Air Products and Chemicals Inc (APD) 2009 Q4 法說會逐字稿

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

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

(Operator instructions).

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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' fiscal year-end earnings teleconference.

This is Nelson Squires.

Today our CFO, Paul Huck, and I will review our fiscal 2009 results and provide our initial fiscal 2010 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.

Now I'll turn the call over to Paul.

Thanks, Nelson.

Please turn to slide number three.

Good morning and thanks for joining us today.

Before we look at this quarter's results, I would like to spend a few moments reviewing fiscal 2009.

Certainly, the world has changed significantly over the past 12 months.

In our plans for fiscal 2009 we expected modest global growth.

On slide number three you can see the severity of the worldwide manufacturing downturn.

Globally, manufacturing was down about 11%.

In Electronics we expected a modest decline in silicon process, and it now looks like for fiscal 2009 MSI will end up down about 35%.

Both of these headwinds had a major impact on our financial performance during fiscal 2009.

Let me take you through the numbers.

Turning to slide number four, sales of $8.3 billion declined $2.2 billion or 21%.

Underlying sales declined 8% with volumes [off] 9% and price gains of 1%.

Energy cost pass-through accounted for 7% of the decline, and currency translation reduced sales by 6%.

Our operating margin fell only modestly, due to the weak demand, as the cost actions we took to counter the weak volume increased margins significantly in the second half of the year.

If you compare the first half versus the second half of fiscal 2009, our operating margin increased by more than 200 basis points to 15.5%.

For the year earnings per share fell 20%, slightly less than sales did, and our return on capital employed declined to 10.6%, above our cost of capital by about 200 basis points.

In summary, 2009 was a challenging year due to the impact of the global recession, but we continued to make progress towards our goal.

We continued to improve our portfolio, completing the sale of our US Health care business this quarter, and we made progress through the year to improve both margins and returns.

Our entire team remains committed to continuing this process.

Now turning to slide number five for a review of this quarter's consolidated financial results from continuing operations -- for the quarter, sales decreased 22% versus prior year.

The major factor was lower natural gas prices, which lowered our contractual pass-through of energy-related costs, reducing sales by 12%.

Underlying sales declined 7% on lower volumes in Merchant and the Electronics and Performance Materials segments and lower pricing in Electronics and Performance Materials.

A stronger dollar reduced sales by 3%.

Sequentially, sales increased 8%, primarily on volume growth across all business segments.

Underlying sales were up 7%, an encouraging sign that the global economy continues to improve.

Operating income of $328 million declined 12% from prior year, again due to lower volumes and unfavorable currency.

This decline was partially offset by our cost reduction efforts.

Our operating margin of 15.4% improved by 170 basis points versus last year, due to productivity and energy cost pass-through impacts, despite the decreased volumes.

For the quarter, net income and diluted earnings per share decreased by 10% each versus prior year.

Turning to slide six for a review of the factors that affected the quarter's performance in terms of earnings per share.

Our continuing operations' earnings per share decreased by $0.12.

Lower volumes reduced EPS by $0.41 year-on-year.

Pricing and energy and raw materials together were favorable, adding $0.02, and lower costs contributed $0.18.

The unfavorable impact to operating income from currency translation and foreign exchange was $0.05.

In last year's quarter four earnings release, we footnoted two specific events, a plant fire and hurricanes, which each were a drag of $0.05 on our prior-year operating results.

Interest expense declined on lower rates, adding $0.05.

This was mostly offset by a higher tax rate this year which subtracted $0.04.

Lower minority interest and fewer shares outstanding together contributed about $0.03.

Now I will 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 $932 million, down 15% versus prior year.

Underlying sales declined 10% with volumes down 11% and pricing adding 1%.

Currency reduced sales by 5%.

Sequentially, Merchant Gases sales increased 6%.

Volumes were up 3%, pricing was flat and currency increased sales by 3%.

Higher volumes were seen in all regions, resulting in improved LOX/LIN system loadings versus prior quarter.

Pricing was better than expected for the quarter despite the negative impact of lower liquid hydrogen pricing.

The lower pricing was due to significantly lower natural gas costs both sequentially and versus prior year.

Merchant Gases' operating income of $166 million was down 16% versus prior year and down 2% sequentially.

The sequential drop in operating income and margins was primarily due to asset disposals, bad debt expense and maintenance timing.

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 15% versus prior year with pricing down 1%.

Ex-liquid hydrogen, pricing was positive year on year.

Signings in the second half of the fiscal year improved versus the first half.

In Europe sales decreased 14% versus prior year.

Underlying sales declined 6% with volumes down 9% and pricing adding 3%.

Currency reduced sales by 8%.

Sales were impacted by the weak manufacturing environment but helped by increased health care volumes and pricing.

Signings in Europe finished the year ahead of plan and reflect continued demand in food, cement and small manufacturing.

In Asia, Merchant sales were down 10% versus last year with currency reducing sales by 5%.

Underlying sales declined 5%.

Volumes continued to improve sequentially across the region.

Q4 signings improved over Q3.

Please turn to slide nine, Tonnage Gases.

Sales of $640 million decreased 32% compared to last year.

Energy and raw-material pass-through decreased sales by 33%.

Currency reduced sales by an additional 3%.

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.

Sequentially, sales were up 13%, due to higher chemical, refining and steel demand.

Operating income of $105 million was down 22% versus prior year, primarily due to better operating efficiencies in the prior year.

Operating income was up 20% sequentially, mainly due to higher customer operating rates.

Operating margin of 16.4% increased versus prior year, primarily due to lower energy and raw material pass-through.

Looking to the future, we announced significant awards in the quarter from MarkWest Energy, Xingtai Steel and PetroChina.

Please turn to slide 10, Electronics and Performance Materials.

Segment sales of $434 million were down 22% compared to last year.

Volumes reduced sales by 16%, price reduced sales by 5% and currency was 1% lower.

Electronics sales were down 27% compared to last year, due to lower operating rates, but increased 3% sequentially, which was in line with our expectations.

As Paul mentioned earlier, millions of square inches of silicon processed were down about 35% in our fiscal year.

Electronics specialty materials sales declined 24% versus prior year but increased 14% sequentially.

Performance Materials volumes declined 10% versus last year but improved 9% sequentially, reflecting seasonal improvement and stronger Asian sales.

Segment operating income of $49 million was up 17% versus prior year with prior-year income reduced due to the fire at our Ulsan, Korea manufacturing facility.

Income was up 26% sequentially, due to higher customer operating rates and good cost performance.

The Electronics business continued to recover in the quarter.

We saw new order activity in both flat-panel and thin-film solar.

In this quarter we started up a new plant in Nanjing, China to support our Performance Materials business.

This facility will enable us to manufacture closer to our customers as well as reduce our costs.

Please turn to slide 11, Equipment and Energy.

Sales of $123 million decreased 3% versus last year.

Operating income of $6 million declined versus prior year due to lower sales and higher energy development spending.

Our backlog in this segment now totals $239 million.

We won an order with Samsung Engineering in the quarter for a plant where we will supply the largest coldbox ever built by the company.

We continue to work on various projects in LNG and expect to see a new order in the next quarter or two.

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

Thanks, Nelson.

Now, if you would turn to slide 12, I would like to share my thoughts on our 2010 outlook.

For our fiscal 2010, we are currently projecting a gradual and modest recovery driven by weak private sector spending growth.

We don't foresee a significant improvement in consumer confidence or consumer spending, so we believe growth will likely continue to be subdued.

Globally, we saw manufacturing contract by about 11% in fiscal 2009.

Over the past two quarters we have seen Asia growth turn sequentially positive.

North America has improved modestly from Q3 to Q4, and Europe's rate of decline has slowed.

We're planning for global manufacturing growth of 1% to 2% for our fiscal 2010.

Our current thinking is that the US will see flat to slightly positive growth of 1% in manufacturing.

Europe should be about flat, and we expect Asia will continue to be the strongest region, growing 6% to 7%, led by China.

While the economic outlook is not robust, we do believe that there are significant factors driving earnings improvement in fiscal 2010 for us.

New plant on-streams in 2009 and 2010 should add $0.35 to EPS.

Our significant cost reduction actions in the year will have their full-year impact in 2010, adding $0.35.

Partially offsetting this will be about $0.15 of higher pension expense due to the significant drop in interest rates from September 2008 to September 2009.

We also expect that, based upon current rates, currency should be a modest tailwind for us next year.

However, this will likely be offset by ongoing restructuring costs.

Based on these factors and our economic outlook, we are forecasting our fiscal 2010 earnings from continuing operations to be between $4.65 and $4.90 per share, which represents a year-on-year earnings growth of 15% to 21%.

Now, turning to our outlook by business segment, in Merchant Gases capacity utilization has begun to recover globally, and our efforts to raise and maintain prices and increase productivity should generate continued improvement next year.

For fiscal 2010 we are targeting a 1% improvement in our Merchant Gases operating margins to above 19%.

20% margins or above should be achievable in 2011.

In the US we are currently operating in the mid-70s, so we have capacity available to serve volume growth as the domestic economy continues to recover.

In Europe we are operating right around 80%, and we are continuing to focus on improving our margins by raising prices, streamlining business operations and driving our shared services model into this region.

In Asia, capacity utilization is in the low 80%'s.

We continued to expand our technology applications, and that alone, with solid manufacturing growth, will continue to increase demand loading on our facilities.

In our Tonnage Gases segment we will see some benefit from loading as chemical and steel plants continue to recover a long with 10 large plants and contracts coming on stream this year.

On the new order front we announced three new projects in September.

The MarkWest hydrogen plant acquisition should contribute to growth in midyear 2010.

The Xingtai Steel air separation unit acquisitions in 2010 plus a new plant order from them which is slated to start up in mid-2011.

And our joint venture with PetroChina will follow in 2012.

In Equipment and Energy we expect results similar to last year's level.

We do anticipate signing two to three LNG orders this coming year.

Within Electronics, silicon process declined significantly in early 2009.

Market sentiment is now positive, particularly in Asia.

We project the MSI index to be up 10% to 15% in 2010.

As we look at fiscal 2010 we also expect demand from flat-panel producers to be significantly higher.

We will also see growth accelerate in thin-film photovoltaic in 2010.

And, while electronics industry CapEx is expected to increase as well next year, we don't anticipate that it will significantly increase our Electronics equipment business results in 2010.

Our Electronics business repositioning efforts will result in additional ongoing restructuring costs, as we've mentioned in the past.

Electronics specialty materials pricing will likely remain under pressure next year as well.

Our growth expectations are high in Performance Materials as the economic stimulus packages continue to bolster the economy and we continue to benefit from new market and application successes and new product introductions.

For the Electronic and Performance Materials segment we continue to target improvement in our operating margins with a goal of delivering 15% margins in 2011.

In any economic environment cost control and cost reduction are important drivers of earnings, margin and return improvement.

For fiscal 2010 we will remain diligent on discretionary spending, new programs and staffing.

We will also continue to see the impact of a number of structural cost reductions that we are making to reach our 2011 goal of 17% operating margins.

At this time in our tax rate guidance is for a rate similar to 2009, approximately 25% to 26%.

While we faced a difficult economy in 2009, the actions we took positioned us well to withstand the storm and take advantage of the recovery.

We remain committed to delivering consistent, strong earnings growth along with improved margins and returns throughout the economic cycle.

Turning to slide number 13, our guidance for quarter one for earnings per share of $1.07 to $1.15 is based on the following factors.

On the positive side, we expect to see increased earnings sequentially from the following areas -- new plant on-streams, including our new SMR to serve Marathon in Garyville, Louisiana, and a steel on-site in Asia, should contribute to next quarter's results.

We expect the manufacturing economy globally to continue its gradual recovery.

And, finally, we expect continued benefit from our cost reduction actions.

Offsetting these sequential improvements are a few seasonal impacts in our business.

In Merchant Gases and Electronics and Performance Materials, we will see lower seasonal demand.

Last year we did see a number of extended holiday shutdowns.

We currently are not forecasting for this to recur.

In Tonnage Gases we expect significantly higher maintenance spending as a number of customers have planned maintenance turnarounds on their facilities.

This will result in lower volumes in quarter one and higher maintenance spending on our part as we time our maintenance to correspond with our customers' shutdowns.

And pension expense, as previously mentioned, will be a headwind.

Please turn to slide number 14 for our capital spending outlook.

Our capital spending for 2009 was $1.5 billion.

For 2010 we expect that our capital spending will be between $1.3 billion to $1.5 billion.

We also continue to work on the acquisition of captive plants from customers, as we did with the MarkWest and Xingtai Steel projects.

The majority of our spending remains in the tonnage area, and about $1 billion is associated with new plants.

Now let me wrap up.

2009 was a year none of us will forget and none of us want to experience again.

As we enter 2010, we believe that we are extremely well-positioned to take advantage of the growth opportunities before us.

We continue to work on opportunities for the future, focused on energy, environment and emerging markets.

These include oxygen for clean and efficient combustion, hydrogen for clean fuels, oxygen for gasification, oxygen for capturing carbon emissions, electronic gases for thin-film solar; and, we remain committed to our goals of improving margins and returns while pursuing these opportunities.

While the global economy is still not out of the woods, we are excited about the opportunities and challenges we face in 2010.

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

(Operator instructions) Kevin McCarthy, Merrill Lynch.

On the joint ventures, Paul, it looks like you are seeing continued improvement there, based on the quarterly numbers.

Can you comment on whether your outlook for the non-consolidated financials is similar to your remarks for consolidated results?

And, yes, they are, Kevin, pretty much, yes.

It goes according to the regions up there, but we have them in all the regions of the world, so yes.

Okay.

Then on Merchant Gases, can you comment on the price outlook there?

In particular, it looked like Asia leaped slightly off about 2% year-over-year.

How would that look on a sequential basis?

And perhaps you could comment on your recent price increases and what kind of success you might be seeing there?

Nelson, do you want to take that?

Hi, Kevin, this is Nelson.

Let me maybe walk through region by region to cover that.

In North America we did launch a price increase effective 1 October, and we are pleased with the results so far.

Obviously, it's still early, but the early returns are favorable there.

And so we expect pricing to end up probably flat to up a bit in North America for the fiscal year.

In Europe, we actually do expect pricing to be up.

We are taking a number of actions there on a country-by-country basis, some of it tied to higher power.

But we are trying to take advantage of certain situations to get price up, and so we expect price to be positive in 2010 in Europe as well.

In Asia -- and by the way, on a sequential basis, probably flattish on a price basis.

We probably will see pricing be flat to slightly down as assets continue to get loaded in the region.

Now, we are not too concerned about that.

But, net on net, we expect pricing to be a slight positive in Merchant fiscal 2010.

Okay, and then final question if I may on Electronics and Performance Materials.

Did I hear you right, Paul, that you're targeting a 15% operating margin there in 2011?

And if that's correct, maybe you could elaborate on how much of the incremental improvement might be derived from cyclical recovery versus your restructuring actions and other factors.

Yes, Kevin, and yes, we are targeting for the margin to be at 15% in 2011.

We look at sales in that area from a volume basis.

We do not expect our volumes to recover to the 2008 levels until 2012, so there is a portion of this which depends upon the cycle coming back.

But I do not need to get fully back as far as volume is concerned.

So the majority, when you look at the numbers here on margin improvement, are from the restructuring actions which we are taking.

David Begleiter, Deutsche Bank.

Paul, can you discuss your leverage to a stronger than expected recovery in global manufacturing, perhaps every 1% change, how that impacts your earnings?

Sure, yes.

If we take a look at the leverage on our manufacturing, from a Company standpoint, Dave, you have to look at the right segments there.

So the Equipment and Energy segment really doesn't have a lot of exposure to that; it's going to be more on the capital cycle.

On the Tonnage business, I don't have a lot there, either.

So it really gets down to the Merchant business and the Electronics and Performance Materials business.

And if you look at just the way those volumes are going to grow in those areas, they are going to grow two times the underlying growth rate in those sectors, in the manufacturing sector there.

So I would anticipate that we have about $5.5 billion in sales there.

And you can do that at a 35% margin or so, and you will come up with, for every 1% growth, probably somewhere between 8% to 10% -- $0.08 to $0.10.

That was very helpful, thank you.

And, just in Electronics, what's the walk in terms -- what is the 2011 operating margin you believe will occur in Electronics?

15%.

I'm sorry; I meant 2010.

2010?

Yes; 2010 is going to be held down a little on the restructuring cost side with those things.

So I think that -- so that we will not see as big of a recovery as far as the overall operating margin is concerned in there.

If you take a look for the year, we finished in operating margins in Electronic and Performance Materials, Dave, at about 11.3.

So we might get up in the 12, 12.5 range in 2011.

How would you characterize the level of current bid activity in the Tonnage business?

The level of activity is still strong.

We continue to work on a number of projects.

The one thing which I will say, and I've said this before, is that the award activity is not as strong as the bid activity.

So there's a lot of people out there, but the final awards continue to be delayed and pushed out a little bit.

But people are still working on them.

So the basic drivers, which are energy -- are people looking to save energy costs or improve energy efficiency, improve volume performance -- those things are still there.

It's just the people being sure that they can go out and spend the capital.

Sergey Vasnetsov, Barclays Capital.

Your volume declines impacted your results negatively by $1.65 in 2009.

And I'm just curious, what kind of expectations of recovery of that lost profit do you expect in 2010 and 2011?

How soon do you expect to catch up all of this loss?

As far as volume declines, as far as overall, Sergey, it depends upon the region.

I think, in Asia we are going to see us back by 2011, pretty much, in volume.

Late 2012 for the US in North America and Europe -- well out there.

It may be 2013, 2014, as far as our growth, as we look at the growth here.

Okay.

Secondly, while I didn't see it in this press release, in the past you have mentioned your [17] margin goal.

Is it still out there for the (multiple speakers)?

It is still out there -- yes; I'm sorry.

I didn't mean to cut you off.

It is still out there.

It is out there for 2011.

We are not backing off that goal, when we talk about our goal.

And that really, as you know, that's really -- as we were looking at this, our actual goal here is to get our return on capital, keep improving our return on capital.

We realize we invest a lot of money, we've got to earn a good return on it.

Of course, okay.

And, lastly, you talked about the pension headwind a couple times, but I don't think you quantified it.

Could you give us some range of impact?

Yes, I did.

And the pension headwind is about $0.15 a share, year on year.

And that really comes from, just so everyone knows, it comes from -- on the discount rate.

The discount rate which we are going to use this year is probably around 5.7%.

Last year it was about 7.5%.

And the liability just grew, and so the way the accounting works, the pension expense goes up.

John Roberts, Buckingham Research.

When you look at your quarter-to-date release that you had back in July and August, the Merchant Gases looked like they were down 8% and 10% back in July and August, but you were down more than that for the quarter.

So it looked like the comparison, at least, was lower in September.

Did the comps get more difficult or (multiple speakers) --?

I think what you always have to look at that -- you have to get to the underlying factors here as far as those are concerned.

And September, it was a good month for us against prior year.

I do not think that it got worse underlying there.

I know it did not get worse underlying.

Because, again, I think the number were down 8% and 10% July and August, and you're down 15% for the full quarter versus a year ago.

But I'll go back and look at the numbers, I guess.

Yes, yes.

It did -- nothing deteriorated as you went through the quarter?

Yes.

The other factor which gets in there is what was happening to the dollar on that thing, too.

And so that's the other factor which I would like to take a look at there.

Fred Siemer, Siemer Management.

I was wondering if you were -- productivity gains in the Merchant Gas business, given the very difficult operating environment in last year, I wondered what was your improvement year-to-year in Merchant Gases for the variable margin, and how much of that was due to positive selling prices, how much due to lower electric power costs and natural gas costs?

And when you net-that this all out, did you achieve any productivity gains?

Yes.

In fact, we achieved a significant amount of savings due to savings on our fixed cost base, on things.

No; I'm talking variable margins, I was talking about.

Variable -- oh, you're talking variable margins and productivity there?

We did not -- I will tell you honestly, we saw some on the distribution end.

On the operations end as far as electronic power costs and where we had to operate, no, we didn't see a lot on that area because of the way the plants operate.

And you are familiar with that, of the turndowns with things.

But we did not -- so we got a little squeeze there.

We did see savings on how much product we ran around and how we used our fleet.

We did see significant savings on the fixed cost base, also, which we would not anticipate having to add back to as we load the plants up.

Okay.

And just one other little minor thing.

What is the capacity in the single-train capacity?

You said you had the largest coldbox you ever built.

What are you up to, 3300 tons per day?

It's even bigger than that, Fred -- this is Nelson.

It's about 3700 (multiple speakers).

3700 tons.

Don Carson, UBS.

Paul, a question on currency -- it seemed, just, again, in looking at the quarter results, that currency moved in your favor in September, just based on where you were in July-August.

Yes.

But you seem to have a rather conservative outlook for what impact it might have next year.

I see the euro just traded through $1.50 today, for example.

Are you just taking a more cautious view on the dollar, or is it that you are (multiple speakers) more offsetting expenses?

And, Don, what I do is I tend to be conservative on these things, as far as the currency is concerned.

We kind of use a rate that exists at the end of the quarter, and we use that for our forecast.

Trying to go out and forecast this stuff is, as you know, very hard [sort of] thing.

So obviously, if the dollar strengthens, as we all know, then that's going to help us; that helps our earnings.

You mean the opposite; if the dollar weakens?

Yes, I'm sorry.

Yes, the opposite -- if the dollar weakens.

Yes, I misspoke, Don.

Thanks, thanks for catching that.

A couple of questions on Tonnage.

What was the PUI impact in the quarter, and what's the outlook for that business in 2010?

And what are your overall GOX/GAN loadings?

I would think you could get quite a pick-up there from higher industrial production.

Yes.

If you take a look at the PUI business, the PUI business operated well in this quarter.

So we had -- and good results from that.

Probably the one thing which it gets offset throughout the whole Company is, at the end of the year, as you know, we are on LIFO and we taken revalue our inventory.

The PUI business took a pretty big hit on inventory, on the revaluation, which took the results of that business down.

But the volumes were solid.

Now, for the overall Company it's a zero impact for us on the inventory revaluations.

But that was a thing which held down the results in that area.

If we look at things like -- if we look at GOX/GAN loading, yes, there is still some upside for that, particularly in steel and chemicals for us.

On the refinery and hydrogen side, obviously there isn't, but that's not GOX/GAN.

Mike Sison, KeyBanc.

Paul, you were somewhat cautious in your commentary for the economic recovery; I understand that, and to some degree, suggesting the consumer could be a little bit sluggish.

I'm just curious; the outlook for the silicon process to be up 15% next year -- can you give us a little bit of help, sort of in a low growth scenario, why that would rebound pretty strongly?

Well, I think -- and the reason why is that, if we look at -- it dropped so much.

So if you go to that front chart on the third slide, Mike, you see how much it dropped and then it comes back up.

It's been a couple of quarters, and pretty low.

And so, with those couple of quarters pretty low, you don't have to have a lot of growth sequentially to really make that -- and to get to the 10% to 15%.

The other thing is the inventory.

The other thing is the inventory.

And that big drop which was there was actually the inventory correction which occurred.

It occurred in a couple of quarters, and we think that that -- and that has worked through.

So I don't think that they are going to sell all that much more.

I don't think the consumer is going to buy all that much more.

But one of the things that they did in our fiscal year -- and this may not be true if you went to a 2009 calendar year, 2010 calendar year.

But in our fiscal year we saw the corrections hit us a lot there.

One other comment, Mike, is on inventories.

We would also suggest that, based on the data that we are looking at, is levels are actually still dropping.

So there still appears to be the ability to rebuild over the next couple of quarters.

Okay, so you do see some restocking efforts and you are sort of hearing that from customers heading into the fourth quarter and maybe the first quarter of 2010?

I don't know if I'm -- yes, I think that's an upside.

For me, I think people are -- what they are trying to do, and my comment here, I don't think, is cautious.

It's prudent, is that people are trying to match -- are trying to take demand and match production to demand.

They are trying to pick out what their demand is and match production to demand.

And once they get the level of inventory for them, at the level that they want to, they are not looking to rebuild inventories a lot.

I would not expect to see that.

So, shifting gears a little bit, when I think about your guidance for 2010 and walk through that earnings walk that you gave us, you sort of get to the bottom end of the guidance with cost savings on-site.

And I'm assuming that the on-site or the Tonnage projects coming onstream represents 3% to 4% type of top-line growth; right?

And then, to get to the high end of 490, you'd need another 3% to 4% top-line growth to get there?

Is that how the math works?

Yes, I think that's -- it's probably -- 3% to 4% would be a reasonable number.

It might be up to 5%.

To get to the high end?

To get to the high end, right, Mike.

In terms of your refinery business, I think, Nelson, you suggested it was better sequentially in Tonnage.

I just want a little bigger color, what you thought about that heading into 2010 on the base business, not new stuff coming onstream.

You see refinery margins and operating rates in the US really not that great.

So I just wanted to get a little bit of color of how it did and the outlook.

I'll add some more common to that; this is Nelson.

They did continue to stay positive in the fourth quarter versus prior year, so we really saw that in all four quarters.

We think, ex the new capacity that's coming on, if you look at just the base business, as you suggested, we think things are roughly stable next year in that business.

I don't think we're going to see a tremendous amount of growth.

We're not anticipating miles driven to go up substantially next year.

As the economy does improve, the expectation would be that there is more diesel fuel, maybe more gasoline consumed.

But I think it's only incremental.

One of the things we continue to see, though, and this is a positive thing for us and for the hydrogen supply, is that the refineries that have done the conversion to a high-conversion refinery, so focusing on transportation fuel, are the refineries that are running the hardest.

The ones that have not done the conversion are the ones that are dragging down the overall rates.

And we think that trend will continue going forward.

And that is because the margins of the high conversion refineries are better than the margins of the low-conversion refineries, for every barrel of input.

Steve Schuman, Lafayette Research.

John alluded to some comments in the press release, particularly about how you've got a new low cost structure that enables you to grow faster than competition.

Could you talk about that a little bit?

Yes.

It gets to the -- and the reduction in cost which we've done this year, the reductions which was done in fixed cost, the reductions which we're making in our structure of management around here -- we've made significant cuts there, taken a number of people out.

We're also making cuts in our capital expenditures as far as how much it costs to produce a ton of oxygen or a ton of nitrogen with capital, and then the cost on variable.

The whole goal of us being low-cost, really, is to beat the competition.

And that's why we are doing it.

There hasn't been some technology breakthrough that would allow you to really beat everybody out?

No, no.

It has been a journey in which we have been on for a long time.

John has emphasized it a lot with the management team around here, so it's a constant theme which we've talked to our employees about, how it gives us a competitive advantage.

And are there any contracts still on a take-or-pay minimum, or have you moved off all those?

And there are still some, yes.

Do you have maybe a percentage or a dollar value?

I don't have a percentage.

Now, I never had that many to begin with because of the refinery comment which you just made, because two-thirds of our businesses refinery, in the Tonnage area.

And those stayed above.

Jeff Zekauskas, JP Morgan.

Your depreciation in the fourth quarter was 225, and in the second quarter it was 197.

Why does it bounce around so much, and what is the D&A number for next year?

The D&A number for next year is probably going to be somewhere around 900 or so for us here.

One of the things which bounces around is currency, for us, and new plants coming on stream.

So you have to look at the currency rates because they have a lot of the stuff around there.

So that's a factor.

Okay.

Secondly, you are supposed to pull out $110 million in costs.

And this year your SG&A was about $943 million.

So if the $943 million grew it, I don't know, 3%, that's $28 million.

So, all things being equal, should your SG&A be down in absolute terms next year?

And once again, you have to pay attention to what happens on the currency rates for that.

So that does influence -- remember, I've got 60% of my business overseas for us here, for things.

I think the way in which I try to look at SG&A is take it as a percent of sales, Jeff, and that's the best way.

And so we continue to drive it down.

We drove it down this quarter.

So, as we go and reload, my whole goal is to get it, right now, below 10%.

Are there any nonrecurring charges that you'll take next year?

And if so, what's the magnitude?

There are not any large charges for things.

We do have some costs on the restructuring side which are really accruals, which we'll be making on plant closures by accelerating the depreciation and accruing the cost of the people for that.

It's not a huge impact for us, as far as that's going forward.

Mike Harrison, First Analysis.

In the Tonnage business, you were showing a year-over-year decline in volume as of the August sales update that you guys provided, and now you are showing a 4% year-over-year increase for the quarter.

I was wondering if you can walk through how much of that improvement in the month of September was related to prior-year weakness.

And obviously, you also had some hurricane impact in there.

And then how much maybe was related to new projects that came onstream during September and how much was related to other underlying economic improvement?

Mike, the big factor there was on the hurricane there in September.

I had an easy comp in that period, for us.

If we take the hurricane out, we were about even, as far as the volumes overall.

And in terms of the longer-term outlook on the Tonnage business, one of your competitors at one point voiced some concerns about commodity weakness and maybe some overcapacity in areas like metals, chemicals and refining and talked about that potentially being a drag on longer-term growth in tonnage projects.

Since then, they have suggested that on their end, those concerns may have waned a little bit.

And I was wondering, to the extent that your Tonnage business is dependent on growth in those markets.

Well, I think the factor which you need to consider is the way the industrial and gases are used.

They save energy in the processes of making these commodities, they improve the environmental performance.

So I think that's the driver which a lot of people have missed on that thing.

So yes, there are going to be some changes, and maybe commodities don't grow as quick.

But there is always those -- but those things are the things which we want to do.

I was also wondering if you could comment on the minority interest line this quarter being zero.

That seems unusual for you guys.

Yes, it was.

We had a couple -- if you take a look at the ventures and some of the ventures, the profits were -- and were not as good, and these are things which are consolidated.

So some of the things are there.

The other factors -- we had a few adjustments in things like -- in some of the ventures there.

But it normally goes between $3 million to $5 million a quarter.

And that's a good run rate going forward?

Yes, that's a good run rate.

David Manthey, Robert W.

Baird.

Wondering, in terms of the revenues sequentially, it looked like they were up about 8%, driven entirely by volume, for the most part, with a contribution margin that was approximately 20%, versus -- I think you've given guidance or at least a goal of sort of 30% to 40% as your volumes ramp up.

Could you talk a little about if there was mix impacting that contribution (technical difficulty)?

Sure I can, yes.

And if I look at the contribution margin for the fourth quarter as we look at this, if I looked at it on a volume basis, I had a contribution margin which was in the mid-30%.

I did see some other things, though, offsetting that and holding down which lowered those things, such as pricing in the Electronics/specialty materials area.

If you look at the -- on the Tonnage area, the bonuses I received in the fourth quarter were not as large as the bonuses I received in quarter three.

So those things cut back on my contribution margins, plus I had a few issues on cost in the Merchant Gas area which held down margins in that area so that, overall, the gains were not as large overall as what you would typically see.

But I think a lot of those cost issues are one-time, when we look at it.

And the issue on bonuses are up and down.

Mark Gulley, Soleil Securities.

I hesitate to pretend I'm an economist, but I can't resist.

If I take a look at those very useful slides on page 3, only a 1% gain in industrial activity next year would be up to 100 or thereabouts, and clearly we saw much better growth historically, running into the '08 bubble.

So is it possible maybe you guys are being a little bit too conservative on the bounce-back from the very depressed levels in '09?

You know, Mark -- and what I hope is, I hope I'm right.

No; actually, I hope you're right on that.

I'm going to be prudent at this point in time, I think, on that, and I don't want to go out and say, well, I think the economy is going to be real, real strong for that because I have the capacity to serve all this.

It doesn't serve the purpose of the Company to put plans in place for a stronger bounce-back at this point in time.

Secondly, you were talking about Tonnage trends before, overall, and you talked about ex-hydrogen.

If you take a look at steel and chemicals, what kind of reductions in Tonnage volumes did you see there when you exclude hydrogen?

You're talking year-over-year?

Year-over-year, principally, in your Tonnage business.

10% or so.

Okay, makes sense.

Finally, talking about the streamlining restructuring that has begun some years ago, I would have thought that maybe you would be done by now with electronics, but it sounds like some of the restructuring activities continue to leak into fiscal '10.

What's holding back your ability to get that behind us so we can get these restructuring charges behind us as well?

Well, as you know, we have a large electronic business.

It catches a lot of -- we have a lot of facilities and stuff like that.

We're making a lot of changes in that business, and those involve the products which go to the customers.

So it takes us some time to make sure the quals get all in for the customers.

We don't want to leave our customers hanging out on that, and that's the thing which relayed -- and paces the changes here.

P.J.

Juvekar, Citi.

Given the solid recovery in Electronics, based on your chart on page 3 here, or slide 3, I was surprised to see that your Electronics revenues were up only 3% sequentially.

Is there a lag?

Can you talk about that?

What you don't have is you don't have quarter four on there yet, as far as that.

We did talk about the special materials sales, which are up 14% quarter to quarter, which is the big thing which is going to vary with production, P.J.

And then the thing which was down from quarter three to quarter four was the equipment sales.

They continue to go down.

When you look at your NF3, WF6 and other specialty products, how much were the sales up in the quarter sequentially?

14%.

From quarter three to quarter four, they were up 14%.

And so when you say you're Electronics volumes or sales were up 3%, what are you talking about there?

(multiple speakers) LOX/LIN?

No, no, no.

What I'm talking about are the specialty materials sales, which are about 60% of the business; and the Tonnage Gases area, which is about a quarter of the business.

And the other 15% of the business is the equipment, and so you have to blend them all together.

The Tonnage was about flat.

And then, sequentially, organic sales were up about 7% for the entire company, and operating income was also up 7%.

So we didn't see much operating leverage going from 2Q to 3Q -- and sorry, 3Q to 4Q, in your case.

Right, and that was the comment which I gave before on that, is that we did see the operating leverage.

We had some things which offset that as far as things were concerned.

I saw the operating leverage which I was expecting to see.

It was offset by some unfavorable cost things in the Merchant Gases area, which we hope will reverse and not recur.

About two thirds of them, we think, are one-time.

And then we had some -- in the Tonnage Gases area, we saw a drop on the bonuses.

And those are lumpy, anyway.

Given that your CapEx is going up in 2010, what are your expectations for free cash flow next year?

My CapEx is about flat to slightly down, is what I'm predicting there.

$1.3 billion to $1.5 billion compared to $1.5 billion.

You have to go to our non-GAAP measure on that because of the capital lease treatment, which some of our on-sites get.

And the free cash flow should improve in 2010.

Edward Yang, Oppenheimer.

Just to clarify, the 2010 EPS guidance -- does that include some of the restructuring costs you mentioned?

(multiple speakers)

Yes, it does.

Yes, it does.

And lastly, when I look at your Merchant Gases business, European volumes were down 9% year over year this quarter.

And in the third quarter they were down 8%, so it looked like the European volumes actually got worse.

And I wanted to understand that better.

Most of that, Ed -- this is Nelson -- is really tied to the summer slowdown in August.

The trends were actually probably good through the quarter, and so nothing really unusual happened beyond the typical August shutdowns.

Wouldn't the year-over-year numbers strip out the seasonality, Nelson?

No.

Yes they would.

Yes, and that was the sequential comment.

Yet, year-over-year it looked like -- well, it was down 9% versus 8% last quarter.

Was that just a matter of comparisons?

Yes.

I don't think there's -- there wasn't anything unusual going on there.

Part of that might be health care volumes that were a bit higher, but nothing unusual from a trend standpoint.

Laurence Alexander, Jefferies.

Two quick questions; one is on the Tonnage, the $0.35 from Tonnage in 2010.

If you look at the timing of when those contracts come onstream, what's the contribution in 2011?

Is it really more around $0.50?

No, it's not.

And if we take a look at this, it's over all of the segments on those.

So you'd also include some things which came on stream in 2009.

So there is a full year impact of that stuff also in there.

And the thing which we are looking at is we are going to see an improvement in 2010, right now, which is probably, which is -- excuse me, an improvement in 2011, right now, from these, which probably goes somewhere in the $0.25 to $0.35 range.

Okay, perfect.

And on pension, what was your funding status at the end of the year?

And, what is your long-term strategy for fixing that?

Well -- and the strategy here is obviously, is we are going to have to make some contributions.

We've already made a contribution of $200 million -- and to the plans in October to go at that.

Our funding status -- it depends upon the way in which we look at this because, if you take the accounting definition, we believe that that always overstates that as we look at that.

And so the PDO right now is about $500 million of a liability for us, a net liability.

Okay.

Finally, you made a comment about how the holiday shutdowns weren't going to be as severe this year.

Are there particular end markets where you are seeing that, or is that just an across-the-board comment?

That is a judgment on our part that people are being prudent in the production of their goods and services right now.

So we think that goes across everybody, and it's our judgment of how this plays out going forward.

That does conclude the question and answer session.

I'd like to turn the call back over to Mr.

Squires for closing remarks.

Thanks, Carrie.

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, ladies and gentlemen, that does conclude today's conference.

We thank you for your participation.