Air Products and Chemicals Inc (APD) 2007 Q2 法說會逐字稿

Good morning and welcome to Air Products and Chemicals' second-quarter 2007 earnings release conference call.

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

(OPERATOR INSTRUCTIONS).

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

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

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

Your participation indicates your agreement.

Beginning today's call is Mr.

Nelson Squires, Director of Investor Relations.

Mr.

Squires, please go ahead.

Thank you.

Good morning and welcome to Air Products' quarterly earnings teleconference.

I am Nelson Squires, Director of Investor Relations.

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

We issued our earnings 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 materials.

Instructions for accessing the replay of this call beginning at 2:00 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.

Please turn to slide two.

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

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

Now, I will turn the call over to Paul.

Thanks, Nelson.

Good morning and thank you for joining us today.

Please turn to slide number three for a review of this quarter's results.

As you can see, we had another excellent quarter.

Consolidated sales grew 11%, with 10% of this coming from increased volumes across most segments.

A consolidated sales analysis is included in the appendix.

We continued to deliver productivity by reducing SG&A as a percent of sales.

This quarter, SG&A was 11.9% of sales, 30 basis points lower than last year.

Operating income of $325 million was up 15% from prior year, again due primarily to strong volume growth.

For the quarter, on a continuing operations basis, our net income was $228 million, and our diluted earnings per share were $1.02.

When compared with the prior year, net income increased by 16% and diluted earnings per share was up 19%.

Importantly, we continued to improve our return on capital again this quarter, with ORONA increasing to 11.9%, up 130 basis points from last year.

We are another step closer to achieving our goal of 12.5% ORONA.

In our cash flow statement, cash flow from operations was lower than last year.

This is due to large decreases in payables and accrued liabilities and an increase in prepaid expenses.

These uses reflect pension contributions, which we made in the first quarter and discussed with you during last quarter's call; estimated tax payments we made this quarter; and a reduction in customer advances, due to increases in percentage completions on projects in our equipment segments.

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

Higher volumes contributed a $0.22 improvement.

Higher pricing and margins together netted to zero, with pricing gains in Merchant Gases offset by lower Electronics/Specialty Material pricing.

Other costs were unfavorable by $0.07, due to increased costs to serve higher volumes and maintenance turnarounds in our Tonnage segment.

The impact of our productivity efforts offset inflation, and we did see productivity get to the bottom line, as our operating volumes expanded by 40 basis points to 13.1%.

The absence of last year's hurricane insurance recoveries, net of estimated business interruption impact, resulted in an unfavorable $0.04.

Improved performance across a number of our equity affiliates generated $0.03.

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 1.6 million shares, spending approximately $122 million in quarter two.

We expect to repurchase approximately $500 million during this fiscal year, the same amount as we repurchased in the two previous years.

Favorable currency, primarily the euro and pounds sterling, contributed $0.03.

Fewer shares outstanding contributed $0.02, and all other items net to $0.01 positive.

We had another strong quarter and a great first half to start our fiscal year 2007.

Today, we are more confident in our ability to deliver a strong second-half finish to fiscal 2007.

Now, I will turn the call over to Nelson to review this quarter's business segment results.

Nelson?

Thanks, Paul.

Please turn to slide five, Merchant Gases.

Merchant Gases had another strong quarter.

Sales of $785 million were up 17% versus prior year.

Continued solid volume growth and increased small-plant sales contributed 10%, pricing contributed 2%, and currency added another 5%.

Sequentially, Merchant Gases grew 6%, due to volume growth and higher small-plant sales.

Merchant Gases operating income of $141 million was up 23% versus prior year, and segment operating margin of 18% was up 80 basis points compared to last year, due to volume growth and pricing gains.

Let me now provide a few highlights by region.

Please turn to slide six.

In North America, our business continues to grow.

Our liquid bulk volume index was up 6% year on year.

About half of that growth was attributable to growth in oxygen and nitrogen.

The remaining increase was in our liquid hydrogen business and evenly split between new volume growth and volume recovery.

I would like to point out the tremendous job our North America team has done to recover and build our liquid hydrogen business.

Our liquid hydrogen volumes are 11% higher today than they were before Katrina.

Our liquid bulk volume index was up 5% sequentially, due to volume growth across all products and increased spot activity.

Average LOX/LIN pricing increased 3% year on year in North America.

Just last week, we announced price increases for oxygen, nitrogen, argon, hydrogen and helium.

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

New business signings were very strong across all major end markets, and ahead of target for both the quarter and the first half of the fiscal year.

The European liquid bulk volume index was up 3% year on year, continuing our solid growth trend in the region.

New business signings were on target for the first half of the year.

Our European LOX/LIN pricing was up 2% year on year, reflecting the results of price increases to offset higher power costs.

Cylinder volumes in Europe were very strong, up 4% versus prior year and 5% sequentially, reflecting the continued success of our new offerings in this business.

Asia liquid bulk volumes were up 14% over last year, driven by solid demand for all products, and pricing was down slightly.

Versus prior quarter, the sequential volume and price declines were primarily due to lower spot sales.

Volumes were also seasonally lower, due to the Lunar New Year.

Please turn to slide seven, Tonnage Gases.

Sales of $607 million grew 14% compared to last year.

The impact of the fiscal year 2000 plant startups and improved plant loadings yielded 18% volume growth.

Natural gas prices were down from prior year and reduced sales by 6%, and currency added 2%.

Sales were flat sequentially, due to planned maintenance turnarounds.

These maintenance turnarounds were all successful.

Operating income of $81 million was up 4% compared to last year, and down 9% compared to last quarter.

The increase over prior year was primarily due to the volume impact of the plants that were brought onstream and increased loading, partially offset by higher planned maintenance costs.

The sequential decrease is due to higher planned maintenance costs.

Operating margin of 13.4% increased 130 basis points over last year, due to higher maintenance costs and prior-year insurance recoveries.

Sequentially, margins were down, due to seasonally higher maintenance costs and higher natural gas costs.

Earlier this month, we announced our latest hydrogen win at Marathon Garyville, and our overall bidding activity remains high in this segment.

Please turn to slide eight, Electronics and Performance Materials.

Segment sales of $551 million were up 17% compared to last year.

Volume gains accounted for 14%, acquisitions added 4%, lower pricing reduced sales by 2%, and currency added 1%.

Electronics sales were up 14% compared to last year, driven primarily by higher equipment sales.

Electronics sales excluding equipment increased 1%.

Higher Tonnage and Specialty Materials sales were offset by declines in other product areas.

In Performance Materials, sales grew 25% compared to last year.

Approximately a third of this increase was volume, half was from an acquisition and the remainder was currency-driven.

Overall operating income of $58 million was up 23%, and the operating margin of 10.5% was up 50 basis points versus prior year, driven primarily by volume gains.

Operating margins increased by 50 basis points from the previous quarter, due primarily to volume gains, tempered by lower-margin equipment activity.

Turning to slide nine, Equipment and Energy, sales of $132 million in this segment decreased 25% compared to last year, largely due to lower large air separation activity.

Operating income of $16 million was down 18% versus prior year and 39% versus the prior quarter, which was in line with expectations.

We currently have eight LNG heat exchangers under construction, having shipped one unit while receiving a new order during the quarter.

Our backlog of projects in this segment now totals $349 million.

Please turn to slide 10, global healthcare.

Global healthcare segment sales of $157 million were up 15% compared to prior year, due to the impact of the UK contract awarded last year.

Sequentially, sales were up slightly, reflecting stronger results in Europe offset by a slight decline in the US.

Operating income of $7 million was up versus prior year on higher volumes in Europe, particularly the UK and Spain, and the absence of startup costs in the UK.

Partially offsetting this were lower US volumes.

Sequentially, we did not see the expected margin improvement, due to the weak performance in the US.

While we are disappointed with the US results this quarter, we believe we have the right team and programs in place to improve this business.

Our focus on improving performance continues to be a high priority.

Please turn to slide 11, Chemicals.

The Chemicals segment had sales of $243 million, down 2% compared to last year, and operating income of $23 million, down 8%, due primarily to a prior-year divestiture of a polyurethane intermediates plant.

Sequentially, sales were up 7% and operating income was up 23%, reflecting a seasonal rebound in volumes and polymers and customer order patterns in polyurethane intermediates.

Regarding our Chemicals restructuring efforts, we continue to have discussions with prospective buyers of our polymers business and our partner, Wacker Chemie, about structuring our exit from this business.

Regarding our polyurethane intermediates business, we are making progress in discussions with our customers to restructure and maximize our cash in this business.

You should know that we remain committed to completing these actions and making certain we receive the appropriate value for these properties.

Despite the complexity of these transactions, we continue to be hopeful that we will be able to conclude them in 2007.

Because of the ongoing nature of these discussions, we hope you will understand that we will not be able to provide any more information today on this matter.

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

Thanks, Nelson.

Now, if you will turn to slide 12, as we look forward from quarter two to quarter three, we are forecasting our third-quarter earnings per share to be in the range of $1.03 to $1.07.

This represents year-on-year growth of 14% to 19% on a continuing operations basis.

On the positive side, we expect to see increased earnings sequentially from the following areas.

In Merchant Gases, we announced price increases in the US effective May 1st, and we should also see a seasonal rebound in volumes in Asia.

In our Tonnage Gases segment, we should experience fewer turnarounds related to customer outages.

This decreases maintenance costs and also results in higher volumes.

In our Electronics and Performance Materials segment, we expect higher volumes.

In Electronics, we are forecasting higher fab utilization rates in the third quarter of our fiscal year, and in Performance Materials, quarter three should be seasonally stronger than quarter two.

We will potentially have some additional benefit from asset management activities as we continue to focus on the best use of our asset base.

Somewhat limiting this sequential growth, [the factors] we forecasted decreased earnings sequentially include -- in our Equipment and Energy segment, we expect lower results as we continue to work through the equipment project backlog.

At the same time, we are increasing our development spending on a variety of energy project opportunities.

In our Chemicals segment, we anticipate lower polyurethane intermediates volumes, due to customer order patterns.

Overall, our guidance is for good quarter-on-quarter growth, which represents significant double-digit earnings growth relative to our performance last year, further demonstrating that our strategies continue to work and produce shareholder value.

Now, turn to slide 13.

Based on our strong operating performance through the first half of fiscal 2007, we are increasing our fiscal year 2007 earnings per share guidance to $4.12 to $4.20, which represents earnings growth of 18% to 20% on a continuing operations basis.

This is up from the 14% to 17% increase we gave you last quarter.

The reason for this increase is our strong performance in bringing on new business and our continued success in driving for productivity.

Our assumptions and economic forecasts remain largely unchanged from last quarter.

While our effective tax rate guidance remains unchanged, there is a chance that our tax rate will be influenced during the second half of fiscal 2007, due to prior-year audits with the IRS being settled and also some potential tax planning moves.

Although the exact timing and absolute dollar amount of these adjustments is difficult to forecast at this time, we do anticipate that these adjustments will have a favorable impact on earnings when they occur.

This is excluded from our guidance.

Lastly, our property, plant and equipment capital spending forecast remains unchanged at $1 billion.

As we look to the future, we have excellent opportunities ahead of us.

Our new project activity remains high as we continue to win good, profitable opportunities across our businesses.

The Marathon Garyville hydrogen win is a fine example of this.

In Asia, our engineering organization is executing a project backlog in excess of $400 million at this time.

We received an LNG heat exchanger order this quarter, and in the near future, we will announce several new projects in our Merchant, Tonnage and Electronics businesses.

Our change to global business units is working well.

We are consistently showing the capability to deliver the best solution to our customers around the world.

Additionally, our attention to work process improvement and a single way of doing things has produced an efficient global platform, focused on serving our customers better.

This progress is evidenced by our results for the first half of fiscal 2007.

We've grown sales by 16%.

We've increased operating income by 23%.

We've expanded our operating margins by 80 basis points.

We've grown EPS by [23%] and improved our ORONA by 130 basis points.

Wrapping up now with the ORONA graph, please turn to slide number 14.

You can see our steady progress in improving our return on capital over the past several years.

Rest assured, as this graph demonstrates, our entire management team remains focused to continue to drive our return on capital higher, as we continue to fund the strong growth of our businesses.

2007 continues to be another year of solid progress in executing our strategies, improving our businesses, delivering our results and making Air Products a great investment for our shareholders.

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

(OPERATOR INSTRUCTIONS).

Jeff Zekauskas, JPMorgan.

As I recall, your ORONA goals used to be 14% and you were going to hit those in 2008.

Is that correct, and is that the schedule?

That is not correct, Jeff.

We always -- back before our stock option expensing, we talked about a 13% ORONA goal in 2007.

Stock option expensing, which isn't a cash expense, lowered the goal by 0.5%, so that's why it's 12.5%.

It's still consistent; we haven't changed that at all.

So 12.5% is the goal that you reached?

12.5% is the goal that we set for 2007.

We set that back a while ago, 2004.

Secondly, your minority interest was $7.4 million versus, I guess, $10.2 million in the previous year.

Why was it down, since everything was up?

Well, it has to do with the particular ventures in which we are in, in those areas.

So there are some businesses was up and some business was down within everything which is there.

Laurence Alexander, Jefferies & Co.

I guess the first question is on the Energy and Equipment business.

Where do you think margins will stabilize towards the end of this year or next year, as the LNG activity slows down?

That's a hard thing, you know, on margins, and we've always talked about that.

Because I have a mix of businesses on the equipment side which produces the bulk of the sales in this business right now.

The reason why is because the air separation margins are a lot lower than the LNG margins, because I purchased a lot of equipment going through, which would pass it through to the customer when I build it on the air separation price.

I purchase the compressors, I very often do the construction.

I don't do that same level of activity in the LNG.

I'm almost 100% on a value-added basis.

I'd rather answer your question a little bit -- I'd rather give you some other guidance along those lines, rather than from a pure margin standpoint, as far as percent of sales would be concerned.

We are predicting, as we have told you, is that our profits in the Energy and Equipment area are going to decline throughout the year.

So you saw a decline from the first quarter to the second quarter.

We are predicting a decline from the second quarter to the third quarter.

We will probably likely have a decline third quarter to the fourth quarter in there.

So that's our visibility on that right now.

Secondly, on hydrogen, can you give us some sense of the landscape for you new HyCO wins over the next two years, both in the US and in Asia?

Sure.

On the hydrogen area, there continues to be a lot of activity, and so I would expect that going forward, we will see a lot of new wins.

We talked about the market in this area previously, the past 10 years, from 1995 to 2005, for which we -- as we looked at the market, it was about $5 billion in spending in hydrogen, both by captives and sale of gas, have captive, half sale of gas.

We predict that for the next 10 years, from 2005 to 2015, is that we will see $10 billion in spending.

Hopefully, as the sale of gas model gets better understood by people, we would hope that the sale of gas percentage of that would expand.

We're certainly working on trying to make that happen.

We are bullish about opportunities for wins here, as people continue to do, and not just in the US and not just in Asia, but we also are working in places like the Middle East and Europe also.

Finally, can you give an update on opportunities to consolidate your JVs?

The opportunities to consolidate our JVs, and we don't have any real changes in that, as we've said before.

Those are JVs in which we are happy to stay in and remain in JVs.

We think our partner adds value.

Partners are typically families.

As they choose to leave, as they choose to make that decision, they normally take us.

We don't have any news on that, and they will tell us, but we normally don't get a whole lot of advance warning on that.

So that's the status; there isn't any real change.

David Begleiter, Deutsche Bank.

Paul, any evidence of improvement or turn in Electronics to give you the confidence for an improved back half of the year?

Yes, well, you know, and yes, we do.

We see the forecast on the fab utilizations coming up.

So that really gives us some encouragement that the back half of the year is going to pick back up that we've seen.

In the second quarter, we've probably seen the low point here, although we have not gone through a bad period in Electronics here.

Everyone should understand that.

Our Electronics business still performs very well.

Our sales are up 14% in that time period year over year, so that's still very good growth.

Paul, just on the spot sales in North America, where do they occur, and are they continuing on the liquid bulk side?

They are continuing.

We see them in the areas where we have seen them before, so it's oil field activity in the Eastern, the Southeast, the Kentucky/West Virginia regions, also some supporting business in the Texas and Oklahoma area.

So that remains pretty strong for us, and we're continuing to see a reasonable input of orders.

Just on the merchant pricing that you have announced from May 1st, is it going through?

Will you get the entire amounts, do you think, Paul?

It remains to be seen, of course.

We certainly have had very good success over the last two years of getting price increases in the marketplace, and so we're very optimistic that we will continue to have success here.

Don Carson, Merrill Lynch.

A follow-up on Electronics.

You had very strong equipment sales activity.

Were those true equipment sales, or was that sale of gas that you had to classify as equipment sale for EITF purposes?

It is a combination of both.

So they both had a good quarter over the prior quarter there.

What was the impact of -- I mean, on a year-over-year basis -- I know you have been pruning some of your sales of third-party products.

What impact did that have on the quarter, both from a revenue standpoint and then also from a margin standpoint?

It has not had a large impact on the revenue side at this point in time.

What you are seeing is you're starting to see our margins improve in this business, so you will see a steady pickup in our margins in Electronics.

Finally, on healthcare, what happened in the US?

You mentioned that volumes fell off.

Obviously, margins fell sequentially, which was somewhat surprising.

How do you see things unfolding in healthcare, both from a volume and a margin standpoint going forward?

Can you still hit a 10% operating margin rate by the end of the fiscal year?

Yes, our goal still remains at 10%.

On the US business, the US business -- it did not see on the volume side the growth which we had expected and forecasted.

We have put some new salespeople on the ground in this quarter, trained them up.

We have a new offering rolled out as far as the approach to the market for us.

So a lot of the changes are in place, and we would expect to start to see the improvements in the third quarter of this year.

Mike Harrison, First Analysis.

I was wondering if you could talk a little bit about what you're seeing in terms of end market demand in the steel industry.

The end market demand in the steel industry, and it still remains fairly good for us.

It is not up to the very high rates which it was a year, year and a half ago, when steel was going extremely strong with things.

But we are still seeing the good activity in our steel volumes.

The point for us is that we do not have a tremendous exposure to steel, especially here in the United States.

Then in terms of the Merchant business in North America, can you talk a little bit about the supply and demand outlook there?

It continues to be strong.

We actually are doing better than we thought we would be at this point in the year.

Our signings are very good.

They are well ahead of target, which, by the way, was a target that was raised year on year.

So we're seeing success.

That is really across all of our end markets.

Clearly, our base business is still growing.

It's not growing at the rates that it was in 2006, but we're still seeing it.

So we continue to see a very good outlook, very strong outlook for North America, for certainly the second half of the year.

If I could just piggyback on Don's question, could you maybe talk a little bit about where you think you are in terms of the turnaround in US homecare, maybe like what inning you guys think you are in?

We have a lot of improvement to make in that business, you know, and we have said before, we are not making money in that business.

So it is a drag on us.

We look at it now as an upside for things.

We have put some very good people into that business.

They have done a fine job of defining the things which need to be done.

They are taking those actions right now, and as I said, we would start to expect improvement coming here in the third quarter.

What you will see this improvement is the improvement is going to come in volume here, and that's the focus of the efforts which we have here, to get the volume of the business up.

Mark Gulley, Soleil Securities.

I appreciate the efforts you have made on productivity in terms of SG&A, but I would have thought that given the strong pricing and given the volume growth, I kind of would have thought that maybe the SG&A ratio might have improved more.

Can you should some light on that, perhaps?

Certainly.

The improvement on the SG&A -- it tends to be a steady drop for us.

So there is no one big thing which we are attempting to do.

An important thing to note, though, as you go sequentially for us, is that the first calendar quarter, which is the Q2 for us, is when we give our -- the increases for a salary for us.

So we got a cost drag in the second quarter compared to the first quarter.

So that tends to drag down -- it tends to retard my progress a little bit on a sequential basis.

But our steady progress is something which we continue to focus on and make sure we continue to get.

I guess that implies that we ought to see even better progress going forward, then?

We ought to, yes.

That is certainly our goal, or certainly [is our goal to get that] margin down.

On return of capital, it looks like you made some terrific progress there, and I would imagine that Merchant has benefited a lot from the improved returns on capital.

Is that going to stimulate capacity increases, or can you still swap people out of liquid for small on-sites?

We certainly, as you know, have added capacity or have announced capacity at additions in North Carolina and Kentucky this year.

We continue to look at incremental expansions.

We are certainly converting enough product from liquid to small on-sites to fuel our growth, and so we are not impinged in terms of product availability.

We're continuing to look and other opportunities, though, to add incremental volume, but it's only in places where we have a demand and see a continued demand over a long period of time.

Lastly, back to your Asia strategy and growth overseas, given the big increases in capital costs for a lot of overseas projects, are you seeing any pushback or delay in your sales of ASUs, given the fact that people have to spend a lot more on these projects than originally budgeted?

On the Asia thing, no, we are not.

We're still seeing very strong growth.

As we said, the Asian activities for us is very high in our engineering department in Asia for right now.

So we are not seeing that.

In general, I think we are seeing capital costs up around the world for everyone.

Mike Sison, KeyBanc.

Hey, guys, great quarter.

In terms of Asia, I'm just curious why LOX/LIN prices were weak or down for the quarter.

Do you think that will continue going forward?

On the LOX/LIN prices, they were down on spot sales in prior years.

We could see that continue over; it depends on the level of spot activity.

It's not a big move when you look overall on that.

Shifting gears in Electronics, you have been working on some product rationalization efforts, some cost savings, some improved profitability.

Could you give us a sense where profitability is?

For the segment, it looks pretty -- it looks good.

Is Electronics there, or are you still sort of in catch-up?

In the Electronics business, as I said before, it's making some good improvements but it's not there as far as its goals are concerned.

The goals for that segment are to get to a 15% margin for us.

When you look at Tonnage, you have had a good first half, 20%, a little over 20% if you average the two quarters.

When you look to the second half, is that going to accelerate year over year?

I'm just curious of how much of that is predicated on a backlog of projects that will ensure, if you will, the level of growth you're looking for.

In the third quarter and fourth quarter, on the volume gains in Tonnage are not going to be as large as they were in the first two quarters.

That's primarily because of us going out and lapping the six plants which we brought onstream in 2006.

But we will continue to see profit growth throughout the year.

In terms of your backlog going into 2008, does it look better, or is it just as strong as what you got -- you went into 2007?

As far as the backlog of projects overall, and the capital spending in our forecast for 2008 is probably going to be the same to probably up slightly.

So we might see some expansion in our capital spending.

Kevin McCarthy, Banc of America Securities.

Paul, you alluded to a potential tax angle that could provide you some relief.

I know that's not in the guidance you put forth this morning, but would you comment on how large of a reduction in tax rate might you expect if that does come through, number one?

Then number two, would it be sustainable in nature into next year and beyond?

The items which I talked about would be a one-time thing, and they would occur either in the third or fourth quarter, and they would not sustain -- and they would not carry over for 2008.

It's hard to predict the exact amount at this time, as we are in talks with the IRS.

Fair enough.

A question on the Tonnage business.

I guess the contribution margin came in a little bit lower than we might have thought.

I heard you say that you had some higher maintenance costs.

Was that a large issue for you, or was it more a function of natural gas fluctuations and loading issues on your new hydrogen plants?

No, and the big issue was what occurred on the maintenance end of this.

Just drop back a little bit on the activities in this business, on the hydrogen end, is that we tend to have the highest number of turnarounds occur in the second quarter for us, every year.

Last year, we did not have as many turnarounds, primarily because of coming out of the hurricanes and all the activities associated with that.

The maintenance costs in these business, and they tend to go up in the second quarter every year for it.

We had a large number this year, because a lot more plants because of the plants I brought onstream over the years.

So that was the drag, both from a margin perspective for us and on the absolute profit perspective.

Would you care to put forth a dollar amount on those maintenance costs, Paul?

Yes.

If you look at that, the maintenance costs probably took away a percent of margin or so for us, compared to the -- on the normal side.

Then finally, if I may, just a follow-up on the Merchant business.

You did expand capacity, as you mentioned, in the Southeast.

Should we expect additional air separation capacity from you over the next year, given your view of the tightness in various regional markets that are supporting these price increases?

That will depend on the opportunities which we see and the availability of us being able to go out and make that cost-effective for us.

There is that possibility for us going forward in a few plants, in a few areas.

But we don't have anything to announce right now.

P.J.

Juvekar, Citigroup.

This is actually Eric Katz in for P.J.

What were margins for the Polish BOC assets before the acquisition, and where can they go once integrated?

If you take a look on the announcement which we had, the margins were in excess of 20% on an EBITDA basis, and that's what we disclosed in that business.

We would expect this to have a good impact as far as increasing the margins in our merchant business, because of us being able to generate cost savings.

Robert Koort, Goldman Sachs.

Paul, I think you made the comment that you expected a volume surge or recovery in the US homecare business, and I don't suspect that you can forecast how many emphysema patients are going to need some home oxygen, so it must have to do with some contract wins.

Or maybe you can just give me a little more color on how you can have the confidence that there will be a rebound in the patient volume for you guys.

The confidence comes from us putting additional people out on the street selling, and giving them some new things to sell and a new approach to selling for us, which we believe is going to carry the day and give success.

There isn't any contract win or anything like that in there.

Then on a completely different topic, I get a little bit of an unsettling feeling when I'm looking at all the announcements of new merchant capacity in the US that we might revisit maybe about a decade ago, when the same trend occurred and it started to create a softer market.

I know you guys have added capacity, and most of your major competitors have.

How do you get comfortable that we're not going to get into a bit of a sloppy period over the next year or two?

If we take a look at where the capacity is actually coming in, it's coming in through areas in which the products and the demand have been good, and the demand for products has been good.

So the confidence which we have is that the capacity is going to be soaked up and needed as we continue to grow and the markets continues to grow.

Would you argue, Paul, that historically companies didn't behave along those same strategic lines, that it was a little more irrational?

I think there was a lot more on the side of people going out and trying to put things in well in advance of the demand.

If we look on our expansions, there's a lot of good things for us of cost savings which we'll generate by just not having to truck product as far to certain customers by some of our expansions.

So there's cost savings associated with that, which it helps, too, in there.

John McNulty, Credit Suisse.

In the Performance Materials area, you had indicated there may be some asset management activities.

What were you talking about?

Can you give us a little clarity on that?

That was not in the Performance Materials area.

What that reflects is that every year, I am out selling assets.

I have a lot of fixed assets, and we're asset-intense as far as the Company is concerned.

So if you look at the first half of the year, it has been slow if you take a look at cash flow statements; there have not been a lot of sales.

That has just been a timing thing, and we are working on selling some things.

So I think that's going to provide some uptick on our earnings across the businesses, and it's not just in the Performance Materials area; it's every area.

Fair enough.

Actually, one other question on the healthcare side.

Not to beat this thing to death, but you basically have said volumes are the key to getting the margins up.

It looks like your volumes were up sequentially, and yet your margins really took a pretty big hit.

Was that just investment on getting more people on the street, or what drove the margin hit sequentially when the volumes were actually up a little bit?

On that one, we did not see the improvement in the US, and so I was talking about that from an actual basis.

So we did see improvement as far as volume is concerned in other areas of the healthcare business.

But, however, the other thing which I talked about is that we give the raises at the first of the year, and so we saw that occur in that business.

That always upticks the costs.

There are a lot of key people in this business.

Peter Butler, Glenhill Investments.

Great quarter.

Always nice to see positive earnings surprises in the results [instead of] in the guidance.

Thank you.

Could you elaborate a little bit on the increase in your prepaid expenses?

Up $165 million seems to be sort of an unusual number.

Yes, and that is entirely due to a tax payment on the income taxes which we had to make this year, and based upon the forecast of what our taxes are going to be for the year.

It should go down as I classify things from the earnings, as taxes move up into accrued taxes to offset that.

Continuing to beat the horse on healthcare, obviously the disappointments continue.

I'm curious -- where does this new management team come from?

Are these guys experienced healthcare people, or are you guys trying to convert Lehigh College graduate engineers into healthcare experts?

Is it possible that this business has a much higher value to one of your competitors than to Air Products shareholders?

The people come from both -- from experienced people in Air Products and people who we have hired from the outside and who have the industry experience.

So we are looking to blend the best of Air Products and the best of the industry to drive the success.

As far as the focus of Air Products right now, it is to get the business up, running and getting better and get this volume moving, and that's our focus.

But the question is, could this have a higher value right now to somebody else than to your owners?

We believe the best thing for the shareholders of this company is to focus on getting the volume up and getting this business better, and then we will look at what sort of things we're going to do in the future here.

The business is not in good shape right now, and it needs to be fixed, and that's the way the value is going to come to our shareholders.

(OPERATOR INSTRUCTIONS).

Steve Schuman, New Vernon Associates.

On the hydrogen side, do you get a feel for the size of the hydrogen treaters that these refineries have been putting in, in terms of is there excess capacity they could actually use?

That is, they wouldn't want to build a new one every year, so they build a large one and then slowly fill the capacity.

Then demand would obviously come from off-road diesel, which specs haven't hit yet and, of course, higher usage of heavy sour crudes.

On that, one of the things which the refineries do is they do build in capacity to handle a range on the input side, on the hydro treaters].

So they may actually wrong run a variety of crudes through the plant and the refinery over a period of time for them.

So they do try to take a look at the range, and then they going out and buy.

Would you expect growth rates to continue -- obviously not as high as last year, but at fairly strong levels as they fill the capacity for those units?

We would expect the growth in this business for us to really come from people going out and buying and putting in new capacity and ordering new plants from us.

The reason for that is that our model in this business is to sell the product before I build the plant.

Finally, a question on gasification.

The electrical power industry is not an area where you or your peers sell a lot of product into.

You talked about coal gasification, petcoke, essentially some work up in oil sands the past couple years.

How is that going in the US?

Obviously, environmental laws are changing pretty quickly.

Do you see that, really, ever picking up to be a sort of a third or fourth leg to the Company?

It continues to get a lot of press in here, and obviously -- and we have a lot of activity.

A thing I talked about is in the energy area, is the efforts for our products are actually picking up, and we are devoting more people to that.

So yes, we do see the energy area as a good area for growth for us in the future.

But nothing in the next year or two, it sounds like?

The projects are hard to predict when they are going to go, but the activity level is higher than 12 months ago, and also things, I think, are getting a lot closer to actually coming to be.

With no further questions, I would like to turn the conference back over to Mr.

Nelson Squires for any additional or closing remarks.

Thanks.

Please go to our website to access a replay of this call beginning at 2:00 PM today.

Thank you for joining us, and have a nice day.

Thank you for your participation.

That does conclude today's conference.

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