Air Products and Chemicals Inc (APD) 2010 Q1 法說會逐字稿

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

(Operator Instructions).

This telephone conference presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved.

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No other recording or redistribution of this telephone conference by any other party is permitted without the express written permission of Air Products.

Your participation indicates your agreement.

Beginning today's call is Mr.

Nelson Squires, Director of Investor Relations.

Mr.

Squires, please go ahead.

Thank you.

Good morning and welcome to Air Products first-quarter earnings teleconference.

This is Nelson Squires.

Today our CFO Paul Huck and I will review our fiscal Q1 results and provide some thoughts about next quarter.

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 the day's earnings release.

Now I will turn the call over to Paul.

Thanks, Nelson.

As we conveyed to you in our press release this morning, our fiscal year is off to a good start.

Please turn to slide number three.

For the quarter sales decreased 1% versus prior year.

This decline was primarily the result of significantly lower natural gas prices, which reduced our contractual pass through of energy-related costs lowering sales by 7%.

Partially offsetting this was favorable currency translation with the weaker dollar increasing sales by 4%.

Underlying sales increased 2% year on year due to higher volumes in our Tonnage and Electronics and Performance Materials segments.

Volume performance in our Merchant segment was mixed with year-over-year gains in Asia being offset by slower economic recoveries in both the US and Europe.

Sequentially sales increased 2% on higher cost pass-through.

Underlying sales were down 1% on seasonality and lower equipment and energy sales.

Operating income of $345 million increased 20% from prior year, primarily due to higher volumes, productivity and favorable currency.

And our operating margin of 15.9% improved by 280 basis points versus last year due to higher volumes and productivity.

This significant improvement in margin in light of the modest underlying gains in sales represents the hard work that our team has done in all aspects of our costs.

We are delivering improved efficiencies and energy utilization, operating and maintenance costs and our selling and G&A costs.

These are substantial savings that we can sustain and will continue to improve upon as volumes recover.

For the quarter net income increased 22%, and diluted earnings per share increased by 20% each versus prior year.

Return on capital employed improved sequentially.

On an instantaneous basis, we have improved ROCE to 11.7%.

Before I move on, just a couple of brief comments on some other items in our financial statements.

Other income on our consolidated P&L was $8 million higher compared to last year, primarily due to large foreign exchange losses last year.

And on the cash flow statement, our operating cash flow was impacted by $256 million in cash contributions to our pension plans.

This shows up as a use of cash in payables and accrued liabilities this quarter and is a timing issue, which should even out through the rest of the fiscal year.

For the entire year, we still anticipate making cash contributions of approximately $360 million.

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

Our adjusted continuing operations earnings per share increased by $0.19.

Higher volumes in Tonnage and Electronics and Performance Materials helped to increase earnings-per-share by $0.12 year on year.

Pricing and energy and raw materials together were unfavorable subtracting $0.05.

Costs were $0.06 favorable, reflecting our cost improvement efforts.

The favorable impact to operating income from currency translation and foreign exchange was $.07.

Equity affiliate income was up $0.01.

Interest expense declined on lower rates adding $0.02, a slightly higher tax rate this year cost us a $0.01, and higher shares outstanding subtracted about $0.03.

All-in-all 20% earnings growth this quarter is a solid start to our new fiscal year despite a slow economic recovery.

We are delivering the improvements we told you about from our new investments and our cost reduction efforts.

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

Nelson?

Thanks, Paul.

Please turn to slide five, Merchant Gases.

Merchant Gases posted sales of $934 million, up 1% versus prior year.

Underlying sales declined 5% with volumes down 5% and pricing flat.

Currency increased sales by 6%.

Versus prior quarter, sales were flat.

Merchant Gases' operating income of $190 million was up 11% versus prior year and up 14% sequentially.

Segment operating margin of 20.3% was up 190 basis points versus prior year and 250 basis points sequentially, reflecting strong cost performance.

We saw the benefits of our global cost actions from our workforce reduction, distribution efficiency and reduced plant operating costs, which in total more than offset the decline in volume and grew margins.

Loadings were flat in North America and Europe versus prior quarter and continued to improve in Asia.

Signings were off to a good start in all regions.

Let me now provide a few additional comments by region.

Please turn to slide six.

In North America sales fell 11% versus prior year.

Sales in the first two months of the prior year quarter were relatively strong, and this yielded a tougher comparison this year.

Volumes were down 9% versus prior year with pricing down 2%.

Pricing was impacted by lower surcharge activity and lower liquid hydrogen pricing as a result of lower natural gas costs.

In Europe sales increased 6% versus prior year.

Underlying sales declined 3% with volumes down 4% and pricing adding 1%.

Currency increased sales by 9%.

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

In Asia merchant sales were up 13% versus last year.

Underlying sales increased 8% with volumes up 11% and pricing down 3%.

Currency increased sales by 5%.

Volumes continue to improve across Asia, driven by steel and electronics customers.

China volumes in particular were up 30% versus prior year.

The price decline in Asia is principally in argon where last year's prices were higher due to tight supply.

Please turn to slide seven, Tonnage Gases.

Sales of $698 million decreased 6% compared to last year.

Volumes were up 11%.

Energy and raw materials pass-through decreased sales by 21%, and currency increased sales by 4%.

The higher volumes reflect the continuing improvement in steel and chemical end markets, as well as new plant on-streams.

Sequentially sales were up 9%, mainly due to energy and raw material pass-through.

Operating income of $100 million was down 8% versus prior year and 5% sequentially, primarily due to higher maintenance spending and lower operating efficiencies.

Operating margin of 14.4% decreased versus prior year and sequentially also due to higher maintenance spending.

We announced new world-scale hydrogen plants for our pipeline networks in Louisiana and Rotterdam and also announced a major upgrade and expansion of our La Porte, Texas air separation facility during the quarter.

Please turn to slide eight, Electronic and Performance Materials.

Segment sales of $433 million were up 7% compared to last year.

Volumes increased 11%, pricing reduced sales by 6%, and currency was 2% higher.

Electronic sales were down 2% compared to last year and were flat sequentially.

Sales in the quarter were impacted by lower prices and lower services in equipment sales.

Electronic specialty material sales increased 8% versus prior year and 4% sequentially.

Tonnage sales were unchanged versus prior year.

Performance material sales increased 18% versus last year and were flat sequentially, reflecting stronger Asian sales and less seasonal decline than in previous years.

Segment operating income of $48 million was up 97% versus prior year, which resulted in significant improvement in margins.

Sequential margins were essentially flat, reflecting lower pricing and ongoing restructuring costs.

We now expect millions of square inches of silicon to grow 20% to 25% in our fiscal year and still expect the Electronics Equipment business to rebound in the second half.

Please turn to slide nine, Equipment and Energy.

Sales of $109 million decreased 9% versus last year.

Operating income of $8 million increased versus prior year due to lower energy development spending, which was partially offset by restructuring costs to close a European manufacturing facility.

We just announced last night a major order for three LNG heat exchangers in support of the Gorgon project in Australia.

Reflecting this order, our backlog in this segment improved to $327 million.

We continue to work on other projects and expect additional award activity this year.

Now I will turn the call back over to Paul.

Thanks, Nelson.

Now if you will turn to slide 10, I would like to share my thoughts on our outlook for next quarter.

Our guidance for quarter two is for earnings-per-share of $1.15 to $1.20 based on the following factors.

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

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

New plant on-streams, including a full quarter impact of our hydrogen plant to serve Marathon in Garyville, Louisiana should contribute to next quarter's results.

And in our Tonnage segment, we expect higher operating bonuses and lower maintenance costs.

Partially offsetting these sequential improvements, in Asia we expect some slowing around the lunar new year holidays.

This will slow down some of the gains we have experienced in Electronics and Performance Materials and our Asian Merchant Gases business.

In Equipment and Energy, we are forecasting higher development spending next quarter, and finally, we expect our tax rate will be closer to 26% in quarter two.

Please turn to slide number 11.

With one quarter under our belt in fiscal 2010, we are raising our earnings per share guidance for the year to $4.75 to $4.95, anticipating growth of 17% to 22% versus prior year.

We have tweaked the 2010 assumptions that we provided to you three months ago.

The changes are highlighted in red on slide number 11.

Overall we expect that global manufacturing will still grow about 1% to 2% in our fiscal 2010.

However, our regional forecast for Europe and Asia have changed slightly.

We believe growth in Europe will be slower as manufacturing is hampered by weak consumer spending and also a strong euro.

We believe these factors will yield around a 1% decline in Europe in our fiscal 2010.

Asia, on the other hand, is a bright spot, and we are now forecasting growth of 8% to 9% in our fiscal 2010.

Demand in the electronics market has been strong.

So we are increasing our estimate for silicon growth to 20% to 25% from 10% to 15%.

Our capital spending guidance remains unchanged, as well as most of our other assumptions.

We are increasing our guidance for fiscal 2010 because of our continued efforts and success in the area of productivity and margin improvement.

Despite the slow nature of the recovery, we remain optimistic about our prospects for growth in the future.

As we noted, 2010 should be a year of strong growth for us.

As we look beyond 2010, we are excited by the opportunities we have to grow, driven by alternative fuels, the focus on improving energy efficiency and the continued need for manufacturers to lower emissions and improve environmental performance.

Now let me wrap up.

We made solid progress towards our goal of improving operating margins and returns this quarter, and we remain committed to our goals while pursuing a large number of growth opportunities.

We believe that our goal to become a low-cost supplier versus our competitors will enable us to deliver greater growth and higher returns, resulting in significant increases in shareholder value.

While the global economy is still sorting itself out in 2010, we are excited about the opportunities and challenges we face.

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

(Operator Instructions).

Kevin McCarthy, Bank of America/Merrill Lynch.

In Merchant Gases your operating margin there was the best in nearly 10 years.

I was wondering if you could comment on the source of that upside.

It sounded like volumes were relatively mixed in the Western world and good in Asia.

So related to that I was wondering if you could comment as well on the relative profitability of your business in Asia relative to the US and Europe in Merchant.

Yes, Kevin, first to answer your question on the improvement in margins.

If you look overall, our volume performance as you commented on we were down in Europe and the US and up in Asia.

However, what was really key to our Merchant business in this quarter really has been the long journey which we have been on on costs here.

And we had very solid results year on year in costs and really quarter to quarter, which drove this volume improvement.

And these things are sustainable.

It is things like our variable costs, improving the power coming out of the power efficiency of our plant.

Improving the distribution efficiency of our plant.

Lowering our fixed costs in SG&A and operations overheads and stuff like that, and that is what drove it.

As far as the relative profitability of our Asian business, our Asian business has good profitability in it.

It is not low profitability.

Our merchant business overall is a very profitable and high return business for us.

Great.

And then as a follow-up with regard to North American pricing in Merchant, did argon way on the average of negative 2% there as it did in Asia or perhaps there were other factors at work?

This is Nelson.

Argon pricing was relatively flat year on year.

Where we did see the impact, as we said, was in the liquid hydrogen pricing.

With the change in the feedstock costs, which, of course, is the lower natural gas versus prior year.

The other thing is we did see some of the surcharge activity that we had come off.

However, with the pricing of a barrel of oil pushing back into the 70s, in the high 70s, we actually feel pretty comfortable that we will not see additional surcharge erosion for the rest of the year and, frankly, stand ready to add more surcharges if the pricing of our feedstock, i.e.

diesel, does go up going forward.

Mike Sison, KeyBanc.

Great start to the year.

I wanted to get a little bit more color on your outlook for silicon growth.

The last quarter just a couple of months ago 10% to 15%.

It has made a pretty good move here to 20% to 25%.

Is it more that the first quarter was that much better and maybe the outlook for the rest of the year is similar or the outlook for the rest of the year is actually that much better?

It is more of the former.

Certainly the first quarter saw pretty good sustained silicon growth, probably better than expected.

And certainly with some of the companies that are already out with their earnings and information regarding their performance, i.e.

Intel and some others, things look to be fairly strong.

Noting, of course, that we will see the seasonal dip because of the lunar new year this quarter.

But certainly all indicators are that recovery here is continuing.

Okay.

And then Paul, can you maybe give us an update on bidding activity, the major projects both Tonnage and Merchant globally?

Maybe any regions that you have seen some pickup that will fill the backlog longer-term?

Yes, as far as our backlog is concerned, Mike, our backlog remains in very good shape.

You can see our capital spending outlook remains the same for this year as far as things are concerned.

If I take a look at bid activity, the bid activity has stayed constant pretty much for things.

We had a few awards in this quarter, which was good news as we will be bringing plants on-stream in this year.

As we look at this, the bulk of the capital spending, which we have in this year which we are spending, it comes in the Tonnage Gases business for new plants for us.

And so we would anticipate that our backlog and workload should be solid throughout this year and going into next.

Jeff Zekauskas, JPMorgan.

So you have two restructurings in fiscal '09, and I think that in the first one there were supposed to be 300 people that would leave the Company in this quarter, which would complete that restructuring.

And then you had a second restructuring which I think was supposed to reduce the headcount by 1150, and that was supposed to be completed I think by the end of the third quarter of fiscal 2010.

That is correct, Jeff.

Okay.

So where are we with those two restructuring efforts?

Did the 300 people leave for the first one, and where are we now relative to the 1150 who were supposed to leave in 2010?

Yes, and we are on track, Jeff, as far as the number of people which have left for us.

We still have obviously some additional people who are going to be leaving.

A good portion of those people already know those things because we have announced the closures.

They go around facilities, etc., which we will be shutting down.

And so we are on track to deliver the stuff which we had.

We are on schedule there.

Right.

The problem is that I don't know what the schedule is.

So, in other words --

Yes.

Okay.

So, in other words, are we halfway through the 1150 or a quarter of the way?

We are about halfway through when you look at it.

We are about halfway through it and I'm sorry.

And you completed the 300 that were --?

And we have -- yes, as far as the original plan, the original plan has been completed.

And then lastly, can you discuss sort of the timing of the additional hydrogen capacity that you expect to come on this year?

Yes, the additional hydrogen capacity pretty much comes on in quarter three for us.

P.J.

Juvekar, Citi.

Given your silicon growth that you guided to, what are the operating rates in Electronics, particularly in NF3, and what is the status of your Asian NF3 plant?

It is Nelson.

I will take that one.

We are operating -- our operating rates are around 80% at this point, and we are actually in the process of restarting the first train in our Ulsan NF3 plant.

We will have that up this current quarter.

So demand continues to rise there.

Okay.

And then my second question is on refining.

With refining margins down, light heavy spreads that have come down as well, how are your refining hydrogen volumes holding up?

And those volumes are holding up well.

We are seeing the volumes which we would expect.

Our customers are taking, they are not cutting back, and this gets all back on the economics of refining is that the people who use hydrogen have better spreads on their products.

It is the people who get pressed on their spreads -- on their crack spreads are the refiners who do not use the hydrogen.

(Operator Instructions).

Dave Begleiter, Deutsche Bank.

Paul, can you comment on the return profile of the two new hydrogen contracts you signed in Rotterdam over the course of the quarter?

Yes, they are very good returns for us.

Our plants have very good efficiencies.

We are on a pipeline system there, so you would expect it to be something which will improve the returns of our business.

And when I look at your overall backlog of large projects, what's the average IRR return of all those projects?

I don't give the exact number because they actually do vary on things depending upon the risk profile in the country in which we are in.

But if you look at it from a -- it is somewhere in the low to mid teens.

And lastly, was the Merchant price increase in October first for Merchant in North America fully successful?

We did have good success with that.

As you might imagine, it was a tougher increase to implement.

But the drivers that pushed us to do it such as increased power prices in various parts of the country really helped to get it through.

And so I think we would term it a success at this point.

And was it in the numbers for this quarter or it will be more in Q2?

It is in the numbers.

I would say we probably get a fuller effect in Q2.

Mike Harrison, First Analysis.

The tonnage side of the business, I was wondering if you could break out how much of the 11% year-over-year volume increase was due to new plants that started up during the quarter and maybe what kind of volume change you might have seen at your existing plants year over year?

Yes, if you take a look at that, as far as new plants starting up within the quarter, when you look at year over year, it is also new plants which started up within this fiscal year.

Excuse me, in 2009 also for us, which had not been started up in the thing.

And the bulk of the increase when you look at this really is due to new plants.

So is it fair to say that volume of the plants that existed a year ago, was that volume at least positive year over year?

Yes, it was.

We have seen steel operating rates come up, so that is in there.

Alright.

And then in the Electronic and Performance Materials segment, I was just wondering if you could give some comments on which product lines are seeing the most pricing pressure right now and any thoughts on when pricing might start to improve?

One comment I would point out is that, as you know, that is a segment that has two businesses in it.

And on the Performance Materials side, we did see lower raw material costs year on year, which did have some impact on pricing.

And so while pricing may have gone down, margins actually stayed constant or even improved year on year because of the loadings.

In the Electronics side, it is the traditional high-volume products where we have seen the pricing pressure.

That pricing pressure has begun to abate.

The loadings have recovered, and our expectations are that we should see continued abatement of the pricing pressure in this quarter as the loadings continue to pick up.

But it is in the key products -- the large volume products -- where capacity was pretty strong before the fall-off, and frankly, customers have taken advantage of that position.

But we do expect things again to improve there as loading tightens up.

Mark Gulley, Soleil Securities.

Talking about return on capital employed, I know you have -- in terms of how you measure the metric, can you give us both the way you measure it, the five quarter average and then, Paul, you did supply us with the instantaneous number as well.

So what about switching to an instantaneous approach and taking out that five quarter moving average?

We actually take -- we actually did take a look at both, and we would be glad to supply you with both.

That is not a problem for us.

Okay.

Secondly, with respect to pricing in Merchant, we are going to talk about this a little bit more if we can.

If you take out the impact of surcharges, can you estimate what the underlying price change would have been?

(multiple speakers) -- if the surcharge is a pass-through?

The surcharge is pass-through.

Obviously the surcharge gets put in place after we incur the problem and have to go out and remedy it.

And so they do stay on longer, say, than the problem stays with us, if you will.

So it is a lagging recovery.

The surcharge -- our pricing was probably positive net of the surcharge impact ex the liquid hydrogen impact.

It is more of a LOX/LIN comment.

The liquid hydrogen because of its high value definitely has a dampening effect on the whole business.

But there is a gas pass-through which goes through on that.

I mean, so if you look at -- if you take a look at it overall on the business, on the segment there, the margins were very good, but volumes held up okay.

Pricing held up well for us overall.

And when you -- and that is the net of the cost aspect, the cost inflation which we saw.

And then when you look at what drove that, it was really cost drove a lot of the improvement there.

But solid fundamentals on pricing and recovery of the variable costs in there.

(Operator Instructions).

John McNulty, Credit Suisse.

Just two quick ones.

With regard to Electronics, I was a little surprised to see that sequentially your sales were basically flat despite the semi industry actually picking up.

So can you give us some color as to what might have been happening there on a sequential basis?

Yes, what happens is we continue to see a drop in the equipment business.

So underlying there, we did see the Specialty Materials sales pick up there sequentially.

But the equipment business is going to be, you know, and what we said is that we think that quarter two here is the low for the equipment business, and we will start to see sales starting to pick up in quarter three, quarter four and on as we start to see some capital spending come back to the industry.

But that is what drove the sequential sales.

Okay.

Great.

And then on the Merchant side, you had talked about Merchant signing is off to a good start.

Can you give us a little more color as to what you are seeing in terms of new signings?

So we are seeing good activity across the board.

We are either on pace or ahead of pace after a quarter in all three major regions, and it is really coming from a variety of end markets.

We are starting to see continued signs of life in North America and Europe in terms of new signings.

Asia probably off to a strong -- to the strongest start, which is not too surprising based on the strength of the recovery over there.

A lot of the signings are in some of the key areas that we have focused on from an application standpoint.

So areas around combustion and food and some other products.

So we continue to see pretty good demand there.

So I think the good news there it is a broad-based recovery or strength in terms of new business.

Okay.

Great and just one last thing.

On the Tonnage side, you had said there were some incremental maintenance costs that hit you a little bit on the earnings side.

Can you quantify what that was and how much of it disappears looking forward if the maintenance schedule remains relatively heavy for a while?

Yes.

And so if you take a look at the maintenance, our heavy quarters on maintenance in the Tonnage business are normally quarters one and two.

We tend to have more done rather than during the spring and the summer there.

So we will see a positive impact of a few cents, a couple of cents or so going into quarter two for us on the maintenance front.

Don Carson, UBS.

I wanted to follow up on Electronics, a couple of things.

I know you have had some restructuring costs there.

Just what were the in the quarter, and will there be further ones in Q2?

And then secondly, as you look to your loadings in electronics with this new revised silicon outlook, do you expect loadings to turn -- volume growth to turn positive in Q2 and how we see volume growth for the balance of the year in Electronics?

Yes, Don, if you take a look at the restructuring costs, the restructuring costs in Electronics were probably $0.01 or a little bit more than that, and we will continue to see those costs through Q2.

They will wind down in quarter three as we complete the actions there for us.

As far as the volumes are concerned, what we would expect is that quarter two is going to be kind of a flattish type of volume quarter for us compared to -- on a sequential basis.

We will certainly see very good year-over-year gains in Electronics and because quarter two also was the bottom in last year for us.

So your revised silicon outlook, that is really second-half strength that you are calling for?

That is why you went from (multiple speakers) 20%?

Well, a lot of the gains -- I think is it the second half -- I think a lot of the gains which you are going to see in silicon occur really in quarter two here because that was the drop-off point and the low point for the whole year.

So you're going to see production on that area be the highest on a year-over-year gain.

And after that quarter three and quarter four, which did pick up in the last year, we would expect also to pick up and be higher on a year-on-year basis.

I don't think you are going to see 20% gains in quarter three and quarter four year over your.

I think your gains are going to be small.

Your bigger gains are against quarter one and against quarter two, quarter two especially.

And then on the Performance Materials side of that segment, you had some very strong volume gains.

What do margins look like relative to the segment average there with both of those volume gains in the new Chinese facility?

Yes, the margins between the Electronics and the Performance Materials are about the same roughly when you look at the individual -- at the two areas, and we have seen very good improvement there obviously.

We don't have as much fixed costs.

So the leverage as we bring volume is not as high as it is in Electronics for us.

But the new Chinese facility has enabled us to take our costs down further.

So we are seeing good productivity in that area also for us.

The strong volumes were actually a very good sign for us because we did not see the same dip on a seasonal basis in that business, which I think is a good sign that we could be in for a strong growth year in that area.

Laurence Alexander, Jefferies.

The first question on Tonnage, can you flesh out a little bit the way the backlog is developing by end markets and particularly in response to higher energy costs?

Sure.

I mean if you take a look at the backlog, the backlog on the Tonnage business really tends to be -- continues to be in two areas.

Hydrogen for refining is a big area for us and continues to be a big area as you can see from our announcements here, and we still have a lot of capital, which is going into gasification projects in China.

Those gasification projects, in order to produce syngas to further on and produce other products down the road on the petrochemical side.

We are starting to see the steel market and some interest pickup in the steel market in certain things.

You can see we got an order in Xingtai Steel in this quarter, which is good news for that.

So the operating rates in Asian steel are starting to raise up, and so there's opportunities which are coming there.

So that is probably the one piece of good news -- it's not -- it is good news, but it is a change per se, it is good news, but it is a change here, is we were starting to see some activities in steel start to pick up also now.

And then just a question on productivity.

Over the last few years, you have moved away from the geographic model to a global model for addressing each of the end markets.

Have you seen the productivity savings that you expected, and what is the next leg on the productivity side?

The answer to that is, yes, we have.

As you can see from things like our SG&A, we have continued to drive that down in light of significant reductions in sales volumes for us.

So we are on track on delivering all those things.

The SAP system has obviously enabled that.

Shared service moves have obviously enabled that.

I think the next area in which we are focusing a lot is on the variable cost area of improving the energy efficiency of our plants, improving the distribution efficiencies which we see out there.

We have had very good progress on that in this quarter, and you can see that on the Merchant Gases business this quarter.

Sergey Vasnetsov, Barclays Capital.

I have a question page eight, which shows the prices have declined by 6% in the Electronics and Performance Materials segment.

Given that those are really too quite different markets in terms of the energy sensitivity, could you please help us to break down between the two trends?

That was that -- you are talking on the Electronics and Performance Materials area?

The 6% price decline is what you are referring to there?

Yes.

The price decline it was slightly higher in Electronics and slightly lower in the Performance Materials area.

The Performance Materials area was a [backhaul] really on a lot of the raw material costs also there.

So you got to be careful with price on some of that because of some of that stuff is looking for us to continue to pass through.

And year over year, as Nelson said, we saw a lot of pressure in price on the Electronics/Specialty Materials area.

As volumes dropped a lot, that brought prices down sequentially.

The prices were pretty close to flat in that area.

Would you expect prices in both Electronics and Performance Materials to be up this year?

I would expect the pressures to not be as great in this -- in both areas this year because of improving volumes there.

David Manthey, Robert Baird.

When you look at the P&L, there is this $11.4 million other income net line, and it looks like about $0.5 million of that is exchange losses.

Could you tell us what else is in that line?

Sure.

Yes, if you take a look at our other income line, I will just give you brief highlights of what sort of things go into other income for us.

We start out -- and normally other income it should be a positive number for us.

It includes interest income, royalty income, insurance recoveries if we have some, asset sales.

So those last two tend to be one time.

We also put the -- which is -- so all those things tend to be a positive for us.

On the negative side, we have to the amortization of intangibles for us goes in there.

And then the last one, which goes in there, is the foreign exchange, and that can be either a gain or a loss.

And last year we had a large loss there.

And that is unusual.

We usually do not have that.

If you look at other income, usually it tends to be somewhere around $7 million to $10 million positive per quarter for those things for us.

So in this quarter we are pretty much in line, and last year was the unusual quarter.

Okay.

Thank you and then as --

And foreign exchange was the bulk -- was the difference there.

Okay.

And then looking at your -- how you are recognizing noncontrolling interests, could you tell us how that impacted revenues and EBIT during the current quarter?

And as we look at that noncontrolling piece that you're kicking out after net income, how much will that vary over time?

Is that going to flex by a factor of 2 or 3, or is it going to be up or down by $1 million or $2 million?

That is actually -- it is just a change in the position on the income statement.

It used to be called minority interest.

Everything above taxes did not change because of that.

It stayed the same for that.

It is just the way in which it is put out there.

It was something which all companies went to pretty much in fiscal 2009 because it was effective for fiscal years starting after 15 December, 2008.

Our fiscal year started early, so we adopted this late.

So it does not really change anything.

It just changes the bottom end of the statement on the presentation.

(Operator Instructions).

Bob Koort, Goldman Sachs.

Two quick questions.

Can you talk a little bit about the equity affiliates?

Is that pretty uniform consistent performance across those, or are there some areas where you have seen strength and other areas where it has been a little bit weaker?

As far as the areas and the large affiliates which we have, the two large ones are Italy and Mexico.

And so their economies pretty much reflect their region.

So their results pretty much reflect their regions.

So if you look at Italy, that is having a tougher time because of Europe.

Mexico is more tied to the US there, so it is starting to see some recovery come back here.

And then our affiliates in Asia, which are India and Thailand, and they are obviously getting better and seeing the boom in Asia, which we are seeing or the strong recovery.

I would not call it a boom yet.

Okay.

And then on Merchant Gases, I guess I'm trying to come up with some sort of algorithm that makes sense.

But it looks like pricing and volume don't have any correlation looking at the regional data you provide.

Can you just talk a little bit about what is going on with pricing in the regions?

And then if prices remained flat today on all new contracts, how long would it take before you would roll off any negative influence of the last 18 months in terms of pricing?

Nelson, do you want to take that?

Yes, let me start there.

Part of this is it is a combination of the product mix and it is a combination of the sizes of the various businesses that get us to the answer.

If you look at some of the key products, if I start in North America, the main impactor was hydrogen as we said earlier.

All the other products were probably flat to slightly up.

In Europe we saw more stronger improvements.

We have seen more significant energy increases over there.

We have gone out more aggressively, and we have seen pretty much stronger pricing across the board, which is yielding the improvement.

Realize, of course, in Europe we also have a package gas business, and we have been very busy at price actions in the package gas business for the last couple of quarters.

And that is showing some impact.

In Asia we have seen basically pressure from two sources.

One, the argon, as I mentioned before, but then also, and this is partly the same answer, a fair amount of new capacity has come on stream in Asia in the last several months.

These were projects that have been in execution for a number of years and just coming on stream.

And that coupled with lower demand certainly has some pricing challenges out there, but all within what we have expected so far this year, Bob.

Nothing really unusual there.

In terms of the cycle of this, we would expect that the surcharges that we have in place probably remain pretty steady for the next couple of quarters.

It is hard to predict where diesel is going to be, but we have largely converted any energy-based surcharges into permanent price at this point.

And so we continue to do that with some of the older surcharges for diesel fuel.

With regards to quality of new signings, we have actually seen that stabilize because demand has begun to pick up.

And one of the issues that we saw in the year ago quarters, there were not too many deals going down because everyone was sort of holding their decision-making to see where the economy bottomed out.

And so there were some less than desirable deals out there.

We have seen that begin to reverse itself with quality of signings actually picking up.

And so, at the end of the day, we think the pricing impact there as that comes on stream will be net positive, although it is such a small fraction of the entire enterprise it will be hard to see it.

Yes, Bob, I think an important thing to remember is that if you just look at pricing and you don't look at the underlying things which are happening on the variable costs, you missed half of the story with those things.

Because on power costs and diesel costs and stuff like that, we are going to push our prices up if we see those things, and our contracts allow us to do that.

And so you could see pricing happen.

Consequently also, as they come down, we are going to see prices come down, and that is kind of the stuff what you're seeing here in the US and Europe for us.

Richard Ong, Eagle Capital Management.

Going back to Tonnage Gases, if you look at last year's existing plants, I would imagine that steel, chemicals were probably shut down for the most part.

So why would maintenance costs be higher this quarter versus last year's quarter when you basically have more downtime where you could have done more maintenance?

And is the operating income decline mainly a function of the newer plants operating at essentially losses causing that, or is there something else going on in the operating income line?

Alright.

Okay.

First, Richard, the thing which steel and chemical plants are not the major source of our sales and profits for us.

If you have to look at us, when you look at us on the on-site area, we are two-thirds plus really in the hot hydrogen area.

And so the operating rates for both of -- for those plants was high throughout this time period.

So we did not see our customers shutting down.

So the maintenance which occurred really corresponded to our customers taking downtime on the hydrogen area, and that is what you're seeing in this quarter.

So that answers that question.

When you look at the operating income decline, we had good gains in volumes for those things.

So we had up positive impact in volumes on there.

Then we had a negative impact on the maintenance costs, and then on the operating efficiencies, which we talked about, the thing which we had is we have a guarantee on the power and the gas consumption at our plants for converting into hydrogen or oxygen or whatever product we are making.

We typically operate more efficiently than that, and we did this quarter.

It is just that the price of gas is lower this quarter than it was a year ago, and so those operating efficiencies which we get are not worth as much.

(Operator Instructions).

Mark Gulley, Soleil Securities.

As a follow-up, Paul, you've talked about how productivity has benefited mainly from SG&A thus far.

And now we are going to get more variable cost efficiency.

Can you talk about maybe the CapEx numbers that you will be putting into the Company that would support increased efficiency both on the Merchant side and the Tonnage side?

Yes, the CapEx numbers are -- and those are included in the guidance which we have out there.

They are not huge.

There is -- we had those type of things happening.

But it's not going to change the curve on the CapEx for us.

I guess my question --

It is under $100 million a year.

You could do that easily.

Now is that increasing -- I guess what I'm getting to, is that an increasing trend?

Are we going to see more and more maybe as the asset base ages?

Is it necessary to put more into efficiency going forward?

I don't think you are going to see a tremendous amount more going in there.

I think, as we look at this, a lot of it just comes on how you go out and run the plants, too.

A lot of it gets around the way in which we run our plants and also the distribution aspect is the other aspect of this.

So it is not only the variable cost of power and gas in the plants, but it is also the improvements which we make in driving the product we deliver around less.

And finally, you are beat by maybe $0.05 or so in terms of your first-quarter guidance.

You raised your guidance for the full year by only about $0.05.

That would suggest the other three quarters are going to be pretty much on plan.

Could there be an element of conservatism in that outlook?

What you can see is we still have a lot of concerns compared to a lot of other people around the economy, the manufacturing economy.

I mean a lot of people have given me comments about why are and why we think the manufacturing economy only grows as little as it does for us this year, and we are trying to be cautious in our approach there.

The other thing which you have got to realize is that I'm also comparing year on year on the fiscal year, and that is a little bad.

So if you look at this, we have the capacity, we have all the ability if the economy gets better to capture that upside at a very nice margin for us.

So I continue to be cautious and John continues to be cautious in our approach here to moving forward.

And so yes, it could be an upside for us if the economy does better.

That does conclude our question and answer session today.

Speakers, I will turn the conference back to you for any additional or closing remarks.

Thanks, Kim.

Please go to our website to access a replay of this call beginning at 2:00 PM today.

Thanks for joining us, and have a nice day.

And that does conclude our conference call today.

Thank you all for your participation.