Air Products and Chemicals Inc (APD) 2009 Q3 法說會逐字稿

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

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

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, Vicky.

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 third-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 get started, I want to point out one major change that we are making this quarter to our variance analysis and reporting.

Energy and raw material cost pass-through will now include the cost of electric power passed through contractually to Tonnage customers.

This was previously included in our underlying sales variance, but we think that combining all cost pass-through will give better transparency on organic sales growth and margins.

Now I'll turn the call over to Paul.

Thanks, Nelson.

Good morning and thank you for joining us today.

Now please turn to slide number three.

I'd like to spend a few moments updating you on three items impacting this quarter's results.

First, as we indicated to you on last quarter's call, given the continued decline in global economic activity and an expected reduction in new plan orders, we recorded an additional restructuring charge this quarter of $124 million, or $0.39 per share.

About three quarters of this charge is for severance costs targeted at improving productivity by further reducing costs related to operations, overheads, business development, project execution and infrastructure costs.

The rest of the restructuring charge is for asset impairments associated with restructuring manufacturing capacity.

Our expected benefit in fiscal 2010 will be about $30 million, and the annual benefit in fiscal 2011 and beyond is expected to be $50 million.

The previously mentioned annual savings do not reflect about $20 million of project execution costs which get capitalized into projects.

This savings will be reflected in lower future project costs.

This quarter's provision excludes an additional $20 million to $30 million of restructuring and accelerated depreciation charges to be incurred over the next several quarters associated with these actions.

These costs cannot be accrued for in this quarter's charge as that associated assets are still being used.

These costs are for accelerated depreciation related to the closure of our air separation manufacturing plant in the UK and electronics asset consolidation.

These costs will be included on our EPS guidance as we provide updates.

Our guidance for the next quarter includes approximately $8 million of these costs.

Second, we recorded a supplemental pension plan settlement charge of $8 million or $0.02 per share for a number of our senior managers who retired recently.

And third, we took a charge related to a large customer bankruptcy in the amount of $22 million during this past quarter.

A bankruptcy court indicated that collection of certain receivables is unlikely.

We also took other asset actions of $10 million for closure of several manufacturing facilities.

Turning to slide number four, I'd like to take a few minutes to update you on the electronics business review we undertook during this quarter.

We are, of course, encouraged by the sequential improvement in Electronics Materials volumes, as we indicated in today's results.

Customer run rates have improved substantially from the lows we experienced in our fiscal Q2.

While that is good news, demand is still significantly below last year.

Our previous actions to improve this business and reduce its cyclicality did not do enough to shield us from the impact of this downturn.

From this review we concluded that the business is still attractive and that we can achieve our margin and return targets.

It was clear, however, that we had to take additional actions to further simplify the business and reduce the variability in our results.

Here are the actions we have taken as part of the restructuring charge announced today.

Please note that, as I mentioned earlier, there will be some additional costs over the next year as we continue to execute this plan.

The Electronics P&L will absorb a large portion of these additional costs.

We have further streamlined and consolidated the organization.

Actions taken this year will reduce headcount by approximately 20%.

We have re-segmented our customers to better match service levels to customer needs and what they are willing to pay for.

We have refocused our technology spending away from long-term development to focus on closer-in projects with an emphasis on working with customers and OEMs.

We believe this reduces risk and provides a higher return and provides for more growth in the future.

We have ongoing opportunities for optimizing asset utilization by consolidating production capabilities and standardizing our packaging.

The timing of these actions is asset-specific, driven by both customer and supply-chain considerations.

Collectively, these actions have reduced our fixed costs and will further streamline our supply chain while increasing our capabilities in Asia and our focus on emerging markets such as thin-film solar that will deliver profitable growth in the future.

In summary, we remain confident in the long-term growth opportunities and Electronics.

We believe we can achieve a low-cost business model with increased ability to flex our costs.

This will reduce the variability of our margins and returns.

It is our goal to complete these changes in 2010 and achieve our 15% margin target in the business in 2011.

Moving onto our financial results for fiscal Q3, please turn to slide number five.

Sales of $2 billion declined 11% versus prior year excluding currency and energy pass-through impacts.

Underlying business was off primarily due to lower volumes in our Electronics and Performance Materials and Merchant segments and, to a lesser extent, our Tonnage Gas segment.

Sequentially, underlying business was modestly higher on volume recovery in our Electronics and Performance Materials segment.

Nelson will walk you through the details by segment shortly.

Consolidated operating income declined by 22%, driven primarily by the lower volumes and unfavorable currency impacts, partially offset by lower operating and overhead costs.

Our cost reduction actions continued to improve results.

Our operating margin of 15.6% improved 130 basis points versus last year, due to our cost management actions and energy cost pass-through impacts, despite the decreased volumes.

We increased our operating margin by 230 basis points sequentially, mainly from higher Electronics and Performance Materials volumes and better cost performance.

For the quarter versus prior year, our income from continuing operations and diluted earnings per share decreased by 24% and 22%, respectively.

Return on capital employed came in at 11%.

Now, turning to slide six for a review of the factors that affected the quarter's performance in terms of earnings per share, excluding discontinued operations and the Q3 disclosed items, our adjusted earnings per share from continuing operations decreased $0.30 per share or 22% versus last year.

Lower volumes accounted for $0.47 of the year-on-year decline.

Pricing and energy and raw materials together were favorable, adding $0.06 and lower costs contributed an additional $0.20.

The unfavorable impact to operating income from currency translation and foreign exchange was $0.09.

Equity affiliates were down $0.06.

Several factors drove our equity income lower this quarter.

Last year's results included some favorable US GAAP adjustments, which accounted for about a third of the decline.

Other factors, including unfavorable currency impacts and lower volumes, particularly in Italy; lower interest expense, due mainly to lower rates, added $0.04; fewer shares outstanding contributed $0.02 and the impact of a modestly higher tax rate was mostly offset by lower minority interest.

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

Nelson?

Thanks, Paul.

Please turn to slide seven, Merchant Gases.

Merchant Gases posted sales of $883 million, down 19% versus prior year.

Underlying sales declined 9% with volumes down 11% and pricing adding 2%.

Currency reduced sales by 10%.

Sequentially, Merchant Gases sales increased 1%.

Volumes were down 1%.

Pricing declined 2%, and currency increased sales by 4%.

LOX/LIN system loadings for the quarter were in the low 70s with North America and Europe essentially flat and Asia higher versus prior quarter.

The sequential drop in pricing was primarily due to fuel surcharges imposed during last year's surge in diesel prices that have run their course.

Merchant Gases operating income of $169 million was down 17% versus prior year and up 8% sequentially.

Segment operating margin of 19.1% was up versus prior year and sequentially, due to continuing cost performance improvement.

Let me now provide a few comments by region.

Please turn to slide eight.

In North America sales fell 16% versus prior year, driven by the slow manufacturing climate.

Volumes were down 19% versus prior year while price added 3%.

We saw lower argon and distributor sales again in the quarter.

We are encouraged by the amount of new business signings, which improved versus Q2 and represented our best performance this fiscal year.

In Europe sales decreased 21% versus prior year, primarily due to currency down 16%.

Underlying sales declined 5% with volumes down 8% and pricing adding 3%.

Volumes were impacted by the weak manufacturing environment but helped by stronger health care sales.

Signings in Europe improved over Q2 levels and continued to remain ahead of plan for the year.

In Asia, merchant sales were down 16% versus last year with currency reducing sales by 7%.

Underlying sales declined 9%.

Volumes improved off the Q2 lows, mainly due to improved electronics customer run rates.

In addition, volumes in China increased 20% sequentially.

Signings were level with quarter two.

Please turn to slide nine, Tonnage Gases.

Sales of $565 million decreased 42% compared to last year.

Energy and raw material pass-through decreased sales by 32%.

Currency reduced sales by an additional 4%.

Volumes were off 6%.

Refinery hydrogen volumes continued to be up versus prior year.

Excluding refinery hydrogen, Tonnage volumes versus prior year continued to be impacted by the operating rates of our steel and chemical customers, but were flat versus prior quarter.

Also, a significant PUI customer was down for a large portion of the quarter.

Sequentially, sales were down 10%, mainly due to lower energy and raw material pass-through, which reduced sales by 11%.

Operating income of $88 million was down 30% versus prior year and 11% versus prior quarter.

The year-on-year decline was due to strong overall volumes, spot sales and operating efficiencies in the prior year, while the sequential decline was due to the previously mentioned PUI customer outage and maintenance timing.

Operating margin of 15.5% increased versus last year due to lower energy and raw material pass-through.

Our key projects for fiscal 2010 continue to proceed in line with expectations.

Please turn to slide 10, Electronics and Performance Materials.

Segment sales of $409 million were down 29% compared to last year.

Volumes reduced sales by 24%.

Currency reduced sales by 3% and price was 2% lower.

Electronics sales were down 35% compared to last year but increased 21% sequentially, better than forecast, due to improved customer run rates.

The year-on-year decline reflects the significant downturn in semiconductor manufacturing.

Electronics specialty materials sales declined 36% versus prior year but increased 30% sequentially.

Equipment sales declined 60% versus prior year.

Performance Materials volumes declined 23% versus last year but improved 26% sequentially, reflecting seasonal improvement and stronger Asian sales.

Operating income of $39 million was down 45% versus prior year but recovered well sequentially due to higher customer operating rates and better-than-expected cost performance.

Our Electronics business returned to profitability during the quarter, and our Performance Materials results were also better-than-expected.

We now expect millions of square inches of silicon process to be down about 40% in our fiscal 2009 versus our April prediction of about 35%.

Industry CapEx is now expected to be down approximately 60% versus prior year.

The Electronics business has clearly bounced off the lows we experienced in our second-quarter.

That being said, our customers continued to take a conservative view towards their production, and this is represented in our guidance.

Please turn to slide 11, Equipment and Energy.

Sales of $119 million increased 12% compared to last year, due to increased large air separation unit activity.

Operating income of $13 million increased due to improved cost performance.

Our backlog in this segment now totals $253 million.

We recently announced the successful startup of the first APX exchanger in support of Qatargas 2, and we expect to see a new order for an LNG heat exchanger this year.

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

Thanks, Nelson.

Now, if you will turn to slide 12, I'd like to share our outlook for Q4.

We saw significant deterioration in the economy during the first half of fiscal 2009, and it would appear, based upon the recent data and trends, that we found a bottom in fiscal Q2.

Looking to next quarter specifically for each of our business segments, we expect our Merchant volumes to be in line with last quarter with Europe continuing to deteriorate, partially due to summer holidays, but Asia continuing to improve.

We don't anticipate any significant change in the US.

As one would expect, given capacity utilization rates in the low 70s, pricing on new business is proving to be more challenging, but we expect continued good cost performance.

In Tonnage we expect volumes will improve as capacity utilization rates creep higher in the steel and chemicals portion of the Tonnage segment.

We also expect refinery hydrogen volumes to improve modestly from current levels across most of our pipeline franchises, due to higher demand and fewer customer outages.

Also we expect higher polyurethane intermediate volumes.

Higher operating bonuses and lower maintenance spending will help, and this segment should benefit from an asset sale next quarter.

In Electronics and Performance Materials we expect that higher volumes will be offset by ongoing restructuring costs.

In Equipment and Energy we expect lower operating results due to ongoing restructuring costs.

Our guidance for quarter four is for earnings per-share of $1.04 to $1.14, which for the full year is $3.95 to $4.05 per share.

With regard to capital spending, we still expect that fiscal 2009 will be about equal to fiscal 2008 spending of $1.4 billion.

And as we look to fiscal 2010, our initial forecast would be for flat to modestly lower capital spending.

We are currently working on our budget for 2010.

Let me share with you some factors that will impact next year's results.

We expect to bring on new plants where the volume is already sold.

This should add $0.30 to $0.40 per share for 2010.

Our cost reduction efforts, with the additional actions, should now add approximately $0.35 per share.

Ongoing restructuring costs should reduce profits by about $0.05 in 2010, and we would expect that, given the overall decline we have seen in this fiscal year in the market, that our pension expense should be about $0.10 higher.

While we are not done with our plans and we'll have more to share with you at year end, we believe we are well positioned for attractive earnings growth in 2010 without a significant recovery in the economy.

In closing, our actions this quarter demonstrate our commitment to improve our margins and returns.

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

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

(Operator instructions).

John McNulty, Credit Suisse.

Good morning, just a couple of questions.

On the Electronics business, with the actions that you are taking, can you give us some color as to how your past quarter, the second quarter, which really came under so much pressure -- what that would look like with the cost cuts that you are looking to pull in?

How would the profitability improve?

You are talking about on quarter two?

Exactly.

As far as quarter two is concerned, when we look at this we are striving to take actions so that we do not drive ourselves into a loss, and so that would be the thing that we think, with the actions which we are taking here, that we could hopefully avoid a loss in this sharp downturn here, and also that we would be, on average over this cycle, have returns which are well above our cost of capital.

Okay, great.

And then, just a question on your big on-site projects -- some of them have been delayed.

Have you seen any come back now that the credit crisis doesn't seem quite as severe?

We have not seen anybody come back on the projects which people have put off.

Our current projects are proceeding well, and we told you that.

But as far as the ones which have not started, we have not seen anybody start to come back on that.

I think that's a little bit early.

I don't think it's a crisis of credit, John, so much as people are looking, are they going to be able to sell the product.

Manufacturing capacity operates at about 65% of global capacity today, so I think the push on new projects is going to be light over the next few years.

I think the places in which we're going to see -- we have told this to people before -- is we still see the hydrogen projects going forward for the refineries to make the refineries a lot more competitive.

That's a case of their economics and improving their economics.

And in China we still expect that -- and manufacturing is picking up faster in China than anyplace else in the world.

And so, as they build a chemical industry in the inland of China based upon coal, we still expect to see the gasification projects proceed.

Mike Harrison, First Analysis.

I was wondering if you could give us a few more details about the 2% sequential decline in Merchant Gases pricing.

It sounded like part of that was related to the diesel surcharge.

But if you could maybe talk about how much of that is related to surcharges going away or a decline in pass-through's and how much of it might be related to contracts rolling over or new business signings that are coming in at lower pricing.

Nelson, why don't you --

The majority of this is the surcharges rolling off.

If you recall where we were a year ago, we had just faced a 30% increase over the stretch of about three weeks in diesel costs when we did this call.

And we were basically chasing the price of diesel all through last year.

And we put three surcharges into our customers, and the whole purpose of the surcharge was we have to incur the difficulty or the problem before we can surcharge to compensate for it.

And then the surcharges roll off as we basically have been compensated and have made up the difference, and this is what has begun to happen.

So it is mostly attributable to that.

We have not really seen any significant changes in pricing contract roles.

But as Paul mentioned in the prepared remarks, we have seen some pressure on new business.

But frankly, that really hasn't impacted overall price all that much.

Mike, I think a point here is that we have not seen a tremendous amount of pressure on price come out here.

There aren't any cost pressures right now pushing price up.

But as far as the pricing, I think everyone understands, you're signing a five-year contract here.

And so, if you want to load something for a year or two, it doesn't make a lot of sense to go out -- if you're short on loading for a year or two, it doesn't make a lot of sense to go out and offer a five-year contract at a low price for us.

It's just not a good economic deal for us, and that's the way we're functioning here.

And as you can see, the business is performing very well, giving a good margin and a good return at these pricing levels, so we're happy with it.

And then, in terms of Merchant volumes down 19% in North America, can you walk through what you're seeing in individual markets in North America?

And now that we are few weeks into July, seeing any signs of sequential improvement in any of those markets?

It's pretty much an across-the-board decline in that two thirds of the business that's focused on manufacturing.

Remember, about a third of the business is focused on things such as food, hospital oxygen, etc., markets that don't really change that much.

So it's a general decline.

It's nothing probably any worse than anything else.

We continue to see lower argon volumes, and that's putting a lot of pressure on the overall volume index.

And our third-party sales continue to be down, so our sales to distributors, etc.

Obviously, they're in markets which are largely also manufacturing, have been hard hit.

As we look forward, our expectations for Merchant in North America are flattish to slightly up as we go forward.

Europe -- we are still seeing declines, but the steepness of the decline is more limited now.

The issue we have in Europe, of course, is the summer holidays, which always slow down our sales in Europe.

Asia, though, continues to look good as we roll into the quarter and continues a nice, steady improvement.

Last question I had was on Electronics and Performance Materials pricing.

I was wondering if you could break out how much of that year-over-year decline was Electronics and how much was Performance Materials, and also wondering if you could talk specifically about what you are seeing in pricing for fluorine-based gases like NF3.

Mike, and the decline was all Electronics on the pricing there year-over-year.

And we are still seeing pressure on prices on the fluorine-based gases.

Realize, though, that this is something which has been a long-term trend for us, and we have been able --and counteract that by our cost reductions.

David Begleiter, Deutsche Bank.

Paul, on Electronics, how much smaller will the business be post the restructuring, and how much in sales did you find during the review that didn't make much or any money?

I don't think it's going to be a lot smaller.

I don't think we found a lot of things -- and which would go out here, as far as that is concerned.

The main thing here is structured around the cost portion of the business for us, and really taking advantage of the downturn to consolidate operations, consolidate production facilities, etc.; the reductions in staff which we have put in.

So we have a lot better cost base today to respond, and we'll improve upon that as we take the actions in 2010.

And Paul, on Q4 guidance, it was reduced by about $0.02 to $0.03 versus the last call.

What were the main drivers of that reduction?

And that would be the top end of the guidance, when you actually look at that.

You are going to the top end of our guidance if you went to there.

I don't think it's really anything which gets that, actually, a reduction.

It's probably -- the variability in the third quarter isn't as much there.

As far as the low end of our guidance, Dave, as we look at this, the thing which we are concerned about is the Electronics dips back down.

We hope that that isn't true.

Our volume trends through the first 20 days or so would say it's not true (inaudible) with things.

And so, as we continue to look, we think that we're still pretty solid as far as the results are concerned.

The recovery is slow.

Realize that.

Everyone should understand that we are not seeing a huge, strong recovery anywhere.

In the US, the package on the stimulus really isn't having an impact for things.

But overall, I think we are performing well, and we think we've done a good job of matching costs and volume here going forward.

And Paul, lastly, what was the PUI impact in the quarter on Tonnage volume?

Yes; the PUI impact of that customer being down was a couple of cents for us.

Kevin McCarthy, Banc of America/Merrill Lynch.

In the release this morning you reiterated your commitment to a 17% margin goal.

I was wondering if you could walk us through how you get there relative to the year to date average of 14% in last year's 14%, number one.

And then, number two, comment on when you might be able to achieve that.

Would it be feasible in 2011, for example?

Kevin, first, I think the 17% margin goal -- and that is our goal for 2011, for us, as we look at that -- if you take a look at it, today we have done a lot to improve our margins.

And so, if we get to our margins of last year, we've already produced a point to a point-and-a-half of improvement.

Most of that -- the bulk of that, actually, has come from cost reductions.

We've had a negative impact from volumes, and we've had a positive impact from gas coming off.

But roughly, if I were to walk you from today, let's say, it's probably something which is an easier way to do it.

And let's say we put gas at $6 or so; that probably puts us pretty close to a 15% margin as the Company is concerned.

About half of the improvement comes from cost; that's from today, improving my cost base, lowering my cost base by $80 million a year.

So I've got those actions in place, with the cost reduction which we announced today and the continued -- and the impact of the rest of the cost reduction which we have going forward from quarter one puts those actions in place.

And then a loading impact of about 1% as the volumes start to recover.

That loading impact is about a 5% improvement in volume for us overall.

So it's not a huge impact on volume.

And that, quite simply, is how we get there.

A second question, if I may, on the Merchant business.

Most companies are bemoaning the regional weakness in Europe.

I think you have posted volume of negative 8% there, much better than North America.

The disparity seemed quite wide, even though I know you have health care in Europe.

I was wondering if you could maybe update or elaborate on what you are seeing in merchants in Europe.

Health care in Europe did have a strong quarter, and so that did mitigate a lot of the volume decline.

I would also say probably that argon sales did not, were not as weak as they were in North America.

But most of the difference is attributable to a very good quarter in health care.

Laurence Alexander, Jefferies.

First question on Electronics, could you walk through how you see the mix playing out over the next few years to get margins to 17%?

That is, are you assuming a sustainable increase in equipment margins, or what kind of levers (multiple speakers) --?

Lawrence, (inaudible) you said the thing which we are striving for is 15% in 2011.

The 17% I just answered, as far as -- and that was overall for the Company.

But as far as trying to get to the margins of 15% in Electronics, the things which, as we look at that, is the mix of business is probably not going to change a lot from today as far as we look at that.

We are about a quarter Tonnage, 15% or so Equipment and 60% is the Specialty Materials for that.

So we think, with that mix, we can get there.

What this does is that we will have some volume recovery; you've seen that.

And you've seen the nice impact of volume recovery.

We are still well below the volumes of prior year, but you're seeing a very strong impact.

And so, if we were at the prior-year volumes, our margins and earnings would be above our 15% today for us.

And so I do not have to get all the way back to the volumes of 2008 to get there.

And so I can get there with some volume recovery and the cost actions which we have put in place here.

And then in Tonnage, how much was the hit in the quarter from the maintenance timing on your margins?

On the maintenance, it was small, about $0.01 or so.

And then lastly, for Merchant, given the timing of the diesel surcharges rolling off and sort of the push-back from customers, is there a possibility that Merchant pricing could be negative in 2010?

If we take a look at that, certainly, if diesel would continue to climb, we could see pricing negative.

Realize that this is a surcharge which goes through, and so all we are doing is recovering our cost here with our customer.

We are not in here trying to make money on our customers on this thing.

And so it really plays out as diesel prices play out.

The other thing which we have is a pressure coming up is that power prices continue to rise, and we have the right to surcharge for power prices, too.

We've seen power price increases in Europe.

We're likely to see some power price increases in the US, as states like Pennsylvania go out and deregulate those things.

So those will put some pressures on, longer-term.

I think the bigger thing which you really need to focus on here is our improvement in margins in this business.

We're going to get this business above a 20% margin in the near-term here.

PJ Juvekar, Citi.

Quickly, on NF3, how low did the operating rates go?

I know you shut down some Asian capacity for awhile.

Can you update us on Asia as well as the hometown plant?

Yes.

Right now, the Asian plant, it is not up yet, so we still have that upside for us to happen as we will bring it back on stream sometime in the near future here, PJ.

So are you supplying Asia from the US?

Yes, we are.

So you are going back to your old supply chain.

And is that costing you incrementally?

Yes, and that does add some costs to us.

But realize, we continue to work on lowering those costs and also continue to work on lowering the cost of the production in the US here, too.

So it's a constant drive to that.

We still have a decent amount of capacity here in the US and plan to have that capacity in the US.

And second, sort of a housekeeping question.

Why was the pension charge put into one-time charge for the quarter?

Why did you call that out?

Because it was an unusual charge.

It was a similar cost to what we had last year.

It wasn't as large, but we thought as far as trying to do it, it's not something which actually recurs, it's a thing which you trip.

With all the divestitures which we've had, we have had a significant cut in the number of senior people at the Company.

And so what that does is it produces these one-time charges.

And also, we can't accrue these charges at the time they occur.

It occurs when the payments actually come, so they are not matched to the cost reduction timing.

Okay.

And then, finally, just the big picture question.

[As] the margin goes [right] goes to half for Air Products, or would you rather have return on capital or some other goals?

Because your margins are impacted by this natural gas pass-through.

Yes; the margin -- I missed the first portion of that.

Are these margin goals the right goals to have?

Yes, they are.

As far as this hard thing -- and the thing which I will tell you is that I do my margin goals.

As I set these up, I put gas at $6.

And so, if there's a variation on the -- if you take a look at the segment of Tonnage Gases, that's a hard one to get a margin goal in here.

But when you look at this in the end, the margin goal is really being driven by our desire to improve our returns.

Everyone focuses, the investor community has a lot of focus on margin.

So our focus, as you know here, is very much on return.

And our goal in improving our margins really is to improve our returns.

And so, if I get to my margin goal, I should get my return on capital employed up to 15% at that point in time.

Jeff Zekauskas, JPMorgan.

What's the size of the gain that you intend to book in the fiscal fourth quarter on an EPS basis?

Are you talking on the sale of assets?

Yes, please.

Yes, it's about $0.02 or so.

About $0.02.

Yes, and so the reason we called those out is we have the ongoing cost of the restructuring, plus we have this one-time gain.

They are going to about offset, if we get the assets sold.

And secondly, in response to some of the other questions about your sequential pricing, you've talked about how it's really an answer to changes in diesel fuel prices.

So, should diesel prices stay relatively stable, then what we should expect for Air Products' sequential pricing going forward, is that it remains flat?

Is that correct?

Yes.

Okay.

And then, lastly, if you look at the Merchant volumes in the United States for the last three quarters, they've sort of stepped down from 6 to -- the Merchant volumes have stepped down globally from 6 to 8 to 11.

What do you make of that in general, Paul?

That is, why should there be an acceleration in the decrease for an industrial gas company, whereas it seems that on a relative basis the economy is more stabilized over that period of time?

Yes, Jeff, and that's a good question.

I think what you have to realize is that we were having growth during these periods.

So the first three quarters we had growth from year to year.

So it's actually the comparison period.

As we go into quarter four and as we go into next year, you are going to see a better -- a comp which is an easier-to-beat number there for us.

So it's just -- and lapping the growth here is what we are getting.

Don Carson, UBS.

Just to follow up on merchant pricing, what impact does liquid argon have on the volume index?

I'm trying to wonder what would that index be if you are just looking at LOX/LIN.

Would that be somewhat muted?

And, Paul, just wondering if you could clarify the comment again on pressure on new signings.

How does the pricing on new signings in Merchant in the US compare to your existing book?

If you take a look at the impact on pricing, the large, whether it's volume or price index in which we are looking at, is LOX/LIN.

And so that's going to be the one which has the biggest impact.

LAR is going to be next and then followed by hydrogen and helium for us.

But LOX/LIN is well above 50% of most of our sales there, here.

So that's going to be the one which is going to dominate.

Regarding the impact on -- the comment on pricing is that, as one would expect, the business is a lot more competitive for things.

And so you are seeing more people show up to these things, and people are taking their pencils out and trying to win business.

I will tell you, I'll say this for ourselves here, we are being very careful because we like our prices today, we like our business today, we like the performance of our business.

We are very happy, even with the performance -- even given the fact that the loadings are in the low 70s.

I do not have an urgent desire to take business at a low price to increase my loadings.

I don't need to do that, and I think the bulk of my competitors, as they're reacting at that, haven't shown a great desire to do that, either, for us.

So I do not think that there's a huge issue here on pricing, it's just that people should understand that pricing is still competitive at these rates.

And a follow-up.

You gave some comments on the 2010 outlook, more just looking at new plants and cost impacts.

What would be the impact if global industrial production recovers?

You've got some pretty low operating rates.

What kind of incremental operating margins would you see in both your Tonnage and Merchant business on a volume recovery next year?

A good rule of thumb for us is anywhere from 35% to 45%.

When I do large calculations, use about 40%.

The big impact on -- which we are going to see -- is Electronics, actually, I think, year to year right now.

We went through, as you know, a very low period in quarter two, and so -- and we are set up for a good comp here next year in quarter two of fiscal year for us, I think, with the volume recovery.

We just needed that sustained.

Mark Gulley, Soleil Securities.

Paul, as you talked about all the restructuring actions that you've taken, one of the things you mentioned, very quickly, was, I think, reflecting lower growth prospects going forward in Tonnage.

I think you talked about reducing your project execution team and stuff like that.

Can you elaborate on that a bit?

Can you talk about whether or not you think the Tonnage business is going to face significantly lower growth prospects going forward, and that's why you've taken these actions there?

Well, yes.

And certainly, as we've said, Mark, is that the new order flow -- there's lots of new bidding activity still out there.

There's lots of development activity still out there.

The awards of orders have slowed down.

I made a comment earlier about refinery hydrogen and, in China, the oxygen for gasification of coal to chemicals.

Those things are still proceeding, albeit not at the same rates as what they were.

But activity is slower for things.

We think, in the longer-term, the growth drivers are still the same.

Energy and environmental, improved energy performance, improved environmental performance are still there for us to keep going.

And as production shifts to Asia, we see that as an opportunity for us to go and take advantage of that.

So we do think that there's a longer growth.

In the very near term, let's say that's the 2010-2011, we think there could be some pressure on capital spending downward for us.

And if that happens, that's cash for the shareholders, which is the nice thing about the industrial gas model.

The other factor here, Mark, and we continue to go out and look at it -- I didn't make a comment in our -- as we went through our results, but we continue to work on project acquisitions, and we think we have some real prospects here which would add very nicely and would give growth instantaneously.

They would involve a cash outflow right away, and it wouldn't be over two years, so it would be a lumpy type of capital spend.

But, it would also put earnings right to the P&L pretty quick here.

Can you elaborate on the kind of acquisitions you are looking at?

Well, there's acquisitions of plants which we have sold or other people have sold in the industrial gas space, of captive plants which people operate for themselves -- oxygen, nitrogen, hydrogen plants -- which these people operate for themselves, and we would buy and put them on our pipeline systems, in many instances, or go in and take that position for them.

And if I may, I housekeeping.

Tax rate cosmetically was low this quarter.

What is the underlying tax rate for the quarter for this year and for next year?

The underlying rate for -- and for this year is 26%.

We're not ready to give any guidance, really, for next year.

But I don't think it's going to be -- it's not going to change a remarkable amount, I don't think, unless the laws change.

Sergey Vasnetsov, Barclays Capital.

You mentioned a couple times your Merchant Gases capacity utilization at about 70%.

Any comments regionally -- US, Europe, Asia?

And also, some changes in the freight?

Yes.

You are saying capacity or system loadings by region, Sergey?

Yes.

In North America, they've probably ticked up a point or so, but still are in the low 70s.

And I'm really talking LOX/LIN here.

As Paul said earlier, that really drives the system.

In Europe they probably ticked down a point or so, but remained in the low 70s.

And in Asia they're up a fair amount; they're probably up 10 points over where we were in the second quarter.

And so that takes, again, from the low 80s or the low 70s and probably to around 80% loading.

Thank you.

Also, your fiscal year is earlier than for most other peers by a quarter, which means that you must be doing your strategic plan review and budgets for next year early as well.

Today may not be the time to seek formal 2010 outlook, but maybe you can offer some quantitative comments on the pace of improvements you expect in your end markets, and also your overall results?

Yes, and one of the things which I gave this I gave an outlook on the budget here, which is about what we are comfortable at this point in time in sharing here for us, as far as the impact to the Company.

And we think -- and we are set up for some good growth going forward here.

We have the projects coming onstream with the full-year impact of the cost reduction out there, which are going to drive the growth going forward, and so we think we're positioned well.

Overall, as far as the economy is concerned, I'm starting to feel a little bit better about the economy, certainly in Asia, and the US seems to have bottomed here.

Europe, we think, will probably bottom in the fourth quarter.

But in the end, the thing which we are planning for is a slow recovery.

So we are going to set our costs and all our plans based upon a slow recovery, to be conservative on here, because it's a lot easier for us to adjust up than it is to adjust down.

Makes sense, thank you Paul.

Peter Butler, Glen Hill Investments.

Your comments on Merchant pricing were primarily describing what's gone on here.

I'm wondering whether in Europe, with the economy worse and the operating rates lower, could they be the lead indicator running into competitive pressures there?

No, I don't think.

In fact, the prices in Europe are actually moving up here, based upon power costs and things like that, for us.

So we have not seen issues in Europe as far as pricing is concerned here.

Okay.

On your pension fund costs, in your presentation, did you say that you expect about a $0.10 head wind next year from pension charges?

Yes, and that's with where the markets are today.

And it's a rough estimate at this point in time.

We'll see how it actually comes out, and based upon -- because you do the valuation on a 30 September year end for it, so it's always the guess here.

But the things which Air Products didn't have the last year is that the markets were higher at the end of our fiscal year than the calendar year companies, so we could run into some of that head wind this year, in this coming year.

Is it possible that you might have to make a contribution?

And how would that impact your balance sheet by the end of next year and possible disposition of some of that cash flow?

(multiple speakers) your own, or is -- ?

Yes.

So, Peter -- and that's certainly something which would be voluntary on our part, the contribution.

We always look at the ability to make a contribution with tax benefits.

We've talked a lot about that in past calls, as far as we manage it.

We would not be forced to make a contribution, just say, from a government standpoint of regulations, and we are fine with that.

And so, if we chose to make the contribution, it would be based upon it's the right thing to do from managing the cash for the Company as a whole for us going forward here.

Edward Yang, Oppenheimer.

Quick question -- your net debt was up sequentially, and the interest expense was actually down.

I was wondering what was behind that and what you expect for the next quarter in terms of interest expense.

Yes, and the debt was up a little bit.

There is the impact of currency rates are a little bit higher, and that produced the bulk of the impact on debt.

As far as the interest rates, the rates continue to be low in the short term here for us, so our CP is low here.

And, Paul, on Electronics and the 15% margin target, I think you had some restatements in the past, so we don't have a lot of historical data on this.

But when was the last time that segment, if ever, had margins in that 15% range?

I would like some historical perspective.

And certainly, in the 90s and the early portion of the 2000 decade, we saw margins there above the 15% range.

We got close in 2008, in that time period, to 15%.

But a lot of things have changed in the business.

We have changed a lot of things.

We have made a lot of changes of -- and substantial reductions in our staffing, substantial changes in our plants, in our product lines and how we do business here.

So we've made a lot of changes to this business, and we feel confident that we can go forward here and achieve our margin target.

Can you talk about the competitive landscape within that segment?

You're taking constructive steps with your cost basis.

I would think that your competitors are probably doing the same as well.

So are the lower margins in that Electronics segment just a function that it's just much more competitive?

Well, you know -- and certainly there have been pressures on price.

But realize that there's been a lot of volume which has been pushed through this segment, too.

And so what that does, that changes the dynamics of it, of the business here.

And what that gives you is an opportunity, and your customers expect that, an opportunity to take advantage of economies of scale.

And that's what we're doing and we'll continue to do, as we go forward here.

And realize that the positions which our product has in this business are very good.

We are a leading supplier, if not the number one supplier, to -- in the bulk of products in which we offer here.

Steve Schuman, Lafayette Research.

One thing I've noticed with yourself and some of the other competitors is that the fall in income has been less than I would expect, considering the fall in sales.

Of course, there are some put and takes with currency and pass-through, but is the bulk of that cost savings, or are you still finding products that are at either zero or negative margin you're able to remove from your sales picture?

I think -- and the bulk is actually in us going out and saving costs here, and continuing to reduce costs is something which we do on a constant basis.

We do it in good times and in bad times.

So I guess, couple of years ago, you went through a product review on Electronics, in particular, where you did remove a lot of the low or negative-margin-cost products.

So that, you say, is pretty much done at this point?

Yes, but I think the thing which -- and which people ought to realize -- it wasn't a huge amount of sales.

It was probably $100 million a year in sales.

So when you put that over the size of Air Products, it's not a huge impact.

All right, thank you.

It helps, but it's not a huge impact.

Bob Koort, Goldman Sachs.

Good morning, this is Amy Zhang sitting in for Bob.

I have two quick follow-up questions.

The first one, on the Electronics side, Paul or Nelson, can you give us a little bit more color on the magnitude of rebound across each of the three divisions there -- Specialty Gases, Bulk Gases and Equipment; and also, what the quarter-to-date trends look like?

Yes, Amy, and the bulk of the change here and the rebound occurred on the Spec Gas and Chemicals side of this business.

The Equipment business is still down and is going to remain down until capital spending comes back.

Tonnage Gases is a stable business, and we don't see that moving a whole lot.

And then the trend, the quarter to date, I guess [rather] consistent with whatever you saw in the June quarter; right?

Yes.

And then, second question, on the cost of savings I think you mentioned $0.35 per share in FY 2010 and then, at the same time as -- you assume a modest economic recovery.

I'm wondering, what's the mix for this cost-saving benefit between the variables and fixed?

And if this global economy rebounds stronger or much stronger than you guys expected, what shall we expect as the cost of saving at the end of the day?

Would Will that be reduced?

Or how we should think about -- how much of the savings is sticky?

And the cost savings which we talk about on the $0.35 a share is all fixed cost savings for us; that's what we have been talking at.

We continue to work on our variable costs, trying to drive that out by improving the efficiency of our plants, etc., and the yields of our plants.

But that's a separate topic for us as we go forward here.

I think, as far as a large rebound in the economy, it could require us to do something.

But for right now, I just don't see that requiring us to be a lot -- given our loadings on the system and things like that, that I would have to add a lot of fixed cost, even under a scenario where we got growth of 10%, let's say.

And you can see the loadings on the plant, so I don't have to add manufacturing capacity, etc., to respond to this.

I've got about $2 billion in sales which is sitting unloaded at this time, at this point in time, which we can grow back into.

And so that's a good thing to have and a great opportunity for us.

So the bottom line here is that $0.35 per share savings is safe and that, regardless of the underlying economic environment?

We should have that; right.

And that is all the time that we have for questions today.

At this time I'll turn things back over to Mr.

Squires for any additional or closing remarks.

Thanks, Vicky.

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.

And that does conclude today's teleconference, thank you all for joining.