Air Products and Chemicals Inc (APD) 2007 Q4 法說會逐字稿

Good morning, and welcome to Air Products and Chemicals fourth-quarter 2007 earnings results conference call.

Just a reminder that you will 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, you may begin.

Thank you, Janelle.

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

This is Nelson Squires.

Today, our CFO Paul Huck and I will review our fiscal fourth quarter and year-end 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 this call beginning at 2 PM Eastern Time are also available on the website.

We have included an appendix to today's slides package with additional detailed information.

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

Most of our comments today will focus on continuing operations, excluding the effect of several items detailed in the footnotes to our financial statements.

Paul will provide more color on our actions later.

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 and at the end of today's earnings release.

Now, I will turn the call over to Paul.

Thank you, Nelson.

Good morning, and thank you for joining us today.

Please turn to slide number three.

We had another solid quarter, a fitting end to another strong year in 2007 with continued growth in sales and earnings while delivering operating leverage to the bottom line.

And most importantly, we continued to improve our return on capital.

I'm glad to say we achieved our ORONA target of 12.5% for fiscal year 2007.

We entered the year forecasting double-digit earnings per share growth and improvements in our return on capital, and we delivered on these commitments.

Turning to slide number four -- looking to our results for fiscal 2007, sales grew by 15% or more than $1 billion to $10 billion, due to higher volumes broadly across all segments.

Operating income was up 23%.

Earnings per share increased by 25%.

And ORONA improved by 110 basis points.

The continued strength of our operating cash flow allowed us to repurchase $567 million in shares, the third consecutive year we have brought back $500 million of our stock.

With just under $0.5 billion remaining under a previous authorization last month, our Board authorized an additional $1 billion towards share repurchases.

Please turn to slide five.

This quarter we had a number of items that occurred.

Let me clarify the impacts of these items.

This slide isolates them to arrive at our underlying performance.

First, we recognized a $0.04 loss on our electronics high-purity process chemicals business, or HPPC, as we have entered into an arrangement to sell the business which we announced this morning.

HPPC generated $87 million of revenues in 2007.

We have reclassified the results for 2006 and 2007 to discontinued operations, as we expect to close by the end the calendar year.

This was a low-margin business, and its sale represents another step in improving the profitability, margins and returns of our electronics business.

Second, as we told you last quarter, we settled on a polyurethane intermediates contract termination and recorded a $37 million or $0.11 per share gain in our chemicals segment.

Third, we reduced our ownership in Air Water, a Japanese industrial gas company.

We donated 65% of our investment to the Air Products Foundation, which generated a small operating loss and a significant tax benefit.

We also sold and recognized a gain on another 15% of our investment.

Combined, this added $0.09 per share to this quarter's results.

Fourth, as we mentioned in our previous guidance, a number of our senior managers retired in 2007.

And as a result, we recorded a supplemental pension plan charge of $10 million or $0.03 per share.

The accounting rules require that the remaining 20 to $25 million charge will be recognized when paid in fiscal year 2008.

Fifth, we are continuing cost reduction actions started in 2006 to further simplify our business and reduce our cost of doing business.

We have included a charge of roughly $14 million or $0.04 per share.

The areas of focus are -- a continuation of our move to shared services to streamline our operations; rationalization of products and assets in electronics to continue to improve margins and returns; and reduction in management and corporate services to continue to simplify our businesses.

And finally, the quarter includes a $0.05 per share tax benefit related to state and foreign audit resolutions.

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

This slide shows what our results from continuing operations would have been excluding them.

Our EPS would have been $1.17 versus our guidance of $1.10 to $1.15.

This is a year-on-year increase of 26%.

We will walk through the factors that drove this growth in EPS in a moment.

Turning to slide six for a brief review of this quarter's operating results -- sales grew 12%, driven mainly by broad-based volume growth across most segments.

Currency contributed 3%, and acquisitions added 2%.

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

This quarter's SG&A was 11.6% of sales, lower than prior year by 20 basis points.

Operating income of $371 million was up 22% from prior year, again due to strong volume performance across the board.

For the quarter, our net income was $262 million and diluted earnings per share was $1.17 -- when compared with prior year, net income increased 25% and diluted EPS increased by 26%.

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

Higher volumes contributed a $0.23 improvement.

Higher pricing and raw material cost together contributed $0.05.

Other costs were unfavorable by $0.12, as improving productivity efforts were more than offset by the impacts of inflation and increased cost to serve the higher volumes.

Overall, we did see productivity get to the bottom line, as our operating margins expanded by 130 basis points to 14.3%.

The Poland acquisition is performing well, and contributed $0.03.

Last year, we had a net $0.04 gain on insurance recoveries split fairly evenly between the merchant and tonnage segments.

And also last year in our U.S.

health-care business, we recorded a $0.05 charge for an inventory adjustment.

The bottom line is we had another strong quarter, and we generated 26% EPS growth.

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

Nelson?

Thanks, Paul.

Please turn to slide eight, merchant gases.

Merchant gases capped off a great year with a strong quarter.

Sales of $855 million were up 18% versus prior year.

Acquisitions contributed 6%; currency, 5%; pricing, 4%; and volume added 3%.

Sequentially, merchant gases sales grew 5%, with volumes contributing 3% and pricing currency each adding 1%.

Merchant gases operating income of $155 million was up 20% versus prior year, and segment operating margin of 18.1% was up 30 basis points due to pricing gains and volume growth, and partially offset by hurricane insurance recovery in the prior year.

Let me now provide a few highlights by region.

Please turn to slide nine.

In North America, our liquid bulk volume index was down 1% year-over-year.

LOX and LIN volumes were up 3% versus prior year; however, overall growth was limited by the availability of argon and helium.

Liquid hydrogen was down 4% due to lower government sales.

Our liquid bulk volume index was up 1% sequentially due to increased spot sales of LOX/LIN with growth limited by the availability of argon and helium.

Last week, we announced that we are jointly building a liquid helium production plant with Matheson in Wyoming.

This new capacity is expected to come onstream in 2009.

Average LOX/LIN pricing increased 3% year on year, reflecting continued solid performance in this area.

Pricing was 1% lower sequentially due to mix.

In the quarter, we did announce a price increase on all products effective 1 October, 2007.

New business signings were strong in the quarter, and well ahead of target the year.

We continue to win new orders at a high rate by bringing applications technology and know-how to our customers.

The European liquid bulk volume index was down 2% year on year, mainly due to the absence of significant spot sales to one customer.

We're now serving this customer via an on-site plant.

The availability of argon and helium affected volume sequentially.

New business signings were solid for the year, but reflect tightness in LOX/LIN availability on the continent.

Our European LOX/LIN pricing was up 4% year on year and 1% sequentially, reflecting our continuing ability to recover higher costs.

Cylinder volumes in Europe were up 3% versus prior year, reflecting solid growth in new offerings.

Sequentially, volumes were seasonally down 4% due mainly to summer holidays.

Underlying demand remains strong.

In Asia, liquid bulk volumes were up 18% over last year and 8% sequentially, driven by strong demand for all products.

Pricing was up 3% year on year and 1% sequentially, reflecting continued success in our recent efforts to recover higher energy and distribution costs.

Please turn to slide 10, tonnage gases.

Sales of $690 million grew 12% compared to last year.

The impact of late fiscal year 2006 plant startups and improved plant loadings yielded 10% volume growth.

Natural gas prices were lower versus prior year and decreased sales by 2%.

Currency added 2%, and acquisitions added 2%.

Operating income of $105 million was up 1% compared to last year.

The increase over prior year was due to the volume impact of new plants and increased loading, and was offset by the absence of last year's hurricane settlement and higher maintenance spending.

The sequential decrease of 5% was due mainly to higher maintenance costs.

Operating margin of 15.2% decreased 170 basis points versus last year due to the prior-year hurricane insurance recovery.

Sequentially, margins were down as we experienced higher maintenance costs.

We were selected during the quarter as a major supplier to Eastman Chemical's gasification project in Beaumont, Texas.

Our scope will include the supply of 7,000 tons per day of oxygen and the offtake of hydrogen.

We will distribute hydrogen via our pipeline to refinery customers in the region.

We're excited to be a part of this important new project.

We also signed a third contract with Guofeng Steel during the quarter, and will build another air separation plant to support their expansion.

We expect to bring six large plants onstream in fiscal '08, including our second hydrogen plant for Petro-Canada's refinery in Edmonton, Alberta, and a large nitrogen facility for enhanced oil recovery for PEMEX, which is currently in startup.

Our bidding activity remains very high.

We're actively working on more than 20 new tonnage opportunities in North America, Europe, Asia, Latin America, and the Mideast.

Please turn to slide 11, electronics and performance materials.

Segment sales of $523 million were up 5% compared to last year.

Volume gains accounted for 9%.

Lower equipment results reduced sales by 3%.

Pricing reduced sales by 2%, and currency added 1%.

Electronics sales were up 2% compared to last year, driven by higher sales in specialty materials while dampened by lower equipment sales.

Excluding equipment, sales increased 8%.

Electronics sales were down 4% sequentially, again due to lower equipment sales.

Excluding equipment, sales increased 8%.

In performance materials, volumes grew 8% and our penetration of new products improved 30% versus prior year and now represent approximately 15% of our portfolio.

Overall operating income of $61 million was up 2% versus prior year.

Operating margin of 11.6% was down 40 basis points versus prior year, due to higher costs associated with streamlining our business portfolio.

We continue to be successful at winning the majority of new fab orders.

During the quarter, we received an award to supply gases to Hynix's latest expansion in Korea.

We will build a new air separation plant to supply this project.

In '08, we expect to see higher tonnage and specialty material revenues and lower equipment sales as capital expenditures ease off and capacity is brought onstream.

While holding down revenue growth, the margins in tonnage and specialty materials are better, and profits will grow faster.

We will also see the impact of the SKU reductions, which will reduce revenue by approximately $100 million.

Please turn to slide 12, equipment and energy.

Sales of $124 million in this segment decreased 4% compared to last year and 8% sequentially, largely due to larger lower LNG heat exchanger activity.

Operating income of $18 million decreased 9% versus prior year.

Income was up 13% versus prior quarter, primarily due to favorable cost performance.

Our backlog of projects in this segment now totals $258 million.

Looking forward into fiscal '08, we would expect to receive some new orders for large air separation units and LNG heat exchangers.

Please turn to slide 13, health-care.

Health-care segment sales of $160 million were up 7% 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 up versus prior year on higher European volumes and prior-year inventory write-downs.

Sequentially, our margins improved 10 basis points to 5.5%, driven by growth in Europe.

The U.S.

business remained flat during the quarter.

While the U.S.

business did not deliver the progress we expected this year, we have redefined the business model and changed the incentive structure.

These changes have put the business on better footing as we begin this fiscal year, and we expect improved results.

Please turn to slide 14, chemicals.

The chemicals segment had sales of $252 million, up 13% compared to last year, and delivered operating income of $29 million, up 96%, due to volume gains in both polyurethane intermediates and polymers.

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

Thanks, Nelson.

Turning to our full year outlook on slide 15 -- based on our continued strong performance coupled with the actions we are taking to deliver next year's results, our fiscal 2008 earnings per share guidance is $4.80 to $5.00, which represents year-on-year earnings growth from continuing operations of 10 to 14%.

This will be our fifth consecutive year of double-digit growth and improving return on capital.

Underlying this earnings per share growth, we're forecasting sales growth of 8 to 10% and margin improvement of 100 basis points from 14% to 15% for the Company.

We will continue to focus on driving improvement in our return on capital.

Partially offsetting the underlying volumes and margin growth, we expect our effective tax rate to be in the 27 to 28% range next year, and the second tranche of our supplemental pension charge related to our cost reduction efforts that I described earlier.

Now let's look at the underlying factors that drive our volume and margin growth.

Globally, we saw manufacturing grow between 3.5 to 4% in fiscal 2007.

We expect 2008 to be about the same to slightly lower.

In the U.S., we anticipate below-trend manufacturing growth of about 2 to 3% in fiscal 2008, or roughly the same as in fiscal 2007.

Industries tied to the housing downturn will place the greatest drag on manufacturing, but we have little exposure there.

Industries with strong export prospects, where we have greater exposure will benefit from the weaker dollar and healthy overseas demand.

We don't think the fundamentals lead to the economy falling into a recession.

For Europe, we expect growth to continue, with the EU expansion, with central Europe as the strongest region within Europe.

And Asia will continue to be the strongest area of growth and expansion overall.

Now turning to our business segments, manufacturing growth along with our efforts to raise prices and increased productivity should generate continued improvement in our merchant gases segment next year.

We are targeting a 19% margin for 2008.

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

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

In Asia, merchant gases demand is growing rapidly.

Based upon strong manufacturing growth coupled with our expanded technology applications, we continue to expect double-digit volume growth across the region next year.

In Europe, we're continuing to focus on improving our margins, streamlining our business operations and utilizing shared services more broadly.

In our tonnage gases segment, we will see some benefit from new facilities loading and productivity.

Refinery hydrogen product development remains high, as we see the market shift from being regulatory driven to being economics driven.

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

In equipment and energy, after posting record profits in 2006 and again in 2007, results will be much lower, as one might expect, given the decline in our sales backlog.

We do anticipate signing several LNG orders this coming year, although those orders won't have a significant impact on our 2008 profit outlook.

New profits for both LNG and large air separation equipment orders continue to be solid.

Despite this level of activity, equipment and energy operating profits are likely to decline by about $0.15 to $0.20 per share in fiscal year 2008.

In electronics, we expect continued growth with growth in square inches of silicon processed of about 7%.

Our electronics customers continue to expand, driving new investment for tonnage and merchant gases, and also creating a greater demand for our specialty gases and materials.

Electronic sales growth will be more moderate due to lower equipment sales and our production rationalization efforts.

We expect margin improvement as we make progress with these plans and our tonnage and specialty materials grow from increased production.

Our growth expectations in performance materials are based on the assumption that we can grow two to three times GDP to a combination of share gain, new market and applications successes, and from new products.

Overall, we expect to achieve double-digit volume growth in fiscal 2008.

For the electronics and performance materials segment, we're targeting to improve our operating margins to about 13% next year.

Health-care should also show significant improvement over the next year.

We continue to take action to turn around volume in the U.S.

business.

We should also see continued growth in Europe.

We're targeting to improve operating margins in this segment to 10% by the end of 2008.

In our chemicals segment, next year guidance includes both polymers and polyurethane intermediates results for the full year.

For polyurethane intermediates, we have now completed the restructuring efforts we embarked on about a year-and-a-half ago.

We have sold the Geismar facility, and have reached a contract settlement with a major customer.

We also explored the potential sale of the rest of our polyurethane intermediates business.

Offers were inadequate, and we plan to retain ownership.

Regarding polymers, we remain on track with the progress we reported last quarter, and we hope to have an agreement of sale in place by calendar year end.

If this happens, it would be our intent to report our polymer emulsions business as discontinued operations once an agreement is in place and approved by our Board.

We also will concurrently moved the restructured polyurethane intermediates business into our tonnage segment.

We will have more to say about this next quarter.

With regard to capital expenditures, our fiscal 2008 PP&E capital expenditures should be in the range of about 1.1 to $1.2 billion, reflecting a strong project workload.

Our success in winning new business is driving CapEx spending higher relative to last year.

Now, turning to slide 16 -- based on our quarter 4 2007 results and taking into account that our fiscal Q1 has seasonal factors that tend to lower income in a few businesses, we expect first-quarter earnings per share should be in the range of $1.08 to $1.13 for year-on-year growth of 5 to 10%.

While there are many factors that will impact our walk from quarter 4 to quarter 1, let me highlight a few of the factors that will influence next quarter's results.

Factors we forecast to increase earnings sequentially include -- continued volume growth in Asia merchant gases and a seasonal rebound on our Europe merchant gases business; continued pricing in our merchant gases broadly; an improvement in both volume and cost in our global healthcare segment.

Factors we forecast to decrease earnings sequentially include -- seasonally, we expect higher outage costs in both our tonnage and merchant segments; lower operating results in equipment and energy following peak workloads in fiscal 2006 and 2007; seasonally lower volumes in performance materials and polymer emulsions; and a higher tax rate, as we talked about earlier.

All things considered, we expect to post a solid quarter to start our fiscal year 2008.

In closing, 2008 should turn out to be another year of solid progress in delivering our results, improving our businesses, executing our strategies, and making Air Products a great investment for our shareholders.

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

We, the employees of Air Products, have a great deal to be proud of.

Sales in 2007 exceeded $10 billion for the first time.

We generated net income of $1 billion, and achieved the return on capital goal we set in 2004.

We also have proven to be good stewards of our shareholders' money, by investing wisely back in the business, making good use of debt capital available to us, increasing the dividend for the 25th straight year, and continuing to buy back shares with the remaining cash.

These facts are evidence of Air Products' underlying strength and excellent prospects for growth.

Our people are focused on delivering today and continuing to deliver in the future.

We are all excited by the opportunities the future holds as we continue to properly grow by winning and executing on new projects; improving our margins by 300 basis points over the next three years by driving productivity, increasing plant efficiency, and improving our business mix; delivering increased value to our customers through technical solutions that address the markets' and our customers' most urgent needs; and continuing to develop our people around the world to meet greater challenges.

Our people represent the essence of the Air Products difference.

They are the ones who create both shareholder and customer value.

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

(OPERATOR INSTRUCTIONS) P.J.

Juvekar, Citi.

You know, you have a goal of raising operating margins by 100 basis points for the next three years.

Can you achieve that with the current portfolio, or do you need to exit chemicals and/or equipment business for that?

Well, certainly, P.J., a factor in here is for us to go out and to sell our polymers business, as we talked about.

The polyurethane intermediates business we're going to keep.

It doesn't impact our goals for margin.

As far as for other things, we have the margin improvement plans, which we have pretty much laid out for people to deliver on that margin improvement over the next three years.

And then by selling HPPC, Paul, are you saying that the Ashland acquisition did not work out as well as you thought?

No, I'm not.

And we really -- we had -- and three products which we got.

HPPC was one of them, but we also bought a strippers business, and a high -- and we also bought a CMP cleans business.

Those other two businesses were -- and they were the reason for why we brought this business.

We did not ascribe a whole lot of value to the high purity process chemicals.

It was a decent portion of their sales.

But if you just go back and look at the growth in which we have had and what we have been able to do in those businesses, the Ashland acquisition is still a good acquisition for our electronics business, both now and in the future.

And just lastly Paul, are you disappointed with the pace of margin recovery in health-care?

Certainly, certainly -- and we don't like the pace.

And we fell short of our goal this year, which we already admit to.

We have got a goal for next year.

And we have taken the steps which we think are right to make it happen.

Bob Koort, Goldman Sachs.

A couple of questions -- first, Paul, the merchant trends -- I guess the monthly trends you provide show a little more strength through August.

Did we see a deceleration in September, and is there anything there that gives you pause or concern?

You know as far as the trends in September, our September -- it was not as strong on a year-on-year basis.

We had a good September last year though, too.

So lots of this gets into taking and trying to compare to a particular month, Bob, with it, and I don't think you can -- you have got to be careful about that.

We are seeing restrictions both here in Europe and also in Asia on the helium thing.

But argon and helium are very tight in North America and in Europe, and that has restricted sales for right now, the sales growth year on year.

Now, the other thing which you have seen -- you saw very strong price results there.

And so that I think has made up for that from a profit standpoint.

Got you.

And on the polyurethane intermediates, obviously, you resolved your contract issue, which I would assume provides a nice near-term financial incentive.

But I suppose you will be operating that unit at a lower utilization rate.

So one, is that accurate, or are there a couple of trains there where you can shut one down?

And secondly, how wide was the gap between the bid and offers there that you might be able to try and resuscitate a sale of that asset sometime down the line?

Well, first -- and regarding the operating rates, we have gone through and made the changes in the plant to size the plant right to the size of the business which we have.

And so I think we are in good shape there.

We also have added a few -- we've also added an additional customer during this timeframe in this business.

What this is -- it's a long-term contract type business.

It has minimums around it.

And so as you go out and offer it, it wasn't as attractive to, let's say, private equity type of deals.

It's not a huge business.

It doesn't have any growth prospects really around it.

But it does provide us a very steady and sure cash flow with it.

And so we made our decision to keep it because it was a good contributor to the Company.

And I guess the logic of a strategic buyer, one of your other main customers, taking a look at it -- that was never discussed, or just wasn't any interest there?

I'm not going to talk about the -- and the things which we talked with our customers about.

But certainly, we tried to explore as many avenues to look at the right place for this asset.

And it turns out the right place, I think, is for us.

We have the knowledge of how to run this plant, how to serve this market well.

We're not going to invest back in this business.

We're not going to build capacity in other places in the world.

But I think we have a good asset here which makes good sense for us to run from a cash standpoint for us.

Laurence Alexander, Jefferies.

First of all, just to be clear, on the outlook for 2008, is there a pension headwind in 2008 as well as the higher taxes?

Yes, there is.

I commented -- if you go to our footnotes, we said that the pension charge is about 30 to 35 in total.

The way the accounting works for this, Laurence, is you can only record it at the time that you pay it.

So we actually paid $10 million of that this year, and we will pay 20 to 25 next year.

And that will be recorded at the time we pay it.

(multiple speakers) And that is included in the guidance.

And then the maintenance spending for that [hit] tonnage this quarter -- that was about 5 to $6 million?

Yes, you are right.

And finally, can you discuss the sort of -- as you are looking at the electronics, [some] SKU reduction -- $100 million.

Is that including the HPPC divestiture, or is that on top -- (multiple speakers)

No, it does not include the HPPC divestiture.

The HPPC -- that divestiture is treated as discontinued ops, so it is out of all of our sales.

The SKU -- and these are different products which are -- these are products which we were buying and reselling in the market, principally.

And so we have been taking actions with that.

And we notified our customers last year, and we gave them like a 12-month notice, so they will be coming off of that in this current year.

And finally, what's your economists' confidence interval on the manufacturing assumptions for next year?

Our confidence interval?

Yes.

Well, as far as the way the economy is working out now, I think we feel good about that.

Jeff Zekauskas, JPMorgan.

I have got a couple of questions about the chemical business.

How did you double profits in the quarter year over year?

I know your sales were up $30 million, but it just seems such a marked improvement.

Are you sure you want to sell the business?

Yes, we are.

And part of reason here is that there is impacts on pricing.

There is impacts on customer mix here of who takes in this business, and that does have an impact on us.

So is the polymers business about 60% of the chemical segment?

Is that the right order of magnitude?

The polymers business -- is, you know, roughly -- probably -- maybe that to a little bit less.

Probably it could be a little bit more, Jeff.

Probably a little bit more -- 60, 65 on a revenue percent.

On revenue percent.

And is its margin above the chemical average, or below the chemical average?

I'm not going to break out the margins of the individual businesses there.

Lastly, on your balance sheet -- in your inventories and contracts in progress of $776 million, how much is inventories, and how much is contracts in progress, whatever that is?

Inventories for us runs about 525 to 550 in that, and contracts in progress is the remaining portion.

What is that?

It pertains to -- on the equipment that we sell.

So if I'm selling you the equipment and I sell it in my electronics business, I sell it in the equipment business there, and what I do is as I build up the sale -- and if I don't -- if I'm not [on] percent complete, or I haven't put it through sales, and then it's less the progress billings for that.

So there are some things which still go on to completed contract basis, some small sales there.

And so it goes into inventory, which is what that is.

If I get a progress billing, that goes against it.

Mike Judd, Greenwich Consultants.

Thanks for taking my question.

My question about currency -- for the first quarter, anyway, do you have any thoughts on how that impacts the business, the various businesses?

And you can talk about volumes also if you like.

As far as currency is concerned, I think if we look at Europe, it's obviously going to impact the European results favorably.

What it does though from an economics standpoint, from a volume standpoint, it's going to depress the European business over time, because the higher cost -- the higher that value of the euro and pound are going to make the exports out of the area harder and imports more attractive.

You know, conversely, it helps on the U.S.

businesses, as we have seen the trade balance get better for the U.S.

David Begleiter, Deutsche Bank.

Paul, will the sale of polymers be dilutive to '08 guidance?

Yes.

By how much, do you think?

You know, depending upon the timing of when that occurs.

And we will have that -- but it could be -- you know, I've gone through the share buybacks, etc., and done a lot of that in advance, which is part of the offset to that dilution [of things].

But at the time at which we do this deal -- and we will give you the information at that point in time.

I'm not going to comment on the profitability right at this point in time of polymers individually, David.

Okay, understood.

On equipment, are you going to lose money in equipment in 2008?

No, I'm not going to lose money in equipment in 2008.

You take the $0.15 to $0.20 on equipment and energy, you can see what the impact of that is.

It does not take that segment to a loss.

(inaudible) about $0.18 this year, did you not?

The segment profits were about $100 million this year.

Okay, I'll follow up later.

And just one more thing -- on the six new plants in tonnage, what's the revenue and operating income impact in 2008 and 2009?

The six new plants in tonnage revenue -- I mean, you know, the thing which we would expect is our revenue growth for tonnage to kind of be in line with the revenue growth for the Company, so somewhere in the 8 to 10% range for that time period.

(multiple speakers)

But all from those --

You know, you have got to look at the loading impact too.

You've got loading impact, and then the new plants.

The new plants are not going to be responsible for everything in there.

We will have some loading impact to that.

Is the PEMEX plant the largest of those six?

The other thing, Dave, on the tonnage thing -- and the PEMEX plants, as an example -- it's not going to be accounted through for sales, it's going to be an equity affiliate, because we're doing a partnership with our partners in Mexico.

And there is another facility, which is also an equity affiliate too.

Mike Harrison, First Analysis.

In your sales update, you noted that tonnage gases were up 20% through July and August.

And then you came in at 12% for the quarter.

I was just wondering if you could explain what was going on in September that you would see such a sharp decline there, and then have you seen any continued slowing in tonnage there so far in November -- in October.

And what we had in tonnage last year is we had a plant come onstream in the last month, which pushed up the comparison period.

As I said, you've got to be careful about any particular one comparison at that point in time too, because there are spot sales which move around and don't occur every month with that.

But that was the big impact which slowed us there.

Did the insurance settlement also hit in September?

The insurance settlement did not go through sales.

The insurance settlement goes in other income.

But it did occur in the fourth quarter, and obviously, it was a big impact on margins for us, because it didn't carry sales with it.

Okay.

And then you mentioned -- in U.S.

health-care, you mentioned that you redefined the business model there.

I was wondering if you could elaborate on what you're doing differently going forward there?

Yes.

And part of what we have done there in the business model is we have looked towards trying to take and focus our sales force on doctors as opposed to hospitals, looking for a longer-term patient with those things.

That's an example of one thing.

We have given them a new offering to go out and go to the market within the respiratory end.

We've taken our sales force and split between the infusion and the oxygen portion of that.

So we've made a lot of changes there.

We're waiting to see the impact of those things.

And then I was just curious in the chemicals business, if you could talk about what you're seeing right now in terms of raw materials cost impact, how that might have impacted the business in the quarter, and what your outlook is as you look into '08?

Certainly, as far as on the raw material impact for us in chemicals in our polymers business -- and we're being helped right now on a raw material [standard], because we are a [van] based emulsion as opposed to an acrylic based.

Acrylic are being forced up by [oil], so that has helped us.

That helped our profits and our margin on relative basis to an acrylic producer with that thing.

On the polyurethane intermediates business, we actually pass through our raw material costs there.

And just really quickly on the Matheson helium JV, I was wondering if you could give me a sense for the incremental capacity that's going to becoming onstream in '09 relative to your existing helium capacity.

Nelson, why don't you handle that?

It will add about 5 to 10% to our global capacity.

Peter Butler, Glenhill Investments.

I'm wondering what are your criteria for a stock split and dividend increase?

I'm going to talk on the dividend increase first, Peter.

And regarding that is that we are going to maintain our policy on dividends to be between 30 to 40% of our earnings, and to pay that out.

And so we don't see any change there.

Regarding a stock split, I think -- I fail to see the value really in that for us right now.

It costs us money to do things.

If we look at our holders and stuff like that, I don't take it's hurting our volumes and stuff like that, or the liquidity of the stock.

And so I can't come up with a case to do it.

I have a lot of holders who buy by -- they want to x number of dollars in Air products, and not by x number of shares.

Okay.

On another subject, in health-care, are your Lehigh engineers experiencing insoluble problems here, and therefore the best case now is maybe to just pretty it up enough so you can sell it?

We don't think the problems are impossible.

We put in place a plan of action.

It certainly has taken us a lot longer than what we thought.

But we remain committed towards making this business better.

Is selling it -- is that high on your option list of things to --

The option right now in which were going at it is we're going to make this business better.

And we'll make judgments as we see the market and the business get -- as the business get better, and we will take a look at what our future is in that business at that point in time.

Mark Gulley, Soleil Securities.

Good morning, guys.

I have got three questions for you.

First of all, CapEx will be down a lot in fiscal 2008 versus 2007.

Can you provide some color there, and is that one of the reasons that you have already announced that [expanditure] of purchase program?

Well, as far as CapEx for PP&E, it's up, Mark, is what you can see.

It was $1 billion roughly this year -- we're taking $1.1 billion, $1.2 billion for us.

And the other factor we have is acquisitions.

And so -- and we have the Poland acquisition, and we bought up the remainder of our business in Malaysia.

And we continue to explore our opportunities there as far as looking forward to that, and we have some of that cranked into our plants, and cranked into the plants for the share buyback there.

And we will see.

Acquisitions depend upon the opportunities, as you well know.

Thanks for the clarification.

Paul, you provide some margin assumptions for '08 for a couple of the businesses, but not all.

Could you maybe fill the inside straight there?

Certainly on the businesses which we have, just to go to the other ones which I didn't talk about, the equipment and the energy business -- it really is not a margin business per se for us, as you well know.

The LNG and the air separation portion of that business have -- the margins differ by a lot.

So it doesn't pay for us to really focus on the margins in there.

With regard to tonnage business, and that business is actually a return business.

It gets -- what you have is you have the impact of the energy flowing through there all the time, and so that distorts the margin.

I will tell you -- on a constant energy basis, what we are looking for, and we're looking to increase the margins there in that business -- so maybe 0.5 basis points or so.

(multiple speakers) I misspoke there, Mark -- 50 basis points or so.

Half a point -- sorry.

In talking about the supply of limitations in liquid helium and liquid argon, both U.S.

and Europe, is it possible to say what your volume growth would have been had you had adequate supply?

That's hard.

But I think it would have been in line with the growth we saw in manufacturing here certainly.

Helium -- there's a lot of demand out there right now, but it's hard to say how much I would have actually sold.

Don Carson, Merrill Lynch.

Nelson, I just wanted to clarify again on that merchant growth -- what was your actual LIN/LOX volume growth in both North America and Europe?

I'm just trying to see whether in fact all this slowness was due to constraints in argon and helium or what is going on with the underlying LIN/LOX trends?

In North America and Europe, both around 3%, both pretty solid year-on-year.

So we didn't really see any surprise, if you will, in growth there.

Right, but I guess it is slowing somewhat.

And I know in the past, people have shown some concerns over -- perhaps up to 4% capacity increases next year.

Do you think that capacity will be able to be absorbed by the market -- I'm thinking of North America specifically -- in sort of a 3% demand growth environment?

We still believe that, and a couple of reasons -- I think everyone is continuing to show good growth in volumes.

And one thing we did point out was our signings were very strong in North America this past fiscal year, significantly higher than our targets, which were actually higher targets than they were a year ago.

So a lot of that is going to come online here in '08.

And so I think that will continue to take up some of that capacity.

Okay.

And just a question on cost.

You talked about $0.12 of higher cost this quarter year-over-year.

How much of that would have been in merchant and things like higher power and diesel fuel costs?

What kind of constraint is that?

Don, on fuel and on the power, what that shows -- it shows up in the price and the raw material cost for us.

Okay.

And then finally, Paul, you made your ORONA target.

I didn't hear a new target in terms of return on invested capital, and what your goals are there.

And obviously, our goals there is to keep trying to drive that up, Don, as we invest and grow the business here.

Our targets for this year on return on invested capital is probably 13 to 13.5 -- in that range.

And what would it be several years out?

Do you think you could get it up to the 15% range?

You know -- yes, I think that's possible in the future.

John McNulty, Credit Suisse.

With regard to your comments about the strength of Europe really likely to come from Central Europe at least over the next year or two, can you give us an update as to any kind of growth initiatives you're doing in Poland at this point, now that you have got your feet on the ground for a couple of quarters here?

I think -- and the big thing is we are expanding a plant there already.

We announced that this quarter.

And so we will continue to look at that as expansions in the business.

Okay, great.

And then the maintenance issues that you had in the tonnage area -- was this just something that took longer than expected, or is it just inflation in general?

And should we be expecting any of those costs to drag into the first quarter as well?

What it actually is is that we have a lot more plants onstream, John.

And when you look on a year-to-year basis, I've got a lot more plants and a lot more plant and equipment.

The maintenance costs are not out of line, they aren't unusual here.

It's just a year-on-year increase, which goes along with the volume of the business.

So you've seen the volume of the business you know on the hydrogen side grow by 35, 40% over the past couple of years.

And what this reflects is the cost of going out and maintaining those units.

Okay, but it's my understanding (multiple speakers)

(multiple speakers) continue.

-- that that negatively impacted the margins year over year, though -- is that correct?

Because the growth should have been there to offset it, I would have thought.

Well, you know, we had volumes -- and the way in which we talk about it -- we said the volumes had a positive impact on margins.

And then we had a hurricane recovery, which is actually a negative, and then the maintenance costs.

But then overall, if I just take the impact of the hurricane recovery, which was unusual, I would have seen margins grow on a year on year basis there.

Kevin McCarthy, Banc of America Securities.

In Asia, how would you characterize the expected rate of capacity growth in the merchant business over the next one to two years?

For us in Asia, the growth for us -- LOX/LIN and the merchant business has been in the 20% range or so.

I think the absolute percentage number is going to decline, because the base is getting larger and larger, so I would say somewhere in the mid to high teens.

(multiple speakers) It looks like your liquid bulk volume accelerated to 18% on slide nine.

I think it was 9% last quarter.

I'm just trying to gauge whether the volume growth is going to outpace supply growth over the next year or so in that region, and what the implications for pricing might be, because from time to time, we hear about competitive intensity popping up in countries like China and India.

Yes, and the thing which you ought to understand with that too, Kevin, is that it does depend upon the region in the country there.

Asia is very spread out, so you know, I can have impacts in Korea or Taiwan or China, India, etc.

for us.

And so as we look at the manufacturing growth, we see very strong manufacturing growth.

And we continue to see our investments load quicker than what our assumptions are in the capital expenditure authorization.

We have also been able to see that pricing is pretty good in the region.

We've been able to recover increases in power cost, etc., and we are encouraged by the progress in the business.

We are encouraged by the growth.

We're encouraged by the pricing.

We are encouraged by our investments there.

Shifting gears to tonnage, Paul, I think you mentioned you're looking at 20 new tonnage opportunities.

How would that number compared with say this time last year?

Are you seeing any pattern of acceleration or deceleration there?

It is certainly more.

And they're getting a lot more real as we go through here.

And so we are encouraged by that.

Finally, with regard to equipment and energy, when would you expect a backlog number to reach a bottom?

I would hope that the backlog number would start to pick up in mid 2008.

Mike Sison, KeyBanc.

Could you give us a little bit of color just maybe anecdotally where operating margins in electronics ended up for the year?

And I know your goal to sort of get to sort of 15% or midteens, if you will -- sort of what inning do you think we are at in terms of getting there?

I think -- if you look at the margins in the segment overall, we are making good progress there.

I think we're on a steady path here to get to 15% margins by 2009, 2010 type time period in that segment.

And we are close.

And then in European merchant margins -- that's an area you've been working on to sort of improve.

Are we getting close to where you want to be in that business as well?

We have seen some improvement.

What this really involves is taking cost out in those areas.

And we're still in the process of doing that, as you can see.

And so as we continue to go out and deliver -- and so we have seen some progress between our packaged gas and the liquid bulk business this year.

But we still have more progress to get there.

Okay, and the last question, in health-care -- as I recall, it's basically just loading up that business, increasing sales.

What type of sales growth do you think you will need to sort of get to that 10% by year-end?

As far as sales growth overall in the business, certainly the market is growing 6 to 7%.

And so we look to go 6 to 7% or more in that business -- grab some share.

That does conclude our question-and-answer session for today.

At this time, Mr.

Squires, I'll turn it back over to you for any additional or closing remarks.

Thanks, Janelle.

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

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

Once again, that does conclude today's conference.

We thank you for joining and have a great day.