Air Products and Chemicals Inc (APD) 2009 Q1 法說會逐字稿

Good morning and welcome to Air Products and Chemicals first-quarter 2009 earnings results conference call.

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

(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.

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Beginning today's call is Mr.

Nelson Squires, Director of Investor Relations.

Mr.

Squires, you may begin.

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

This is Nelson Squires.

Today, CFO Paul Huck and I will review our fiscal 2009 first-quarter results and outlook.

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.

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.

Before we start, please note that today's comments on operating results will exclude the $174 million restructuring charge.

Details are included in the notes to the earnings release.

Now I'll turn the call over to Paul.

Good morning and thank you for joining us today.

Now please turn to slide number three.

As we indicated back on December 16th, declining conditions in the business around the world are creating one of the weakest business environments that we have seen across our end markets in some time.

This quarter, volumes declined each month as many customers are running at significantly lower operating rates or, in some cases, have temporarily idled their facilities completely.

Sales of $2.2 billion declined 5% versus prior year excluding currency and natural gas pass-through impacts.

Underlying business was off, primarily due to lower volumes in our Electronics and Performance Materials segment.

Volumes were lower in Merchant Gases, but this decline was offset by higher prices.

Sequentially, the rapidly deteriorating business conditions are more obvious.

Underlying business was off 8% sequentially on lower volumes across Electronics and Performance Materials, Merchant Gases and Tonnage Gases.

Nelson will walk you through the details by segment momentarily.

Consolidated operating income declined by 24%, driven by the lower volumes and unfavorable currency.

Our operating margin declined 270 basis points versus last year, primarily due to lower volumes, partially offset by higher prices and lower costs.

For the quarter versus prior year, our net income and diluted earnings per share decreased by 21% and 18%, respectively.

Return on capital employed was unchanged versus prior year.

Now let me turn to slide four and review the factors that affected the quarter's performance in terms of earnings per share.

There were two disclosed items this quarter.

In discontinued operations we took an additional impairment charge this quarter reflecting a revision of the estimated net realizable value of the US Healthcare business.

Discussions with potential buyers for this business continue.

As we finalize our restructuring charge, the actual cost for business exits and asset management actions and the number of positions impacted were slightly higher than our initial estimates back in December.

Excluding the discontinued operations and the restructuring charge, our adjusted earnings per share from continuing operations decreased $0.21 versus last year.

Lower volumes accounted for $0.25 of the year-on-year decline.

Pricing and margins together, including energy and raw materials, were favorable, netting to $0.05.

Our cost improvement actions contributed $0.03.

Unfavorable currency and foreign exchange cost us $0.13.

Lower interest rates added $0.01.

A lower tax rate added $0.03, and fewer shares outstanding (technical difficulty) $0.05.

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

Nelson?

Thanks, Paul.

Please turn to slide five, Merchant Gases.

Merchant Gases posted sales of $925 million, down 8% versus prior year.

Currency reduced sales by 8%, while volumes were down 6% and pricing added 6%.

We delivered solid pricing performance worldwide, and this helped to offset the volume declines.

Sequentially, Merchant Gases sales decreased 16%.

Volumes were down 7%, and currency reduced sales by 9%.

Merchant Gases operating income of $171 million was down 15% versus prior year.

Segment [operating] margin of 18.4% was down 150 basis points versus prior year, due to lower volumes and reduced system loading.

Operating margins were up 50 basis points sequentially due to improved cost performance.

Let me now provide a few comments by region.

Please turn to slide six.

In North America sales increased 2% versus prior year, driven by strong pricing gains.

Our 1 October pricing increase was well timed.

Volumes were down 6% versus prior year, reflecting weakness across most of our end markets and the impact of a very soft December.

New business signings were stronger than Q4, but below prior year.

In Europe sales decreased 13% versus prior year.

Currency reduced sales by 12% while price added 6% and volumes were down 7%.

Similar to North America, we saw demand weaken across most end markets in regions in Europe.

The availability of argon was impacted by steel shutdowns across both the US and Europe.

Pricing was strong in quarter in both our liquid bulk and packaged gas businesses.

Signings in Europe were ahead of plan and well ahead of prior year.

In Asia merchant sales were down 8% versus last year.

Currency reduced sales by 7% while volumes were down 6% and prices were up 5%.

Volume declines were mostly due to lower demand from steel and worsening demand from electronics.

Pricing was solid and signings were strong and on pace with prior year.

With regard to the overall Merchant segment performance in these difficult times, we are encouraged by strong pricing and very good new business signings driven by our strong applications capability.

Please turn to slide seven, Tonnage Gases.

Sales of $744 million decreased 6% compared to last year.

Currency reduced sales by 4%, and volumes excluding hurricane impacts were down 2%.

The two Gulf Coast hurricanes reduced sales an additional 2%.

Natural gas and raw material pass-through increased sales by 2%.

Sequentially, sales were down 21% with natural gas and raw material pass-through reducing sales by 13% and lower volumes reducing sales 7%.

Sales in the quarter reflected continued strong refinery hydrogen demand offset by reduced demand from steel and chemical customers.

Operating income of $109 million was down 2% compared to last year and 19% versus last quarter.

The sequential decrease was due to lower steel and chemical customer operating rates, a stronger dollar and seasonally higher maintenance costs.

Operating margin of 14.6% increased 60 basis points versus last year, due to cost efficiencies, and 30 basis points sequentially, due to lower natural gas costs.

Our project backlog remained strong and continues to be on schedule for this fiscal year and next.

Please turn to slide eight, Electronics and Performance Materials.

Segment sales of $407 million were down 21% compared to last year.

Volumes reduced sales by 20%.

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

Electronics sales were down 28% compared to last year and reflect a significant global downturn in semiconductor and flat-panel capacity utilization that worsened throughout this quarter.

In Performance Materials pricing was up 9%.

Volumes declined 17% due to weaker demand in coatings, autos and housing.

Asia was the weakest region, followed by Europe and North America.

Many Asian customers have indicated that they will remain down through the lunar new year.

New product sales in Performance Materials increased 15% versus prior year and overall pricing remained solid.

Operating income of $25 million was down 63% versus prior year.

Operating margin of 6.1% was down 670 basis points versus prior year, driven by the steep decline in volumes across the segment.

While overall semiconductor capital spending will be down substantially this year, we continue to win new thin film photovoltaic opportunities around the world.

Please turn to slide nine, equipment and energy.

Sales of $120 million in this segment increased 19% compared to last year due to higher large air separation plant sales.

Operating income of $7 million decreased due to lower LNG heat exchanger activity.

Our backlog in this segment now totals $324 million.

We are seeing some renewed activity in the LNG heat exchanger area, and we expect two to three orders in 2009 as more resources are available to the LNG industry and capital costs have leveled off.

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

And thanks, Nelson.

Now if you'll turn to slide 10, I'd like to share my thoughts on our 2009 outlook.

As I stated earlier, the global economy got worse in the first quarter.

We expect that the economy will continue to deteriorate in quarter two and expect the second quarter to be the worst quarter of 2009.

January volumes have started slow as many of our customers have extended their holiday shutdowns into this month.

Additionally, we will see the impact of lunar new year in Asia this quarter.

Specifically for our businesses, we are forecasting lower sequential volumes in Merchant Gases, Electronics and Performance Materials and the steel and chemical portions of Tonnage Gases for quarter two.

On the favorable side we will see some impact from our cost reductions.

A larger impact will be seen in quarters three and four.

Our guidance for Q2 is for earnings per share of $0.80 to $0.90.

As we look at 2009, we are facing the most uncertain economic environment we have seen in decades.

Here is our current view on the global economy and our key markets for our fiscal 2009.

Overall, we now expect manufacturing to decline globally by 4% to 5%, with the US declining 6% to 7%, Europe declining 6% to 7% and Asia excluding Japan growing about 2%.

The global decline is down significantly from the 1% to 2% growth we gave you in our initial 2009 guidance.

Specifically, by market, we expect the following.

Refinery hydrogen demand should hold up well even with the drop in demand for transportation fuels as the refineries that use large quantities of hydrogen have the best cash margins and will continue to operate.

Electronics will continue to decline in quarter two.

However, we do expect that sometime in our third or fourth quarter we will start to see a sequential increase.

Overall, we forecast MSI to decline greater than 20% in fiscal 2009, and we are also forecasting a similar decline for LCD displays.

[TV] volumes will grow, but they have a small impact right now.

Chemical markets will continue decline in 2009 until key end markets such as autos, housing and consumer goods start to pick up.

Overall, we expect the chemical industry demand for our products to be down 10% to 15% in our fiscal 2009.

Overall, global steel operating rates decreased significantly in the first quarter to about 50%.

We don't expect this to improve until late in calendar year 2009.

Given this demand outlook, we expect the second quarter to be our low point.

With the cost reduction actions we are taking, second-half earnings should be better.

We are now forecasting our fiscal 2009 earnings from continuing operations excluding the charge to be between $4.00 and $4.30 per share.

We remain committed to improving our margins and returns.

The cost actions we are taking are not only to attain our near-term profits, they also position us with the right cost structure for achieving our 17% margin goal when volumes recover.

As we look beyond 2009, we still see a solid set of fundamentals for driving industrial gas demand in the future.

As the world seeks alternative forms of energy and better efficiency in using its existing energy resources and improvements in the environment, industrial gases will play a large role in the solutions people use.

These opportunities include hydrogen for clean fuels, oxygen for gasification of solid fuels to produce both power and petrochemicals, oxygen for combustion efficiency, oxygen for capturing carbon emissions and nitrogen for enhanced oil and gas recovery.

These opportunities will drive our capital spending in 2009 and beyond.

Currently, we are forecasting capital expenditure for 2009 to be in line with 2008.

In closing, while the current environment is challenging, our fundamentals remain solid.

We have taken the right actions to adjust our cost structure to the size of the business and will continue to do so in the future.

Our operating cash flow is strong and protected by long-term contracts.

Our balance sheet and access to capital give us the ability to improve and grow our business as the markets change and opportunities present themselves.

Thank you, and now I'll turn the call over to Elizabeth to take your questions.

(Operator instructions) David Begleiter.

Paul, any further insight into the backlog?

Any cancellations or delays that you've seen recently?

Yes.

We have not seen any of our projects canceled.

We have seen our projects delayed, and you can see that in the reductions in capital spending.

The other thing in which we are seeing as far as the backlog is concerned is that, on the order side, I think that we are going to see delays in orders going out.

People are not going to make a lot of long-term decisions at this point in time with the economic uncertainty that's out there.

And just on electronics, obviously a very severe environment.

Any structural erosion in electronics profitability in long-term electronics operating margin targets?

No, Dave.

As we take a look at the business long-term, we continue to take the right actions and to size the business correctly.

A lot of the reduction which you are seeing here is around our Electronics business.

They have been the one which has been hardest hit on the volume side, and so we are taking the right actions to do that.

The commitment on the margin target remains for us.

Bob Koort, Goldman Sachs.

Can you offer us any rays of hope out there that you've seen some improvement after some destocking period?

In any of your end markets, has there been any improvement in trends?

And then, secondly, I think, Paul, if I do the math, based on what you're saying about this current very weak quarter, it would imply a year-over-year improvement second half fiscal '09 versus second half of fiscal '08.

And just wondering how you get comfort around what might be some optimism there that things are better than the prior year.

Bob, if we take a look at -- on the rays of hope for things, I don't think I am seeing it in the operating rates of my customer base.

The good news, which I already gave you, was that in fiscal '08 and fiscal '09 so far, the refinery hydrogen business has held up very well.

And so that is a very -- is good performance for us.

So I think we are happy with that as we take a look at that.

And if we look at the economy as a whole and break the economy down, I hope that we have moved through the bulk of the financial crisis portion of this, and that is the cause of this.

And until we get through that, we are not going to see rays of hope from the consumer.

The consumers have gone back and retrenched.

So if you take the first phase, it occurs on the financial crisis side, and the consumers have started that.

And they started that in the summer quarter, and they went through the first quarter of our fiscal year and we think it's going to get worse in the second quarter.

Now, the rays of hope which I would say is that we think that things to start to pick up on the consumer demand side in the third and fourth quarter for us.

If I take a look at '08 versus '09, my second half of the guidance, I still think I'm down a little bit on that.

I'm certainly not down as much as I was in the first half of the year, but it certainly is a much better, a much better year, a much better second half if you look at that.

And the things which actually produce that, Bob, because, if you take a look at that, the thing which I am going to get, I'm going to get the cost reduction impact.

That's probably worth somewhere around $0.15 a share for me in the second half to first half.

I have a number of new plants which come onstream.

That's probably worth about $0.10 a share first half to second half, on average.

And then, if I take a look at the volume recovery, how much is that worth?

It's probably worth somewhere around $0.30 to $0.40, first half to second half.

Steve Schuman, Lafayette Research.

A question on the currency impact from Merchant Gases.

It's quite large.

I was under the impression over the years you had been moving to setting your contracts up in dollars instead of the local currency.

Could you kind of explain your efforts on that and where the currency impact came from?

Steve, we put our contracts in terms of where our costs are.

And so, in the Merchant and Gas area, the bulk of our contracts are in the local currency because I produce in the local currency.

So I get the -- and the sales are going to go down, obviously, but my costs go down by the same amount, or close to that; in the same percentage amount.

And then on Electronics, you've bought and sold a few companies through the years, but how do you compare this downturn versus the one we saw in '99 and 2000?

A lot faster in the decline right now.

We just got a preliminary look at the MSI for our first quarter of our fiscal year, or the last quarter of '08, and it is down about 35%.

So it is a very sharp decline; it has not been a steady decline.

And I think the reason why is that people are reacting to inventories.

They don't want to build inventories, and we'll see how it plays out.

And, in the forecast which we have, it has a continued decline in the second quarter, but then a sequential pickup, a sequential pickup, in third and fourth quarter.

And then on the profit side, you have done a lot of work cutting off various product lines that you felt weren't important.

How does that look versus the last time?

We have reacted a lot faster to that, and we're doing it right now, and we will continue to do that to get to the goals in the business in that margin -- to get to the business goals for margin.

P.J.

Juvekar, Citigroup.

In Merchant Gases you took a sizable hit of profitability.

What is your average operating rate?

And do you think pricing can really hold if volumes keep dropping?

P.J., this is Nelson; let me answer that.

Yes; certainly, the biggest impact was operating rates.

And if you -- they are really disadvantaged by a very weak December.

We look across all three regions of the world -- really, everywhere.

Operating rates dropped substantially in December.

A lot of people just closed up in mid-December and frankly have taken their time getting started back up in January.

So we saw operating rates drop in all three major regions that we operate in.

But at the same time, though, you can see from our numbers that pricing has gone up in all three regions.

We are pretty happy about that, and we actually expect no change in that in the current time.

The other thing that gives us some confidence here is you can see that signings remain pretty strong through the first quarter.

We are on level par with Asia.

We are up substantially in Europe, and sequentially we saw an improvement in North America.

So, while operating rates are down, we think it's more of a phenomenon of the very weak December and carrying into a pretty weak January, and we expect pricing to hold up.

And how much of your merchant business, Nelson, would get repriced this year?

That's really a function of going out and doing price increases.

As we said in the commentary that we tried to time our increases to more of a summer and early fall type of sequence.

We are basically raising prices only in places now where we have cost changes, meaning cost increases.

So that could be power, changes in deregulation of power, et cetera, but we're going to be very careful there and go for pricing only where it's needed to get us recovery against cost increases.

Okay, and one quick question for Paul.

While your operating cash flow was weak and less than your CapEx, so do you expect your debt to sort of go up throughout '09, or do you expect any help from cash relief from working capital?

Well, P.J., the cash flow in the first quarter was held down by a few things.

If you take a look at the operating cash flow, it's about $170 million different from Q4 of '08 and Q1 of '08.

About a third of that, P.J., is due to the drop in income and changes in depreciation.

So, if I take a look at that, that's what I would expect coming out of the business.

We did have a couple of things which flowed through operating cash flow in this quarter.

One was taking our derivative contracts, and they get marked to a fair value, and we book a receivable which we are going to receive during the year.

That's actually almost half of the difference in cash flow.

So I'm going to get that through the year.

The other thing was, which on the year-on-year comparison, is I got a refund in taxes last year which was a one-time item which boosted it and boosted it by about $30 million to $40 million.

So a long explanation, but I think in terms of cash flow I think we are going to turn -- it's going to turn -- in 2009, quarter two, three and four is going to improve.

Peter Butler, Glen Hill Investments.

A year from now is a long time, but it's usually one of the critical questions.

You ask yourself, what is Air Products' environment going to look like a year from now?

I'm wondering, as you look down the road, is there going to be a new normal that we are trying to get back to?

Are we going to get back to the old normal, or do you think some of these changes are permanent?

Maybe you can talk a little bit about what you see in next year.

Right now, we are in a time of a lot of uncertainty as to where the economy is going.

Hopefully, as we go through 2009 and enter 2010, we are going to see a lot of things come forward, and we'll have the economies picking up at that point in time.

That would be what you would normally expect as the world plays out and goes through a recessionary time frame.

So I think -- and that's important.

The other thing for us which is important is that we will be bringing onstream about $1 billion in capital in 2010, which is going to add a lot to our profitability in that time period.

We have four contracts in the hydrogen area which come onstream, plus we have some oxygen plants which come onstream in next year.

So that's going to give us a good boost towards growth.

The other thing is we're going to see the impact on the cost reductions, and we will do the right level of cost reductions to size the cost structure to the opportunity in the business.

Okay.

Second subject, the only time you mentioned share repurchases was during your mention of the pluses and minuses to earnings per share, and I think you said that fewer shares contributed $0.05 a share, roughly.

Yes.

I'm wondering what you actually did in share repurchases during the quarter.

Did you take the opportunity to buy low after perhaps buying high previously?

Or, how is it working out?

I did not do any share buyback in the first quarter, Peter.

If you take a look at the free cash flow, it didn't permit it.

One of the things which we said is that we were not going to get ahead of ourselves on this.

We want to have the funds available because, if we take a look at how we use cash, the first priority is always to invest in good projects in the business.

And we still have a number of good projects in the business, and they need to be funded and we will take that.

I don't expect I'm going to see an opportunity to buy back shares in the second quarter, and we will see in the last half of the year.

Mike Harrison, First Analysis.

I was wondering if you could talk about what you're seeing in terms of competitive behavior for new projects, any trends that might be of concern as they relate to the returns on future on-site projects?

Mike, for the moment, we have not seen the prices going down or anything like that or our competitors, in trying to grab projects.

I think everyone still has a good backlog of things to bring onstream.

I think the thing which we have seen, and I talked about this earlier, is that we have seen bids postpone and projects delayed for the future.

And so that's kind of the environment which we are looking at.

But for right now, the pricing seems to be good for us.

In your commentary on the equipment business you said that you are seeing some new activity that you thought might the related to capital costs leveling out.

I was wondering if maybe you are seeing that kind of respect as well in customers who are looking at the new on-site projects.

Maybe we have hit an inflection point in terms of customers delaying decisions on those bigger projects?

Mike, this is Nelson.

Quarterly activity in terms of discussion with customers and bidding on the LNG heat exchanger side is beginning to pick up again.

So we do expect some movement here this calendar year.

With regard to your second question, I think people are still watching to see where the general economy is heading, and what bottom the economy finds, and therefore how much manufacturing capability is unloaded when we come out of the downturn.

That being said, there is still project activity in the places where you would expect, in hydrogen, in oxygen for gasification, as Paul mentioned.

And those activities have remained relatively steady here through the last six months because most of those are long-term decisions that A-rated customers are making.

And so that continues, and we will see, I think, when we get out of this downturn the activity level across the project stack pick up again.

Last question I had was on the Electronics side.

You mentioned that you expect sequential volume to increase in Q3 or Q4.

But I was wondering what you are hearing from customers in terms of when they expect to return to some level of, quote-unquote, normalized production.

Any sense of when that happens and maybe where that production level might be relative to where it was before the downturn began?

Are we talking about production down 10% versus like an '07 type level, 15%, 5%?

Okay, Mike, if you would take a look at that and go out, I think what we have said is that in the first quarter we saw a sharp drop on the MSI, which I talked about before.

We expect that to continue to drop, and then a sequential pickup in the third and fourth quarters.

That would still leave the third and fourth quarters below the third and fourth quarters of 2008.

So if you take a look on MSI, and it could be down anywhere from 20% to 30% for the year, what that would say is that third and fourth quarters are likely to be somewhere 10% to 15% under the production rates in the third and fourth quarters of '08.

Any sense on the timing of returning to a more normalized?

Is that what you mean by the sequential increase?

Yes.

Yes, it is, and because it would be.

If you take a look at on MSI, the MSI was -- in '08, it was up in the first quarter, up in the second quarter, about flat in the third quarter on a sequential basis.

It was down about 5% sequentially in the fourth quarter, and now it's down 35% in the last quarter, well, in the first quarter of this year, for us, of 2009.

And then we are predicting a further downturn in the second quarter.

So we are not going to get back up to the rates of '08 until sometime in 2010, certainly, certainly.

Laurence Alexander, Jefferies.

First of all, just in terms of assumptions, what's your currency assumption embedded in your outlook?

If you look at the rates of the euro, we probably have it about $1.30 right now.

Okay.

Secondly, with the plants that are being delayed, are they -- is it broad-based, or are there particular industries, in particular, that you have seen most of your delays?

Well, it is across the industries, Laurence.

So if you take chemicals, if you take refining, if you take steel and stuff like that, people are just not going out and making a lot of decisions long-term right now on those industries with the economic outlook.

And then, if you look at the new plants that are coming on over the next 18 months, if they just ran at their minimum take or pay contracts, what do you see as the year-over-year tailwind?

The increase year over year, next 18 months -- we are probably (technical difficulty) something around $0.40 a share.

And then lastly, could you just give a quick snapshot on trends in the argon and helium markets?

Nelson, you want to handle that?

Yes.

Clearly, the supply of argon is being impinged by steel operating rates right now.

We've seen that really happen most acutely in North America and Europe.

Steel operating rates are probably under 50% right now in North America and Europe.

We expect them to go down a little bit and probably not see recovery until late in 2009, in the calendar year.

So I think argon will continue to be in shorter supply.

Demand has obviously come down a little bit because of the slowdown in the economies.

So we are managing that situation right now.

Pricing still remains very good in that product.

Helium has -- the dynamics have not changed all that much.

There's still a pretty tight supply, and demand remains relatively solid for the helium product.

While we've seen MSI drop substantially, flat-panel utilization has probably only dropped to about 80%, and that is a new demand, as you know, for helium.

So that market has held up pretty well, so we expect things to remain tight throughout 2009.

Jeff Zekauskas, JP Morgan.

So in your data, you said that your prices year over year were up 3%.

So last year, your sales were $2.2 billion.

So if you multiply that by 3%, you get $66 million.

And if you tax-effect it, that's a benefit of about $0.23 a share.

And in your slide, you say that price/raw materials was a benefit of $0.05.

So is the right way to read that number that the cost hit from raw materials was $0.18, roughly?

Yes.

And could that be something where you might get some relief through the course of the year?

Yes, yes, Jeff.

The second thing is, your shares outstanding on a sequential basis on a fully -- for fully diluted purposes went from 216.9 to 212.1, or down 4.8.

But I think your basic shares went from 208.9 to 209.4, sequentially.

So this is a -- I imagine that this has to do in part or in total with changes in the value of options because of the share price.

So is this a permanent difference or a temporary difference, or how do we account for that change in fully diluted shares on a sequential basis?

The way in which you take a look at that is that the dilution increases from options as the price goes up.

And so the decline in the price of the shares takes options and takes the dilution impact down, and that's what happened.

So if I understand that correctly, then, if we look at where your share price was over the past few months, it was more like 70-ish, I guess, to pick a number.

So if we were back up at 70, would your shares outstanding go back up to 216 or 217?

Or how do we get back to that 217 number?

It would go that high, Jeff, because, if you look at it and you take a look at that 217, it was an average -- and for the year, last year, I believe.

Oh, okay.

Is what you had, alright?

So if you take a look at the fourth quarter, it was actually lower.

I don't have the fourth-quarter numbers right in front of me, but it was lower.

Alright.

In terms of the Merchant business, I guess, was hydrogen up, and by what amount?

And, was oxygen and nitrogen down, and by what amount, for the quarter?

It's a bit of a -- you have to dissect that regionally.

Hydrogen, basically all products were down.

Nitrogen, oxygen actually up slightly in North America, but really price driven versus volume driven.

We saw -- when you speak to hydrogen, that's liquid hydrogen.

Demand was off for government contracts, which is a major customer, pretty substantial there.

That really drives the hydrogen business; and on top of that, weaker demand.

But if I look to Europe and Asia, it was really demand in nitrogen and oxygen that was down that really pushed it.

Helium was up, for example, and that was the biggest contributor in the decline.

I didn't ask that question well.

So in your slide, it said hydrogen volumes up and oxygen and nitrogen volumes down.

So can you give me those orders of magnitude, how much hydrogen was up and oxygen and nitrogen down?

Well, hydrogen would have been up in the Tonnage segment.

Yes; in Tonnage, I'm sorry.

And that's why I just wanted to make sure we got apples and apples there.

We were up in Tonnage year on year, even with the hurricane impacts, about 3%.

So how much was oxygen and nitrogen down in Tonnage?

In Tonnage, it was down about 9%, I believe, Jeff.

Okay.

GOX/GAN.

And then, lastly, in Electronics I guess I had always thought that there might have been a more stable component to your Electronics business, maybe some on-site oxygen or on-site nitrogen.

So maybe if you kind of break up Electronics into equipment and specialty gases and on-site oxygen and nitrogen, how do those individual pieces look?

How did they look in the quarter?

Jeff, before I just give you -- the GOX/GAN number was down 6%; it wasn't 9%.

Oh, I'm sorry; that was the fab utilization rates.

If you take a look at the Electronics volumes, and the volumes overall were down about 20% for us.

If you then take a look at the structure of what we had in the business, the Tonnage volumes, which are about a third of the business, were actually up 4%.

Specialty Materials, which is about half of the business, was down about 20%.

And then, if you take the Equipment and services portion of the business, which is about 15% of the business, it was down 60% year on year.

That's really helpful, okay, thank you very much.

Jeff, just one follow-up.

As Paul said, the GOX/GAN to Tonnage was down 6%.

Down 6, okay, good, thank you.

Kevin McCarthy, Banc of America.

You mentioned in your press release that one of your customers filed for bankruptcy and that you had $35.7 million of exposure there.

Presumably, that's Lyondell for refinery hydrogen.

Can you address that in terms of your outlook?

In other words, is there any provision for higher bad debt expense reflected in your fiscal second quarter or annual numbers?

We have not accrued anything for that bankruptcy, which occurred in the beginning of January, at this point in time, Kevin.

We are seeing, as far as the business overall, we are seeing bad debt expense go up, though, a little bit.

But it's not up a lot; we don't have a lot of bad debt expense in our business.

Okay, so these output numbers are really reflective of the underlying business --

Yes, they are.

-- excluding any variables like that?

Yes, they are.

Okay, good.

And then, a broad question, if I may, on the Merchant business.

You have indicated that you anticipate a global manufacturing decline of 4% to 5%.

I was wondering if you could comment on your expectations for volumes globally in the Merchant business.

Historically, we have seen the industry, I believe, grow at a premium due to application growth.

In this market, perhaps you have greater energy-related headwinds, such as nat gas fracking and the like.

So would you expect your volumes in Merchant to be materially different than that global number for the fiscal year?

Not materially different, Kevin -- this is Nelson.

We would see those volumes dip in Q2, I think, as we bottom out, as Paul referred to, in terms of global demand.

What also is going away on that in Merchant this quarter is the slow restart after the long turn-down in December that has extended into certainly early to mid-January.

And then, lunar new year is upon us here shortly, which will affect Asia volumes.

But we do expect to see that tick back up in the third and fourth quarters.

And a couple of points that you made -- certainly, fracking is important at gas at $5 and above.

And right now, gas is below $5 in North America, as we know, and that has certainly slowed down that business a little bit.

It's hard to imagine that that level stays down there.

That's obviously down due to the lack of industrial demand for nat gas.

So we would expect that to recover.

The good news is that we have -- the signings have stayed fairly solid across all regions.

While things slowed down dramatically here, we have seen pretty good signings across our applications base, and so that should continue to point us well towards volume growth.

Obviously, we are going to need our customers that we have under contract right now to pick their volumes up as the economy rises.

But there are no real systemic changes in the application interest at our customers.

That seems to be progressing well.

Okay, that's helpful.

And then, finally, in the Merchant business, if we were to look at pricing trends on a sequential basis rather than year over year, if you were to survey the major markets around the world, have you seen any examples of reversals or erosion of prices versus, let's say, September levels?

Or, are the increases hanging in nicely?

Simply put, Kevin, they are hanging in nicely.

We have not seen any specific erosion, and that comment pretty much carries globally for us.

Mike Sison, KeyBanc.

In terms of the first quarter results for Merchant and Tonnage in terms of operating income, somewhat encouraging in terms of op income year over year relative to volume declines.

So when you think about '09 in total [and better] your guidance, is Merchant and Tonnage operating income going to be sort of like flattish to up, flattish to down at the end of the day?

If we take a look at the op income in 2009, what we should see is, we ought to see, in the Merchant area, a decline in operating income, but principally from what happens on the currency end of things.

We are seeing a currency headwind here, which I see the bulk in the Merchant Gases area, which is probably, year over year, about $0.50 a share right now, in the forecast, Mike.

So if I then turn around and say, on the Tonnage area, I expect that to be about flat year on year.

But the Merchant op income is probably down year over year.

And then I guess when you look at it, then, Electronics and Performance Materials really takes the brunt of the year-over-year declines embedded in the EPS guidance year over year, so --.

A lot of it, yes.

So it sort of masks the more defensive nature of your Merchant and Tonnage Gases --

Exactly.

-- in a difficult environment.

So strategically, you've sort of looked at other businesses in the past.

Why is it in Electronics and Performance Materials that you think makes sense (technical difficulty) considering its more cyclical nature?

Sort of a business to keep, I mean?

Sure, absolutely, and that is a fair question for people to ask.

And we have obviously had a very sharp decline in the economy here, for this thing.

For right now, we are not happy with the results which we have gotten out of the business.

We have to make the business a lot more stable over time, and we have made a lot more changes in it.

And we are going to -- and continue to make those changes in the business and position us for the long-term.

And we want to be able to achieve a better margin in the business.

And if we entered this time period with a better margin, it wouldn't be as tough of a ride for us, and that's one of the reasons why we want to get it.

You have to remember, we don't have any sacred cows around here, and we are committed to trying to improve the business.

We have shown that we can make improvements here.

But, if we can't get it to the right place, above our cost of capital, we are going to take other actions on those businesses.

At the end of the day, will Electronics, excluding Performance Materials side, be profitable by year end?

As far as for the year, they should both make money.

Yes, they should.

But it's going to be below the cost of capital for us, and we have to get that above.

Okay, then last question --

(multiple speakers), Mike.

Go ahead.

Go ahead.

Then my last question was, just in terms of energy costs, considering where natural gas is, it should be down for you in '09 versus '08.

And if you hold pricing, that's sort of a nice little bonus, if you will, in your outlook.

It does help.

But the thing which you have to think about on the energy side is that, on the Tonnage business, I pass that through so I don't get an impact.

I will take the sales down, but the profits will stay the same.

On the other side of this is, I do get an impact from the Merchant side, but I do surcharge on the energy costs.

So, as the energy costs come down, the surcharge is going to come off, too.

Sergey Vasnetsov, Barclays Capital.

On the tax rate, is 24% the number we should use for the rest of the year?

No.

It is likely to be higher.

We will probably finish the year somewhere at 25% to 26%, Sergey.

Okay.

And your interest income this time was a little bit lower than we expected, although that hasn't changed.

Is it because the LIBOR got lower?

And should we expect a similar number, at least, for the next couple of quarters?

Yes.

Okay.

On pensions, I think your projection for the full-year impact, based on your annual report, was about $170 million for the full year.

I think the cash contribution this quarter was around $20 million.

So has your view changed for the full year, or this number will accelerate through the rest of the year?

No, we have not changed.

I think the actual pension was about $40 million or so, the contributions, net, overall.

Chris Shaw, UBS.

Just to click over the guidance one more time, I'm sorry, but for the second-half guidance, if you take your -- the midpoints above the Q2 and the full year and then -- or, versus 2008, you add back the $0.10 from hurricane impacts and the fire at your Korean plant.

And then, if you take out, say, the $0.15 in cost-cutting and the $0.10 coming from the new plants, your base business seems like the earnings are going to be down about 22% in the second half.

Is that a right way of looking at it?

Will the base business be off that much?

I didn't follow the --

I just sort of stripped out the --

-- as far as the math is concerned.

If I look at the second half, it was $2.61 a share in the second half for us.

So, what you are saying is you're adding back on the fire and the --

Hurricane.

And the hurricane, for us.

Right.

But then also, for your second-half guidance this year, I took out cost-cutting and the contribution from new plants.

So I was just trying to see what (multiple speakers) --

Alright, okay.

Yes; if you take a look at the year over year for us, Chris, and the hit on volume total for the whole year is somewhere in the -- as far as a percentage of sales -- as far as sales are concerned, somewhere around 10% to 12% when I look at the forecast for the year, overall.

And if you then take that out, what you see is that it is a large amount which is going to impact there.

The big offsets to that are the new plants coming onstream and the impact also of the cost reductions for those things.

And the other thing which you have to look at is, we have a headwind on currency which is somewhere $0.10 to $0.15 a share every quarter, probably, right now.

And so that is something which, for the last half, that's a $0.20 to $0.30 headwind.

So the impact of that is somewhere around a 10% drop in income, if you think about it that way, Chris.

Okay, that makes sense.

That help you?

Yes.

And then, just quickly, you said chemical operating rates at your customers were down 10% to 15%.

What does that mean to you in volumes for Tonnage, then?

Are they down 10% to 15%?

Yes, it does, about that.

Okay, thanks a lot.

That does conclude today's question-and-answer session.

I would like to turn the call back over to Mr.

Squires for any closing remarks.

Thanks, Elizabeth.

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.

Once again, that concludes today's Air Products and Chemicals conference call.

We thank you for your participation, and have a wonderful day.