The $0.03 after-tax charge for adoption of FIN 47 reflects that salvage value can no longer be considered.

As you can see on this slide, our EPS would have been $0.94 versus our guidance of $0.88 to $0.92, and a First Call consensus of $0.92.

This is a year-on-year increase of 22% over a $0.77 pro forma in quarter four of 2005, including stock option expensing.

For the full year EPS from continuing operations would have been $3.50, a pro forma 19% increase.

Turning now to slide five for a brief review of this quarter's operating results.

Sales grew 18%, driven by broad based volume growth across most segments.

A consolidated sales analysis is included in the appendix.

Sequentially sales rose 5%, driven by the full quarter impact of our new refinery hydrogen facilities in Tonnage Gases, and higher equipment sales in Electronics and Merchant Gases.

We continue to make progress reducing SG&A as a percentage of sales.

This quarter SG&A was 11.8% of sales, lower than prior year by 150 basis points.

Operating income of $205 million was up 25% from prior year, again due to a strong volume performance broadly.

For the quarter our net income of $210 million, or diluted earnings per share of $0.94 when compared with the prior year, net income increased by 19%, and diluted EPS was up 22%.

Please turn to slide 6.

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

Higher volumes contributed a $0.26 improvement.

The Tomah acquisition is performing well, and has been accretive to earnings, contributing $0.01.

This was offset by the Geismar plant divestiture.

Higher pricing and raw material costs together were neutral.

Electronic price declines were offset by price increases in Merchant Gases.

Other costs were unfavorable by $0.11, as improving productivity efforts were more than offset by the impact of inflation and increased cost to serve the higher volumes.

Overall, we did see productivity get to our bottom line, as our operating margins expanded by 70 basis points to 12.9%.

The hurricane business disruptions in 2005 cost us $0.05 a share in that year.

This year we had a net $0.04 per share gain on insurance recoveries split fairly evenly between the Merchant and Tonnage segments.

Our performance around the hurricane was extraordinary.

Not only were we able to restart our operating facilities within a few months, but we also closed out a very large insurance claim in a relatively short period of time.

In a time of need our people delivered.

In our U.S.

Healthcare business we recorded a $0.05 charge for an inventory adjustment.

We have changed people, and we have put in place processes to prevent this from happening again.

Interest expense increased due to a higher debt balance and higher interest rates.

Our debt balance increased due to our share repurchase program.

We repurchased 7.7 million shares, spending just under $500 million this year.

We expect to repurchase another $500 million next year.

The bottom line is we had another strong quarter and we generated 22% EPS growth, primarily on strong, broad based volumes.

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

Please turn to slide 7, Merchant Gases.

Our Merchant Gases segment provides industrial gases via tank truck, cylinder and small on-site plants to a variety of customers globally.

Merchant Gases sales of $722 million were up 17% versus prior year.

Strong volume growth across all regions contributed 10%.

Pricing contributed 4% and currency added another 3%.

Sequentially, Merchant Gases sales grew 3% with volume accounting for the bulk of that growth.

Merchant Gases operating income of $128 million was up 41% versus prior year, primarily on strong growth in all regions and increased pricing, as well as insurance recoveries.

Segment operating margin of 17.8% was up 310 basis points compared to last year.

About two-thirds of this is due to volume and price, and the other one-third is due to insurance recoveries.

Let me now provide a few highlights by region.

Please turn to slide 8.

In North America our liquid/bulk volume index was up 6% year-on-year, primarily due to increased hydrogen and argon volumes which have recovered from last year's hurricane levels.

Our liquid/bulk volume index was up 3% sequentially, primarily due to increased spot sales and strong base business growth.

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

On October 1 of this year we implemented price increases for LOX/LIN, helium, argon and hydrogen.

These price increases were put in place to recover increased power and distribution costs.

New business signings were strong and ahead of target for the quarter and full year.

Our business conditions have remained strong in North America.

Our European liquid/bulk volumes were better than expected, up 5% due to new customer signings and significant spot requirements.

Signings were significantly ahead of goal for the year.

Our European LOX/LIN pricing was up 2%, as price increases to offset higher power costs have taken effect.

A price increase was implemented on September 1 of this year across all of Europe to continue to recover increased power costs.

Cylinder volumes in Europe were up 2% versus prior year after adjusting for workdays.

Sequentially, cylinder volumes were seasonally weaker as expected.

Our Asia liquid/bulk volume index was up 17% over last year, driven by continued solid demand for all liquid products across the region.

We continue to see strong growth as we are profitably loading our new liquid plants across the region.

We will start up seven new liquid plants in Asia in the next 18 months.

Our LOX/LIN prices in Asia were up 1% versus prior year.

Now I will turn the call over to Phil.

Now turning to slide 9.

Our Tonnage Gases segment continued its strong growth trend this quarter.

This segment supplies hydrogen, oxygen and nitrogen via large on-site plants and pipeline systems to all our customers, excluding our Electronics customers.

Sales of $614 million grew 34% compared to last year, driven by both new plants and improved plant loadings. 12% sequential sales growth benefited from the full quarter impact of three new hydrogen plants that we brought on stream in the third quarter.

Two of the plants are in Canada and one is in the U.S.

Operating income of $104 million was up 71% compared to last year, and 22% compared to last quarter.

The increase over prior year was primarily due to continued strengthen in our hydrogen business, as well as strong performance of our base oxygen and nitrogen tonnage plants, and the previously mentioned hurricane insurance recovery.

Operating margin of 16.9% increased substantially over last year and prior quarter.

Margins benefited from lower natural gas costs, insurance recoveries, and seasonally lower maintenance costs.

Our newest hydrogen plants in Texas, which supplies Valero Port Arthur refinery is now on stream.

This year has been an exceptional year for the Tonnage segment as we brought on six new hydrogen plants, adding over 450 million standard cubic feet per day of hydrogen to our system.

Some of these plants were impacted by Hurricane's Rita and Katrina, but all came online within our customers' expectations, a real tribute to our employees who worked hard to make this happen.

Please turn to slide 10, Electronics and Performance Materials.

This segment consists of our Electronics business combined with the Performance Materials business from our Chemicals Group.

Segment sales of $522 million were up 20% compared to last year.

Volume gains accounted for 18%.

Lower pricing reduced sales by 2%, and the Tomah acquisition added 4%.

Electronics sales were up 16% compared to last year, driven primarily by higher volumes broadly across the productline.

Electronics sales, excluding equipment, increased 9%.

In Performance Materials sales grew 27% compared to last year.

Half of this increase was volume driven, with the other half coming from the Tomah acquisition.

We posted record sales in key epoxy and surfactants markets.

Operating income of $61 million was 57% higher than last year, driven primarily by increased volumes and lower costs, offset somewhat by lower pricing.

Operating margin of 11.7% was up 280 basis points over last year, driven primarily by volume gains, combined with reduced costs and somewhat offset by lower price.

During this quarter we brought two electronics plants on stream in Asia, and won awards for another two plants which we will be announcing shortly.

Please turn to slide 11, our Equipment and Energy segment sales, LNG heat exchangers, air separation equipment and other hydrocarbon and helium processing equipment.

In addition, this segment operates and has equity interest in power generation and flue gas treatment facilities.

It also contains our significant development efforts for the Company's future growth in the energy markets.

Sales of $130 million in this segment increased 30% compared to last year.

Operating income of $20 million was up 21% over prior year and 32% over prior quarter.

This was driven primarily by increased LNG heat exchanger and large air separation plant activity.

Note that the sales backlog of $446 million now excludes approximately $120 million of backlog from small gas generators, as this business has been transferred to our Merchant Gases segment.

We currently have 10 LNG heat exchangers under construction.

Our backlog of projects, as well as worldwide interest in LNG heat exchangers and large air separation units remain strong.

Please turn to slide 12, Global Healthcare.

Our Global Healthcare segment sales of $150 million were up 11% compared to prior year, mostly due to the large UK contract this year, along with strong growth in Continental Europe.

Sequentially, sales were up 1% as increased sales in Europe were offset by lower sales in the U.S.

Healthcare had an operating loss of $17 million this quarter, which was primarily due to an inventory adjustment in the U.S., and higher costs both in the U.S. and Europe.

Our largest issue in Healthcare has been the significant decline in the U.S. business performance.

Turning this business around is our highest priority.

We have replaced a significant portion of the management team.

We've also recently realigned the entire organization along functional lines to increase accountability and consistency throughout the organization.

We have hired a number of new salespeople and realigned the sales incentive plan.

And we've also initiated a set of focused action plans all aimed at improving this business over the next several quarters.

Ultimately we believe it can make this an attractive business that can contribute meaningfully to corporate profitability and growth.

Please turn to slide 13, Chemicals.

The remaining Chemicals segment consists of our polymer emulsions business, which is currently being marketed to potential buyers, and the polyurethane intermediates business, which is being restructured.

Chemicals segment sales of $222 million were down 11% compared to last year, primarily on lower volume.

Customer shutdowns and divestiture in the polyurethane intermediates business were only partially offset by higher polymer emulsion volume.

Sequentially sales were flat.

Operating income of $15 million declined primarily due to customer shutdowns and a divestiture in our polyurethane intermediates business.

Now I will turn the call back over to Paul.

Turning to our full year outlook on slide 14.

Based on our continued strong performance, coupled with the actions we're taking to improve next year's results, our fiscal 2007 earnings per share guidance is $3.84 to $4.00 per share, which represents a year-on-year earnings growth from continuing operations of 10% to 14%.

This should be our fourth consecutive year of strong earnings growth and improving return on capital.

We're forecasting fiscal year 2007 manufacturing growth to be moderated from 2006, as we see the impact of lower consumer confidence, higher interest rates, and weaker housing on the U.S. economy.

Here are our key assumptions.

We expect domestic manufacturing growth next year in the range of 2% to 3%.

Fiscal 2006 growth came in at about 5%.

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 globe we expect manufacturing growth of about 3%, which compares to fiscal 2006 growth of slightly above 4%.

Manufacturing growth, along with our efforts to raise prices, should generate continued improvement in our Merchant Gases segment next year.

In the U.S. we're continuing to operate at a high rate across our system.

Therefore to serve our volume growth, we will continue to debottleneck plants and convert our larger customers to on-site.

In Asia we're currently commissioning new plants in China, India, Thailand and Malaysia.

And we continue to expect double-digit volume growth across this region next year.

In Europe we're focused on improving our margins.

And a significant portion of this year's -- of this quarter's restructuring charge is to streamline business operations and utilize shared services more broadly.

In our Tonnage Gases segment we will see the full year effect of the six hydrogen facilities we started up last year.

Our bidding activity for new projects remains high.

In Equipment and Energy we expect another solid year based on our strong equipment backlog.

Results will be slightly lower due to the increased spending on energy development opportunities next year.

In Electronics, we expect continued growth, with growth in square inches of silicon process of around 5%, as flat-panel growth of approximately 40%.

We expect margin improvement as well as we move forward with our product and asset rationalization plans to continue to improve margins.

Our growth expectations in Performance Materials are based on the assumption that we can grow 2 to 3 times GDP through a combination of share gain, new market and applications successes, and through new products we develop.

Overall, we expect to achieve double-digit volume growth in fiscal year 2007.

Healthcare should show significant improvement over the next year.

We had the impact of onetime accounting adjustments this year.

And as Phil outlined, we're taking expensive actions to turnaround volumes in the U.S. business.

Plus we will also see a full year of the UK volume growth with lower costs.

In our Chemicals segment we continue to make progress marketing our polymers business.

We're actively engaging potential buyers and our partner.

For now next year's guidance includes polymer results for the full year.

Our efforts to restructure our polyurethane intermediates business are also progressing.

Be assured, we're working hard to complete all these transactions as soon as possible.

When we announced these actions last March, we told everyone that these actions, along with 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.

We will also see the impact of these actions taken to reduce our management structure and keep corporate service costs in line with the size of the business.

This should mitigate the stranded cost impact.

We are also continuing to drive real productivity gains that result in margin expansion across the Company.

While the restructuring actions are aimed at major changes, we will also continue next year and beyond with the smaller actions, the numerous actions we have taken over these past few years that have characterized our improved productivity efforts.

With regard to CapEx, our fiscal 2007 PP&E capital expenditures should be about $1 billion, about the same as last year, excluding the tank lease repurchase.

We continue to see very strong bid and new business activity across the Company.

Asia Merchant Gases demand is growing rapidly, based upon strong manufacturing growth, coupled with our expanded technology applications.

Our Electronic customers continue to expand, driving new investment for Tonnage and Merchant Gases, and also creating greater demand for our specialty gases and materials.

The refinery hydrogen project development remains high as we see the market shift from being regulatory driven to being economic driven.

Right now we're actively involved in proposals to a number of refiners as they expand their transportation fuel capacity.

Now turning to slide 15.

Based on our quarter four 2006 results, and taking into account that our fiscal quarter one had seasonal factors that tend to lower income in a few businesses, we expect first quarter earnings per share should be in the range of $0.90 to $0.95 for year-on-year growth of 13% to 19%.

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

Factors we forecasted that decreased earnings sequentially include, no hurricane insurance recoveries as we have closed out our claim, seasonally lower volumes in Performance Materials and polymer emulsions, lower operating results in Equipment and Energy due to fewer hours worked during the holiday season, and therefore a lower percentage completion being booked in quarter one.

Also, we will see seasonally lower Tonnage contract operating performance bonuses.

Factors we forecasted that increased earnings sequentially include, continued volume growth in Tonnage, hydrogen and Asian Merchant Gases based on the new capital we have recently brought on stream.

Continued improvement in both volume and costs in our Global Healthcare business and the absence of the prior quarter inventory write-off.

All in we expect to post another solid quarter to start our fiscal year 2007.

Turning now to our last slide.

In closing, 2007 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 are all excited by the opportunities the future holds as we continue to load our asset base, drive productivity across the Company, and maintain our capital discipline by focusing the bulk 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.

Before I close, I would like to thank Phil for his efforts over the last two years, and wish him great success in turning around our U.S.

Healthcare business.

Thank you, and I will turn the call over to Jennifer to take your questions.

(OPERATOR INSTRUCTIONS).

Laurence Alexander, Jefferies.

First just let me address several of your businesses have highly visible backlogs.

For instance, you have the seven plants coming on in Asia, for example.

Can you highlight for each of them how much the backlog represents as sort of locked in growth?

The amount of locked in growth for the next year or --?

Or for the next couple of years for both -- I guess for the Merchant more than Tonnage, and I guess also for Electronics.

If you look at the -- if you take a look, obviously the big one which we have coming forward is in the Tonnage business.

You look at that.

What we're looking for is continued volume growth somewhere for next year in the 15% to 20% range in Tonnage, as we would look forward.

That carries forward to the full year impact of the capacity expansions which we have.

The actual sales price actually depends on gas prices coming through.

But on a constant gas price it would be about there.

If you look at the Merchant Gases segment, the big area in which we are investing there is obviously Asia.

You have seen the strong growth in our Asian business in that area.

It is getting to be fairly substantial of there.

But it is not going to drive the 15% or 20% growth of what we saw in Tonnage, but probably more somewhere in the 5% to 10% range in Merchant Gases I think over the next year.

The Electronics and Performance Materials has been fairly substantial, as far as we look at what sales growth is in that area.

We have a number of projects coming on Electronics.

We have the full year impact of the Tomah acquisition in Performance Materials.

We have got new products coming out in Performance Materials and new applications.

We're making a bigger push into Asia in our Performance Materials business.

I would expect to see a double-digit sales growth easily in that area.

And in Healthcare, this is in a backlog comment, but obviously turning around the U.S. business, and we have the full year impact, as I said earlier, of the UK contract.

Just secondly on the restructurings and the stranded costs.

If we net them all out, are you running at about $0.02 to $0.03 net savings or net accretion?

If you look at what the impact of those things would be, if you look at the impact -- first I will answer it, but maybe a little broader question.

If you look at the impact of amines and what came out, amines earned about $0.05 this year when you work through all the math.

However, if we use that -- we get the funds and use them well -- the impact of amines is about zero for us when I go forward.

There isn't any dilution from the amines transaction.

You didn't exactly ask that question, but that is one of the things that applies to some of this.

As we look at the savings, and if you're looking at the impact of what these savings should be, we would expect to save when we went fully implemented about $30 million a year would be the full year impact.

We will not see all of that impact in this year.

We will probably see somewhere around half to two-thirds of the impact this year.

Finally with Healthcare, what is your medium-term target for margins?

Our target obviously is get these margins positive first.

We're looking in the low single digits in the first quarter.

We would like to be back up to a double-digit margin in our Healthcare business by the end of the year.

Robert Koort, Goldman Sachs.

Phil, congratulations on going from the frying pan into the fire.

Maybe you can help me out a little bit.

I guess ex the charge Healthcare broke even.

My recollection was you had more sales in the Healthcare markets outside of the U.S. than the U.S., which makes it sound like the U.S. is really quite horrible at the moment.

Now that you have dove in there for a few weeks, can you give us a more granular assessment of exactly what went wrong, and why changing a sales compensation scheme and the other actions are actually going to revive that business?

Maybe you should just cut bait and sell it to one of the other consolidators.

Just think, the size of our business, the U.S. and Europe, is about the same roughly.

They are about the same.

It is roughly 50-50.

Now I will let Phil give you his action plan and his objectives for the following year.

When we go forward, we look at a number of action plans that we put in place to really turn this thing around quickly.

One of the issues, frankly, in the U.S. business was it was operated very much in a regional structure.

It was very hard to cascade messages.

Everyone was on their own system and you couldn't get any consistent data out of the business.

We have realigned all that to a functional organization.

We have got systems in place and action plans going forward, daily operational metrics, hired a bunch of new salespeople, and realigned the incentive plan.

I believe after only having been there for a few weeks now, we are ready to turn this thing around this year.

I don't see what would prevent us from doing that.

A follow-up question.

Paul, the TDI markets are likely to be a little bit better now that Dow has taken some capacity out.

Does this give you any hope that maybe you can start selling some more TDA in the future, or at least the promise of selling it so that you might be able to get rid of that asset?

We continue to work on the efforts which we have going forward to -- for us to restructure our business there.

Yes, I'm hopeful that the tightening of the TDI markets does help that.

Maybe I could ask it a different way.

Any closer to getting a resolution with Lyondell?

As far as the negotiations on any of these things, I can't comment because they are in negotiations.

Kevin McCarthy, Banc of America.

Several of your competitors have announced plans to build new air separation units in the U.S.

You had great LOX/LIN pricing of plus 12, so the market is clearly tight.

You mentioned debottlenecking and migrating customers to on-site.

Is that the game plan or might we expect some ASUs from Air Products over the next twelve months?

I'm going to pass the question to Nelson, since he just came from that business.

Yes, we are -- our efforts this year in debottlenecking have added around 5% to our total capacity.

So that has been good for us, and we have been able to place that product in the market.

As a part of our expansions, or the part as we look at the business we continue to convert business, and that totals about 2% to 3% of capacity a year.

That also frees up capacity to go back into the marketplace.

Currently we are looking at expansions in various parts of the country based on market demand, based on what our long-term picture is.

But we really have in place plans to generate enough product through our debottlenecking and through conversions to keep up with market demand for the next few years.

I have got a question on refinery of hydrogen.

It looks like volume was up 40% in Tonnage.

Obviously the six new plants had a lot to do with that.

But if we look at refinery hydrogen demand on a same-store basis, if you will, what would volume growth be recognizing the marginal barrel is increasingly sour?

For us the refinery of hydrogen is the uptick in this quarter was very strong because the impact of the hurricanes on September of last year.

As you recall we had that -- New Orleans and at the end hit the Gulf Coast, so we lost some volume last year.

That is the impact of those things.

But if we look at these things the amount of refinery hydrogen in keeping required in the future is going to continue to grow as more and more is required for both the crude slate and also for making more transportation fuels.

Do you have a guess as to how much it grows at the individual plant level?

Is it low single digits, mid single digits?

At the individual refinery level, it is going to depend upon the decisions which they make.

When people make these decisions at the individual refinery level it is normally very large.

They are typically out doubling things.

If we look at -- if we just look to the future, we think that overall demand growth is going to be somewhere 10% to 15% per year for the next ten years.

Then finally on electronics, it looks like the margin in that segment in quite a while.

What is your outlook sequentially there, and would you anticipate continued improvement?

Yes.

We do anticipate continued improvement, and that is why we're taking some of the productivity actions.

And we're very bullish on what our sales prospects look going to the future also in this business.

Mike Judd, Greenwich Consultants.

I just wondered if you could provide a little bit more detail on the inventory correction in Healthcare?

And what exactly was going on and what is it that was actually corrected?

I will provide with some of the details on that.

It was not our finest moment.

We are embarrassed and are not happy about this, obviously.

But what happened is we did not have a fraud on this thing.

It wasn't inventory walking out of the backdoor here.

This was a matter of keeping very poor records.

Not doing things like account analysis.

One of the things which one when we talked about -- in the second quarter we talked about changes in people and stuff like that.

I changed my Controller out after the end of the second quarter in the U.S. business and put a new person in.

We told the person to go through, do a thorough look at things.

She did that.

Part of that was taking a very hard look at our inventories and our inventory practices of the things that we're doing.

We found some things that just weren't right.

And we went in and we did the things to correct them.

We did the appropriate analysis, and now we have got it right.

But it wasn't very good.

I appreciate that.

I'm still grappling with kind of visualizing exactly what the issues were.

The issues were things like when they did physical counts, they counted some things -- and which were actually not being held for sale, but were being held for rental.

So it was shown in PP&E when they counted -- the instructions were bad when they sent them out to the field to things.

It is, like I said, this is not something which we're proud of.

It is not something which we're happy about.

But it was bad record-keeping, as people not reconciling properly and other things.

It was just poor accounting.

Just as a follow-up to that, not to be beat it to death, but when you're talking about single digits margins in that business potentially in the fiscal first quarter, if the inventory correction occurred in the September quarter, why wouldn't you basically move back to -- closer to a double-digit margin sooner rather than later?

Is there anything else going on there?

The inventory correction, if I take that out it takes me to flat margins, right, on that thing.

Now I have to come back out of that.

Part of that is some of the things -- the bulk of the improvement we're looking for in the U.S. business, we have not seen the improvement yet in the U.S. business in our volumes.

We are looking for that turn.

I hope it comes back quicker.

We all hope that it comes back quicker.

Was that an issue of pricing or what are the issues there?

No, the issue is volume and making the right -- doing the right things with your salesforce, calling on the right customers.

It is blocking and tackling for us.

Sergey Vasnetsov, Lehman Brothers.

I have a couple of questions on your Asian plant.

In your Asian atmospheric gas, what percent is currently the margin, and what do you plan to have in 2008?

Excuse me?

You broke up there.

In your Asian atmospheric gases, what percentage is currently the Merchant volume in 2006?

And for your new plants that they are rolling out, are they mostly Merchant focused or contract focused?

They are both.

Our new plants in Asia are both there.

A number of the liquid plants which we have are also on-site, as we bring them on stream, which I referenced there.

So we are looking for growth in both those areas.

Do you have any numbers to share with us?

Numbers to share as far as what?

What percentage of the atmospheric gases is derived from Merchants versus on-site sales?

I don't put -- if you're adding Merchant and Tonnage together -- I don't know what number you're looking for there.

I will take it off-line.

Perhaps if you could take -- if you look at Merchant -- if you look at our Merchant business, a lot of our growth is being driven by Asia.

That is where we are expanding capacity.

So you can count a lot of that growth coming from there.

When you look at the Tonnage business, you obviously have a decent amount of growth being driven on the refinery and hydrogen side.

In light with the natural gas price decline recently, what kind of impact could we expect on your price on your price of Merchant Gases in the United States?

It probably does not have a major impact in natural gas on my Merchant Gases prices.

The only place where it has any large impact is in hydrogen from there.

The bulk of everything is diesel fuel and power-related, and power is not that much tied to natural gas.

Jeff Cianci, UBS.

First I guess we'll give Phil credit for providing transparency of reporting here by segment, which revealed some things that are good.

And Phil's good job -- such a good job we will get rid of you in Investor Relations.

What jumps out at you is the margins in Merchant and Tonnage, so first I will ask Paul what do you think for -- I know you're not providing guidance for the next year yet, but directionally to look at what the margins are now, would you think the mix would change between Merchant and Tonnage margins, given the project mix you got coming on?

Is there more upside in Tonnage margin than Merchant margin?

Anything directionally would be helpful.

I think as far as I look at that, the Merchant margin we're obviously -- it is a large business.

You can see some fairly steady growth which we have had in the quarters, which we have outlined for you.

That is a lot around our productivity, and reading the last -- loading the plants and things like that.

So we continue to look for us to have a steady increase in our Merchant margins.

The Tonnage margins, as you can see, bounce around a lot more.

And they do depend upon the gas price with things.

They do depend upon the impact of the hurricanes.

They had some remarkable impact on our Tonnage margins, as you can see that.

As Phil said, they roughly increased our Tonnage margins this quarter by about 1% for things.

Longer term, as we just go out and we try to look at things, in a constant gas price scenario our Tonnage margins should continue to grow.

As we continue to load the plants, as we continue to bring on good deals and load our basic asset base, our Tonnage margins should continue to grow.

My thought is there is more loading opportunity in Tonnage, because Merchant you're running pretty hard now.

We are running pretty hard.

We do have opportunities in Asia though.

We continue to bring on good capacity in Asia and those things.

And we continue to have some capacity in Europe to sell also.

But I have one final question, if I could, for our Healthcare expert, Mr. Sproger.

You guys are factoring in more reimbursement pressure next year.

Is this -- is your plan going to be really just an internal turnaround plan cognizant of -- for continued margin pressure U.S.?

I would say it is pretty much the latter thing that you mentioned, which is a turnaround plan, but are absolutely aware of some of pricing pressures that are out there.

In February the [DNE] reimbursement will go from 13 to 15 months.

We are well aware of that.

We have that factored in the plan.

There are also some proposals out there to cap oxygen rental at 36 months.

We are well aware of that.

And we have got that into consideration and still think we can make our goal in light of that.

Don Carson, Merrill Lynch.

I wanted to follow-up on Merchant Gases.

I know you restated some numbers, but back in '04 it looked like you're getting just under 19% margins in Merchant Gases.

Obviously the U.S. wasn't as loaded back then.

I am just wondering why margins have trended down despite the better loadings in the U.S. market.

It is due to Asia or Europe, or what is going on there?

Paul, what would your overall targets be in terms of operating margins in gases and tonnage, say on an optimal target that would get you to your 12.5% ORONA goal?

For the one thing which obviously has started to expand, is the amount of price which we pass through on raw materials, especially in areas like on the hydrogen business in the U.S., where that has raised our base here.

Probably the other thing which is in there is we did transfer the generated gases business in the history, which will take down the '04 margins a little bit from there.

But as far as target for things -- and we would look for this thing to get above 18% next year.

Like I said, I think steady progress is what we're looking for in this business here.

Except for the liquid/bulk business in Europe, every business in this area is above its cost of capital.

We are putting in place programs to get the -- to help on the liquid/bulk side.

A lot of that restructuring and what we're doing in Europe is aimed at making that a lot more efficient business for us.

A question on your Electronics business.

I know you announced a new construction of a NF3 plant in Asia.

What is the margin outlet for that plant?

Presumably you are saving a lot on shipping costs there, but I'm just wondering at the plant gate what are the returns on what is a smaller facility than what you have been in hometown?

The market outlook, it is still a large plant when you get down to it.

It is about 500 metric tons a year is a good sized plant.

It is obviously smaller than my hometown plant, but it is still a very large plant from a world scale basis.

I think the market outlook is a double-digit return on capital, as we have looked at it and have analyzed it.

We think we have a reasonable price scenario in there.

Dave Begleiter, Deutsche Bank.

On NF3, in the quarter, did volumes again offset pricing?

And what is our expectation on your plan for NF3 price declines in 2007 as well as volume gains?

The answer to first question is, yes, it did.

As far as the expectations in my plan is we continue to see that happening going forward.

We have seen a steady run of volumes now increasing price decreases in this business for us.

I'm not going to share too much about the specifics on NF3 pricing, obviously, because I don't want to advertise it on the customer base with things.

I hope you guys appreciate that.

But NF3 continues, as we have said all along, to be a very good product for us.

And the returns on that product are good.

If they weren't, then we won't be building a new plant.

Just on hydrogen, any increase in competitive intensity on recent signings?

Can you give us your forecast now of what is happening in Alberta in terms of timeframe and size and scale?

As far as the increase in competitive intensity, it is the same people who are still out there.

The answer to that is basically, no, we still see people showing up.

Once again, the big impact here is the make case which we go against every day on that one.

Alberta, obviously things continue to move forward there.

Those are very large scale projects.

I think the only news there is that I think we going to see a lot more investment occurring further south than -- and then in the north there, because the construction costs and labor -- availability of labor.

Last thing, Paul, on Europe would you expect again above trendline signings next year as well, and what is driving those signings?

We would expect to have good signings going forward again next year in Europe.

What is driving that signing is we have renewed or sales effort.

If you remember, that is something which we did here in the U.S., and Nelson led that.

We have translated those same learnings over to Europe to do the same thing.

And so, yes, we would expect to see good signings continue.

Mike Sison, KeyBanc.

Nice quarter.

In the Electronics Performance segment you had nice improvement in margins '06 versus '05, almost 2% there.

Can you give me feel, was the improvement from the Electronics side?

Was it from the Performance and Materials side, a little of both?

The improvement, it was principally on Electronics side.

As I said, our Performance Materials business has continued to be a very -- it has been a very steady business as far as that business went.

So the bulk of the improvement in this business came on the Electronics side, and we continue to improve it.

As I recall, there is a product rationalization efforts, cost savings.

I would imagine there is -- it is are a lot of room for more improving electronics or are you where you want to be?

No, I'm not where I want to be, and there is room for more improvement.

When you take a look at your -- this is sort of a longer-term question -- take a look at your ORONA target, you pretty much are going to be there in '07.

When you look at the potential through the end of the decade, where do you think you can get to?

And can you make any comments on what you think the organic sort of sales growth potential is for Air Products through the end of the decade?

If you look at -- if you take a look at the ORONA target, our target is 12.5%.

We have a plan which drives us to there, and we are committed to making that.

That is our number one priority as a company making that target.

If you then look forward, I would expect to see continued improvement there.

It will depend upon the types of investments in which we do when you look at this.

Because if we have a surge of new capacity come on stream for a refinery and hydrogen, that obviously doesn't come on at the average higher ORONA level, as a new investment will do that.

It is a balance of growth and maintaining the return.

Our goal here is to keep our return on capital in a very attractive position.

We think we are well on our way to getting that there to maintain the balance and focus on return on capital and growth going forward here.

Did I answer everything?

[Mark Bowling], Soleil Securities.

A couple of things.

One, in Europe it does sound like your price increases are not keeping up with the cost increases, particularly in the power site.

When do you think price increases could be as robust as we are seeing elsewhere, and you could get those returns up to where they should be, Paul?

Our price increases in this quarter did keep up on the power site for us.

They did.

Secondly, on the --.

The other thing, as Phil said, is that we have announced price increases through the 1st of September also.

We continue to see power prices go up, but it is there.

If I look at my price margin in Europe, it was good this quarter against prior year.

In Electronics and Performance Materials, how much of the sales and earnings gains, and for that matter margin improvements, were due to the inclusion of Tomah?

Tomah actually contributed 1% as far as the earnings improvement.

The margin improvement is Tomah probably is maybe about the average margin to a little bit above that.

I don't think Tomah was a big driver of those things.

A lot of this gets down to the basic business itself underlying is very sound.

P.J.

Juvekar, Citigroup.

Paul, since you became the CFO, you have generally stayed away from major acquisitions, except for smaller ones like Tomah.

But once all the divestitures and all the restructuring is complete, what do you think is a priority for cash?

Do acquisitions move up on that list again?

The priority for cash is to use it well and wisely.

My priorities for cash are that.

Acquisitions come out as part of executing the strategy for us.

If I -- in our basic businesses, as we have laid them out for you.

It is Merchant Gases, Tonnage, Electronics and Performance Materials, Equipment and Energy and Healthcare.

If acquisitions come and they are good things for us to do, and they make sense, they drive the business, they execute the strategy, and they make should the shareholders better, we're going to do that.

But if they're not, we're not going to do them.

From the sound of it, it's still sounds like acquisitions are not very high-priority for you.

the acquisitions -- I will tell you, and obviously as I said before, returns and .growth are important to me.

You get them in a various number of ways.

But that is how I create value for the shareholder, and the whole team create value for the shareholder in doing that, in managing that balance.

That is our focus.

Acquisitions are a tool in a tool kit, but I would never seek growth for just growth's sake.

And on the same side, I might have very good projects if I got my returns up very high, which might drive my average return down, but it's still could be a very good project to do and have attractive returns and value for the shareholders.

We're going to do the right thing for the shareholders is what is going to drive that.

Jeff Zekauskas, JP Morgan.

Can you remind us how dilutive the sale of the Chemicals businesses, or the remaining chemical business is likely to be.

As I said, the means is basically -- is going to be basically a zero.

If I look at the remaining pieces of the Chemicals business, I would say that roughly somewhere 2%, it could be when I use the funds coming back in from there.

That would be a guess on that.

It is obviously on the price and what I do with the funds on those things.

We would obviously try to manage that to zero.

Right.

So the idea is somewhere between zero and say $0.08 a share, something like that?

Yes, somewhere around that.

Secondly, in the 40% Tonnage growth, if you ex out the new capacity that has come on in hydrogen, what was the growth rate?

If I ex the amount and due to the new -- on the new plants?

Yes.

The new plants probably contributed about roughly half.

Remember, it is the hurricane impact too in there.

Lastly, the Merchant Gas growth has been very healthy in the U.S. versus the previous year.

Is that more on the oxygen side or on the nitrogen side, or what accounts for the strength of the Merchant business this year versus last year?

Nelson, do you want to try that?

Sure.

It is really across the board.

It is driven by both LOX and LIN.

We continue to sell those products.

We continue to find new applications for them.

We have had a strong year in argon as well.

And hydrogen has bounced back in this quarter versus a quarter ago.

We see that continuing to grow.

It is a good story there.

Pretty much across all productlines we are seeing continued growth and continued demand.

[Peter Butler], [Glenhill Investment Research].

I'm a bit puzzled over who has more shoes, Imeda Marcos or you guys in your Healthcare business.

If we're sitting here a year from now on the fourth quarter '07 conference call, and we look back and in retrospect you don't make your goals in Healthcare, what do you think could have gone wrong?

What do you think the risks are to your rosaic prognosis here?

In the focus on Healthcare we said in the regions it is different.

In the U.S. the focus is on driving volumes back up.

We are, as I said before, we're going back to the basics there.

It is just the basics don't work.

I don't think that that is a huge risk to be honest with you.

Obviously there is a startup cost and a timing impact of those things.

But going out of and basically selling, that is something which the Company knows how to do.

Phil and his team, and the people underneath him, know how to do those things, and it is just getting back to that.

The second area is Europe where in the UK business we have to drive the cost and drive the productivity across that new contract.

That is within our control, as far as how we do it.

A lot of that stuff the market is there in the U.S. for us to sell into And the cost control, the cost reduction activities are -- we've got them targeted.

I'll covenant that we've got a good team, the right people in place, who are going to make this work for us.

On a different subject, most companies seem to have a pretty sad experience with SAP or whatever version they're using, particularly compared to the rosy forecast.

But in your case, and in some other cases, the Company has finally turned the corner.

I'm wondering, what sort of delta -- if you're ready to start smiling, what sort of delta could we be be looking in earnings per share, say '05 to '06 to '07 to '08?

And who was in charge -- who is the top management guy in charge of this program for you guys?

It was myself on this thing.

Thank you very much for the kind words about our success there.

But however, it is one of these things which takes a lot of people.

This touches all of your people and it touches them at the transaction level.

I think taking care of your people and paying attention to them, training the people, making sure -- and you don't just go out and put in the same way of doing things.

Our key to success here is that we look for ways in which we can make this a lot better.

And so we didn't repave the cow path in doing this.

And we took out a lot of cost.

I think we also have potential for the future to continue to drive transactional efficiency, and plus we're going to make -- we're going to take this information and use it to make better decisions in running our business.

That is the real upsides.

I think that has the ability to stimulate not only cost savings, but also to stimulate growth.

To make better decisions as to what markets to be in, how to price, how to go out and attract customers, etc.

I think it is a long-term benefit.

Ray Kramer, First Analysis.

A couple of questions.

If I look at the Healthcare business and about the half of that that is outside the U.S., is that more or less operating at about your long-term sort of double-digit margin goal for that business?

The Healthcare business in the U.S. is operating at a better margin obviously than the other one is -- than the U.S. is.

Is it at your target or is there still room --?

Europe (indiscernible) outside the U.S..

I'm sorry.

Excuse me, I'm sorry?

Is it at your target or is there still room to bring it (multiple speakers)?

No, we still have to bring that one up.

That is what I was saying before when I was talking about it.

In the U.S. the goal is to drive volume.

In Europe we're looking to drive cost out.

We have had the good volume growth in Europe.

We're happy with our volume position in that going forward, but we've got to drive the cost out of the new contracts.

There are opportunities in both.

Obviously the opportunity in the U.S. is larger than in Europe.

On the hydrogen front, you had, I think, six new plants in fiscal '06.

In fiscal '07 do you think the number will be bigger or smaller than six new hydrogen plants?

In '07 -- and we're not bringing on any new plants in hydrogen.

We're getting the full year impact of those six plants, and it is split evenly between the two years roughly that impact when you look at it.

[Fred Seymour], [Seymour Management].

I double the comment on the transparency for your reporting by segment.

But I do have two questions.

One on the Electronics and Performance Chemicals business, the combination of those into one business segment brings a question in my mind.

Apparently they are two completely separate businesses.

Could you tell me how Tomah is selling to the cosmetic or surfactants industry (inaudible) ammonia rather to the Electronics industry?

What is the rationale behind that grouping?

The rationale behind the grouping really is two things.

First, they operate under a very similar model for the business.

They both are very big on application selling of those things.

Now we have a decent portion of that in the Merchant business obviously also with our application selling.

But these are very much products which get formulated into the process or the product of what people are doing.

We do that in the Electronics business; we do that in Performance Materials business.

We solve customers problems is the underlying thing.

The basic hook here between the businesses is on the technology side.

It is a technological sale, and it is also very much -- all these areas use a [service science] type of technology to do those things.

Trying to drive a synergy across that is something which we are -- and which we're doing by combining those two businesses.

We see the underlying model for the business and the underlying technology trying to utilize that is important.

If I may, one other question.

I noticed the operating income for the Equipment and Energy group is restated to $29 million.

In '05, the Equipment group alone earned $44 million.

This implies a very negative number for your Energy products business.

And I wonder how much of that lost is really developmental costs, or upfront costs for the Energy business?

As you pointed out, we do have cost in the Energy area.

These are for our development activities around technology.

And also for on the project developments, we are in the very early stages of looking at a number of projects in that area.

These are going to be big projects.

They are big opportunities.

As we said in the second and third quarter, one of the things which we had was the cost of our pet-coke refueling project, which we ran a test on.

These things are expensive.

But we think that the returns on this business could be very good, especially since we're looking at a technological base sale in most of these instances, and where we have an advantage for our customer.

At this time we have no further questions.

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

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

And thank you for joining us, and have a nice day.

Once again, ladies and gentlemen, that does conclude today's conference.

You may now disconnect.