Air Products and Chemicals Inc (APD) 2012 Q2 法說會逐字稿

Good morning and welcome to the Air Products and Chemicals second 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 a redistribution of this telephone conference by any other party is permitted without the express written permission of Air Products.

Your participation indicates your agreement.

Beginning today's call is Mr.

Simon Moore, Director of Investor Relations.

Mr.

Moore, you may begin.

Thank you, Deanna.

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

This is Simon Moore.

Today, our CFO Paul Huck and I will review our Q2 results and outlook for the remainder of 2012.

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 2PM Eastern Time are also available on our website.

Please turn to slide 2.

As always, today's teleconference will contain forward-looking statements based on current expectations and assumptions.

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 day everyone and thanks for joining us.

Please turn to slide number three.

Before we get into this quarter's operating results I want to spend a few moments reviewing a few items impacting this quarter's numbers.

First, as we announced last quarter, we're in the process of divesting our European Homecare business, and as a result, we are now reporting this business in discontinued operations.

As a reminder, European Homecare contributed $0.10 to our fiscal quarter 1.

If we adjust our previously provided guidance for moving Homecare to discontinued operations, it would reduce quarter 2 by $0.09 and the full year by $0.30.

Specifically, quarter 2 guidance adjusts to $1.28 to $1.34, and full-year guidance adjusts to $5.60 to $6.00.

The sale of our Continental-European Homecare business has been approved by the European Commission, and we expect to close next week.

Our quarter 3 results will reflect an after-tax gain in the range of EUR105 million to EUR130 million, or approximately $140 million to $170 million from this transaction.

We continue to work towards completing the divestiture of the remaining European Homecare business located primarily in the UK.

We also recorded a cost reduction charge of approximately $60 million after-tax or $0.28 per share.

This charge represents the ongoing actions we are taking to improve our cost structure, particularly in Europe.

It includes removing the stranded costs resulting from our decision to exit the Homecare business and the actions we are taking to right-size our European cost structure in light of the challenging economic outlook.

This charge includes the severance costs for the elimination of about 600 positions, primarily in Europe, and the write-down of two small plants.

Most of the position eliminations should be completed by the end of the fiscal year.

In quarter 4, the savings should offset the approximately $6 million of quarterly stranded costs generated by the Homecare divestiture.

When fully implemented, we expect the cost reduction plan to provide $60 million of annual savings.

Third, we recorded a tax gain of $58 million or $0.27 per share for a disputed tax item which was finally resolved.

This item dates back almost 20 years in Spain.

There is no cash impact, and as you can see from a book basis, this essentially offsets the impact of our cost reduction charge this quarter.

Excluding these items, our adjusted non-GAAP earnings per share from continuing operations is $1.31 for the quarter.

As I mentioned, the comparable range for our previous quarter 2 guidance is $1.28 to $1.34.

The comparable results for quarter 2 fiscal '11 were $1.33, and for quarter 1 fiscal '12 was $1.26.

Now let's turn to our operating results.

Please turn to slide number four.

Overall, the quarter was within our expectations.

However, our volumes did not grow through the quarter as we had expected.

For the quarter, sales of $2.3 billion or were 2% lower versus prior year, primarily due to lower energy pass-through and a stronger dollar.

Underlying sales increased 2% year on year, with both volume and price contributing 1% each.

Higher tonnage volumes in both the refining and steel markets were partially offset by lower volumes in Merchant Gases and Electronics.

Pricing gains were reported broadly across our Merchant segment.

Sequentially, sales increased 1% with volumes up 2% and pricing contributing 1%, partially offset by lower energy pass-through.

Simon will provide segment and geographic details later.

Operating income of $375 million decreased 6% from prior year.

The mix impact of volumes was the principal factor.

Unfavorable volumes in Merchant and Electronics were only partially offset by favorable volumes in Tonnage and Performance Materials.

Also, lower margin air separation unit sales replace higher-margin LNG heat exchanger sales in our Equipment and Energy segment.

Sequentially, operating income was up 6% on higher Performance Materials and Tonnage Gases volumes.

Our operating margin declined to 16%, down 60 basis points versus prior year.

Sequentially our margin improved 80 basis points.

For the quarter, net income decreased 3% while diluted earnings per share decreased by 2%.

Our return on capital employed on an instantaneous or run rate basis is 12%.

On an annual basis, return on capital employed is 12.6%.

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

Our adjusted continuing operations earnings per share of $1.31 decreased by $0.02 versus last year.

Lower volumes increased earnings per share by $0.09 year on year.

Pricing, energy and raw materials taken together increased earnings per share by $0.02 and costs were $0.01 unfavorable.

Currency translation and foreign exchange, taken together, were neutral.

Equity affiliate income was $0.01 higher, primarily due to strong volumes from our Mexican affiliate.

Fewer shares outstanding contributed $0.02.

And finally, excluding the Spanish tax gain, our effective tax rate of 24.5% contributed $0.02.

All other factors added $0.01.

For fiscal '12 we expect the tax rate to be between 24% and 25%, a percentage point lower than our previous guidance.

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

Simon?

Thanks, Paul.

Please turn to slide six, Merchant Gases.

Merchant Gases sales of $884 million were down 3% versus prior year.

Underlying sales were down 1%, with positive pricing offsetting most of the impact of lower volumes.

Currency was 2% unfavorable.

Sales were flat sequentially with positive pricing offsetting lower volumes.

Merchant Gases operating income of $153 million was down 8% versus prior year, and also down 8% sequentially.

Segment operating margin of 17.3% was down 80 basis points compared to last year, and down 140 basis points sequentially.

Versus last year, operating income declined on lower volumes across most of the businesses.

Pricing and our operating cost performance were both positive, but did not overcome the volume decline.

The full quarter effect of our new La Porte ASU improved argon production and distribution costs.

Versus prior quarter, pricing was also positive, but higher costs and the impact of lower volumes reduced operating income.

Let me now provide a few additional comments by region.

Please turn to slide seven.

In US/Canada sales were flat, with higher pricing offsetting reduced volumes.

Volumes were down 2% on weakness in hospitals, electronics and liquid hydrogen.

US/Canada LOX/LIN volumes were flat.

We report Mexico as an equity affiliate, so neither the volumes nor sales are included here.

If we included Mexico with US/Canada, our overall North America LOX/LIN volumes would be up 6% on very strong oil and gas injection volumes in Mexico.

Helium sourcing challenges continue.

We now don't expect our new US helium facility to be on stream this fiscal year, as our feedstock supplier continues to have challenges with their facility.

Pricing was 2% positive with improvement across the product lines as we took actions to recover higher costs.

Contract signings rebounded to the strong levels we saw in the second half of 2011, and we expect to begin to see the positive volume impact of these 2011 signings next quarter.

LOX/LIN capacity utilization remains in the low 70%'s.

In Europe, sales were down 5% versus last year primarily due to currency, with underlying sales down 1%.

Volumes were down 2% on weak end market demand in both liquid bulk and package gases.

In addition, helium volumes were down on supply availability.

Pricing was positive in both liquid bulk and packaged gases.

LOX/LIN plant loadings remain in the low [80s] and new contract signings continue ahead of target.

In Asia, sales were up 1% versus last year with underlying sales flat.

Overall, volumes were down 1%.

LOX/LIN volumes, excluding conversions, were flat with slower overall demand and a more modest than typical manufacturing rebound post-Lunar New Year.

Packaged gas volumes increased on the continued success of our microbulk product line.

Helium volumes were lower as product availability limited sales.

Pricing was up 1%.

Helium pricing was positive, but we saw lower liquid argon pricing due to the prior-year price premiums in the China spot market.

Plant loadings are in the high [70s].

New contract signings were the strongest ever, and aligned well with the new capacity that will come on stream for the rest of the year.

We announced an exciting win in China this quarter.

We will supply our integrated Oxy-fuel solution to Yongxin Glassware in China.

We will install a VSA non-cryogenic oxygen production unit, an automatic flow control skid, and our clean fire burners to improve productivity and reduce emissions from their glass production.

We've installed over 1500 clean fire burners around the world.

Please turn to slide eight, Tonnage Gases.

Tonnage Gases sales of $784 million were down 2% versus last year, driven primarily by an 8% impact from lower energy pass-through.

Volumes were up 7% on existing asset loading and new projects.

Sequentially sales were down 3%, also primarily driven by a 6% impact from lower energy pass-through.

Volumes were up 3%.

Operating income of $125 million was up 4% versus prior year on the higher volumes, was up 13% sequentially on higher volumes, bonus timing and less impact from the polyurethane intermediates contract modification discussed previously.

Operating margin of 16% improved 90 basis points versus prior year and 220 basis points sequentially on the higher operating income and lower energy pass-through.

We continue to win important deals in key growth markets, including large on-site oxygen projects for coal gasification in China.

Last month we announced a contract to supply oxygen to Xinlianxin's coal gasification unit in Henan, China.

We will build an ASU to provide supply 2000 tons per day of oxygen to Xinlianxin, and over 250 tons a day of liquid oxygen, nitrogen and argon for the region's growing Merchant Gases market.

With this award we are currently executing 4 different projects to supply oxygen for coal gasification in China.

In total, this represents almost 25,000 tons per day of oxygen capacity.

And we expect to announce additional oxygen and hydrogen deals through the rest of 2012.

Please turn to slide nine, Electronic and Performance Materials.

Segment sales of $567 million were down 2% compared to last year on 2% lower volumes, primarily driven by softer Electronics demand.

Sequentially sales were up 6%, primarily driven by stronger Performance Materials demand.

Electronics sales were down 4% compared to last year on slower end market demand, and down 2% sequentially on the expected seasonality.

Electronic Materials sales were down versus last year, as would be expected with lower semiconductor production, while Tonnage and Equipment were higher as we see the industry leaders continuing to invest in new capacity.

The semiconductor industry was down versus prior year in the first half, but as we said last quarter, we expect a stronger second half of 2012.

Electronics Materials pricing was stable.

Performance Materials sales increased 2% versus last year on stronger volumes and price.

Sequentially, sales were up 17% on volume improvement, as we saw the typical seasonal recovery plus improvement in key end markets across the regions.

Operating income of $86 million was down 7% versus prior year, and operating margin was down 80 basis points, primarily on lower volumes and higher raw material costs in Electronics.

Sequentially, operating income was up 9% and operating margin was up 50 basis points to 15.1%, primarily due to higher volumes.

In Electronics we announced the acquisition of all of DuPont's interest in our DuPont Air Products NanoMaterials 50/50 joint venture.

DA Nano manufactures chemical, mechanical, planarization slurries used in the semiconductor industry.

This acquisition helps broaden our strategy of delivering a portfolio of differentiated offerings to our customers.

The deal closed on April 2, and we expect to book an after-tax gain of approximately $45 million to $55 million in Q3.

Now please turn to slide 10, Equipment and Energy.

Sales of $110 million were down 3% versus prior year on lower project activity.

Sequentially, sales were up 24% on higher project activity.

Operating income of $10 million was down 56% versus prior year, primarily due to lower LNG activity, but up 34% sequentially, primarily due to higher LNG activity.

Backlog is up 69% over last year.

We believe we will announce more orders in 2012.

As we said last quarter, LNG bidding activity remained strong, and we were pleased to announce an agreement to provide technology and two LNG heat exchangers to JKC Joint Venture for their Ichthys project in Darwin, Australia.

These exchangers will produce 8.4 million tons per year of LNG from their Browse Basin offshore Western Australia.

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

Thanks, Simon.

Please turn to slide 11.

Now let me give you a brief summary of our outlook.

As we said earlier in the year, we expected that the first half of our fiscal year would be slower in the US and Asia, and that Europe would be in a recession.

We also expected that the second half of our fiscal year would be much stronger as economic activity picked up in both the US and Asia.

While we still expect improvement in the second half, our volume growth in the first half has been slower than we anticipated.

In the US, volumes have been lower than expected as new customers have been slow to ramp up.

Europe volumes have been close to expectations.

Asian volumes have lagged most, with declines year on year in both China and Electronics.

Looking forward, we expect our US volumes to grow faster in the second half of our fiscal year.

For Europe, our emphasis is on cost reduction in price improvements because we do not foresee much volume growth.

Finally, we expect Asia volumes to improve in our second half, although at a slower rate and from a lower base than originally anticipated.

On the positive side, our project development and contract signings continue to be very strong.

We expect our capital expenditures to be at the high end of our previously stated $1.9 billion to $2.2 billion range.

We continue to win large oxygen products for coal gasification in China.

Our new project wins have increased our project backlog to $2.8 billion, securing future profitable growth.

However, given our lower-volume starting point coming out of quarter 2, and the lack of strong momentum in March, we are lowering our guidance.

We expect our earnings per share to be between $5.47 and $5.60 for the fiscal year, up 2% to 4% versus last year.

As a reminder, our previously communicated guidance included $0.30 for Homecare.

The principal reason for the decline in guidance is due to weaker demand in Merchant Gases and Electronics.

Both our range for the next quarter and the full-year guidance excludes the gains we expect to book on the closing of the Linde Homecare transaction and our portion of the DuPont Air Products NanoMaterials venture referred to earlier.

As we previously told you, we would be repurchasing about $300 million of shares this year.

As you can see on our cash flow statement, we did repurchase $53 million in quarter 2.

Given our success in winning new business, which will drive our capital spending to the high end of our range, we will likely not be repurchasing more shares this year.

Now let's turn to our third-quarter outlook.

Our guidance for quarter 3 is for earnings per share of $1.40 to $1.45, based on the following factors.

On the positive side, we expect to see Asia Merchant Gases post strong gains this quarter as volumes started to rebound from the lower-than-anticipated level in the first half of the year.

Electronics should start to see and Performance Materials should continue to see normal seasonal volume improvements in their markets.

We should begin to see the early positive impact of the restructuring program, focused on removing the stranded costs from the Homecare divestiture and appropriately sizing our Europe business for the economic environment.

Partially offsetting in this sequential improvement, we expect that -- lower bonuses in our Tonnage business, as many of our annual operating bonuses occur in the second quarter.

Although our Equipment and Energy bidding activity remain strong, our results will be lower in quarter 3 due to project timing.

Now, let me wrap up.

We have taken a number of significant actions in 2012 that we are confident will deliver better performance in 2013 and beyond.

We took actions to improve our portfolio and business mix by exiting our Homecare business.

We are implementing cost reductions across Europe to remove the stranded costs of our Homecare operation, and also reduce the cost of conducting our Merchant European operations.

We won a number of new orders under long-term take-or-pay agreements that expand our tonnage presence in China and add to our leading global hydrogen position.

We continued to improve our Electronics, business even as industry millions of square inches processed was down significantly in this quarter and year.

We have improved margins, won new Tonnage business and taken full control of the DA Nano joint venture we had with DuPont.

We are winning LNG orders, which will expand equipment profits in 2013.

2012 has certainly offered its challenges, and while not seen in our current results, we're confident the actions we're taking continue to position us to meet our 2015 goals.

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

(Operator Instructions) PJ Juvekar, Citi.

Hi, this is [John Heard] standing in for PJ today.

In Electronics, overall sales and volumes were up about 6% sequentially.

But core Electronics sales were down about 2%, and I guess about 4% year-over-year.

Can you talk about why that was weak, and maybe give some color on how you see that playing out for the rest of the year?

Sure we can.

If we just take a look at our Electronics business, we have -- and what we have seen is we have seen a pretty sharp decrease in the first half of this year in millions of square inches processed, one of the things which I talked to.

We think the current stats, which the industry published, has that measured down 13% year-over-year.

If we just look at our base Electronics sales for that whole time period, in that first half we're about flat.

So we have -- and weathered this storm in the industry well.

We still think that the industry, for the full, year is going to be down year-over-year, but sequentially, we're going to start to see improvements in their production statistics.

So, we would expect to start to see our Electronics business turn positive year-over-year in sales, such that for the rest of the year that we would have a mid-single-digit increase in sales, probably in just the Electronics portion, Electronics and Performance Materials.

And John, maybe just to add, as Paul mentioned, we were flat with the industry reports being down.

And again, this goes down to what we've talked about; our strength with the industry leaders.

If you look at what Intel talked about, they were a little bit better than they expected to be, saw a better improvement next quarter.

TSMC sales were up and Samsung continues to do well and looked to invest.

In fact there they are working on their major fab investment in China.

So, as we've talked about, we're the leading supplier to leaders in the industry.

They continue to do better than the industry, which helps support our sales and makes us less cyclical.

Okay.

A then maybe just a quick follow-up, if you had to put the -- I guess the sources of your revised full-year EPS guidance into regional buckets, how much of that guidance reduction would you attribute to Europe, and maybe how much would you attribute to other regions?

If I was putting it in regions -- and realize I don't regional profitability.

And so if I was looking at the impact, it would be some in Europe in our Merchant Gas area.

And if you look at the guidance, roughly, so if we went to the midpoints, and let's just do some math for you.

If you went to the midpoint, so the $5.60 to $6.00, that would be $5.80.

If you go to the midpoint of the $5.47 to $5.60, that's roughly $5.55.

So it's down $0.25.

If I look at that, the largest area in which we have seen an impact has been Electronics for us.

And even though, as I said, we're going to have a gain in profits in this year in Electronics, we were actually expecting more because we thought the industry production would be higher.

The MSI Index, which we talked about was going to be up about 5% or so, was our original prediction.

We actually think it is probably going to be down about 10%.

But we're going to increase in our profits there, but not as much.

So, a large portion of that decrease really has to do with Electronics.

The next large area is the Merchant area, which has some decline in the US.

Not decline year-over-year, but some shortfall in the US because of volume; some shortfall in Europe, principally because of price; and then shortfall in Asia on volume.

If you look at other things, we have taxes which are favorable for us.

And all the other businesses, when lumped together, are probably favorable by a small amount for us overall.

Okay.

Thanks a lot for the color, guys.

Jeff Zekauskas, JPMorgan.

Your volume in Tonnage was up 7% and your operating income was up 4%.

Why didn't operating income grow faster than volume in Tonnage?

So if we take a look at that on the Tonnage area, we did have some new plants come on stream in this quarter which drove the volumes up a little bit.

For one thing, we saw steel operating rates improve a little bit in this quarter, which drove us up.

The other thing which we saw is we did see price declines in natural gas, as you see, which are substantial.

So our operating efficiencies, the portion which Air Products puts in its pocket, because we improve the plant as time goes on, they don't have the same value for that.

So, those operating efficiencies held down some of the profit gain, because it wasn't as large.

We had sales decrease and also a little profit decrease from that.

So as you see, you see the large impact of natural gas year-over-year in the hydrogen area.

And then lastly, what was depreciation and amortization for the second quarter of this year and for the first quarter?

Okay, let me get that.

I've got to look at the depreciation and amortization here for the second quarter.

I think I've got the year-to-date numbers here, Jeff.

If we could have a follow-up conversation rather than me -- I don't have those numbers directly in front of me.

Sure enough.

I only have the year to date, but Simon and Ken can walk you through those things.

I know that you've had questions before on that number.

One of the things that is happening, because of the impact of capital leases, our depreciation and amortization really aren't growing.

I know for a year-to-date basis we are down about $8 million in D&A, a good portion of that being currency for us, just lowering that, having a stronger dollar.

And then the other -- and then, but if I looked at -- I looked at replacements and I looked at additions to D&A, and they pretty much offset one another.

So, things which -- and not replacements, but D&A which just actually went off the scale.

And, the things which were fully depreciated or retired, and then the new -- and they are about the same for the quarter.

And the reason why is that we aren't getting the capital leases.

They don't go through depreciation.

And that represents about $200 million to $300 million of our CapEx, so a fairly substantial large portion of our growth CapEx.

And then we are also signing contracts for a longer period.

If I go back 15 and 20 years or so when our original plants were put on depreciation, we pretty much had 15-year contracts.

Now, a lot of the hydrogen business, a lot of the gasification business are -- they're signing up to 20-year contracts for these.

So it's just a longer period over which these plants depreciated.

Okay, thank you very much.

David Begleiter, Deutsche Bank.

Hi, this is Jim Sheehan sitting in for Dave.

Good morning.

Just wondering if you all have become any more bullish on construction end market demand for Performance Materials?

As far as that is concerned, within the US, I still a skeptic on the residential construction, which gets into insulation and things like that, which we sell things in.

I think a bigger bull is in the automotive area for us, and the construction for non-residential for us, and seeing that for the coatings aspect of things.

So we are more of a bull there.

Okay, and just with respect to the remaining Homecare assets, do you have any further updates on timing for those?

So, yes, and we would expect them to -- and we would expect to complete a sale before March of 2013, hopefully before that.

We have buyers who we are currently talking to.

We are taking them through a process of taking a detailed look at the business, trying to prepare them to give us bids.

And so that is what we will probably spend the next couple of months doing.

And I'll have more to say about that in July, as far as the timing is concerned, to see how those bids go.

Okay, thank you very much.

Bob Koort, Goldman Sachs.

Hi, it's actually Brian Maguire on for Bob today.

Hi, Brian.

I was hoping to get a little bit more color on the weakness in volume in the US and Canada.

It looked like the volume decline accelerated it down 2% from down 1% in the first quarter.

It's a little bit of a contrast to some of the other companies we're hearing, where their US business is doing fairly well and actually showing some signs of improvement.

So, I know you kind of mentioned some issues with signing new customers up.

Is it a matter of not having enough salespeople or not having the tenure of the salespeople about right, or just some hesitancy on your clients' part?

Or how would you kind of attribute the accelerating decline there?

Simon, why don't you take that?

Brian, thanks.

Good question.

A couple of points there, and again we just wanted to make the point that since we don't consolidate our Mexico results, our LOX/LIN volumes would have been up 6% year on year if we included that on a North America basis.

So that is one factor.

Let me just talk about a couple of things that did hold down the growth there.

As you remember, we reported very strong contract signings in the third and fourth quarter of last year, so our second half.

It takes a while for those customer volumes to come on stream and start to show up in our sales.

And as Paul mentioned, that's been happening a little bit more slowly than we expected.

So, still a very strong leading indicator and we expect to see that over future quarters.

Again, we signed -- we were back to the very high levels of contract signings this quarter, which bodes very well for the future.

Another factor was helium supply.

As I mentioned, we now don't expect our new helium plant to be on stream this fiscal year.

That is unfortunate, because we certainly could have sold more helium if we had that product available.

Our plant is ready and we are awaiting feedstock from our supplier.

So again, I think in the long term the signs are positive with new contract signings.

But in the near term, we were held back by lower signings from earlier last year and helium availability.

Okay, thanks, that helps.

And then on the $60 million of annualized cost savings, is the bulk of that in the Merchant segment because that is where Homecare was?

Or will there be some in the other segments?

And what would be the timing in 2013 when you would expect to kind of fully realize that on a run rate basis?

Yes.

And the bulk of the savings will come in the Merchant area.

The -- the removal of the stranded costs will also help impact the other segments, but principally the savings are principally targeted in the Merchant area for that.

As we enter 2013, we're going to have the bulk of the people out the door, and the other actions which we need to take to lower cost done by the end of the year.

And so, I would say we're going to have almost all of that as savings in 2013.

You'd say between that and the use of the proceeds from the sale, what you could use to either pay down debt or not take on debt that you otherwise would have taken on, that combination will still make the 2013 EPS kind of neutral from the divestiture or the reclassification?

Yes.

If we take -- and we look at the cost reduction in total and the paydown in debt, it will actually -- it will come and it should improve our earnings overall with that.

Okay, and then just one housekeeping thing.

What's the right first-quarter EPS number for us to use to get to the new $5.47 to $5.60 number?

$1.26.

$1.26.

Okay, great.

Thanks a lot.

Thanks, Brian.

Laurence Alexander, Jefferies.

Hello.

I guess first on the CapEx backlog, you were far enough into the year; do you have a sense for how much of a tailwind you will have next year, just from on-site projects coming on stream?

If you look at projects which are come on stream next year, and just I estimate that, it's around $0.35 for 2013 over 2012.

And that could still grow a little bit.

And then given the ramp in your capital spending, it seems reasonable to assume that 2014 will be higher than 2013.

Is that fair?

It should be, yes.

And how are you thinking about Merchant margins, like where you can get them to over the next couple of years?

So, if you look a little bit further out, what do you need to see to see margins inch up again?

And so our 2015 goal, with regard to margins, stay intact, Laurence.

We still think and we are trying to get the Merchant margins to the 21% to 24% range, which we talked about that.

And we realize -- and that that's a lot of improvement as people look at the margin today.

However, we've got plants to load in the US.

We've got plants to load in Asia.

That comes at a -- the incremental margin in those areas is about 35%.

The bulk of our unloaded capacity sits in Merchant for us as we look at it, so we've got good things there.

And we've got improvements to make in Europe.

We've got the cost reduction which will come in and will help in this year and next.

And we also have, in Europe, programs to get to continue to get our prices up.

That's -- as I said before, that's not going to be a quick program, but it's going to be over a number of years for us to get our prices higher there.

And then lastly, this natural gas efficiency issue in hydrogen has been coming up more frequently.

Do you have a rough rule of thumb for if there is a $1.00 per million BTU swing in natural gas prices, what that means for your earnings?

For us, it really depends upon the contract and the customer at that point in time, and the plants which we're operating.

A thing which will help us with this whole thing is, by us being able to operate our most efficient plants on the -- as soon as we get the pipeline connector put together, so that will take some of this out of it, because we currently have two systems.

When we combine them as one, we can always operate the most efficient plant as far as savings are concerned, and so we -- and that is a benefit to which we have.

The rules of thumb which we have, they always break down whenever I go into the details, so I don't want to give you one, because I have to always look at all of the individual plants ourselves.

Maybe to come at it from another angle, if I may, if -- does this imply that there is a further headwind to show up in the back of the year because of contracts rolling over?

Or are we now through this?

No.

No, no; it doesn't have anything to actually do with contracts rolling over, because we passed the price increases through based upon the cost that we pay for the gas in the month in which we supply it.

So we're matched perfectly here.

It just says that if I save money, if I make my plant more efficient and improve the heat rate of the reformer so that I don't have to put as much gas through to make the hydrogen, I get a savings for that the way I bill the customer, because I take the efficiency risk.

So it's not a huge amount on these things, for these things.

But it is -- when gas moves and you've got gas basically at $4.00 in the prior year and gas below $3.00 in this year, in around $2.50 or so, you are going to see some movement in profit because you don't save as much money when you do that.

And so, that is the factor there.

You're talking about the difference between a 7% volume growth and 4% operating income growth here.

So it is not a huge factor for that, and there are a few other things in there, but that is the bigger factor.

Fair enough, thank you.

Kevin McCarthy, BofA Merrill Lynch.

Good morning.

This is Chris Perella on for Kevin.

Just wanted to follow up on the timing of the Tonnage bonuses and the outlook for next quarter, and also what -- the growth trends you see in the tonnage business as that volume ramps up.

And so, for -- in this area what happens is that we earn a bonus based upon our reliability and our supply.

And so that occurs across the year.

So, if your contract started on 1 February, we earn that bonus on 31 January.

We don't accrue it throughout the year or stuff like that.

We book it in the month which we'd earn it, so that would be something in which would be booked in January.

We have more contracts which have the anniversary date in the first calendar quarter than in any other.

They occur in all quarters, so we earn bonuses every month.

It just happens to when the anniversary date of those contracts happen.

And so we have that.

And that produces some of the volatility from quarter to quarter.

It does not produce volatility much from year to year.

We have consistently grown bonuses, as our reliability is very good in this business.

And as we continue to add to this business, those bonuses are going to grow.

But it doesn't produce volatility really from year to year.

It does put some volatility in the year for us.

As we look at growth for things, the largest plant which we have coming on stream -- well it's already on stream -- towards the end of the second quarter was our hydrogen plant building.

So we'll see the impact of that.

The other major on-streams really occur for us in 2013.

So, as far as growth is concerned, we would expect to see good growth in our Tonnage business.

A lot of this depends upon gas prices and power prices as to what gets passed through.

But long-term, as we look at volume growth in this business, we think our volumes in this business are going to grow in the low double digits.

Okay, in the longer term.

That's right.

But as we look out 2013, 2014, 2015, we think we're set up to grow at that rate in this business.

All right.

And then as a follow-up, in Merchant Gases in North America, with the low utilization rate on the assets and I guess the slow pickup, not in customer signings, but those customers actually coming on line, is there any restructuring to do to right-size that business?

No.

Okay, thank you very much.

Vincent Andrews, Morgan Stanley Smith Barney.

Thank you very much.

You mentioned in your comments that Asian volumes did not come up the way that you had expected post-Chinese New Year.

And I'm wondering if you can just sort of contextualize what you are hearing from your customers about that.

And then, other companies in other industries have mentioned that they saw sequential improvement in Asian volume throughout the quarter and then so far into April, so maybe you could comment on that as well.

Thanks.

Yes.

And so if I take a look at Asia, certainly March was better than February and January with those things.

And so -- and April looks so far to be pretty good, and we'll see what actually comes up.

But the point being is that we didn't get to the point which we would have expected to get to, to start the third quarter for the thing.

So it was a relative disappointment for us.

Certainly our March volumes were better than the volumes we saw in February.

And was it just -- what caused that delay?

Anything specific from your customers or things we should be looking out for, or just was it sort of general malaise that we saw sort of everywhere?

Yes, and so I think everyone is looking -- and at a lot of this is China.

For us, this is Electronics volumes, but a lot of this is China when you look at what is happening.

And I think everyone has made comments on China being slow.

The official stats are higher than what people are observing right now.

So the official stats on manufacturing and stuff like that look high.

It's not what everyone is seeing in their volumes.

Okay, thank you very much.

Don Carson, Susquehanna Financial.

Paul, question on [2015 by 2015].

You reiterated your confidence in hitting those targets, but you've lost a year.

And certainly I would imagine that fiscal '12 has turned out a lot poorer than you thought back in June of last year.

So, what gives you the confidence that in this reduced timeframe you can still hit those goals?

Is it better than expected wins on the Tonnage side of the business, or other factors that continue to give you confidence?

And Don, you are right; 2012 -- it has not been according to the plan that we have, so that's a -- the thing.

So the confidence which we have, as we look at this, is that our capital spending is going to drive our growth and give us the plants in the Tonnage area to serve our customers with is -- has gone along according to our plans.

We have had some acquisitions in this year, so we're starting to fill that pipeline also, which was in there.

And so we are behind (technical difficulty) couple of areas, namely Merchant and Electronics in this year, as I talked for that.

We can recapture that.

We can load those plants because we still have the same amount of capital going into the businesses.

It's just going to take stronger growth.

Electronics -- it does go up and down as far as growth is concerned.

So, at some point between now and 2015, we will probably see some very strong quarters as far as growth is concerned.

In the Merchant area, we're putting a lot of emphasis on the US, a lot of emphasis on Asia, on getting the loading up and loading our plants there.

And I think you'll start to see some improvements in quarter 3 and quarter 4 there.

We think we can do some things to solve the problems on helium, which Simon talked about a little bit, between now and 2015 to get us more product, which will help us.

So I think a lot of things that have held back the growth are things which we can address.

And of course, obviously, the cost always sits within the things in which we need to do, and we're making progress there, too.

A follow-up on Merchant, back when you had 20% Merchant operating margins, what would that margin have been pro forma for not having healthcare?

And then also, Simon, if you just tell us -- you told us what LOX/LIN volumes would be pro forma Mexico.

What would your North American operating rate be in Merchant if you included Mexico?

As far as the -- as far as what happens in the Merchant margins, they have probably -- we are probably down a few tenths.

Depending upon the individual quarter, it's anywhere from two-tenths to three- tenths to maybe four- tenths, two-tenths to four- tenths of an impact there.

It isn't going to be huge on that.

It doesn't change our view of where we need to go.

Simon, as far as operating rates?

Certainly operating rates would be higher in Mexico as we have that growth, but certainly there would still be a lot of opportunity to load up the assets in the US and Canada.

The opportunity stays the same because you're not going to move -- you're not going to change the direction of the products there.

Thank you.

Thanks Don.

Mike Sison, KeyBanc.

Hey, good morning guys.

In terms of getting your margins back up in Merchant, if I did the math, I guess the cost-saving efforts that you're undergoing should probably get you back to that 19%, 20% range.

And then the loading and maybe new wins over the next couple of years get you to your goal in '15.

Is that how the math works?

You're right.

The cost savings in Europe obviously are one thing.

Now the other thing is we continue to drive cost across every region, so we're looking for cost savings in Asia and the US.

But here we have one time -- we're actually changing the size of the business and the structure of the business there, and that is why the charge.

But we're always going to be looking for cost savings on things.

And then loading, loading is important for us.

Improving the price in Europe is also important for us, too, Mike.

(multiple speakers) But it should get us there, right, to the 21% to 24%.

Okay.

Got it.

Just from my understanding, are your margins significantly lower than what you're seeing now, and that is where the big sort of lever will be over the next couple quarters once you get the cost savings through?

You know, the margins -- right now, the margin in this quarter was 17.3%.

We aren't very happy with that margin, obviously.

That is the lowest margin we've seen in a long time in the business.

We intend to get that -- to move that better.

Okay.

And then, last question, when you think about Electronics as you head into '13 and '14, what would you need to see sort of overall to start to see volume growth return to the levels that you need to hit your 2015 plans?

And we think the industry should be growing for us somewhere in the high single digits, so somewhere between 8% and 10%, let's say, or so, for Electronics growth.

Because the gases into that are going to grow faster, they always have.

Got it.

Thank you.

Thanks, Mike.

John McNulty, Credit Suisse.

This is [Avi Rajinan] calling in for John.

Quick question on M&A; could you talk a little bit about the health of your M&A pipeline?

Now that NanoMaterials has closed, are there opportunities for further consolidation in some of your other JVs?

If you take a look at our JVs, we obviously have always said we want to buy them.

We don't have anything active going with any of them right now on those things.

It depends upon the partner for us on those things.

But they typically occur very quickly.

So it's not going to be something which is going to be subject to a long negotiation and bid process.

The ones which I've been involved with since I've been here, things like Korea and Taiwan, Malaysia and stuff like that, they all have occurred very quickly for us.

Got it, thanks Paul.

And one quick follow-up, on the photovoltaics market, do you have any color on that area in terms of what you were seeing by way of utilization rates or potential excess capacity out there in the market?

The market is very slow right now on PV.

What they had was a lot of incentives which were in there.

The governments have taken back a lot of those incentives because they couldn't afford them.

And so there is excess capacity to make PV panels.

And just a reminder, PV is about 5% of our Electronics sales.

Right, yes, got it.

Okay.

Thanks very much.

Thanks.

Edward Yang, Oppenheimer.

Hey, Paul.

You mentioned the slowness in China and perhaps the macro there, data there understates the micro weakness.

Given some of the softness you see there, are you hearing from any customers rethinking some of the projects in the backlog?

No, we're not.

A lot of the projects in the backlog really get around producing feedstocks which are needed to generate power, produce chemicals, replace imports of LNG and stuff like that.

So I would be surprised to actually see anybody in backlog there.

Okay, and I might've missed this, but did you provide a regional breakdown for volume trends in Tonnage and what were they in North America, Europe and Asia?

We do not.

We try to take a look at that business in total.

Is it fair to say that European Tonnage volumes would be down year-over-year?

If they were, are there any customers that are nearing take-or-pay provisions are below take-or-pay?

For us, in Europe our business is principally -- a lot of it is hydrogen also in Rotterdam, and those customers are not anywhere near their take-or-pay, so we don't have any concerns there.

Okay, got it.

And finally on the Electronics, could you just educate me on what is happening on the semi side?

That is where the biggest variance was to your change in outlook.

It sounds like that semiconductor side is doing weaker than the consumer electronics side.

Why was MSI down so much, for example?

And so I think it just had to do with a lot of pullback related to things like what happened in Japan, what happened in Thailand as far as flooding is concerned.

So people were trying to be cautious, watch their inventories.

Inventories are not high in the semi space, and so as we look at this, we think we are poised to take off and have a very good year.

Last year was unusual.

Last year in quarter 1 and quarter 2, they kind of built through the cycle because of the recovery which occurred in the business.

And so in this year we saw more of a normal cycle.

So we did not see the build through, and so we showed the drops year on year.

But we do think that we are poised here to see a return here in quarter of 3 and quarter 4.

Okay, that's good to hear.

Thank you.

Mark Gulley, Gulley and Associates.

Hey guys.

I wanted to follow up on Merchant if I could.

Paul, you had talked about really beefing up the sales force, more feet on the street, those kinds of things with respect to Merchant.

Are you happy with your progress there?

Or do you think there's more resources yet to commit to make that happen?

I think we have done well as far as putting the people -- the feet on the street in the right spots.

I am happy with the signings which we have had.

And the thing which I said is that we have seen the loading of the new business which we signed be a lot slower than what we typically would expect to see.

I can't tell you why, Mark, yet.

We don't really know.

You've got to look at that on a customer by customer basis.

The only thing which I could attribute it to, in general, is that within the US manufacturers are still very, very -- they -- and cautious around trying to overbuild or build inventory and stuff like that.

So people are just being cautious about things, and so I think we still have that which is occurring with our customers.

And so, typically, we would see a customer go and ramp his plant very quickly as he put an addition on, or he made a change.

We aren't seeing those plants load as quick.

And a housekeeping thing; you have a gain on the purchase of DuPont's interest in the Nano joint venture.

Can you help me understand how you have a gain on purchase?

It's the way the accounting words.

And so what happens is, you write your existing asset, your existing investment up to market.

So, whatever I paid to DuPont, it used to be I could take the 50% which I held and keep it at historic costs.

Now I write that up to market.

So, in that write-up to market, I get a gain and I run it through the income statement.

I don't just make an entry to equity.

Okay.

Thank you.

That will conclude our question and answer session.

Mr.

Moore and Mr.

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

Okay, thanks, Deanna.

Thanks everybody.

Please go to our website to access the replay this call beginning at 2PM today.

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