Air Products and Chemicals Inc (APD) 2011 Q3 法說會逐字稿

Good morning and welcome to Air Products & 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.

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Beginning today's call is Mr.

Simon Moore, Director of Investor Relations.

Mr.

Moore, you may begin.

Good morning and welcome to Air Products' third-quarter 2011 earnings teleconference.

This is Simon Moore.

Today our CFO, Paul Huck, and I will review our Q3 results and outlook for the remainder of 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 to access the materials.

Instructions for accessing the replay of this call beginning at 2 PM Eastern time are also available on the website.

Please turn to slide two.

As always, today's teleconference will contain forward-looking statements based on current expectations regarding important risk factors.

Please review the 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 thanks for joining us today Please turn to slide number three.

For the quarter sales $2.6 billion were up 14% versus prior year underlying sales increase 7% and 6% higher volume primarily in our electronic and performance materials and tonnage segments and 1% higher pricing.

Favorable currency transaction contributes 5%.

Sequentially sales were 3% higher mainly due to currency and well we did see sequential volume growth in our electronic and performance material and tonnage segments merchant Gases were flat sequentially and equipment sales decline.

Operating income of $417 million increased 11% from prior year primarily due to higher volumes.

Our operating margin of 16.2% decline 40 basis points versus prior year and 80 basis points sequentially Due to higher operating cost in our merchants segment and plan and maintenance cost in tonnage segment.

For the quarter net income from continuing operations increased 15% and diluted earnings per share increased 14% each versus prior year.

Return on capital employed for the quarter improved 13% up 30 basis points, 16.2% operating margin for this quarter is disappoint for us.

Short fall to our goal is primarily in the merchants segment due to poor factors a lack of volume growth in the North American business, where we have significant available capacity.

Further declines in our European business continued operating problems that resulted in higher operating and dislocation costs, and tight helium supply with increased procurement costs.

To remedy these issues, we're taking the following actions.

In North America, we are continuing to add sales resources focused around our plants and on the end markets where we have strong offerings.

For example, oilfield services and electronics packaging.

We have already seen signings in the third quarter improve, and we expect continued improvement.

It does take about six to nine months for new signings for new signings to come online.

We will also continue to drive price improvement.

In Europe, we continue to face a slow recovery along with the pricing environment that is under recovering our variable cost increases.

To address this, we had raised prices for a number of products and in a number of countries, and we will have more price increases this quarter to stop price and variable margin erosion.

We will strongly defend our volumes from competitive attack.

However, there are certain accounts we will either improve or shed.

We are focusing our sales efforts on customers close to our plants to lower our distribution costs and to leverage our application strength in areas like cement and combustion.

For our operating performance, we are working hard across our system to increase plant availability and reduce unplanned outages.

An example is argon production, where product has been tight and operating and distribution costs have been high.

Tonnage expansions currently underway, such as the new LaPorte plant scheduled to come onstream later this year, will enhance our argon availability.

Regarding helium, we have and will be raising prices further, and we will be bringing on additional capacity later this year.

Overall, we are forecasting Merchant margins to improve next quarter and that we now expect to meet our 20% margin goal in fiscal 2012, on our way to our 21% to 24% goal for 2015.

While Merchant margins disappointed, the Electronic and Performance Materials segment exceeded their 15% goal, posting a year-to-date margin of 15.8% and 18.1% for this quarter.

This performance has offset some of the Merchant shortfall.

While this quarter just made it harder on ourselves, we are still committed to achieving our 17% goal for the year.

Turning to slide four, for a review of the factors that affected the quarter's performance in terms of earnings per share, our adjusted earnings per share increased by 14% or $0.18 per share.

Higher volumes increased earnings per share by $0.14 year on year.

Pricing, combined with the impact of energy and raw materials, subtracted $0.02.

Costs were $0.06 unfavorable as our productivity gains were more than offset by higher operating and maintenance and distribution costs, particularly in our Merchant segment.

Equity affiliate income was broadly higher across our Merchant, Tonnage and Electronics segments, contributing $0.03.

Currency translation in foreign exchange netted to a $0.09 favorable impact.

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

Simon?

Thanks, Paul.

Please turn to slide five, Merchant Gases.

Merchant Gases sales of just over $1 billion were up 12% versus prior year.

Underlying sales improved by 4% on 3% higher volumes, primarily in Asia, and positive pricing in North America and Asia.

Currency increased sales by 8%.

Sequentially, sales were up 1% with underlying sales flat and a 1% increase due to currency.

Merchant Gases operating income of $182 million was up 3% versus prior year end down 2% sequentially.

Segment operating margin of 17.7% was down 160 basis points versus prior year and down 60 basis points sequentially.

Versus last year, plant operating issues increased maintenance and distribution costs.

These challenges resulted in higher dislocation costs to keep our customers supplied.

In addition, our price increase efforts in Europe did not fully recover increased cost.

Versus prior quarter, fixed and variable cost increases drove the margin decline.

As Paul said, we expect margins to improve from these levels in Q4 and beyond.

Let me now provide a few additional comments by region.

Please turn to slide six.

In North America, sales improved 3% versus prior year.

Volumes were flat with modest liquid oxygen, nitrogen and argon growth offset by helium supply constraints limiting sales.

Pricing was 3% positive with improvement across the product lines.

LOX/LIN plant loadings were in the low 70s.

Signings were very strong this quarter, which will improve loadings as these new contracts take effect.

In Europe, sales increased 14% versus last year with underlying sales up 1% and a positive 13% currency impact.

Volumes were up 2% with modest growth across the product lines.

Pricing remained a challenge, down 1% due to competitive pressure in both healthcare and liquid bulk.

LOX/LIN plant loadings were in the mid-80s.

In Asia, sales were up 22% versus last year with underlying sales up 15%.

As expected, growth rates have moderated somewhat from previous quarters as we have moved to tougher year-on-year comparisons.

Overall volume growth remains strong.

Volumes were up 12% with liquid oxygen and nitrogen up 13% across the region and up 19% in China.

Pricing continue to be strong, up 3% with liquid oxygen and nitrogen prices up modestly.

Argon pricing was strong versus last year; but, as expected, we did see lower sequential argon pricing due to less spot sales in China with a more balanced supply/demand market.

Plant loadings remained in the mid-80s.

We did bring onstream our new merchant capacity at Qinghai Steel in China, integrated with our tonnage and oxygen plants.

Please turn to slide seven, Tonnage Gases.

Tonnage Gases sales of $869 million increased 20% versus last year with volumes up 11% in energy and raw material pass through increasing sales by 7%.

The volume increase was driven by both new projects and improved loadings.

Sequentially, sales were up 9% on a 5% volume increase and 3% higher energy and raw material pass through.

New plant volume growth and less volume impact for maintenance outages drove the increase.

Operating income of $115 million was down 4% from prior year on higher maintenance costs, primarily from customers' scheduled outages, and down 5% sequentially due to lower annual operating bonuses.

After a number of scheduled maintenance outages in Q2 and Q3, we expect Q4 maintenance spending to be lower.

Operating margin of 13.2% decreased 330 basis points versus prior year.

About two thirds of this decline is due to the maintenance costs just mentioned.

The remainder is due to higher natural gas cost pass through.

Moving to new business, we were pleased to announce a significant increase in our hydrogen supply to Valero's two Gulf Coast refineries.

This award of over 200 million standard cubic feet a day for Valero in Port Arthur, Texas and St.

Charles, Louisiana was facilitated by our Gulf Coast pipeline project and expands our leading global hydrogen position.

We expect to announce additional hydrogen and oxygen awards in Q4.

Please turn to slide eight, Electronics & Performance Materials.

We were very pleased with this quarter's performance as sales, income and margin were all the highest in the history of this segment.

Segment sales of $602 million were up 21% compared to last year on 14% higher volumes, 3% positive pricing and 4% currency.

Sequentially, sales were up 5% on 3% higher volumes and 1% higher prices.

Electronics sales were up 24% compared to last year and up 3% sequentially as the industry maintained high utilization rates.

Electronics specialty materials sales increased 14% versus prior year and 6% sequentially.

Tonnage sales were up 12% versus prior year and 4% sequentially, and our equipment business was up significantly versus prior year and sequentially.

Electronics specialty materials pricing was flat versus last year and last quarter.

As we communicated at the investor conference, we continued to see more stable pricing.

In fact, NF3 prices were up slightly both versus last year and sequentially.

This positive impact was offset by lower new product pricing, resulting from higher new product volumes based on previously negotiated price and volume discounts.

This is good news as customers move our profitable new products into full production.

Performance Materials sales increased 18% versus last year with volumes up 7%, pricing up 7% and currency contributing 4%.

We continue to recover increased raw material costs with our pricing actions.

Sequentially, sales rose 6% on 3% volume growth and 2% price.

Operating income of $109 million was up 75% versus prior year, primarily due to volume leverage and continued positive cost performance.

Income was up 19% sequentially, primarily due to volume leverage.

Segment operating margin of 18.1% improved 550 basis points from last year and 220 basis points sequentially, due to strong volume and cost performance.

As expected, we did not see any material impact to our business from the tragic events in Japan.

There have been some signs of softening in certain electronics sectors including foundry and LCD.

However, you probably saw the very strong results from Apple and Intel exceeding expectations in results reported this week.

As we have said, we believe our strong position with the industry leaders and our new product success will mitigate any effect, and we expect continued strong performance from this segment.

In terms of new projects, last month we announced the successful startup of our new Electronic Materials facility in Banwol, Korea.

This facility will produce products enabling our customers to create advanced generation devices and reinforces our leadership position in the electronics market.

During the quarter we announced plans to increase production of ultrahigh purity nitrogen and oxygen and expand the nitrogen pipeline at our Chandler, Arizona facility.

We have successfully served semiconductor manufacturers in the Chandler market for over 30 years.

Finally, earlier this week we announced an expansion of our nitrogen capacity and pipeline network at the Gumi National Industrial Complex in Korea.

We currently supply nearly 20 semiconductor and photovoltaic customers via our pipeline network.

This expansion will support existing customer growth and new customers.

Now please turn to slide nine, Equipment and Energy.

Sales of $80 million were down 31% versus prior year on lower ASU sales and 30% sequentially on lower ASU and LNG sales.

Operating income of $9 million was down 59% versus prior year due to lower sales and a prior year asset gain and 62% sequentially due to lower sales.

Our backlog is down versus prior year; but, as expected, showed a 34% increase sequentially, primarily driven by our new LNG technology and equipment order for the world's first floating LNG facility, at Shell's Australia Prelude Project.

We leveraged our innovative capabilities and years of LNG experience to meet the unique demands of a successful floating LNG facility, and we feel we are well-positioned to benefit from what could be a major LNG trend.

Now I will turn the call back over to Paul.

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

First, let's take a look at the current economic environment.

This quarter, our underlying revenue growth rate declined from 12% in the first half to 7%.

This is partially due to the slowing of manufacturing growth rates across all regions.

Many manufacturing markets slowed as a result of spikes in commodity price inflation, high inventory levels, uncertainty over government policies in fiscal situations and weak private sector confidence.

As uncertainties surrounding policy, fiscal and sovereign debt issues begin to resolve over the coming months, we would expect growth to pick up early in our fiscal 2012.

Our guidance for quarter four is for earnings per share of $1.48 to $1.53, year-over-year growth of 10% to 13%.

It is based on the following factors.

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

The manufacturing economy globally should continue its gradual recovery.

This, along with some seasonal boost, should result in higher sequential volumes in Merchant Gases.

And in Tonnage Gases, operating income should improve significantly on higher volumes and lower planned maintenance spending.

Partially offsetting these sequential improvements will be a higher fiscal quarter four tax rate.

Our tax rate in quarter four should be about 26%.

For the year, we expect the rate to come in towards the lower end of our original guidance range of 25% to 26%.

For fiscal year 2011 the underlying assumptions from the beginning of the year have not changed significantly.

Our capital expenditure guidance is now $1.6 billion to $1.7 billion for 2011 at the top end of the original $1.5 billion to $1.7 billion range.

Our full-year fiscal 2011 earnings per share guidance range is now $5.70 to $5.75, 14% to 15% growth over last year.

While it is still early, as we look to fiscal 2012 we expect our capital spending will increase by 20% to 30% next year.

We will provide more specific guidance on next quarter's call.

Now let me wrap up.

Please turn to slide 11.

Last month many of you joined us at our Investor Conference, where we shared our 2015 revenue growth and margin and return goals along with the actions and plans we have to achieve them.

All of us are excited by the growth and improvement opportunities these goals represent.

We believe the market positions we have built, the customer relationships and product offerings we have cultivated, and the actions we're taking to drive out costs will make us the best investment in our industry for our shareholders.

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

(Operator Instructions).

John McNulty of Credit Suisse.

Just two questions, the first one on the European pricing issues.

You made a relatively strong statement that you were being attacked by your competition there and you weren't going to let go of volumes in that situation.

Can you walk us through what is actually going on and maybe what has changed to make it such an aggressive environment there?

Yes, John.

And we have seen the pricing in Europe be more aggressive, particularly by some of our European competitors as they have striven for volume.

As you know, growth in Europe is not as strong as it is in other parts of the world.

However, as we look at this we're going to defend our key accounts and we're going to -- but we're also have a need to increase prices, and particularly in certain regions of Europe, particularly in the South.

We have started to put price increases out.

The good news is that we have also seen -- we have seen our competitors start to follow those price increases.

So we are encouraged.

It's still early to tell, but pricing needs to get better in Europe.

And then just a follow-up, also somewhat tied into the competitive environment -- we were a little bit surprised to see, I guess, one of your competitors announced a pretty large project down in what has historically been kind of your territory, in Louisiana, with regard to hydrogen.

I guess I'm wondering how we should be thinking about the competitive environment along the Gulf Coast for hydrogen projects going forward.

Well, in the competitive environment, it is exactly that.

We believe, as we look at this, is that with our connector project, which connects the Louisiana and Texas pipeline systems, that we have the most reliable, the most efficient pipeline system in that area and that we should win the majority of projects there and maintain our position very well with good pricing and good returns.

We also won product at the same customer over which this occurred.

Those things are going to happen.

You are not going to win 100% of the business, but we still believe, as we said on our Investor Day, that we can maintain our share of the business here going forward.

As we mentioned, too, we would be expecting to be able to announce some additional hydrogen orders in this next quarter as well.

Don Carson of Susquehanna Financial.

Paul, you characterized -- you said you can still meet 17%, or at least that's your goal for the year, still, after this 16.2% this quarter, that seems somewhat aggressive, especially with the Merchant outlook.

So is that implying that this new 18% Electronics margin level is sustainable?

Simon, I know you talked about how some areas of Electronics are good, but growth does seem to be slowing sequentially there.

So maybe you can just walk me through how you still expect to achieve 17% operating margins this year?

Sure, and one of the things which we said is we just made it harder for ourselves.

So we're going to have to have things go our way.

But if we're going to make it, we are going to need improvement in the Merchant business itself in the fourth quarter.

That means we're going to need for volumes to pick up here in the United States in this quarter.

We're going to have to see some of our pricing actions take effect in Europe.

And, most importantly, we are going to have to operate our plants well and remove some of these extra maintenance, operating and dislocation costs which we talked about.

And so, that's how we get there, with a marked improvement in the Merchant margins.

But it's hard.

We're not going to get everything better all at once in that business, very clearly.

We didn't get their all in one quarter, we are not going to get out of it all in one quarter with these things.

To follow up on US merchants, your operating rates seem unusually low, low 70s.

And you just typically don't get pricing till you get close to 80.

I know you've added some plants, and that has had an impact.

It is there a need to restructure some of your US Merchant plants here and maybe close down some plants in some regions to get higher operating rates and, hence, better pricing power?

We do not believe so, as we look at this.

As we look at this, we look at the industry overall, and we think that, given the demand structure which is out there and the applications efforts which we have going forward to be able to sell this product and that we can -- is that we can get to a decent, a better operating rate over time here and that we would not take any product out at this point in time.

P.J.

Juvekar with Citi.

This is [John Hurd] standing in for P.J.

this morning.

I was wondering if you could break out the 10% year-over-year volume growth of the tonnage business into new plant startups versus growth in your base book of business.

Sure.

Good question, John, thanks.

It's split about evenly between new projects and loading up of existing assets.

Okay, and can you give us an update on how large your project backlog is at this point following the recent contract signing with Valero?

Sure, and we take a look at that, at our backlog.

Our backlog right now is in excess, and well in excess, of $2 billion.

But as I've always said, you have got to be careful about just focusing on backlog number.

The real good number for us here and that we are excited about is the growth in capital spending as we look to next year.

We had previously been talking about a growth of 15% to 20% off of this year's guidance range of $1.5 billion to $1.7 billion.

Now it looks like we're coming in at the top end, towards the top end of that range, and we have taken our growth up to be 20% to 30% for next year, which gives us a much better feel for and should give you a much better feel for what is happening.

Because how long a project sits in backlog, it can always be there.

So you can have something which you're building over three or four years.

It's always there.

What you really want to see is the capital spending for the Company growth and the CapEx.

And so we don't have any real additional to support capital or replacement capital in there; that's still about $400 million a year in our guidance.

But we have got very strong capital spending growth looking for next year.

John, if I could just add also, too, as Paul mentioned, that our backlog is up but just because when you asked the question you mentioned the Valero -- actually, in that backlog number there's increase that Paul mentioned.

There is no project for Valero yet.

We have one the order with the customer, but with our pipeline network down there we can continue to be flexible in terms of adding demand and supply.

So we will build supply, but I just wanted to emphasize that in that number there's no project for that large order yet.

Robert Koort of Goldman Sachs.

I guess I'm struck by the really strong volume, double-digit volumes in tonnage, electronics and Asian merchant and how contradictory that is by no growth in North America.

It seemed like in May and June, at least, the comments out of you guys were a little bit more constructive on North America.

Did we just -- do you think the economy stepped in a pothole?

Is there something specific to the merchant market itself that's causing you problems?

And then second question would be you mentioned throwing some more feet in sales attention.

I know you guys have done that in various iterations in the past, in various regions.

But can you talk about what the lag time is between putting those people in the field and actually starting to see some revenue on the P&L?

Sure.

Certainly.

And if you take the economy in North America, certainly the economy in North America has kind of hit a soft patch, as we look at it.

There's still a lot of uncertainty around there.

You don't -- you would have to be blind to not see it; it's on every news channel and every newspaper, about what's happening with the various things on the debt crisis --.

And that worries us, and so that worries consumers, which then worries a business which has to invest.

We aren't creating jobs and stuff like that.

And so we've got to get beyond this uncertainty.

So hopefully, as we go through the summer, we resolve some of these issues, we start to move forward.

We take some better -- and get firmer on what the policy actions will be, we will see the economy, the uncertainty start to lift a little bit off the economy and people start making decisions with regard to that.

But if you look at any of the production statistics for the US, they have been trending downward as far as the growth rate was concerned.

The first half of our fiscal year, which is the last part of the calendar year in 2010 and the first quarter of the calendar year in 2011, certainly had a stronger economy from a manufacturing standpoint.

We are probably seen growth somewhere in the 6 to 7 range.

We are seeing growth less than half of that in the third and fourth quarter, if we are lucky, given things.

So then, if you look at that, the impact of our sales force -- we started to increase our sales force post things which happened with Airgas.

And so we have already started to see the signings get better for us.

So we are seeing that with our people.

So I think it doesn't take too long for our sales guys to become effective and start to add some business.

It does take, as I said, some time to bring that business onstream.

So it's normally six, maybe nine months until that business starts to come onstream.

So, Paul, would your Tonnage oxygen and nitrogen business, excluding the hydrogen part -- would that mirror the kind of volume trends you've seen in Merchant?

Yes, it would.

As we look at that, yes, it would.

We have been seeing slow growth.

Just to look at steel operating rates, steel operatings are a little bit better than they were a year ago around the world.

The world has had somewhat of a soft patch year.

As we mentioned, too, very slow growth.

But we did have some positive in liquid oxygen, nitrogen and argon in North America.

There was some offset with helium supply constraints, limited helium growth.

Mike Harrison from First Analyst.

I wanted to just ask a couple more questions around the margins in the Merchant business.

You talked about the need to get volume in North America and pricing in Europe.

I think both of those things are a little bit market and competitive environment dependent.

But with respect to the operational issues and the need to reduce some of the dislocation costs, etc., how much of those issues have been fixed at this point and things are taken care of?

And to the extent that they could give you confidence that you will see margin improvement from those areas where you have more control over your own destiny, so to speak?

And so the way this works is you fix one, and another one popped up.

And that's somewhat of what we saw between quarter two and quarter three.

So far, for our look at this it's just -- it's hitting a lot of singles, making sure we run our plants well and do a better job.

So it's not one issue, it's a number of issues, and they are small and they are at different plants around here.

And so, it's going to be something which we are going to have to pay attention to.

With regard to some of the issues which I mentioned, argon availability has been an issue for us.

We do have capacity coming onstream in the on-site area in both the US and Asia which will help our argon availability around the world.

We've brought some argon capacity at Xingtai Steel, as an example.

That will help us.

We have a plant coming onstream towards the end of our fiscal year in Laporte, Texas, which will help us with argon availability and also cut down on the distribution costs.

So it's going to be -- it's not one thing which we can do to fix it, it's a number of things.

And then it's just getting onto -- getting the benefits out of our -- out of the service center investments which we have made and things like that.

So we can do these things.

You have seen the progress of focus which we've made on SG&A as a company.

SG&A -- you know, we didn't make a big deal about it -- but SG&A is under 10% of sales this quarter.

If you took currency out of it, SG&A is down year on year for us.

So we continue to make a lot of progress in those areas.

We can take costs out.

We can be successful at this.

We apply the tools, we apply the information systems which we have to make good decisions.

And we can get this done.

And then in terms of Merchant pricing in Asia, it seems to be decelerating a little bit compared to what you showed in the last couple of quarters.

Can you disaggregate for us what is going on in LOX/LIN pricing in Asia versus LAR and maybe talk a little bit about the outlook for Merchant pricing, given the inflationary environment we are seeing in Asia?

Simon, why don't you take that?

Sure.

Yes.

And as you pointed out, we've talked in the last couple of quarters about the spot opportunities we had in argon.

So that was one of the drivers.

We still had positive pricing in LOX/LIN in Asia this quarter, year on year, that we have done.

So in the low single digits types of numbers.

So obviously, the argon spot opportunities have wound their way through the system a little bit, and so we continue to see positive pricing in Asia.

I think we are able to recover the increased cost that we have there.

So I think low single digits going forward is something that we would expect to be able to deliver.

Last one is on the interest expense.

You saw about a $3 million decline quarter on quarter, even though your debt level went up.

To some extent that's driven then by increased short-term borrowings.

But just -- can we get any guidance, maybe, on what the interest expense number could look like over the next couple quarters?

Yes.

If you take a look at that, it is obviously going to depend upon the floating rates.

A portion of that was rates, a portion of that was capitalized interest, which you saw here for us in this time period.

But I would expect -- the interest rate is -- the interest expense for us to grow as we increase borrowings to fund the capital.

Kevin McCarthy of Bank of America Merrill Lynch.

In Tonnage, what was the impact of the customer maintenance outages that you referenced in the quarter?

And were those complete by the end of the quarter, or is there any residual spillover into the fiscal fourth quarter?

The actions were complete.

As we look at the maintenance, spending costs us $0.04 or so a share, when you look at that.

So it was substantial in a year over year.

Quarter to quarter wasn't a big deal, and we probably get a benefit of a similar amount going forward into quarter four.

(multiple speakers)

Very good, and then shifting over to Merchant, Paul, in your prepared remarks I guess you indicated four separate issues that you thought were pressuring margins there.

One of them was tight helium supply.

Can you comment on that and maybe size the impact of that in terms of any volume constraints and I think you indicated elevated procurement costs as well there?

Right.

Yes, and it's actually a long answer for this one.

I'll try to keep it short in the interest of time.

Helium has been tight around the world.

It is a commodity which ships around the world, and you don't ship it in the gas, you ship it in liquid form, in containers.

But it has been tight, due to various production issues around the world and continued strong growth, a lot of the growth being driven by the electronics industry for -- in the uses of helium.

We do have new capacity coming onstream within the United States towards the end of calendar year 2011, which will help our -- which will help our supply things.

One of the things that has -- which is a factor here is the Bureau of Mines, I think it is, in the United States, BLM, land mines, they have a storage amount of helium which they have gradually been selling off in which -- we own a portion of it, our competitors own a portion of that.

And that amount is going away.

And so we're going to become more reliant on foreign sources of helium globally.

And the procurement cost for that is higher for these things as we attempt to take this helium.

It mainly occurs in -- it occurs in gas fields, and you strip it out and then you purify it.

So it is something which we manage.

We're the largest supplier of helium in the world, so it impacts us a decent amount.

But we also think that we have a good handle on that; it's just the need that prices are going to have to go up as we see higher costs for procuring the raw helium.

Jeff Zekauskas of JPMorgan.

The equity income in the quarter was about $40 million, which was a lot more than it was in the first two quarters.

How did things get so much better there?

And what's the outlook going forward?

The outlook going forward is for that to continue.

As we look at that, we think our equity affiliates -- they're good, solid businesses.

We told you they got number one positions in a number of markets.

But the gains occurred in the Merchant area, principally Mexico and India.

In the Tonnage area we have some JVs in China, which are starting to contribute now as we build the plants and bring them on line.

In our Electronics ventures, we have an electronics venture with DuPont which had very good quarters in which we expect to also continue.

It if so yes, we expect this level of profitability to continue.

And they will grow.

Sometimes in the fourth quarter, payables steps up by $300 million, and sometimes it's steps up by about $100 million.

You've used a lot of working capital so far this year.

What's the working capital outlook in the fourth quarter?

Well, the working capital, if you are trying to get at free cash flow [and what I] can give you from that -- as far as the working capital, the payables steps up because the classification of the pension and our expectations over how much we're going to contribute within the next year.

I would expect that our pension contributions in this year will not be as -- in 2012 will not be as large as they were in 2011 or 2010.

But that is a decision that is still to be made as we close out the year.

There will be some pension contribution.

But that's what causes the payables to step up.

As far as overall, I think we've got a very good story on free cash flow for the year, though.

And I expect -- we had a very good quarter in this quarter if you just look at that and adjust some of the things out about the operating cash flow.

But we had free cash flow in excess of $100 million this quarter.

And I would expect us to be somewhere $100 million to $150 million in the fourth quarter also.

Lastly, and you may have covered this, your pricing in Electronics year over year is plus 3.

And in the old days those numbers used to be zero or negative 1.

Why are the price realizations so much better now?

Simon?

Yes, great question.

So --

Former business here.

So as we talked to the Investor Conference, I think we're seeing a fundamental change in the electronics business.

So I'll talk about electronics first.

We did see very significant declines in pricing as you go back over the last 10 years.

But we've definitely seen a stabilization of those larger volume, more mature products.

And that's why we were commenting about stable pricing going forward.

I did mention that, in fact, actually NF3 is up slightly year on year and sequentially.

And what is offsetting that and bringing that to flat for Electronics is the great news that some of our new products are being adopted by our customers.

What happens when we work out these new products -- the customer is doing, let's say, a test quantity.

We might be supplying from a small pilot plant, and we need a certain price.

But for the customer to agree to adopt that product in full production, they need to have a price road map and understand where that is going to go before they commit to it.

So we often, [whenever] a new product -- we will pre-negotiate, let's say, a share of the savings, a price/volume curve.

So actually seeing prices go down in those new products is very good because it shows that they're being adopted.

So if you take the more mature products, slightly up; the newer products, slightly down.

That's where Electronics is fairly stable.

Of course, the other part of the segment is Performance Materials, where the team has done a great job of basically recovering some cost increases with some higher prices.

And that is what has driven the segment.

Laurence Alexander of Jefferies.

This is Lucy Watson on for Laurence today.

A question on Merchant volumes, you've mentioned a couple times that they were slow in the US and Europe.

I just am wondering if this was relatively consistent across the quarter, or did you see gradual improvements or declines from month to month and I guess, also, exiting the quarter as well, have you seen any change?

It was consistent across the quarter.

As I said about the economy, we have seen the economy globally hit a little bit of a soft patch.

That's not -- you can see that in the statistics there.

Okay, and then in your -- the increased quarter over quarter in your Equipment and Energy backlog, it looks like, was mostly due to the addition of the new floating LNG facility.

That's correct.

Can you just, I guess, expound for us on the potential addressable market opportunity for offshore gas liquefaction facilities and the expected timeline (multiple speakers)?

Sure.

In the -- okay, I'm sorry.

And there are a number of projects which people are considering as ways to explore projects which are not on shore.

This is an alternate to running a pipeline into shore to take the gas in and then liquefy it there.

It also enables you to take smaller deposits and then to move the platform at some point in time, so you would do that.

So as we look at the future for gas around the world, we see gas being more and more utilized to make chemicals and also to make power.

It has some advantages as far as on the carbon side, naturally, and with regard to the power.

Plus, with the events in Japan and the shutdown of nuclear power plants, we see more and more LNG occurring around the world.

It may not come into and probably will not come into the United States, but certainly we are going to see more LNG come into places like Europe.

We're going to see more LNG come into places like Japan, India, China.

Big market for us going forward in the future.

Thank you.

And one last quick question -- does FX play a role in your forecasting for CapEx for next year?

Or is that just additional projects that you expect to come onstream?

Does what?

I missed the --

Does currency play a role?

Currency?

(Multiple Speakers).

No, no, no.

The currency did not play a big impact.

David Manthey of Robert W.

Baird.

It sounds like you think that the North American Merchant softness was broad-based.

But do you feel that it you lost any share, or was it just market weakness?

Or was it just weakness where you are?

Could you just go into a little detail there?

If I take a look overall, over this time period, over a longer time period and not particularly onto one quarter here, I think -- and we probably have lost some share in the United States.

Okay.

And then in terms of the backlog, the increase there, the 20% to 30% off the high end of the old range, it implies that projects in the backlog are starting to break loose.

Is that the case?

Or are you also at the same time betting on winning more orders going forward?

And then, secondarily, if you can talk about that roughly $2 billion in CapEx, any comments on geographies or if that's hydrogen or where it's weighted?

Sure.

If we just take a look at the CapEx here going forward, in regard to backlog, like I said, I think the real number you got to look at is capital spending.

And so it isn't so much of projects trying to break loose.

You put a project in the backlog and then you have a certain curve which you spend the money on with things.

And certainly a bigger backlog is probably better for you, but the real number which you want to see is growth in CapEx.

As we look at growth in CapEx for next year, if we looked at the spending in 2011, it's probably 40% in the Americas, 20% in Europe and 40% in Asia.

We think that that number starts to tilt more towards Asia going forward here, although America's still has strong growth for that because of the hydrogen projects which we are currently building.

Europe probably tones down a little bit because we have two large projects which we are building there.

And it hasn't been as strong.

The Middle East probably picks up some things for us within the next year or so as far as backlog is concerned.

But I would say that we are going to see a more tilt in our self towards Asia as far as the spending is concerned.

Just to clarify, too, that was capital spending that Paul mentioned could be up 20% to 30%, not backlog.

Yes, right; it's not backlog.

Not necessarily.

Peter Cozzone of KeyBanc Capital Markets.

You may have alluded to this a little bit already, I know North American Merchant front, I'm just trying to kind of get some more color around if the operating initiatives you experienced during the quarter may have impacted volumes and to maybe what extent that might have accounted for some of the share pressure here during the quarter.

Yes, and the operating issues were not confined to North America.

We had operating issues around the world.

That's a broad comment on the Merchant segment.

I think we would say, generally speaking, we were able to keep our customers supplied.

Perhaps on the helium side we mentioned supply limitations on the helium did impact growth opportunities there.

Okay, and then kind of as you look at Q4 here and the second half of calendar 2011, maybe could you provide some more color around the Electronics outlook, if you are hearing any indications from customers that would suggest anything than normal seasonality?

And then also maybe on the PV front, maybe some color as far as what you're hearing for the outlook for the rest of the year on that market.

Good question.

So a lot of different things in Electronics.

We are knowledge than our comments that we are seeing subsegments that are a little bit softer, particularly the Foundry segment.

I think TSMC has mentioned they see utilization rates down a little bit going forward.

Kind of on the flip side of that, on Intel's call they referenced, and I quote, increasing confidence in the second half of the year.

We still see growth in PV and LED.

Again, perhaps the growth rates are moderating a little bit.

When we take a look at MSI, we had thought MSI for the year, going back to our comments back in October, was up 5% to 10% for FY 2011 over FY 2010.

I think that we're going to see a little flatter back half of the year in the industry, and we saw a very strong second-half FY 2010.

So when you put that together, we could see MSI growth year on year be below that lower end of our range.

Having said that, we still see some strength.

Apple obviously had tremendous results.

And as we have explained a few times, the pull through from iPads and iPhones both in terms of the computer chips in those devices themselves but, again, the processing technology capability that has to be in the servers that are doing the math in the cloud, if you will, continues to drive business forward.

So I think we should -- we see probably moderating but no significant drop-off at all going forward.

Okay, kind of just a follow on.

You had mentioned some new product wins on the electronics business.

Do you expect a meaningful benefit, I guess, near-term on the volume from here as those products ramp up?

Or maybe also what type of margin impact do these new products generally carry?

Yes, and that's going to be a gradual impact as they start to be deployed.

And as we said, as our customers put them into full production.

So they will have an impact with us over time.

And we will continue the growth of this business.

Mark Gulley of Ticonderoga Securities.

I thought the highlight of your prepared remarks was the increase in CapEx for next year.

You have already talked about the geographic side of that.

But going back to your Investor Day, I was struck by the fact that a lot of that new CapEx in Tonnage is going to go for oxygen for, let's say, coal conversion projects in China.

So are you starting to see that ramp up next year?

Is that adding to your confidence in oxygen for next year, in Tonnage?

The simple answer is yes.

It's yes.

We are seeing the orders there, and those are in that forecast.

Now, does the forecast also include some more steel projects in emerging markets overall?

Yes.

And then finally -- thanks for the short answers.

You're welcome.

With respect to the Merchant side, [half] your sales and earnings -- we've had two straight quarters here now of some bumps in the road.

On the one hand, you're looking for more volume in the US.

But is that going to be at the sacrifice of price as you have more feet on the street?

And I guess, in other areas, you are looking for more price in Europe.

Could that contribute to some volume pressure there?

So you face some kind of vexing trends to boost results in Merchant.

You are right, but that's why we pay people a lot of money to do this work, you know.

And not to be flip on that, but that's the truth.

We have to balance that.

And I think we've proven we can do that.

If you take a look at within the US, we think it's an issue of sales coverage and getting broader sales coverage out to certain accounts.

And we don't think we have to go out and sacrifice price for that.

With regard to Europe, as we said, there are also some accounts which we look at in which, if the price doesn't go up at, and we don't want to serve those accounts.

David Begleiter of Deutsche Bank.

This is James Sheehan sitting in for David.

Do you see anything, sitting there in fiscal Q4 right now, that would lead you to expect that you could not achieve your long-term growth, EPS growth forecast of 15% for fiscal 2012?

No.

I think we are on track, as we have talked about at the Investor Day, and that we will continue to move forward.

You're always going to have some bumps in the road, but we're going to manage our way through them.

We're going to fix them and we're going to move on and deliver the results.

So how much of that target depends on fixing the problems in Merchant Gases or on getting improvement, continued, sustained improvements in Electronics?

The Merchant business is a big portion of our business; it's about 40% of the Company.

We've got to make sure that that performs.

So as you look at this, we've got to make sure Merchant does a good job.

I think you've seen the progress which we've made in Electronics and Performance Materials -- very solid businesses.

They are at levels of performance which a number of people over the years have questioned if we could ever get even close to those levels of performance.

And we think we can sustain that and continue to make it better.

Just with reference to this hot weather we are having in July, do you see any impacts in that on the efficiency of your plants or in terms of higher electricity costs?

You are right; it does not help the efficiency of our plants.

Now, the good news is I've got a lot of capacity here.

Because it cuts down, actually, on how much I can actually make.

And could you just give me a little color on pricing in packaged gases in Europe?

Is it getting stronger there?

The pricing in packaged gases has been okay for us.

I think it always could get better for us.

The thing which we are not seeing is we are not seeing the volume growth yet in Europe on packaged gases, and the volume growth has not been good, particularly in the South, in Spain.

Why don't we take one more question?

Edward Yang of Oppenheimer.

You mentioned that you expect to or you are willing to shed some unprofitable customers in Europe.

I was wondering how meaningful that could be.

Second, you mentioned cement and combustion as two areas in Europe where you feel like you could gain some share.

I was wondering what your particular expertise there is, relative to your competitors.

Yes; on the -- with regard to expertise, it gets down to applications and it gets to particular areas.

We do have a combustion lab which is world class which we can bring our customers into, and they can see -- they can see flame patterns, they can see how oxygen really will help them and make them better.

Examples of that are the position and the success which we've had in the glass market, as an example for us, by taking the glass companies in here and showing how we can -- what sort of things we can do to help them raise the efficiency and the environmental performance of their plants with regard to that.

And as far as the -- on the customer side of things, in the end I think all of this -- the impact of this is that it increases your margins.

Our experience with this is you don't want -- you don't lose a lot of business by doing this.

We have gone through this in the United States years ago, of taking customers' prices up.

And pretty much you wind up getting the bulk of them up.

And it comes down to the thing of you've got to make -- at every customer, you got to be able to make a profit.

And that's just the way it is.

Okay, so that wraps up, Augusta.

Thank you.

That does conclude today's conference.

Thank you all for your participation.