Air Products and Chemicals Inc (APD) 2010 Q3 法說會逐字稿

Good morning and welcome to Air Products and Chemicals' third-quarter earnings release conference call.

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

Also this teleconference presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved.

Air Products will be recording this teleconference and may publish all or a portion of the teleconference.

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

Your participation indicates your agreement.

Beginning today's call is Mr.

Nelson Squires, Director of Investor Relations.

Mr.

Squires, you may begin.

Thank you, Lauren.

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

This is Nelson Squires.

Today, our CFO, Paul Huck, and I will review our fiscal Q3 results and outlook.

We issued our earnings release this morning and it is available on our website, along with the slides for this teleconference.

Please go to airproducts.com and click on the scrolling red banner to access the materials.

Instructions for accessing the replay of this call, beginning at 5 PM Eastern Time, are also available on the website.

Please turn to slides two and three.

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 these slides and at the end of today's earnings release.

Now I'll turn the call over to Paul.

Thanks, Nelson.

Please turn to slide four.

Once again, our quarterly results show the benefit of our restructuring actions and our focus on continuous improvement as we continue to drive margins and returns higher.

We are delivering operating leverage to the bottom line.

Sales were up 14% higher versus prior year.

Underlying sales increased 12% year on year, due to higher volumes in our Electronics and Performance Materials segment and our Tonnage and Merchant segments.

The Merchant segment growth continued to be driven by strength in Asia.

We are also seeing improvement in both our US and European liquid bulk businesses.

Sequentially, sales were flat.

Underlying sales were up 4% on volume growth across the same three business segments.

The 4% underlying volume growth was offset by currency and energy passed through impacts.

Operating income of $374 million increased 22% from prior year, due to higher volumes.

Operating income was up 3% sequentially on operating leverage across all segments.

Our operating margin improved to 16.6%, up 100 basis points versus prior year and 40 basis points versus prior quarter.

And we remain on track to deliver our 70% goal in fiscal 2011.

Looking forward, this margin improvement is sustainable and margins should continue to expand as volumes recover.

We still have operating leverage available, and we remain committed to driving sustainable cost reduction.

For the quarter, net income increased 23% and diluted earnings per share increased by 22%, each versus prior year.

Return on capital employed improved to 12%.

On an instantaneous or run rate basis, we've improved return on capital employed to 12.6%.

Turning to slide five 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 $0.23.

Higher volumes in Electronics and Performance Materials and Tonnage and Merchant helped to increase earnings per share by $0.36 year on year.

Pricing, energy and raw materials together were unfavorable, subtracting $0.09.

Costs were $0.01 unfavorable as higher year-over-year pension costs and the final electronics restructuring actions offset our productivity gains.

The unfavorable impact to operating income from currency translation and foreign exchange was $0.02.

Higher equity affiliate income, due to stronger volumes at a number of our joint ventures, was offset by higher non-controlling interest.

Interest expense was $0.01 higher, due to lower capitalized interest.

Our effective tax rate for the quarter of 25% was within our full-year guidance range and contributed $0.02 and higher shares outstanding subtracted about $0.02.

In summary, we generated excellent financial results again this quarter.

We are delivering on 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 six, Merchant Gases.

Merchant Gases posted sales of $915 million, up 4% versus prior year.

Underlying sales improved by 6%, with volumes up 7% and pricing down 1%.

Currency reduced sales by 2%.

Underlying sales were up versus prior year due to continued strong performance in Asia and improved volumes in North America and Europe.

Sequential sales benefited from an improving economy and seasonally higher volumes offset by a sharp decline in the euro.

Merchant Gases' operating income of $176 million was up 5% versus prior year and down 1% sequentially.

Segment operating margin of 19.3% was up 20 basis points versus prior year and flat sequentially.

Income and margins were higher than prior year with higher volumes, particularly in Asia, partially offset by the impact of currency and higher power costs.

New business signings through the first three quarters of fiscal 2010 are on track to meet our full-year targets in all regions, which represent significant improvement versus prior year.

Let me now provide a few additional comments by region.

Please turn to slide seven.

In North America, sales improved 4% versus prior year.

Volumes, led again by stronger liquid argon and liquid hydrogen sales, were up 6% versus prior year.

Pricing continued to be impacted by lower liquid hydrogen pricing as a result of pass-through of lower natural gas prices.

LOX/LIN loadings increased slightly and remained in the mid-70s.

In Europe, sales decreased 2% versus prior year.

Underlying sales improved 3%, with volumes increasing by 4% and pricing down 1%.

Currency decreased sales by 5%.

Our liquid bulk volumes improved sequentially which was expected.

As a result of this increased volume, our locks loan loading improved to the low 80s.

In Asia, merchant sales were up 27% versus last year.

Underlying sales increased 23% with volumes up 22% and pricing up 1%.

Currency increased sales by 4%.

Volumes continued to improve driven by steel, electronics, and bulk hydrogen with loadings reaching the high 80s.

This was the highest revenue quarter ever in Asia.

We delivered real price improvement, particularly in China, responding to higher power costs by raising prices on oxygen and nitrogen.

Sequentially, liquid argon pricing also improved.

Please turn to slide eight, Tonnage Gases.

Sales of $725 million increased 28% compared to last year.

Volumes were up 19% and Energy and Raw Material pass through increased sales by 9%.

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

Sequentially, sales were down 4% with volumes up 4% in energy, raw materials and currency reducing sales by 8%.

Volumes were helped by new plant onstreams and the ongoing recovery.

Operating income of $120 million was up 37% versus prior year and 12% sequentially, primarily due to higher volumes in new plant start-ups.

Operating margin of 16.5% increased versus prior year due to higher volumes.

Operating margins improved sequentially, due to new onstreams and lower maintenance spending.

Refinery hydrogen volumes, excluding new plant onstreams, were up slightly versus prior year.

As we told you earlier in the quarter, we announced an agreement to build a steam methane reformer to produce hydrogen for PetroChina in Sichuan province.

This represents the first major on-site for hydrogen at a state-owned refinery.

Also, as we announced yesterday, Air Products has been selected by Pushang Clean Energy Company in Shanxi Province to build, own and operate three air separation plants, producing over 8,200 tons per day of oxygen and 3,100 tons per day of nitrogen.

We will also produce liquid products for the merchant market in the region.

As you can see from these major awards, new project activity is proceeding well and we expect additional awards this year.

Please turn to slide nine, Electronics and Performance Materials.

Segment sales of $497 million were up 21%, compared to last year.

Volumes increased 21%, pricing reduced sales by 1%, and currency added 1%.

Each division continued to see sequential volume gains and we are now back to pre-recession levels in this business segment.

Electronic sales were up 18%, compared to last year, and 11% sequentially.

Electronic specialty materials sales increased 30% versus prior year and 9% sequentially.

Tonnage sales were 14% higher versus prior year.

Our equipment business is up 36% versus prior year, reflecting the expected pickup in orders in support of improving new fab CapEx.

Performance Materials sales increased 26% versus last year and 10% sequentially, reflecting stronger volumes across all regions.

Segment operating income of $62 million was up 60% versus prior year, which resulted in continued significant improvement in margins.

Sequential margins were flat, which was better than expected.

As we told you previously, Electronics incurred significant restructuring costs in the quarter as we completed our remaining business repositioning activities.

We were pleased to meet our goal of completing the restructuring in Q3.

While this did impact margins in the quarter, it was offset by higher-than-expected volumes.

We expect to get the full margin benefit of the restructuring starting in Q4.

We now expect millions of square inches of silicon to grow by more than 30% in our fiscal year.

New business activity is heating up again in Electronics.

Just yesterday, we announced two major orders from Samsung in Austin, Texas in support of their 300 mm fab expansion.

We will double the existing on-site production of high purity oxygen and nitrogen, as well as provide a significant amount of specialty gas and chemical delivery equipment for the expansion.

Please turn to slide 10, Equipment and Energy.

Sales of $116 million were down slightly and reflects slower air separation unit sales.

Operating income of $21 million increased versus prior year due to higher LNG activity and lower project costs.

Our backlog versus prior year is higher, due to the previously announced LNG orders.

Now I will turn the call back over to Paul.

Thanks, Nelson.

Now, if you'll please turn to slide 11, I would like to share our thoughts on our outlook.

Our guidance for quarter 4 is for earnings per share of $1.27 to $1.33, based upon 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.

This should result in higher sequential volumes in Merchant Gases and the Electronics and Performance Materials segments.

In Electronics and Performance Materials, we expect demand to continue to remain strong.

As Nelson mentioned, we finished our restructuring efforts in quarter 3, which will result in higher margins next quarter.

We are on track to meet our 2011 goal of 15% margin.

Looking at fiscal 2010, we are now forecasting earnings per share of $4.94 to $5, up 22% to 23% versus prior year.

We have raised the bottom end of our guidance range from $4.90 and maintained the top end, despite a less favorable currency outlook, relative to where we were a quarter ago.

At current rates, compared to last quarter's guidance, currency is about a $0.05 headwind for us over the second half of the fiscal year.

For the year, we are expecting our tax rate to be in the lower part of our previously announced range of 25% to 26%.

Overall, our 2010 economic assumptions haven't changed much.

Our fiscal 2010 capital spending guidance remains unchanged.

And, as we've been telling you, we still anticipate that our CapEx will grow 15% to 20% per year over the next few years.

As Nelson commented on earlier, our recent PCEC and Samsung project announcements are further evidence of the strength of our capital backlog.

Now let me give everyone a brief update on our Airgas offer.

Please turn to slide number 12.

As you know, we raised our offer for Airgas on July 8 by $3.50 to $63.50.

We remain convinced of the strong strategic rationale and sound investor logic that underpins this transaction.

As we have communicated before, this combination will create one of the world's leading integrated industrial gas companies.

We remain confident in our ability to produce the substantial cost savings we have identified, primarily relating to reductions in corporate overhead and public company costs, supply-chain efficiencies and better utilization of infrastructure.

Coupled with the enhanced growth opportunities we see, this deal creates significant value for our shareholders.

We believe that our offer represents excellent value to the Airgas shareholders, well above the $43.53 price Airgas shares closed at on February 4, the day before our initial offer.

Despite the highly attractive nature of our all cash offer and our repeated attempts to engage the Airgas Board in discussions, they have continually refused to engage with us.

As we have said previously, we have analyzed the regulatory issues thoroughly and we are having productive discussions with the Federal Trade Commission.

We are negotiating a consent decree which we expect to sign in the next few weeks that will be subject to approval by the Commission.

The fundamentals of the consent are in line with our expectations.

We are therefore focusing on the Airgas shareholders and asking them to send a strong message to the Airgas Board to bring this process to a conclusion.

If you are an Airgas shareholder, here is what we are asking you to do.

Tender your shares by the August 13 deadline.

Vote for our three highly qualified, independent directors, who we believe will better represent all shareholders' interests.

Vote for our three bylaw amendments which will ensure a fair and expedient process is conducted.

And lastly, let the current Airgas directors know that you support engaging with Air Products on our offer.

Now is the time for you to act.

We are as confident as ever in being able to obtain regulatory approval and remain as committed as ever to this transaction.

Our regulatory strategy and shareholder actions are designed to ensure that Airgas shareholders have the opportunity to send a clear and unambiguous message to their Board at the 2010 Annual Meeting which Airgas has disclosed in SEC filings will be held no later than September 17.

Now, let me wrap up.

We continue to make solid progress towards our goals of improving growth, margins, and return on capital and we remain focused on these goals.

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

You are seeing evidence of this in the results we delivered today and the project wins we announced this week.

We continue to pursue our many growth opportunities around the world and we believe we are well-positioned to win.

Also, we have significant operating leverage in our businesses.

This will increase earnings as the global economy recovers.

Finally, we have also made significant progress in our offer to acquire Airgas.

To be clear, the whole team at Air Products is excited and energized by the many opportunities we have, which we believe will deliver even greater shareholder value in the future.

Thank you.

And now, I'll turn the call over to Lauren to take your questions.

(Operator Instructions).

John McNulty with Credit Suisse.

Good morning.

Two quick questions for you.

The first is, in the past, you've given guidance with regard to your project backlog and what it would mean for earnings in the upcoming year.

Now that you have gotten a number of new contracts updated, can you give us an update as to what this may mean for next year?

Sure, John.

And one of the things which you should realize is that the projects which we are working on, those are going to come on in 2012, 2013.

However, we are in the planning stages as we look at this.

And so as we look at the full-year impact of this year's projects and the projects in which we will be bringing on in 2011 -- for 2011, it is probably around $0.30 a share or so in growth for us, 5% to 6% growth of EPS when you look at this is what it will add to us.

Okay.

Great.

That's helpful.

And then with regard to the electronics restructuring, can you remind us of what the cost of that restructuring was this quarter and how that should, I assume that -- it sounds like almost none of that remains in the fiscal fourth quarter.

Yes and the cost is there a couple of cents.

Okay.

Okay.

Great.

You know the important thing when you translate that out and you just put that on to the segment margins, it just takes the segment margins up 100 points or so.

100 basis points.

Okay.

Yes, that's what I was really looking for.

(Multiple Speakers).

Okay.

Thanks.

Kevin McCarthy with Banc of America Merrill Lynch.

Good morning, gentlemen.

I was wondering if you could update us on what you're seeing with regard to merchant pricing in Asia?

It looked like Asia was plus 1 versus slight declines in Europe and North America, whereas we typically hear of greater competitive intensity in Asia.

Is that starting to change?

Nelson, why don't you take that?

Yes, Kevin.

It is -- we have been working very hard at that and what we've been trying to do is implement some of the best practices that we are using around the world of when we see cost increases, such as power, etc., that we get right out there and move those in for the customer base.

And so some of the subsidies have relaxed in China.

And so, we have been very diligent and we are seeing, as I said in the prepared remarks, real price improvement in China.

Our overall picture in China looks pretty positive.

The electronics pricing is stabilized, which is a very positive development and so -- and I realize you ask a question about Merchant, but pricing in the region is pretty decent these days and on the right trend.

And then with regard to Electronics, you had a double-digit sequential volume increase.

It sounds like you are expecting ongoing increases to wrap up the year.

Can you maybe give us a little bit more color as to what you are seeing on equipment versus consumables, and where you are seeing the [strength]?

Yes, certainly the strength that we have seen the last couple of quarters and what we expect in the fourth quarter is going to be largely driven by the consumer products.

The -- certainly the iPhone, the iPAD, etc., we are seeing extreme demand for memory and that's doing -- our memory customer is doing quite well.

Certainly some of our flagship customers like Intel have also reported very strong results and strong guidance.

And we are the key supplier to these top tier customers such as Intel, Samsung, TSMC.

And so we are certainly going to see the benefit of that.

I should point out also that our top tier customers' utilization probably crossed 90% in the quarter, which is another good sign.

And we actually expect rates at our customers to pretty much hold up to maybe slightly increase in the fourth quarter.

Yes, a good point on this thing is -- on the Electronics is just remember is that going from our quarter 2 to quarter 3, there's normally -- it goes up on a seasonal basis as production normally picks up in that time.

Because Asia has the new year impact in quarter 2.

Most of this business exists in Asia today.

Okay.

Thank you very much.

Paul Mann with Morgan Stanley.

Thanks.

Just looking at your Merchant division.

I mean, in the first three quarters this year you're going to report operating margins of 19.5%.

And I think you are targeting 20% in that division.

You said that [pending] operating leverage to go.

Should we view that 20% margin target as an intermediate target?

And what is the longer-term margin target for that division?

And what operating leverage do you get, what sort of incremental margins do you get in that division?

Well, the first goal is to get it above 20% and maintain it above 20%.

And then we will look to keep raising those goals.

So we had a long-term margin improvement goal of getting to -- and 17% as a company.

In that for two key divisions, we set goals of 20% in Merchant and 15% in the Electronics and Performance Materials area.

As you can see we are well on track to achieving those goals for us.

And so if you get it to 21%, if you get it to 20%, your next goal is to get it to 21 and sustain it there and keep [walking it] up.

But we felt we had a major -- a large improvement program in which we are doing there.

We are always going to be looking as far as the businesses to increase margins, to reduce costs, deliver productivity and value to the bottom line.

And what was [something coming] from margins should we assume on the return of revenues at the flowback?

Yes.

In that business, I think you can pretty much assume and rental margin of about 35% or so.

Okay.

And then just thinking about your CapEx 2011, I'm assuming that given the recent contract wins you have had, CapEx is going to go up in 2011.

Is that a fair assumption?

Yes, it is.

As I said in the call, we expect our capital expenditures over the next few years to grow 15% to 20% per year.

Okay.

Thank you very much.

P.J.

Juvekar with Citi.

Good morning.

Recently, you won several projects in India and clean coal in China.

In places like India, your competitor was traditionally strong.

So to break into that market, what kind of IRR are you expecting on these new projects?

We are expecting the same sort of return which we get around the world.

You know, and this is obviously based upon the risk that we see, India is a riskier country than the United States.

And so our returns are higher in India.

But we will not cut -- but will not cut and compromise the returns on our projects to go out and win business.

Okay.

And then secondly, in Electronics, your volumes were up 18%.

What are your operating rates in key chemicals for you like NF3?

We are rapidly filling up capacity there.

We are probably around 90% in key products at this point in time.

On the NF3, P.J., one of the things which you realize is that we still have the, on the [Wilson] plant to bring all of those lines up.

So we do have the ability to expand -- to bring that up.

And then we will line that plant out and I'm sure we will be able to produce more over time, too.

And just to clarify it, Wilson is not running right now?

Yes, it is.

But we don't have all and all of the lines are not.

We still have capability to bring in more lines up.

And finally, you are not seeing any inventory builds in the Electronics chain there, by your customers or their customers?

We are not seeing that.

It is something that obviously is very important to us.

And as we've said to all of you many times before, typically when you read about that we already know about it because we are so far back in the supply chain.

But as we have looked at our key customer demand and have mapped it out, certainly for the next three to six months, we have a pretty good feel on things.

And we do not see any signs of an inventory overhang at this point.

Thank you.

Mike Harrison with First Analysis.

Good morning, gentlemen.

You guys noted a little bit of weakness in the European-packaged gases business.

Was wondering in what country is that weakness most pronounced?

And do you view that weakness as pretty typical lagging of packaged gases during the recovery?

Or is it cause for greater concern?

The answer on the lag question is that it fits with the economy and where they sit.

The investment activity in Europe is obviously very slow at this point in time.

So there is a drag on packaged gases in there.

So there is not a cause for concern here.

We are seeing a normal recovery type of activities at this point in time.

The countries in which we have been hurt the most have been the ones in the south -- Spain, Portugal, Italy, as examples.

Those are the ones which have the largest drags on them right now, because their economies have been hurt the most.

And what sort of metrics do you look at as leading indicators in that European packaged gases business?

And which direction are they pointing right now?

Yes, and if you look at it, it's -- the one thing which you look at is the manufacturing activity, is something which is starting to point up so that's good news.

The other measure is investment activity.

That is still pointing downward.

So not -- non residential construction is a good one for there.

There are some other ones as far as investment is concerned.

But that is trending down and so that is somewhat of a drag.

Got it.

And then a question on the liquid hydrogen front.

You mentioned that pricing was lower there due to natural gas pass-throughs.

But then we look at the Tonnage business and natural gas was a positive, year over year.

So is there a lag on the liquid site and should we see pricing pressure in liquid hydrogen subside in the next quarter?

Yes, there is a lag.

It is the way the contracts operate.

We basically recalibrate that portion of the price on typically a quarterly basis.

And so that has lagged.

It's -- and we would expect that to subside going forward as natural gas prices basically stabilize versus what we have seen over the year-on-year and fairly significant drop still.

All right.

And last question I had is on the guidance.

You have a $0.06 range in the guidance that's a little bit wider than the last couple of quarters.

Are you guys seeing additional uncertainty right now?

And can you maybe walk through some of the factors that could swing earnings towards the high end or the low end of your guidance range?

Yes and the thing -- the reason why I have a wider range is on the currency.

You know, for us, I mentioned that we had -- currency kind of drug (sic) us down about $0.02 against our guidance last quarter in here.

And so and it's a continuing drag.

So it is about $0.05 for the last half of the year for us.

So that volatility in currency is why I put a greater amount of movement up or down in that thing.

I just -- normally currency rates have not been fluctuating as much.

And so that -- and that's why.

I don't think there's any more volatility in the business.

We have a pretty good look on the economy going forward for us.

And we still feel that it is playing out as we expected, which is for just good steady slow growth here in the US, starting to turn in Europe in the second half which we're starting to see.

And Asia had a [be] coming out but it's not going to grow as strong year over year.

But it is still going to be the best growth in the world.

So we are still -- we think our economic assumptions are still fine if they don't cause any more concerns for us going forward.

Do you have a specific euro rate that you are assuming in your FX outlook?

Yes.

The rate which I have in this whole outlook is about and where the rate is today.

All right.

Thanks very much.

Mike Sison with KeyBanc.

Congratulations on a good quarter.

In terms of Electronics, it sounds like everything is running on full cylinders sort of across the board.

Any reason why we are not at that 15%?

Anything else you need to do to get there?

(multiple speakers) in terms of operating margins.

Yes, Mike, it's a great question.

And as Paul said during the call and in one of the questions, we are certainly poised to be right there.

Our margins would have been 100 basis points higher or so this quarter.

We expect equal or better performance in the fourth quarter.

It puts us very close.

There's still some loading that needs to occur.

We have the capability and capacity to achieve that, but what we expect to see in silicon growth for next year which is going to be moderate and this year it will be well over 30% in our fiscal year.

It will be lower than that next year.

We still expect that volume growth to get us over the 15% margin.

And Mike, and the return which these guys actually have done through the year is actually above our plan.

Obviously, this has been a very good year in Electronics for us and we are proud of what these people have achieved.

Right.

And then when I think about your Merchant business in Europe, it had a very good quarter.

And there has been a lot of concern, I guess, generally about Europe.

Any changes in your outlook or anything to that degree from -- in Europe, generally speaking?

When we provided our outlook for the fiscal year back in October, we basically thought that Europe would be down for the first half of our fiscal year and in our second half, up sequentially from our first.

So the comps are still tough, but we are seeing, as you can see in the numbers, the volume improvements largely in line with some improved manufacturing numbers that we are seeing in Europe.

Northern Europe is strongest, but Eastern Europe, Poland, the Czech Republic have come back pretty nicely.

Southern Europe is still a problem.

But we are not seeing anything different than that as we look at that economy.

We have always expected this to be a slow ride back.

We are not seeing any systemic or macro changes that would take us away from that opinion at this point.

Right.

And last question, Paul, when you think about fiscal '11 and you are tracking above 16% fairly -- I wouldn't disagree, you're pretty -- 17% seems pretty easy to get to for next year.

Thinking longer term, any thoughts on sort of the potential above that?

Certainly, Mike.

And we had 17% as a goal there.

We never would say we want to stop there.

We still think there is improvement for us in improved margins and returns [to] deliver more value to shareholders.

So we are trying to look at that as something which is -- which goes out.

So if you take a look at our plans going out, we obviously have plans to increase both margins and returns in the future.

Great.

Thank you.

David Begleiter with Deutsche Bank.

Good morning.

Paul, can you comment on merchant pricing trends in the US?

Yes, and Nelson's close to that.

So I will let him take that.

We really -- if you take away the impact of liquid hydrogen and look at pure price and then look at LIN/LOX or nitrogen oxygen, we are seeing positive pricing.

So pricing is -- has remained a pretty good story for us.

We have not seen any leakage from that standpoint.

It is a tough market to get price in, but the team is doing an excellent job of maintaining price and getting price where we are seeing cost increases in areas where powers are being deregulated or just general power increases.

We expect to be able to keep up with that going forward.

And Paul, just looking at the backlog again, what is the return profile of the entire backlog right now?

The return profile of the backlog is really unchanged.

You know, we are in the low to mid teens on a DCF basis when you look at that.

Fully costed for all corporate costs and everything else.

And lastly, just on the potential new projects coming on in the next few quarters, are they still pointed towards Asia and China?

Or are they more broadly speaking [electronics] US, etc.?

Well, it's -- and we are having success around the world.

And so we have projects which are coming in here in the US.

We have projects in Europe which we are waiting on and projects in Asia.

Now, admittedly, I will tell you this is that Asia is going to be the area of the greatest investment for us.

It's where most of the manufacturing expansion is happening, but we are not ignoring the US, Europe.

The Middle East remains an opportunity for us, which we continue to be -- to work on.

We have had a few orders there and we would expect to get some in the future.

Thank you very much.

Mark Gulley with Soleil Securities.

Good morning.

Couple of questions if I can.

First of all, with respect to that second project in China.

I wasn't clear if that was sales of equipment or sale of gas.

That is sale of gas.

That's the Pushang Clean Energy Corp.

is sale of gas.

It is actually the largest sale of gas quarter we have ever taken in the Company's history.

So we are pretty excited about that.

Okay.

Congratulations.

The other thing on that project is it is also a great success story for us and our engineering team and what we have done to really get a good plant solution.

As you know, in this business, having the right plant for the customer and the right plant solution, we think, in the gasification area that we have the right plant solution here for -- and for these plants in China.

So we would expect orders to follow on in this area, too.

Do you have piggyback liquifiers on both of those plants that you talked about for China?

Yes, as a matter fact, we will see those come on stream earlier than the full investment.

There is a great opportunity there.

We are a first mover in that region.

We will be the first major gas company in the region.

So, yes, we will be bringing merchant capacity in there.

Yes and that's on the plant for PPC.

EC, the PetroChina plant is a hydrogen plant market.

Good one.

I'm sorry, of course.

Yes.

And that's how you -- but that also goes with -- and we also announced a previous order for that same site on the oxygen side which we won earlier in this year.

And we will also have a liquifier on that.

Sticking with Merchant, if I may, it is the largest business by earnings but has the slowest growth right now.

So, Nelson, when do you think you might get back to normal growth rates in LOX/LIN globally and what might that level of growth be?

Well, certainly we are well ahead of trends in Asia with regards to growth.

We expect the North American numbers to improve a bit next year.

We think we are in a slow steady improvement there.

Europe, we -- as Paul said earlier, we think the manufacturing trend will continue to improve.

And so we think we will begin to see a more normal profile over the next, let's say four to six quarters in terms of what our growth rates look like.

Yes.

And Mark, to comment on that a little bit, I think the thing what you have to look at in the Merchant area is the underlying growth rate from quarter to quarter was 3% up.

So that's a good return to -- and do some more growth.

Europe has turned and Europe is a -- it's not small for us in this.

And so Europe has started to turn.

And the liquid bulk business is improving, Package Gas business is not yet improving.

It is going to be a few quarters before that starts to improve.

And once we see that, I think you'll see the growth rates start to pick up more.

Okay.

Thanks.

Chris Shaw with Monness Crespi.

You might have given this number.

But on the Tonnage side, you gave a 4% sequential growth in volume.

I was wondering, could you split that out between what was new plants and what was actual new loadings?

Higher loadings?

Yes, if you look at that, it was about half and half.

Okay.

Then in the Equipment and Energy, it is doing very well on the profit side.

But is there going to be some point when, I guess, the LNG exchangers come on or orders start picking up that the sales part is going to start ramping up?

Will there be an inflection point some quarter that we should expect?

I would not see that -- the sales in the sales growth in that area is going to be large quarter to quarter in the near term.

The LNG margins are much better.

And they are better than the air separation margins.

So they have actually improved the margins as sales have declined a little bit this year for us.

And the air separation mix has gotten less to the LNG mix for us.

And do you still think there is upside to the margins from here?

Yes, there is.

And we obviously had a good quarter here in this business.

But the margins and they move a little bit around.

I mean, it is the absolute profit in which we pay a lot of attention to in this business and the value delivered.

Because that's a real measure of value added and not sales.

Great.

Thanks a lot.

John Roberts with Buckingham Research.

Good morning.

Trying to actually find the US recovery in your Merchant volumes.

Your year ago Merchant volumes in North America were down 19%.

So you had a really easy comp there.

And you are only -- you are up 6% this quarter.

You were only up 5% last quarter and the total global number was up 4% sequentially.

I don't know what the North American sequential Merchant growth was, but it seasonally would pick up normally.

So is there more than just a seasonal improvement in any real sign of recovery in your Merchant liquid business in North America?

And there are -- and there is a sign of improvement as we have gone on.

But, as I said before, the economy is slow and steady.

It is not going to be fast.

We are starting to lap the improvement, the pickup which we saw.

We started to see pickup in quarter 3 of last year.

And so we have not gone down.

It would be prior to this what we were seeing as decline in volume, now we are starting to see and we are lapping increases in volume.

So we are pleased by the progress in the business here as far as volume is concerned.

The other thing is that the performance on price has been very good for us here.

And so, we are going to -- and we are going to maintain our discipline and stay at that.

But, overall, we believe that the progress in which we are making here as far as volume is concerned fits with what we're seeing in the underlying economy.

We run correlations to that all the time.

And then back to Electronics, just quickly, Paul.

I think you said it normally seasonally increases into your September quarter here.

But I think Nelson said that you expect the customer operating rates to hold up that's there.

You are expecting to more than hold up?

And the comment was that it seasonally increases from our quarter 2 to quarter 3.

And so, and that is the March quarter to the June quarter are the things that we see.

And (multiple speakers).

I'm sorry, John, I misspoke.

But June to September would be more stable rather than (multiple speakers).

June to September yes.

As far as the customer operating rates, and they would be typically about the same unless they start to see some growth.

And we are starting to see some of those guys, the operating rates pick up a little bit more.

So we would predict a good quarter for us in Electronics from -- on the volume side.

Everything in that business looks solid.

There's been some concerns on people building the inventory into this.

We are not seeing those builds come through from our customer or their concerns about that.

Thank you.

David Manthey with Robert W.

Baird.

Good morning.

Is there any clarity on whether or not the movement of the shareholder meeting up to January at Airgas -- is that a simple majority or a super majority or has that been decided yet?

It is our position that is a simple majority.

They have obviously come back and said that it is not.

It requires, you know, it is governed other something else, another bylaw.

We believe it is quite clear that we should prevail on this.

It has not been challenged in court yet so there has not been a ruling on it for things.

As far as Airgas is concerned, we think we have made good progress.

We are positioned well.

A lot of stock has moved to the [arbs] and the hedge funds and real progress on the FTC, which I mentioned earlier here.

Our price, as far as things -- we made a move here to get more shares in the hands of arbs.

We think that was well-timed and we think that happened.

We still have a top price and a limit there.

That has not changed.

We, as far as the -- we do not need to do this deal, though, however.

Everyone should maintain and understand we will not chase this price up.

We will not get into a bidding war on this thing, as far as I'm concerned.

And so -- but we think we are positioned well with the stock moving to arbs, and the progress at the FTC, which gives us a real advantage.

Okay.

Understood.

Finally, on the cost containment efforts here between the two quarters, sequentially it swung about $0.13 and I know you mentioned pension and Electronics restructuring.

I was just wondering if you could talk about the trend from this quarter to next quarter.

Do those continue to stay at elevated levels or get some relief there?

Yes.

Well as far as the trend here from quarter to quarter, one of the things which you should remember is that we had a distinct impact of the cost reduction efforts which occurred in quarter 3 of last year for us.

And so we had a distinct margin which -- the margin improvements which were driven by cost.

So our comparables got a little bit tougher.

Yes, pension is up.

Pension has been up for the whole year.

We are on track to deliver the $0.35 of improvement from cost for the year.

Costs should get a little -- cost performance should get a little bit better as they go from quarter 3 to quarter 4.

There are a few things in this quarter such as Electronics restructuring costs, etc., which had -- for us.

But we are in a good position as far as costs.

Costs are not leaking back in.

Our margins show that.

Great.

All right.

Thank you.

Robert Koort with Goldman Sachs.

Thanks very much.

Just a question on the Electronics side.

Obviously, a dramatic recovery from the depths of despair not so long ago.

What do you see happening on the -- as we go into the next fiscal year?

Can you still maintain a very lofty 20 plus percent silicon acreage growth rate or do you think we are going to see some pretty dramatic deceleration back to a more steady-state rate?

Yes, Bob.

I do not think that that we are going to see a growth rate in the 30% range.

If I had to -- and we are trying to look right now, I would think the thing which we are going to have is something in the low double digits.

Remember, they went to a fairly easy comp for them because they dropped so much and that is what the growth rates are so high.

But we have been pleased by these markets.

I mean, Electronics has proven to bounce back very well.

It has also been proven that something that consumers want to buy as consumer spending has returned.

Very good.

Thanks, Paul.

Robert Reitzes with BroadArch Capital.

Yes, I guess, Paul, I wanted to ask you one question.

What gives you the confidence that you are going to have a strong second half in Europe?

And that comes from the -- and the outlook on the business in which we are thinking and we get feed, and we get information from our customers all the time.

And we watch volumes, we watch volume trends, we have had good signings and as we start to bring those signings onstream we see just a solid, slow growth in the business in Europe.

LOX/LIN has started to pick it up.

LAR started to pick up on a sequential basis.

Packaged Gas has not picked up yet, so that is still an upside for us.

But overall on a year-on-year basis, all of those things considered, we had fairly good improvement over the prior year and a decent improvement sequentially.

So we expect that to continue.

It's not going to be a B, Bob.

It is a long slow ride.

Okay.

Thank you very much.

Lawrence Alexander with Jefferies.

This is [Lucy Watson] on for Lawrence today.

Just a couple of clarification questions.

On Electronics, as your customers run closer to their capacity limits, do you expect to see any sequential slowing in month-over-month momentum until your customers start bringing more capacity onstream?

Or, I guess, would you mind just providing a little bit more color there?

Yes, our customers still have a fair amount of capacity.

As Paul pointed out, we are coming back from a pretty significant down with silicon being [down] 59% at the bottom of the recession.

So there is still capacity available.

What is encouraging about the state of affairs for our customers is that in places like memory, we are actually seeing pricing go up in memory.

And so it does look like they are being more disciplined about how they add CapEx.

But as you can see from the Samsung announcement from us yesterday, some of our key customers are beginning to loosen the purse strings again and move forward.

So we think it actually will allow for a normal progression from here, solid silicon growth rates, CapEx coming on in a logical manner and, hopefully, giving us some multiple years here of stability.

Okay.

Thanks.

And then just to clarify your earlier comment on the Middle East opportunity, how are you thinking about the timing of an acceleration there?

We are currently working on a number of opportunities there.

It is always tough to predict when an award is going to happen, but we would hope for an award sometime within the next year.

Thank you.

Jeff Zekauskas with JPMorgan.

Good morning.

How much were hydrogen tonnage volumes up for the quarter and for the year?

If you look at -- just hold on.

I will get a number here on our hydrogen tonnage.

About 20% against prior year in this quarter.

20%.

Yes, and that has to do with all the new capital which we are bringing on.

And if you look at the -- on the year to date, we are about 8%.

8%.

And in the beginning of your presentation, you said that your underlying sales for the quarter were up about 12%.

So if you looked at your business in April, May and June, what was the trend?

Was June greater than 12% or less than 12% or a lot greater or a lot less?

It is always hard to take a month and compare it.

And so I never get overly excited by it, by a month, because we have holidays around the world which fall in months that are different and things like that.

If you look at (multiple speakers).

No, but what I will try to do is I'll try to give you the trend here which we're seeing.

So, as far as growth rates are concerned and more -- and this goes on a sequential basis -- I think we are seeing slow sequential growth around the world.

Every month, things are getting better a little bit.

We have not seen anything roll over, which gives us any concern from an economy side of things, which -- and things which change from things.

But we aren't seeing a tremendous acceleration either.

So for this quarter we saw on Europe and we saw them turn a little bit more positive for us, but that was as expected.

It fit with our plan.

Asia trends, obviously, they had a B.

We expect them to not be as strong next year, year over year.

They had an easy comp this year.

The United States, I think we expect the growth rate to be kind of slow and steady and fits with what we have seen.

So, I think going in the summer I think we are expecting sequential growth for us.

Okay.

Thank you very much.

This concludes today's question-and-answer session.

At this time Mr.

Nelson, I will turn -- Mr.

Squires, I will turn the call back over to you for any additional or closing remarks.

Thanks, Lauren.

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

Thank you for joining us and have a nice day.

This concludes today's conference.

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You may now disconnect.