Air Products and Chemicals Inc (APD) 2010 Q4 法說會逐字稿

Good morning and welcome to Air Products & Chemicals fourth-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 telephone conference presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Air Products will be recording this teleconference and may publish all or a portion of the teleconference.

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

Beginning today's call is Mr. Simon Moore, Director of Investor Relations. Mr. Moore, you may begin.

Thank you, James. Good morning and welcome to Air Products' fourth-quarter earnings teleconference. This is Simon Moore. Today, our CFO, Paul Huck, and I will review our fiscal 2010 results and outlook for fiscal 2011.

We issued our earnings release this morning. 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 p.m. 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 information on these slides and at the end of today's earnings release, explaining factors that may affect these expectations.

Now I'll turn the call over to Paul for a review of our financials.

Thanks, Simon. Good morning, everyone, and thanks for joining us today. Please turn to slide number four. Before we look at this quarter's results, I would like to spend a few moments looking back over these past two years. They have been quite a journey.

This slide shows the progress we have made at improving two key financial metrics, operating margin and return on capital employed. If you take a look at the left side of this slide, you'll see the improvements that we made over the four-year period before the recession. We have moved our operating margin up by more than 1.5% and we improved our after-tax return on capital to 13% by the end of 2008.

In the middle of this slide, you can see the impact of the global recession on our fiscal 2009 results. During that time, we took a number of significant actions to lower our costs and position ourselves for success coming out of the recession.

On the right hand side of the slide, you can see our 2010 results, which show the improvements we have made, the impact of the actions we took, and the sequential progress we are continuing to make. Our operating margin in this last quarter improved to 17.1% and to 16.5% for the full year, as we remain on track to deliver our fiscal 2011 goal of 17%.

More importantly, we continue to drive our return on capital employed higher. We are already back to our prior peak, despite operating rates being lower, and we have kept our return on capital well above our cost of capital across this last business cycle. Our focus on putting in place a low-cost structure makes us more competitive and positions us to grow faster with higher returns.

Turning to slide number five for a review of fiscal year 2010. Sales of $9 billion increased 9%. Our underlying sales grew 8% with volumes up 9%. We delivered strong volume growth as the economic environment improved. This was driven by a significant recovery in our Electronics and Performance Materials segment, and new investments and contracts in our Tonnage Gases segment. Operating income of $1.5 billion grew 25% on better performance across all business segments.

Our operating margin for the year averaged 16.5%, an improvement of more than 2%, reflecting solid productivity and strong operating leverage. This is the highest operating margin in more than a decade.

Looking forward, margins should continue to expand. We still have operating leverage available and remain committed to driving further cost reduction. For the year, earnings per share increased 24% and our annual return on capital employed improved to 12.4%, almost 2% higher than last year.

In summary, we delivered significant improvements in 2010. Some examples are -- we completed our global cost reduction actions and the electronics business platform renewal; we repositioned our manufacturing centers; continued to leverage SAP; and further utilized our shared services centers. All of these actions contributed to increased productivity to the bottom line.

Finally, we increased our dividend for the 28th consecutive year as we made significant improvements in both our operating and free cash flow this year.

Please turn to slide six. For the quarter, sales of $2.4 billion were 10% higher versus prior-year. Underlying sales increased 8% year-on-year due to higher volumes in our Electronics and Performance Materials, Tonnage Gases, and Merchant Gases segments. Sequentially, sales grew 4%. Underlying sales were up 3% on volume growth across all business segments. Operating income of $402 million increased 22% from prior-year due to higher volumes. Operating income was up 7% versus prior quarter, mainly due to improved Electronics and Performance Materials results.

Our operating margin improved to 17.1%, up 170 basis points versus prior-year and 50 basis points sequentially. We remain on track to deliver our 17% goal for fiscal 2011. For the quarter, net income increased 19% and diluted earnings per share increased by 18%, each versus prior-year. Return on capital employed improved on an instantaneous or run rate basis to 13.2%, up almost 2%.

Turning to slide seven 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 $0.21. Higher volumes in the Electronics and Performance Materials, Tonnage and Merchant segments helped to increase earnings per share by $0.28 year-on-year. Pricing, energy, and raw materials together were unfavorable, subtracting $0.06. Costs were $0.04 favorable as our productivity gains more than offset fixed cost inflation.

Currency translation and foreign exchange netted to a $0.01 unfavorable impact. Higher equity affiliate income was more than offset by higher non-controlling interest for a net decline of $0.01. Higher interest expense, taxes and shares outstanding each cost us $0.01.

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'll turn the call over to Simon to review our business segment results. Simon?

Thanks, Paul. Please turn to slide eight, Merchant Gases. Merchant Gases posted sales of $948 million, up 2% versus prior-year. Underlying sales improved by 5% on increased volumes with stable pricing. Currency reduced sales by 3%. Sales were up versus prior-year due to continued strong Asia growth and improving volumes in both North America and Europe. Sequentially, sales were up 4%, principally from volume growth.

Merchant Gases' operating income of $185 million was up 12% versus prior-year and up 5% sequentially. Segment operating margin of 19.5% was up 170 basis points versus prior-year and 20 basis points sequentially. Income and margins were higher than prior-year, driven by higher volumes, particularly in Asia, and improved productivity, partially offset by the impact of currency and higher power costs.

New business signings for the year were up over last year and exceeded our targets across all regions. We recently announced that construction commenced on a new helium production facility in Wyoming, and we also just announced yesterday a further expansion of our Shanghai-based Asia technology center. This expansion will enhance our ability to develop Merchant Gas and Electronics applications closely with our customers in this key growth region.

Let me now provide a few additional comments by region. Please turn to slide nine.

In North America, sales improved 5% versus prior-year. Volumes were up 5% with consistent growth across all product lines. Pricing was flat overall with higher liquid oxygen and liquid nitrogen pricing offset by lower liquid hydrogen pricing as a result of the pass-through of lower natural gas prices. LOX/LIN plant loading increased slightly and remained in the mid-70s.

In Europe, sales decreased 8% versus prior-year, primarily due to currency. Underlying sales were flat with volumes increasing by 1% and pricing down 1%. Currency decreased sales by 8%. Our LOX/LIN volumes improved; however, healthcare was flat and packaged gas volumes continued to lag. Our LOX/LIN plant loading remained in the low 80s.

In Asia, sales were up 17% versus last year. Underlying sales increased 14% with volumes up 11% and pricing up 3%. Currency increased sales by 3%. Volumes continued to improve driven by strong growth across all products and markets. We did see some sequential moderation due to reduced liquid oxygen peaking demand for steel. Plant loadings remained in the high 80s. We delivered real price improvement, responding to higher power costs by raising prices on oxygen and nitrogen across the region.

Please turn to slide 10, Tonnage Gases. Tonnage Gases sales of $752 million increased 17% compared to last year. Volumes were up 4%, and energy and raw material passthrough increased sales by 14%. Higher volumes were primarily driven by new plants and customers. Sequentially, sales were up 4%, with volumes up 2% and energy and raw material passthrough increasing sales by 2%. Volume growth was driven by loading existing assets. Operating income of $117 million was up 11% versus prior-year, primarily due to higher volumes from new plant startups, and down 2% sequentially due to operating bonus timing.

Operating margin of 15.6% decreased 80 basis points versus prior-year due to the impact of higher natural gas cost passthrough. Sequentially, margins were lower due to volume mix. Earlier in the quarter, we announced plans to build a third air separation unit to expand our supply of oxygen, nitrogen, and argon to ArcelorMittals' Gent, Belgium steel mill and increase our supply of Merchant Gases to the Northern European market.

Last week, we announced plans to connect our Texas and Louisiana pipeline systems. This will create the world's largest hydrogen plant and pipeline system. The project will unite more than 20 plants with over 1 billion standard cubic feet a day of capacity and over 600 miles of pipeline. This will allow us to increase sales by better utilizing existing capacity; improve system efficiency by sourcing from our most efficient plants and better coordinating outage planning; and improve customer supply reliability and flexibility.

Please turn to slide 11, Electronics and Performance Materials. Segment sales of $523 million were up 20% compared to last year. Volumes increased 21% and pricing reduced sales by 1%. Electronic sales were up 25% compared to last year and 9% sequentially, as all industry segments grew beyond previous production peaks. Electronics specialty materials sales increased 19% versus prior-year and 4% sequentially. Tonnage sales were 9% higher versus prior-year, and our equipment business reported the best quarter in two years, reflecting the expected pickup in orders due to improving new fab CapEx.

Performance materials sales increased 15% versus last year and 1% sequentially, reflecting volume growth across all markets. Segment operating income of $84 million was up 71% versus prior-year and 35% sequentially, due to volume leverage and the full benefit of the restructuring actions finalized in Q3. Margins improved 480 basis points from last year and 350 basis points sequentially. Q4 margin of 16.1% exceeded our 15% operating margin goal for FY '11, was the highest quarterly margin since we began reporting this segment four years ago.

New business activity continues to grow in Electronics. As you saw last week, we announced an agreement to build two ammonia onsite purification plants for Sanan OptoElectronics in Wuhu, China. This is the world's first on-site large-scale specialty gas plant and supports the high growth LED market. Earlier, we announced a turnkey contract to supply our SunSource Solutions gases, equipment, and services to a new photovoltaic facility in Malacca, Malaysia.

Please turn to slide 12, equipment and energy. Sales of $128 million were up 5% versus prior-year and 11% sequentially, reflecting increased LNG activity. Operating income of $20 million increased significantly versus prior-year, due to higher LNG activity and favorable project performance. Our backlog versus prior-year is higher, due to the previously announced LNG orders but reduced sequentially.

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

Thanks, Simon. Now if you'll please turn to slide 13, I'd like to share our thoughts on our outlook.

For our fiscal 2011, we are projecting the gradual economic recovery continues. We expect that manufacturing will continue as the leading sector in the recovery. Fiscal year 2010 growth was somewhat stronger than expected, led by Asia. We anticipate that growth will moderate in fiscal year 2011 as inventory restocking ends and global stimulus programs expire. We expect that regional differences will continue, with stronger growth in Asia and more gradual recoveries in the US and Europe.

Based on our global footprint, we are planning for worldwide manufacturing growth of 3% to 4% for our fiscal 2011. Our current forecast is that the US will see positive growth of 3% to 4% in manufacturing. Europe should be up about 1% to 2%, and we expect Asia will continue to be the strongest region, growing 6% to 7%, led by China. Volume growth will be the key factor driving earnings improvement in 2011 for us.

New plant onstreams in 2010 and 2011, and loading our existing assets should each add $0.30 to $0.40 to EPS. Offsetting these volume gains, pension expense will be about a $0.10 headwind due to the drop in interest rates from September 2009 to September 2010 and lower asset returns.

Based upon current rates, currency should not have a significant impact on earnings next year. Based on these factors and our economic outlook, we are forecasting our fiscal 2011 earnings from continuing operations to be between $5.50 and $5.70 per share, which represents a year-on-year earnings growth of 10% to 14%.

Now turning to our outlook by business segment. In Merchant Gases, capacity utilization continues to improve globally. We continue to expand our merchant capacity in Asia. Last year, we delivered on our 1% operating margin improvement goal. For 2011, we are targeting to exceed our goal of 20%.

In our Tonnage Gases segment, we will see the benefit from the full year loading of our fiscal year 2010 startups along with a number of investments due to come onstream this year. The major projects that will drive the improvement from fiscal year 2010 to fiscal year 2011 are our new world-scale SMR for Exxon Mobil in Baton Rouge, Louisiana, which came onstream towards the end of fiscal year 2010; a 2000-ton-per-day oxygen plant for the [Wayi] Clean Energy Gas Fire is on target to start up towards the end of calendar year 2010; a new oxygen plant to supply Xingtai Iron and Steel should start up in March 2011; and our new pipeline near Edmonton, Alberta, Canada, where we've added three new hydrogen customers to this franchise in the past year.

On the new order front, we announced a significant number of new projects over the course of this past year, which will provide growth in 2012 and beyond. In Equipment and Energy, we expect results similar to last year's level. We do anticipate signing two or three LNG orders in this coming year. Within Electronics, we expect slow steady growth next year with newer segments like PV and LED growing at higher rates; [inches of] silicon process rebounded nicely in 2010.

As we look across industry forecasts for fiscal 2011, we project the MSI index will grow in the range of 5% to 10%. In the Integrated Circuit segment, which accounts for about 75% to 80% of our Electronics business, we are well-positioned with the industry leaders who are bringing on new fabs and expanding capacity. As expected, Electronics industry capital expenditures rebounded in 2010 and it is anticipated to continue to increase next year as well.

So our Electronics Equipment business results in fiscal 2011 should grow accordingly. With the restructuring behind us, the benefits of our Electronics business repositioning efforts have become more visible this quarter.

Switching to Performance Materials, our growth expectations are solid, as we leverage our low-cost production facilities in Asia and we continue to benefit from new product, market, and application successes. For the Electronics and Performance Materials segment, we continue to target improvement in our operating margins with a goal of delivering 15% in 2011.

Those are my thoughts on the business segments. Now shifting gears back to the total Company.

In any economic environment, cost control and cost reduction are important drivers of earnings, margin, and return improvement. For 2011, we will remain diligent on discretionary spending, new programs and staffing. We will also continue to see the benefit of a number of structural cost reductions that we have made to reach our 2011 goal of a 17% operating margin.

At this time, our tax rate guidance is for a rate similar to 2010, approximately 25% to 26%. We remain committed to delivering consistent strong earnings growth along with improved margins and returns throughout the economic cycle.

Turning to slide number 14. Our guidance for quarter one is for earnings per share of $1.31 to $1.35, based on the following factors. On the positive side, we expect to see increased earnings sequentially from the following areas -- new plant onstreams, including our new SMR to serve ExxonMobil in Baton Rouge, Louisiana; we expect the manufacturing economy to continue its gradual recovery; finally, we expect a modest benefit from currency translation next quarter.

Offsetting these sequential improvements are a few seasonal impacts in our businesses. In Merchant Gases and Electronics and Performance Materials, we will see lower seasonal demand. In Tonnage Gases, a number of customers have planned maintenance turnarounds on their facilities this quarter. This will result in lower volumes in quarter one and higher maintenance spending on our part, as we time our maintenance to correspond with our customers' shutdowns. And pension expenses previously mentioned will be a headwind.

Please turn to slide 15 for our capital spending outlook. Our capital spending for 2010 was $1.3 billion. For 2011, we expect that our capital spending will be between $1.5 billion to $1.7 billion, excluding acquisitions. We continue to work on acquisition opportunities, including captive plants from customers such as the MarkWest and Xingtai Steel projects. And we also continue to look for focused opportunities that complement our existing positions.

The majority of our spending remains in the tonnage area, with about $1 million associated with new large plants and pipelines. When you look across all four business segments, about 75% of our growth CapEx is under long-term contracts.

Now let me give everyone a brief update on our Airgas offer. Please turn to slide number 16. As you all know, the Airgas shareholders voted to elect three independent Board members nominated by Air Products, and to support our three shareholder proposals at the September 15th meeting. We are pleased that the Delaware Chancery Court rejected Airgas's challenge to the January meeting by law and upheld the validity of the shareholder vote.

We will nominate another slate of independent directors for the 2011 meeting in January. We are disappointed that Airgas continues to oppose the will of its shareholders expressed at the 2010 annual meeting. As we have said before, Air Products stands ready to meet with Airgas, its directors and advisors to exchange information and to negotiate a mutually beneficial transaction. We remain convinced that such a meeting is in the best interest of both companies' shareholders.

If you are an Airgas shareholder, here is what we are asking you to do now. Continue to communicate to the Airgas Board that the time is right to conclude a deal. Vote for the second group of highly qualified independent directors who we will nominate for election at the January meeting. We need to continue to work together to drive this process to a successful conclusion for Airgas and Air Products.

Now let me wrap up. We had an excellent 2010, growing sales and earnings while making significant improvements in our operating margin and return on capital. As I just covered with you, we are well-positioned to deliver further growth and improvements in 2011. The increase in capital spending we announced today, along with the progress we have made on the Airgas transaction, gives us a number of excellent opportunities for the future beyond 2011.

We remain committed to delivering a combination of growth, margin improvement, and higher returns that will make us the best investment in the industry for our shareholders. Our whole team in Air Products is excited by the opportunities we have and are ready to deliver greater shareholder value in the future.

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

(Operator Instructions). Jeff Zekauskas, JPMorgan.

A couple of questions. The first is, there really wasn't much change in your Tonnage revenues from the second quarter to the fourth quarter, and I guess Baton Rouge is a little bit late. But it also turns out you had a number of other plants at Corpus Christi, Baytown, Port Arthur -- why didn't those have more of a pronounced effect on Tonnage Gas revenues?

The big impact is gas there, Jeff. Gas is down about $1 when you look at it. So the volumes are up but if we look at that, the gas from quarter two to quarter four is down $1. We've had the natural gas throw, as you know.

Right, but the sequential volumes don't really change all that much.

The volumes -- our volumes are up in that time period. Our volumes are up in there. I mean, but the big impact on sales, if you're looking at the revenue delta, which I think is what you're trying to look at here, is that the -- and gas gets passed through in the revenue line to our customers.

Right. I guess I would have expected the volumes to be up more, but we'll let that go.

Okay.

In terms of just lastly on the pension side, what's the magnitude of the pension contribution for next year?

We think the pension contribution is probably going to be about $250 million or so, and the bulk of it we're going to do in quarter one.

And then lastly, what's the cost of the new hydrogen pipeline to link Louisiana and Texas, and how does that get done?

We have not disclosed the cost of the pipeline for people. People can do an estimate if they care to on the -- because of the length of it, but we do not like to disclose the cost of our projects on that. And it will get spent over the next two years or so as far as timing is concerned.

Okay, thank you very much.

John McNulty, Credit Suisse.

Just a couple of quick questions. On the Electronics business, clearly the margins -- you had a solid pickup and they've actually exceeded what you were really targeting, and even sequentially, I mean, it looks like you saw incremental margins like 80%. How should we think about the margin going forward looking into 2011? Was there anything that may have been a little bit unusual in the fourth quarter? Or is 16% the right base to start looking out to 2011 with?

John, if you [look] at the fourth quarter, it certainly is the strongest quarter from a volume standpoint in the business. We normally see a seasonal slowdown towards the end of quarter one of our fiscal year and then into quarter two -- caused by the holiday season first around Christmas, and then the holidays in Asia in the second quarter. So we normally see -- it depends whether you actually do see a real volume decline, but we probably will see some volumes decline in this. And then pick up again in the third quarter and the fourth quarter.

Okay, fair enough. Another question on -- in the Merchant business, we've gone basically a year, it looks like, without any real, other than raw material-related, any real price increases on the US and European businesses. What kind of volumes do we need to see come back in the Merchant business before we start to see real price increases in those platforms?

Actually, I consider that to be a good thing in that we haven't seen the price erosion here, because the operating rates -- I think you need to see the operating rates and get above the 85% or so place before you're going to see a growth in price.

And John, this is Simon. Maybe I can just add to it. In North America, versus last year, LOX/LIN pricing was actually up. It was offset by lower liquid hydrogen with a passthrough of the lower natural gas prices.

Okay. No, that's fair. And then just the last question on the pipeline that you're building in the Gulf that you were talking about, how do you think about getting returns on that? Because it doesn't sound like it's necessarily a big revenue-generating opportunity for you, or at least that certainly wasn't how it was highlighted. So how should we think about the revenues and how should we think about the returns and when you get maybe paid back for that pipeline?

Yes, and it has a good return on it, because the return is generated in two areas, John. First off, if you think about the sales, increased sales, is that -- and we will be able to sell more of the product just because we have the two -- and a connection of the systems. So we now have the best supply system, bar none, in the Gulf Coast, and certainly the broadest here. So our reach to customers is going to -- is by far the best, and our ability to deliver to those customers is by far the best. So we would expect to see an increase in sales from -- on that.

The second aspect is that we are also going to be able to source the product a lot better. We're going to be able to pick and get the lowest cost source for us to go out and generate the hydrogen. And so we're going to be able to optimize the plants across the system. So we think that it's a combination of cost and revenue, but those -- but both those projects -- but both of those give us a very nice return on the project if you just look at the amount of investment required there.

Okay, great. Thanks a lot.

Michael Sison, KeyBanc.

Congrats on a nice end of the year. (multiple speakers) In total, Paul, when you take a look at volume growth for '11 -- and I apologize if I missed this -- you add up all the new loading for Merchant and Electronics and Tonnage, what is the -- what do you expect for volume growth for the full Company?

When you're talking about -- and we expect an impact, as I said before, Mike, first on the new plants which we're bringing -- which we brought onstream in '10 and '11, probably which impact about $0.30 to $0.40 a share. And then the other thing is that we will also load the existing asset base, which we have, which will probably generate another $0.30 to $0.40 a share also for us.

Yes. So, I mean, volume growth for Air Products in '11 versus (multiple speakers) would be --?

Oh, Air Products in total?

Yes, in total. Is it going to be like high single digits?

Oh, I'm sorry. As far as on a volume growth basis, we don't run indices on this, Mike, so I'll give you an estimate. I think it's probably 8% to 9%.

Right. And then in terms of your silicon growth outlook for the full year, the 5% to 10%, is the fiscal first quarter going to be much higher than that, then sort of a little bit lower for the rest of the year?

It jumps around a lot on the individual quarters when you have to do it -- I don't know about that, Mike. If I had to guess right now, I would think that that growth is pretty steady across the year. And the reason why is that Electronics ran hard throughout -- in Q1 of our 2010.

And we think that we're more likely to see, now that production has gone up, that it's not going to run -- that they're more -- and more likely to take a drop in production rates over the late -- over the December through February timeframe. But we're still seeing -- we have more fabs onstream. The fabs are running harder than what they were running a year ago. So we still are looking for a good set of volumes in our Electronics business in quarter one (multiple speakers) [than] prior-year.

Got you. And then last question, in terms of Electronics and Performance Materials and profitability of 16%, was the Electronics side in the fourth quarter basically running full out?

No. No, we still have room to grow in Electronics.

Okay. Great. Thank you.

P.J. Juvekar, Citi.

Several questions on Electronics here. But just one more -- how much of your growth is from traditional silicon these days versus LCD and photovoltaic business?

And then secondly, can you compare margins in the IC business versus LCD and photovoltaic?

And Simon, since you just came from the business, please take that question, okay?

Yes, sure. So I think just kind of to frame out our Electronics business, about three-quarters or so that is in the IC business, LCD about 15%, and then the last 10% is made up of PV, LED. So the growth rates on the PV LED are quite high as they're coming off a relatively small base, but in terms of absolute growth, it's still the IC that drives the business primarily.

Your second question, in terms of margins, I would say we don't see a substantial difference between pricing across the different industry segments. The customers that are in those are large and sophisticated, and so we have fairly similar pricing across the different segments.

And margins, do you think margins are similar as well?

Yes. So, with pricing being similar, I was really commenting that margins are fairly similar across those segments.

And you know, some of your Electronics customers has indicated slower growth coming out of the summer. And you think there was maybe some inventory correction that took place in Electronics and do you think that's behind us?

Well, it's a very good question. So we saw fairly steady, consistent growth in our volumes through this time period and through the last quarter. And that's where our customers are telling us they're going to continue to operate. Their operating rates are in the 90s, expected to stay there.

And a couple of things that have come out recently, of course, everybody noticed. We've been talking about handhelds driving particularly the memory market. And I'm sure everybody saw that for Apple, although their Mac sales on units were up 27% year-on-year, they still sold more iPads last quarter than they sold Macs. So again, the concept that the handheld devices are not necessarily replacing PC sales, but they are complementary in bringing additional demand.

As another example, TCMC, the Taiwan foundry, announced a month-to-month sales increase in September. So just a little flavor to help you see what we're seeing there.

Okay. And just Paul, lastly, can you give us a geographic breakdown of your capital spending?

Sure. If you take a look at the CapEx, which we have -- I think we had a slide in there on that.

I'm sorry, you're right. There's a slide here. Thank you.

Don Carson, Susquehanna.

Paul, a question on the Merchant business. I know you put out some domestic price increases on September 16, but you also made the comment that you don't see pricing power returning until you kind of get to the mid-80s operating levels. I think you're still in the high 70s. So are these price actions -- are you expecting to get them? Or would you categorize them as more trying to recover some higher costs like power, for example? And then finally, what's the incremental operating leverage as you improve loading in the Merchant business?

Okay. First, on the leverage comment, it's about 35%, Don, on sales. But as far as pricing power is concerned and the things we look at, I think -- and the increase, it's early, obviously, because we're still in the first month, but so far things are going well. And as people know, it isn't across every customer gets the same price increase, so we think we're going to be successful in the goals which we have for that.

The other thing which you know is that the new business which we're signing is coming in below the average price today. And we've said that before. And that's normal for the way in which we're operating at this point, with the operating rates that we have. And we will take those prices up over time on the price increases. And they will be the targets of us going out and increasing in the future.

So basically, you need these price increases on existing business just to offset the price declines on the new business you're signing (multiple speakers) and you'd expect pricing to be flat overall?

Yes. As far as pricing flat overall, the thing which we look at, Don, is that we actually look at the conversion margin of our business. And so what our goal is to get a positive increase in conversion margin in this year, which is the price -- unless the cost -- the variable cost to produce and deliver, and get that, and that number contributing in a positive way to our fiscal '11 results. So that's our goal for this year. And we think the actions which we're taking are going to be effective there.

And you talk about 3% to 4% outlook for US manufacturing growth. So would you expect a similar volume growth in your US Merchant business and maybe get back up to sort of the 80% operating rate level by second half of fiscal '11?

Yes, I think it actually should be a little bit higher than 3% to 4%; I think 5% to 6%.

Okay. Thank you.

Paul Mann, Morgan Stanley.

Just a couple of questions. You mentioned you had three new hydrogen customers in your Edmonton pipeline. What sort of utilization of that Edmonton pipeline is currently in place? And what sort of utilization rate will you get to once you've got these three new hydrogen customers onboard?

Then my second question, just thinking about the Electronics market, you mentioned [Federal Tech], maybe they account for about 10% of your revenues in Electronics, and clearly, LED lighting has been a big focus in Japan. Energy efficiency is clearly a part of China's next five-year plan. Do you see any interest from your Chinese Electronics customers regarding LED lighting? How do you think about the opportunity of LED lighting in China?

I'll let Simon answer your Electronics question. On the Edmonton pipeline, we're close to sold out on that pipeline right now.

Right. So Paul, good question on Electronics. Maybe just -- maybe clarify what I said before, right? So, together, PV, LED make up less than 10% of our sales. So just to clarify that on the Electronics side.

And we are absolutely excited about the growth in the LED market. As you saw, we announced this -- the industry's first large on-site spec gas plant for Sanan for LED in China. So we think the dynamics of the world being more interested in energy efficiency will drive LED demand overall, and China clearly has identified LED as an industry they would like to promote in-house.

So we think that's a good opportunity. To be fair, though, it's a modest sized part of our portfolio right now. And while it will have strong growth rates, the overall business is still very dependent on IC.

Okay. Thanks so much.

Mike Harrison, First Analysis.

Wanted to ask you a little bit about merchant pricing in Asia. It looks like pricing in Asia is accelerating a little bit. You mentioned LOX/LIN prices had to come higher in order to recover higher power costs. But I was wondering, are you still getting more traction on the pricing front there? Or had the gains kind of leveled off at this point? And are there any other drivers of the improved pricing besides the LOX/LIN pricing?

Simon?

Sure. So, yes, I mean, we were very pleased, quite frankly, to show positive pricing moves in Asia. As you know, as you look back a little bit over history, that hasn't been the case. It was the case last quarter. So we're pleased by that. At the same time, we continue to invest for the growth in Asia and we bring on new projects. In Asia, we have a fair number of projects coming on. So, bottom-line is we're pleased by the pricing that we're able to secure in the marketplace in Asia.

And in terms of the new merchant business signings coming at lower pricing, is that something that's consistent across all regions? Or would you see maybe better pricing in a higher demand region like Asia and lower pricing in, say, Europe and North America?

That's right. You're right.

And in terms of new business signings, particularly in North America merchant pricing, is the pricing improving? Or has it been pretty steady over the last couple quarters?

Pretty steady and the prices have been steady over the past few quarters.

Got it. Wanted to ask a little bit about the Tonnage business and the outlook for Q1 outage plans. Are your customers seeming to be at more or less a normal rate of down time or --?

Yes. Yes.

And do you have any significant opportunities significantly larger than normal opportunities to upgrade facilities or do maintenance on your facilities that --?

No. No.

Alright.

But having said that, of course, we will time our outages with our customers' outages to take advantage of that opportunity, obviously.

Alright. And the last question I wanted to ask you was on Electronics and Performance Materials. It looks like the Performance Materials side of that business saw kind of a deceleration in the rate of growth. I was wondering if that's a seasonal September quarter issue? Or if you feel like some of those markets have hit a point where they've hit maybe that normalized rate of more gradual growth rather than inventory-driven growth?

Yes. And the business starts to slow down in the September timeframe because of construction in the North tends to go out and so the inventory builds. And people tend to start taking the inventory down of their products here on the construction markets which we serve.

Laurence Alexander, Jefferies.

I guess two quick questions. One is just -- I don't want to count chickens before they're hatched, but if the Airgas deal goes through, do you have any internal sense for how long it would take to get back to the relatively high return on capital that you're posting right now? Could it be like three years, four years? (multiple speakers) benchmarking?

We think it's -- yes. And we think that it takes three years for us to get through the trough on the return on capital.

And secondly on helium, would you mind characterizing the current supply/demand situation and what you're seeing in terms of pricing in the helium market?

In the market as far as helium is concerned, and the supply and demand goes up and down, and because of some plants which have had production issues in the Middle East, principally. But it's pretty much in balance right now and pricing is okay. Electronics drives a lot of the demand of helium.

So pricing is fairly stable?

Yes.

Thank you.

Kevin McCarthy, Bank of America Merrill Lynch.

Paul, as you show on slide four, you've achieved your 17% operating margin goal, at least on a short-term quarterly basis. I think when you unveiled that goal, natural gas prices were significantly higher than they are today. So my question is, if we kind of strip out some of the volatility and percentage margin related to energy, how much additional upside in the margin level do you think is still available over the next year?

Well, we certainly are going to look for trying to -- and to drive the margin higher. If you look at natural gas, when we put it out, we said that a gas price of $6 was in the assumption with it. At this time, gas is $4.35, $4.50 or so in quarter four. So that had a slight help on the margin. But it has a bigger impact on the on-site business, on that business. It doesn't have as big an impact on the Company, obviously, for us. So it's still a good margin for us.

Okay. So am I correct in understanding then you would expect to just sustain the current level into fiscal '11?

Well, you know -- and for us, I think if you do look at Q1, I think the margin is going to decline a little bit for us, because of factors on the cutdown of production in the Electronics and Performance Materials. So as the volumes pull back there -- and also the on-site spending on the turns in the Tonnage Gas business. So we have that as a little drag on margins going from quarter four to quarter one. We have that every year. We see that every year.

I think, Kevin, our goal certainly is to hit 17% for the full year for next year, and then when we are -- we're optimistic we'll be successful doing that, we'll look to reset some longer-term targets at that time.

Very well. Thanks very much.

Mark Gulley, Soleil Securities.

A couple of questions. As part of your CapEx plans, Paul, you were referring a little bit to, I guess, sometimes what you call decaptivations buying sale of equipment plants and turning them into sale of gas. One, are you active in that area in China? And two, are you seeing some competition from the new startup that seems to be rolling up the China market [Yingdee], have they had an impact on your ability to accomplish that goal?

Yes, we do do it in China. We have not seen [Yingdee] buy any plants to date, although I'm sure that they are trying to do those things and look at those opportunities, because a thing which we do, Mark, is that we look -- for us to go out and buy a plant from someone, what we want is the ability to invest again at that site. And what I don't want is just to go in and finance that plant for that person. I want to go be able to go in and expand the site for us and give us the opportunity to invest more.

Okay. That's helpful. Following up on Laurence's question, you talked about a three-year recovery in your return on capital employed. Can you share with us what you think the decrement will be the day of closing, if you will, when you -- and assuming you do buy your gas?

Yes, I think it drops us down by about 3% or so and then we come back from there.

Okay, finally. And then, finally, can you update us on the balance sheet? Again, following through on the Airgas thing. Are you going to be able to maintain investment grade financing internal capital expenditures you talked about today and Airgas without an equity raise? Or can you update us on balance sheet strategy going forward?

Yes, and we can do this at the top price which we are willing to pay for this and do it with all that. So the strategy has not changed any there; we're not going to need to raise equity and we can remain investment grade, and that's a BBB.

Thanks, Paul.

Bob Koort, Goldman Sachs.

I think you've answered most of mine, but I was hoping for a little more clarity on Merchant Gas and the passthrough of natural gas or energy costs there. Can you just give me a sense if hydrogen unit price was $100, what would a $1 change in gas do to that price?

So, are you talking about on the liquid hydrogen side?

That's right, yes.

Yes. So, I mean, I think we generally talk about the energy costs being in the range of one-third of the cost there, so it could be in that sort of range. Again, remember on the Merchant business, it's not quite as quick as it is on the Tonnage business, the passthrough. There is some lag there. So that's why you see some different things on a time basis.

And then, Paul, could you talk a little bit about if you've seen any evolution in behavior since the financial crisis to present? And then looking forward in terms of competitive activity around bids and returns, implicit returns in those bids? Has it changed much over the period?

No, it has not changed, Bob. I think everyone is looking still for a good return on that. I don't think people have said, well, I'm going to take advantage of the fact that rates are low, et cetera, and finance a plant real cheap and those things. On the competition, we always have good competition, but we have not seen anyone really out there doing anything which we think destroys -- and destroys the opportunities for us investing.

Great. Thank you.

John Roberts, Buckingham Research.

Yes, I wanted to ask about your 1% to 2% growth outlook for Europe for 2011. The volume in the quarter just reported was only up 1% and I think that was a deceleration from 4% last quarter?

Yes.

The comp was actually easier, so it decelerated, I think, even more because, again, you're decelerating on a one-year basis and the two-year -- the comps are easier if you go back a couple of years. So is the turnaround here? Or is it the lagging packaged gas business coming up that will cause things to pick up a little bit? Because the trend is actually the other way right now.

And yes, John, the packaged gas business does lag. The volumes in that business were down for us as we looked at this year-over-year. So that's -- and that's a business which depends upon people really starting to invest again and we are predicting that to happen until late 2011.

Okay. So it's the packaged gas lag turnaround here that's going to cause the total to start to turn?

Yes.

Okay. Thank you.

Edward Yang, Oppenheimer.

I apologize if these questions have been answered already; my line got cut out for a minute there. But first, on equipment, why are margins there so volatile? Is there any way to model that out in a predictable way? Usually it's sort of a plug in my model, but I look at '010 results versus '09, your revenues are down but the operating income is up substantially. So what are the drivers there?

Yes. And that's caused by the mix of the business between LNG and the air separation units. The air separation units which we sell have a lot of equipment which we buy in and we don't put a mark upon. But it runs through our sales. LNG, we make the exchanges, we do the process design, it's 100% value-added. And so the -- and the margins in the LNG business are a lot higher than on the air separation business.

So if you just look at 2009 to 2010, 2009, the mix of the business was a lot more on the air separation plant side than on the LNG side. And it reversed in 2010 a lot more on the LNG side. And we would expect in 2011 for the bulk of our profits to come from the LNG side also.

Okay, that's very helpful. And on refining hydrogen, what were volumes in the quarter, including new projects, and also on a same store sales basis and your expectations for 2011?

Yes. In the quarter, if we look at the -- against prior-year in the volumes on the refinery side were up a little bit for us and about flat same-store sales.

And your expectation for next year?

We continue for them to continue to grow. I don't have an exact number on the volume side, Ed.

Okay. Thank you very much.

And that's all the time we have for questions today. I'll turn the conference over to Mr. Moore for any additional or closing remarks.

Thanks, James. Please go to our website to access a replay of this call beginning at 2 p.m. today. Thank you for joining us and have a nice day.

This does conclude today's conference call. Thank you for your participation.