Air Products and Chemicals Inc (APD) 2007 Q3 法說會逐字稿

Good morning and welcome to the Air Products & Chemicals third-quarter 2007 earnings release conference call.

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

(OPERATOR INSTRUCTIONS).

Also, this teleconference, 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 teleconference 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.

This is Nelson Squires, Director of Investor Relations.

Today our CFO, Paul Huck, and I will review our third-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 few review of this quarter's results.

As you can see, our employees delivered great results again this quarter.

We delivered record sales, net income and earnings per share.

We saw solid growth in most regions, broad Merchant Gases pricing strength, strong new order activity and we increased our overall margins.

Consolidated sales grew 16%.

Excluding currency, natural gas pass-through and acquisition impacts, underlying sales growth was 11%, driven primarily by higher volumes and pricing.

This strong 11% underlying top-line growth will likely be the highest among our global peers again this quarter.

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

This quarter's SG&A was 11.7% of sales, 80 basis points below last year.

Operating income of $365 million was up 25% from prior year.

Again, our strong volume growth and our productivity efforts are generating operating leverage that is getting to the bottom line.

For the quarter, on a continuing operations basis, our reported net income was $285 million, and our diluted earnings per share were $1.28 -- increases of 38% and 42%, respectively.

As we mentioned last quarter on this call, we successfully resolved tax audits with the IRS for fiscal years preceding 2005, which resulted in a favorable reserve release of $27 million or $0.12 per share this quarter.

Excluding this impact, adjusted net income of $257 million, diluted EPS of $1.16 increased 25% and 29%, respectively, on a continuing operations basis when compared with the prior year.

Most importantly, we continued to improve our return on capital again this quarter, with ORONA increasing to 12.2%, up 130 basis points from last year.

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

ORONA for the quarter or on an instantaneous basis was 12.8%.

Now please turn to slide 4.

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

Higher volumes contributed a $0.20 improvement.

Higher pricing and margins together netted to a $0.04 increase, with pricing gains in Merchant Gases and efficiency gains in Tonnage Gases being partially offset by lower Electronics/Specialty Materials pricing.

Other costs were unfavorable by $0.06, due to increased costs to serve higher volumes.

The impact of our productivity efforts helped to expand margins by 110 basis points to 14.1%.

Acquisitions net of divestitures contributed $0.01.

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

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

Gains on asset disposals contributed $0.03, reflecting our ongoing efforts to improve asset utilization.

The gain is spread over most segments, and isn't significantly different than that achieved in most years.

The absence of last year's hurricane insurance recoveries, net of estimated business interruption impacts, resulted in an unfavorable $0.02.

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

Our debt balance increased due to our share repurchase program and the Poland acquisition.

We repurchased 1.6 million shares, spending approximately $126 million in quarter three.

We expect to repurchase approximately $500 million this fiscal year.

Fewer shares outstanding contributed $0.03, and we have lowered our effective tax rate guidance by 0.5% to 26.5%, a bit that lower than our previous guidance of 27%, as we are now forecasting slightly higher tax credits for this year.

This contributed approximately $0.02 this quarter.

We have included a slide in the appendix to summarize this quarter's favorable tax adjustments.

All other items net to zero.

Another strong quarter for the record books, and we're raising EPS guidance again for fiscal year 2007.

But before I give you our outlook, let me 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 $817 million were up 17% versus prior year.

Continued solid volume growth contributed 5%, while pricing, acquisitions and currency each contributed 4%.

Sequentially, Merchant Gases sales grew 4%, mostly due to acquisitions.

Merchant Gases' operating income of $147 million was up 22% versus prior year, and segment operating margin of 18% was up 70 basis points, 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 liquid bulk volume index was up 2% year on year, reflecting solid oxygen and nitrogen growth, tempered by availability of argon and helium.

Our liquid bulk volume index was down 3% sequentially, due to lower spot sales and availability of argon and helium.

Average LOX/LIN pricing increased 5% year on year and 2% sequentially, reflecting the impact of our 1 May price increase.

New business signings continue to be very strong across all major in end markets, and are ahead of target for both the quarter and fiscal year.

The liquid bulk volume index in Europe was down 1% year on year and 2% sequentially, mainly due to argon and helium availability.

New business signings are on target for the fiscal year.

Our European LOX/LIN pricing was up 2% year on year, reflecting the impact of price increases to offset higher energy costs, and down 3% sequentially due to surcharges last quarter related to product sourcing.

Cylinder volumes in Europe were up 2% versus prior year while down 1% sequentially.

Adjusted for work days, volumes were up 3% sequentially.

Growth in new offerings increased 10% year on year.

Asia liquid bulk volumes were up 9% over last year, driven by solid demand for all products.

Growth outside of China was constrained by product availability.

New and incremental capacity startups in the next four quarters will continue to add needed capacity to the system.

Volumes were up 6% sequentially, reflecting a rebound from the lunar new year.

Pricing was up 3% year on year and 2% sequentially, reflecting success in our efforts to recover higher energy and distribution costs.

Please turn to slide seven, Tonnage Gases.

Sales of $695 million grew 27% compared to last year.

The impact of fiscal year 2006 plant startups and improved plant loadings yielded 17% volume growth.

Natural gas prices were higher versus prior year and increased sales by 7%.

Currency added 2% and acquisitions 1%.

Operating income of $111 million was up 30% compared to last year and up 37% sequentially.

The increase over prior year was primarily due to the volume impact of new plants, increased loading and improved efficiencies.

The sequential increase is mainly due to increase loading and lower planned maintenance costs.

Operating margin of 15.9% increased 30 basis points over last year.

If not for higher natural gas pass-throughs, operating margins would have been about 100 basis points higher.

Sequentially, margins were up 250 basis points, due to loading and seasonally lower maintenance costs.

We announced our latest hydrogen win at Marathon Garyville during the quarter.

The facility will supply the Marathon refinery and other customers located on our Louisiana hydrogen pipeline network.

We recently were selected to participate in a major gasification project in the Gulf Coast.

Our involvement will include hydrogen offtake and the supply of oxygen.

We are excited about the opportunity to bring our technology, offerings and operating experience to this significant project.

Further information about this project will be available shortly.

We will be bringing seven plants onstream through the end of fiscal 2008, including our second hydrogen plant for Petro-Canada's refinery in Edmonton, Alberta, and a large nitrogen facility for enhanced oil recovery for Pemex.

Each of these plants is currently on schedule.

We are actively working on about 20 new tonnage opportunities in North America, Europe, Asia, Latin America and the Middle East.

Please turn to slide eight, Electronics and Performance Materials.

Segment sales of $552 million were up 13% compared to last year.

Volume gains accounted for 14%.

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

Electronics sales were up 14% compared to last year, driven by higher Equipment and Tonnage sales.

Electronics sales excluding equipment were flat, with higher Tonnage sales offset by declines in high-purity process chemicals.

In Performance Materials, sales grew 10% compared to last year, primarily through volume growth across all product lines.

When we announced our Performance Materials strategy last year, one of the things we told you that would be critical to our success in the business was increasing our penetration of new products.

This quarter, new products grew to approximately 15% of our portfolio versus 10% last year.

Overall operating income of $63 million was up 28%, and operating margin of 11.4% was up 140 basis points versus prior year, driven by volume gains and continued benefits from our Electronics restructuring.

Operating margins increased by 90 basis points from the previous quarter, due primarily to volume gains and restructuring efforts, tempered by lower-margin equipment activity.

We announced plans to close our Morrisville, Pennsylvania facility in 2008 and continue to make progress on other aspects of our Electronics restructuring initiative.

Going forward, we have a number of new Tonnage facilities coming onstream in Electronics in 2008.

In the past 12 months, we have seen a very strong capital investment cycle, and we have won well over half the business we bid.

In 2008, we do expect to see lower Equipment sales and higher Tonnage and Specialty Material revenues, as capital expenditures ease off and capacity is brought onstream.

Please turn to slide nine, Equipment and Energy.

Sales of $134 million in this segment decreased 3% compared to last year, largely due to lower LNG heat exchanger activity.

Operating income of $16 million was up 7% versus prior year and down 4% versus the prior quarter, in line with our expectations.

Our backlog of projects in this segment now totals $268 million.

The decline in our backlog was anticipated in our guidance for this fiscal year.

As we look forward, we would expect to receive some new orders for large air separation units and LNG heat exchangers over the next year.

In fiscal 2008, we expect profits from equipment sales to decline from the peak backlog in LNG that we experienced in 2006.

Please turn to slide 10, global healthcare.

Global healthcare segment sales of $159 million were up 6% compared to prior year, due primarily to better performance in Europe.

Sequentially, sales were up slightly, again reflecting stronger results in Europe.

Operating income of $9 million was down versus prior year on lower US volumes.

Sequentially, our margins improved 90 basis points to 5.4%, driven by growth in Europe.

US margins were impacted by increased costs as we added sales and customer service people to generate and support our growth efforts.

While our US business results were lower this quarter on a sequential basis, our volumes have flattened.

This is an improvement from the decline we were seeing.

We are not happy with the rate of improvement in this business, and we are accelerating actions to improve it.

Please turn to slide 11, Chemicals.

The Chemicals segment had sales of $238 million, up 7% compared to last year, and operating income of $21 million, up 40%, due to volume gains in both Polyurethane Intermediates and Polymers.

Polyurethane Intermediates results were higher, due to prior-year customer outages.

Now I'll turn the call back over to Paul.

Thanks, Nelson.

Now, if you will please turn to slide 12, based on our strong operating performance through the first three quarters of fiscal 2007, we are increasing our fiscal year 2007 EPS guidance to $4.30 to $4.35, which represents earnings growth of 23% to 24% on continuing operations.

This is up from the 18% to 20% increase we gave you last quarter.

This guidance does not include the impact of three items -- the $0.12 per-share tax audit settlement this quarter and any future tax planning impacts; the supplemental pension plan settlement charge; and the contract settlement in Polyurethane Intermediates.

The reason for this increase remains the same as in the previous two quarters, when we also raised guidance, our strong performance in bringing on new business and our continued success in driving productivity.

Our assumptions and economic forecasts remain largely unchanged.

As in the past, we will provide fiscal year 2008 guidance in next quarter, following the completion of our annual operating plan this summer.

Right now, we are seeing the economic conditions we had forecasted.

As expected, US manufacturing growth has continued to slow through the year, and momentum is slowing overseas as well.

Also, the high capital cost environment has delayed a number of projects.

We still expect to see a large number of projects built that will require industrial gases; however, some project sponsors are waiting for the capital cost environment to cool down.

As I mentioned earlier, we have modestly reduced our effective tax rate guidance for fiscal year 2007 to 26.5% excluding this quarter's audit settlement impact.

Note that our tax rate may be influenced during the fourth quarter of fiscal 2007, due to some potential tax planning moves.

Although the exact timing and absolute dollar amount is difficult to forecast, we do anticipate that this will have a favorable impact on earnings.

This is excluded from our guidance.

Also, in quarter four, we are anticipating that there will be a supplemental pension plan settlement charge to recognize pension costs related to a number of retirements by senior managers this year.

Under current accounting rules, this charge of $30 million to $35 million will be split between fiscal years 2007 and 2008, with about $10 million in fiscal 2007.

The remaining portion will be recognized in fiscal 2008.

Regarding the Chemicals restructuring efforts, we have entered into a settlement agreement with a major customer to terminate a long-term DNT supply agreement and amend other supply contracts.

We expect the gain to be $30 million to $37 million.

Our guidance excludes this gain.

We continue to have discussions with our partner, Wacker Chemie, about structuring our exit from the Polymers business, and we remain hopeful we will complete this process by year end.

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

Turning now to slide 13, as we look forward from quarter three to quarter four, we are forecasting our fourth-quarter earnings per share to be in the range of $1.10 to $1.15.

This represents year-on-year growth of 17% to 22% on a continuing operations basis.

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

In Merchant Gases, we expect to see continued volume growth in Asia, albeit more modest, given the tighter capacity rates in a number of countries.

In our Electronics and Performance Materials segment, we expect modestly Higher Specialty Materials, Tonnage and Performance Materials volumes, and in our Tonnage segment, higher operating bonuses.

Factors we forecasted to decrease earnings sequentially include seasonally higher operating and distribution costs in our Merchant Gases business; seasonally softer volumes in Europe, generally due to holidays and vacations; lower Electronics Equipment sales, as our project backlog is down following several very strong quarters -- as a result, overall Electronics sales will likely decline next quarter; lower Equipment and Energy results, as we continue to work through our equipment project backlog.

Overall, our guidance again represents significant double-digit earnings growth relative to last year.

Please turn to slide number 14.

We continue to have excellent opportunities ahead of us.

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

As you can see from our ORONA graph on this slide, we continue to make steady progress at improving our return on capital over the past several years.

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

We are all very excited by the opportunities that lie ahead of us.

In next quarter's call, we should report to you the achievement of our ORONA goal of 12.5% along with our outlook for growth in 2008 and beyond.

Thank you for your interest in Air Products.

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

(OPERATOR INSTRUCTIONS).

P.J.

Juvekar, Citi.

You had good numbers in Tonnage as well as Merchant Gases.

Excuse me, P.J.

I didn't catch that first thing you said?

You had good growth in both Merchant as well as in Tonnage.

Yes.

You had several plant startups as well.

Is there a way you can break out sort of same-stores sale growth?

So whatever was existing last year, what is the growth in that business today if you exclude the new plant startups?

Well, when you look at the startups -- let me deal with Tonnage first of all.

We lapped a number of our Tonnage plants in this quarter.

So we did have some impact from the new plants, obviously, as the loading on those plants got better.

But we also saw refinery operations run very well, and we saw our plants run very well.

So a good portion of that growth represents our good performance in operating our plants.

With regard to the merchant business, the bulk of that continues to be loading of our assets when you look at North America and you look at Europe.

As we said, we haven't invested very heavily in really new capacity.

We have had some capacity expansions in North America over the past year, but a lot of them have been incremental.

In Europe, we haven't really been out expanding capacity in those things.

We have been trying to sell our system out and raise our prices.

You can see some of our results there also.

In Asia, a lot of that is loading from plants which were onstream this year.

We've gotten to very high run rates in both Korea and Taiwan, as Nelson talked about, and we're still loading investments there in China.

But we will have more plants coming onstream in the next 12 months.

So what is your loading rate or operating rate in Merchant Gases?

Overall, our loading rate?

Overall (multiple speakers), yes.

Our operating rate in Merchant Gases is probably somewhere -- we don't compute it overall, but it's probably somewhere between 85% and 88% in total, when you look at the whole thing.

So it's a very good, high rate for us.

As you know, if we get up to the 90 percentile on Merchant Gases, it gets very tight for us.

Can you update us on unbundling of products that you sell to electronics customers in Asia?

You sell some third-party products, and you're going to discontinue that.

Is that happening now?

Yes, that is.

That is something which we started in the beginning of this fiscal year.

As we said, we give our customers a notice of about 1% from there -- excuse me, about one year.

We don't expect this to have a huge impact on our sales, but it does hold down our sales growth.

What it really does, though, is it increases our margin growth.

So what you see there is you see in our Electronics and Performance Materials segment we've increased our margins this quarter 140 basis points over last year.

So that's a really nice improvement for us, and something which the team has worked very hard with as they tried to drive their margins up above 15%.

Bob Koort, Goldman Sachs.

Paul, I was wondering if you could help a little bit.

There's probably a lengthy list of CFOs that have suggested divestitures that would close in a certain date and then unfortunately surprised to the down side.

Is there something about the contract termination and/or your advanced discussions with Wacker that allow you that confidence?

Can you tell us where you stand in the individual processes to get that done and what the hurdles are to getting a completion?

Certainly -- and we can't add a whole lot more to that, because of the ongoing negotiations with things.

But we do have the contract termination, and that will be recorded in the fourth quarter.

So we do expect that, and one of the things which we had in there is, as we look at this, just take our Polyurethane Intermediates business.

You remember last year, we sold the Geismar assets to BASF, and then we have this step of getting through this contract termination.

Then the next step is getting the right future for our Polyurethane Intermediates business, which we are well on the way and will have a path forward, I'm sure, by the end of this quarter for everyone.

With regard to the Polymers business, it has been a lengthy process for us.

It has gone slower than we would have liked and anticipated.

The real issue here for us is that I think we are starting to make some progress there.

So, as I said, I'm hopeful that I'll get something done in this business to resolve a path forward for us by the end of this calendar year.

I noticed your friendly competitors in Connecticut announced a big share repurchase this morning.

Any chance that you could use proceeds from some of these sales to fund a more aggressive --?

It's about the same as ours has been running, if you look at that; it's $1 billion over two years.

So divide by two -- $500 million, and that has been our rate for the past three years for things.

In the end, the share repurchase is a fallout of the cash for us as we look at this.

Our first preference is to invest in good, high-return projects.

I think we've demonstrated the capital discipline that this company has been able to do, and so we're going to fund those things first.

Then share repurchase is really what comes after that, after we fund the business.

Don Carson, Merrill Lynch.

Nelson, actually a question for you on US Merchant.

I notice that volume growth slowed, and you attributed it, I think, to constraints on argon and helium.

I wonder if you could just describe what those constraints are, how long they might last.

You mentioned that you have a very strong new order backlog in US Merchant.

I take it that you're not seeing any impact from this much-feared capacity expansion by some of your peers?

Let me start with the volume growth.

Still solid volume growth in oxygen and nitrogen.

A lot of that has been fueled by our continuing success in winning new orders and really an acceleration over last year in our signings, which is very good to see.

These signings have all been at very good returns and really help on the bottom line.

Speaking to argon and helium, helium is really a worldwide issue.

It has been with us now for probably 9 to 12 months, and it looks like it's probably got a ways to go.

It's hard to say whether it will be another 9 to 12 months.

You've got two things hurting the situation, or maybe three things.

One is demand is up.

Two is supply is down because of a lot of outages at production sites around the world.

This whole thing is hampered by the ability to move product around the world.

Containers are very tight; there's long leadtimes on them.

So what we have been doing is managing that very carefully, taking advantage of that from a pricing standpoint, of course, that supplies are very tight.

We are continuing to supply our customers fairly well, but it is restricting the amount of new business that we can bring on.

With regards to argon, argon growth has been very robust for the last several years.

We've enjoyed that, but at the same time we have really worked hard to raise our prices, because we were unhappy with our average selling price in the argon product line.

We continue to add incremental capacity through our productivity efforts, and we have been pretty successful at doing that.

But what the supply situation has caused is our inability to really supply everything that's out there.

So we are choosier.

We're looking for the better deals, we are looking for longer-term contracts and looking for more favorable business conditions.

We would expect our argon supply to increase over the next year or two, mainly due to productivity.

We'll continue to find the best places to put that product.

How about your signings on LIN/LOX and fears of new capacity there?

Are you seeing any impact of that new capacity on the market yet?

We really are not.

I think as we've all said, the market needed this capacity, and it is isolated as to where it is coming on.

We have had very good success.

As a matter of fact, as I said, we have accelerated our signings rate and we have set higher targets for this fiscal year.

We're actually exceeding those targets right now in North America.

So we don't see any slowdown in our rate or ability to bring new business in.

Mike Harrison, First Analysis.

I was wondering if you could talk about the dynamics of the North American merchant market and what has been happening there to get some pricing traction.

Then also, has the appearance of Airgas as a merchant player following their acquisition of Linde change the way you're approaching North America?

Nelson, why don't you take that?

In terms of pricing, we really have not seen any changes in all of the favorable impacts on the business.

One is the economy has continued to grow, albeit at a slower rate, but it has continued to grow.

There wasn't a lot of new capacity brought onstream for several years, and so that allowed systems to become much tighter.

Our run rates in North America are probably at the high end of the range that Paul gave earlier, probably closer to that 88% range.

As we bring on new capacity, it is really going in places where there is demand, where we are dislocating product right now to take care of increased demand.

So when we add this incremental capacity, it's pretty much already spoken for.

All those things have helped get the pricing and continue to maintain the pricing momentum that you have seen from us this quarter and from previous quarters.

We don't really expect that dynamic to change, because we believe all of our competitors are in similar situations.

With regards to Airgas, they come in as a major player.

We believe that not really much has to change as a result of that.

We continue with business as usual, using our technology and our offerings to really propel our signings and continue to bring in good business as a result.

Then maybe if you could talk a little bit more about Tonnage Gases and the impressive volume growth that you showed there, maybe where that volume growth is coming from in terms of both geography and end markets?

Yes.

The volume growth in our Tonnage segment has been a lot around the refinery hydrogen segment.

We brought out six plants in fiscal year 2006, as I referenced earlier, and that was about a 35% capacity expansion for us.

So, as those plants came on relatively well-loaded, so as we've gone through the fiscal year, we have seen the impact year over year, because they came on two in the first quarter, three in the third quarter and one at the end of the fourth quarter last year.

So that is something that has driven it.

The other thing which has driven it is the refineries are running very hard.

We've heard about a lot of refinery outages, and we've all seen the price of gas at the pumps or those things.

So the refineries and their margins are very good right now, and so they are running as hard as they can.

Our customers have operated very well, and our plants have run very well.

We've been able to squeeze additional capacity out of there.

Part of the gain in margin this quarter in Tonnage Gases is gained from the efficiency of our operations, so just running our operations better there, too.

In terms of geography, where are you seeing most of the (multiple speakers)?

In the US, on that refinery hydrogen -- the US and Canada is really where the bulk of that has been.

We have brought on some Tonnage assets also in Asia over the past year, but it hasn't been as large.

We do have a few -- we have a number of Tonnage assets being built in Asia.

We had a gasification plant come onstream this year for oxygen for gasification for chemicals.

So that has also contributed in this current quarter.

Kevin McCarthy, Banc of America Securities.

The strategy question for you on healthcare.

Given the US regulatory regime and the associated pricing pressure, would it make sense for you to explore a combination or establish a joint venture to extract costs from that business?

Obviously, scale is the way people are looking at that.

For right now, we have a volume problem and it is not so much as a scale problem.

We need to get our sales moving in the right direction.

That's what we are focusing on, and that will take advantage of our scale.

As far as the future steps which we take in that, we're going to take them at the appropriate time.

But for right now, we are focused on getting the volumes back in that business.

Then a question on hydrogen.

How large is the unit that you said you won at Marathon, and what is the timing associated with that?

It's 120 million standard cubic foot a day for Marathon, and late 2009 is when it comes onstream.

Late 2009?

Okay.

Then, finally, Paul, on emulsions, the acetyls complex has tightened quite a bit as a result of a competitor's outage in Texas.

Are you able to get enough VAM to satisfy your requirements these days in that business?

Yes, we have.

Yes, we have a number of sources.

So we have been able to maintain our supply of VAM.

First quarter you have owned BOC Gazy in Poland.

How is integration progressing?

Integration has done very well for that.

we have started to implement the -- we have started them on their SAP implementation already; we should have that done within the year, within a year of buying them.

So we are in very good shape as far as that's going.

The business has performed very well, and we are very happy, albeit it's two months.

But we are ahead of schedule on our synergies right now, of our goal, our schedule to get there.

So we are excited by this opportunity.

Mark Gulley, Soleil Securities.

I had a series of questions on the Tonnage business, if I can.

Paul, first of all, you alluded to this prospective signing coming up here on gasification.

Is that going to sale of equipment or sale of gas for the oxygen plant?

What it will involve is sale of equipment and hydrogen offtake for us.

So we will sell the hydrogen and we will sell gas to the customer there.

So that's sale of gas or sale of equipment?

(multiple speakers).

Sale of gas, sale of gas, sale of oxygen into -- and we will take the hydrogen -- we will take the offtake hydrogen from that and sell that.

Secondly, you have talked about the project pipeline going forward in earlier comments you made.

What kind of visibility, maybe in terms of years, do you have in terms of the Tonnage project pipeline?

The Tonnage plants take about anywhere from two to three years to build, depending upon the permitting activities there around those things.

So we have a good visibility as far as our pipeline is concerned.

Somewhere two to three years out as we watch the awards.

So right now, as we've gone through -- as we've gone through 2007, we're looking at deals which will come onstream in 2009 and 2010.

Finally, you have alluded to the fact that high input costs -- steel, tradesmen, that sort of thing -- is delaying CapEx projects on the part of your customers.

Have you experienced a lot of overruns in your projects?

Is that causing any problems with respect to your own CapEx that's going into your plants?

No.

Our project stack -- when we look overall, our project stack is within 1% of budget for things.

So we have looked very good on that, on our project stack.

What people are doing, really, is they're looking at these project costs, and they are saying, if the markets for labor and the markets for materials, and some people bringing more capacity to make things like heat exchangers and vessels, et cetera -- if that starts to drop down and I can get a 10% to 15% reduction in my capital costs and feel a lot more assured out of it, it's not a bad deal to wait 6 months, 9 months, 12 months for them, just from a running the business standpoint.

Mike Sison, KeyBanc.

Hey, guys, excellent quarter.

Can you make any commentary on your confidence in the recovery of semiconductor demand in the second half of the calendar year of 2007?

Yes.

We are seeing that.

As we look forward and look at our special materials volumes, they are starting to pick up.

There is new capacity coming onstream, so you might see operating rates overall for some of these things actually decline as they start to load new fabs.

We've said there has been an investment cycle; that's what has driven all these equipment sales for us.

That is something which we look forward to over the next year, is that we do expect it to increase.

I just corresponded overnight with the guy that runs our Electronics business in Taiwan, and he was very favorable in what he was seeing here as far as on the Specialty Materials for us.

In terms of the improvement in operating margin year over year, did both businesses -- obviously, Electronics and Performance Materials are essentially different businesses.

Did they both achieve that level?

Was one stronger than the other?

The Electronics business had a -- the margin improvement was better in that business.

We've put a lot of focus on that business to get the returns up in that business, and those guys put a lot of efforts into it.

So they've made a lot of progress year on year in doing that.

I know it has taken a little bit of time to go through the product rationalization efforts; it's difficult just to shut down customers here.

When do you think you will get through that process in terms of reducing your SKUs in Electronics?

What do you think the benefit will be in profitability by getting that area complete?

We announced to our customers in last September our intent.

So we have been gradually moving them off.

We like to give them a year's notice, and some have come off earlier.

We try to make this -- and work with our customers, because they're going to continue to buy a lot of other products from us.

So that's important to us.

So we've been able to get some off earlier, and some will probably take a full year for doing that.

So we should be done somewhere in the 18-month timeframe, so maybe nine months from now or so, as we look at that, with those things.

But that's the outlook for us.

The increase in profitability -- you can see the increase in margins.

Those a lot of efforts going on, so it's hard to say what is responsible for each individual one.

But we are confident that we're going to deliver these 15% margins in our Electronics business on schedule, within a couple of years.

Just a last quick question on healthcare.

You've spent a lot of time repairing your customer service programs, your sales force there.

What type of volume growth do you want to see in the US to confirm your belief that you've made that turnaround in terms of those fixes?

Sure.

The volume growth which we would like to see is 6% to 7% from the market, and then we also believe that we ought to be able to take share by our operating scale and things like that.

So we think we can grow within the individual areas in which we had, so we would like to see a couple percent or so from that, added on top of that.

Once you get that typical growth for a couple quarters, that would sort of get you back to that 10% plus?

As far as margins is concerned?

Right.

As we get that, that will improve the margins, that's right.

We then have to start working on the cost element of those things, the rationalization and some of the other things.

But it will put us well on the way to that as we start to grow into this.

David Begleiter, Deutsche Bank.

On the new gasification project, can you comment on the IRR or the return on capital of that project?

Because I assume it was competitively bid.

Yes, and I'm not going to disclose the internal rates of return of what we [make] because everyone calculates those things differently, whether you use full costs or part incremental costs or things like that.

But we do believe that this is -- as we've looked at this, this is a very good deal for us and a very good deal for our customer.

Because what it does is we get a good, solid on-site deal in this project.

We also get hydrogen offtake, which we have the unique ability here to go out and sell.

So we capitalize on our strengths, so we bring our strengths into that project for our customer.

We believe that this will have a very nice return, and something which our investors will enjoy as far as the project is concerned.

Why did they choose sale of gas as opposed to sale of equipment -- the customer, that is?

I can't announce the customer on these things, so you would have to actually go talk to the customer in the end.

But just to give our viewpoint on that is that we think Air Products brings a unique set of skills in here.

We obviously bring the operating skills about supplying oxygen.

We also bring the skills around pipeline sales.

We're the largest producer.

We have the largest volume in hydrogen than anybody else.

So we bring that position to the table with the customer.

We have a better ability to sell this product than anybody else.

Do you expect additional gasification announcements for you guys over the next 12 months?

We would expect -- we are working on a number of deals, as I've said.

It depends when these projects go forward, but there are additional gasification announcements, hopefully, coming -- both here and Asia, for us.

Can you just comment, lastly, on NF3 price and volume trends?

Yes.

NF3 has continued to grow for us year over year.

Price has continued to decline.

As we look forward, the loading in our current system is very tight.

We've got new capacity starting to come onstream in 2008, around the middle of the year, there for us.

So, as that product comes onstream, we will get a little bit more growth, probably, from that product there.

Has volume offset price this quarter and/or this year?

In Specialty Materials, about overall, yes, as we look at that.

(OPERATOR INSTRUCTIONS).

Jeff Zekauskas, JPMorgan.

You spoke of seven plants coming on in 2008.

Is that something that economically affects you in 2008, or is it in 2009?

If you compare that amount of tonnage to the previous year's -- that is, to 2007 and 2006 -- is it more or less or the same?

What's the incremental effect of all that tonnage?

As far as the plants, yes, it does affect us in 2008 and it does affect us in 2009.

2006, as I referenced earlier, we had a number of large hydrogen plants -- five very large hydrogen plants and one smaller hydrogen plant -- come onstream in 2006.

We have not had, in 2007, as many plants come onstream.

The largest plant which we had was the oxygen plant for gasification in China there.

So, as we bring these new facilities onstream, they will have incremental impact on 2008 and 2009.

It probably from an overall volume basis will not be as huge as the impact was of our hydrogen plants; that was a 35% increase in our hydrogen capacity.

So it's more modestly down in the probably 15% to 25% range when you look at it overall for those products.

Then just lastly, in the electronics area, I think you said that your business excluding equipment sales was flat.

But year over year, you're up $13 million or 26%.

Can you analyze that $13 million increase?

How much of that was equipment sales?

What are the large buckets of the improvement?

The equipment sales do not bring a tremendous amount of profit with them.

A large portion of the improvement -- they obviously bring some, but they are not at the same margin as our other ones incrementally are.

So when you look at this, the real issue that we have here are the costs which we have taken out, the reductions in some of these products in which we were losing money in as we looked at that, using our SAP system.

So as we have gone through that, the real benefit for us has been here, as we have run the business better and expanded our margins by growing the products which have a better margin and dropping out of the products which have a poorer margin.

So that's where the bulk of that margin improvement comes from.

Lastly, your working capital was a use, I think, of $530 million through the first nine months?

Yes.

We have commented on that before to you.

Most of that stuff occurred in the first two quarters, and the thing which we said -- we have pension payments which went out and increased -- about $273 million versus $120 million last year; that's like $153 million.

Taxes -- we made some tax payments early.

That increased, for this quarter, about $130 million.

So that's about $280 million or so of it, of that working capital increase.

If you look at that compared to last year, our working capital as far as the use is concerned is up about $300 million.

So that explains the bulk of that.

That pension plan increase was planned by us.

It was very tax-efficient for us.

It shielded some taxes which we would have had to pay from the sale of our Amines business.

So it was a good use, a good, solid use of the funds for us.

The tax payment should work off during this last quarter for us, and so we should see the bulk of the impact of that one go away as we move forward.

So that number should get better.

So the use for the year will be about $300 million?

Is that the right inference?

It should probably be about what it was last year plus the impact of the pension.

The pension, like I said, is about $150 million of higher pension increase than we had, which gets classified.

So the use might be a little bit larger this year, but we should see -- the thing which we did see is you look at our quarter three, you've got to do some subtraction to get at it.

But my cash flow from operations was $425 million this quarter.

It was $325 million last year, and so we didn't have any unusual uses.

The bulk of that was driven by us delivering on the income and depreciation aspect.

That accounts for all of it, so we didn't have any really increases from the working capital on net when you look at that for the whole time period.

Peter Butler, Glen Hill Investments.

I was wondering if you could tell us how many hydrogen and LNG projects you might expect to be up for bid in the second half of 2007 and in calendar 2008.

There are a number of projects in which we are working on.

As Nelson said, we have about 20 projects which we're currently -- in which we're currently working on, for bids that probably occur within the next year.

Not all of them are hydrogen or LNG, respectively.

The hydrogen activity is very strong.

Refiners are looking to upgrade their refineries to be able to process more sour and heavier crude, so those [movement up] and the refineries are happy.

LNG activity -- we have seen some pretty good LNG interest and activity out there.

Once again, people are looking at their capital costs with regard to these.

Those are up, obviously, because of metal prices and those things.

We would expect to see some orders in LNG within the next year.

The big thing for us which is going to occur in LNG is about the middle of next year, 2008, is the [APX], the first of the APX exchangers comes onstream.

Once that is proven, we would expect that more orders for this good large exchanger -- which really makes LNG even a better product for them, because it lowers the cost of LNG by a nice amount -- would really stir some additional (inaudible) after that technology is proven in the field.

Could I ask a big-picture question on healthcare?

Do you really need to be in this business, even if you can get it fixed?

I remain skeptical that your Lehigh engineers are going to get the job done.

I wonder if bringing in expert management might do some good.

But even if you do fix, is this thing going to be a business that adds to your price/earnings ratio and to your story?

Well, as we have always said, we are first going to fix this business.

We will make whatever strategic decisions, based upon the progress which we make as far as fixing this business and what the market for this business looks like.

We have a very successful business in Europe, as we have pointed out.

The market in the US is going through a lot of change with things; it depends how that market shakes out.

There are good scenarios, probably, and there are bad scenarios for that business.

So we are going to focus on fixing it, paying attention to what happens in the market, and we will make the appropriate decisions.

With regard to the people, we have put some very good people down there.

They are working very hard.

They are making progress, albeit it is slower than they would like or anybody else would like.

But we do expect that we are going to turn this business around, and then we will make the right decision for us.

You can trust that we're going to make the right decision.

We have proven that time and time again in our decision-making over the past few years, for our shareholders.

I've seen in the past that some companies, faced with a problem like this, come up with the answer to listen to the investment bankers and bid for -- try to acquire somebody big that does have management or whatever and put together the two pieces.

Have you ruled that out, hopefully?

We're not going to comment on the actual strategy, as I said, with those things.

Trust us, as we've said; we are not going to invest a ton of money in this business unless we fix it.

We do not think that going out and acquiring a very large company in this thing would make any sense for us right now.

Okay?

John McNulty, Credit Suisse.

With regard to the Tonnage business, with the 17% volumes, can you give us some color as to how much of it is tied to the projects that you brought on last year that may be annualized at this point, and how much of it is just the actual solid strength that you're seeing in all of your end markets?

Certainly, the ability to serve a lot of this volume comes from the projects which we have brought onstream, from the plants which we have brought onstream, because it did have a nice increase in our capacity for things.

So, when you look at that, it didn't all come all from those customers, if you look at that.

So we brought those plants onstream on franchised pipelines; there was really one small plant which is actually a stand-alone.

The other ones have a number of customers on them.

We have the two new pipelines which we've established in Canada, in Eastern Canada and Western Canada.

We brought plants onstream on our Gulf Coast pipeline and on our Louisiana pipelines.

So that is something which really helps us to sell these plants out.

So the bulk of the increase, as we've said, from a volume standpoint, does come from the new plants.

But there is a portion of it, I don't know exactly how much, from the new customers.

But there is a portion of it from us selling to the existing customer base.

Just one last question on the healthcare side.

I know your goal had been to get to a 10% margin by the end of 2007.

It looks like that may -- because the volumes may not be coming in quite as you had helped, that may beginning pushed out a bit.

How far out or how long to you think it takes before you do get to a 10% margin?

Well, our eventual goal here is 15%.

10% was a place to stop off at for the year end.

Obviously, from the progress which we've had in the first three quarters, that is not something which looks like it's going to happen in this year.

So, for right now, we're going through our operating plan in the healthcare business.

We'll have probably more to say about our goal for 2008 and the timing of those margins at that point in time.

Obviously, the thing which we want to see here in the fourth quarter is for us to expand those margins a little bit.

So add a percent or two to what we achieved here in the third quarter for the fourth quarter, is kind of our goal and to keep that momentum moving forward.

But we'll have more to say in our year-end call on this when we give guidance.

With no further questions, I'd like to turn the call back over to management for any additional or closing comments.

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.

Again, that does conclude today's conference.

Thank you for joining us.

Have a good day.