Air Products and Chemicals Inc (APD) 2012 Q3 法說會逐字稿

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

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

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

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

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(Operator Instructions)

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

Mr. Moore, you may begin.

Thank you, Leah.

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

This is Simon Moore.

Today our CFO Paul Huck and I will review our Q3 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 Air Products.com to access the materials.

Instructions for accessing the replay of this call, beginning at 2 p.m.

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 3. Before we get into the quarter's operating results, I want to spend a few moments reviewing a few key items affecting this quarter's numbers.

First, the sale of our Continental European Homecare business closed; and included in our quarter three discontinued operations results is an after-tax gain of $150 million or $0.70 per share.

Regarding the remaining European Homecare business located in the UK and Ireland, we have received bids from several interested parties and we expect to close on the sale of the remaining business before the end of calendar 2012.

Quarter three results include an after-tax charge of $30 million or $0.14 per share in discontinued operations to access the book value of the remaining Homecare business to its estimated net realizeable value.

As we mentioned on last quarter's call, we closed on the acquisition of the remaining 50% of our DA NanoMaterials joint venture at the beginning of April.

Included in this quarter's results is a $55 million or $0.25 per share after-tax gain.

This represents the gain on our previously held 50% ownership.

This acquisition supports our strategy of delivering a portfolio of differentiated offerings to our semiconductor customers.

Excluding these items, our adjusted non-GAAP earnings per share from continuing operations is $1.41 for the quarter, within our $1.40 to $1.45 guidance range -- good performance, given the weaker economy and unfavorable currency impacts driven by a stronger dollar.

To help you with the quarterly comparisons, slide number 14 in the appendix shows earnings per share from continuing operations ex-disclosed items for the past two years.

We are on track with our cost reduction plans and in fact saw about $4 million of benefit in this past quarter.

As we said last quarter, most of the actions should be completed by the end of our fiscal year.

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

When fully implemented in 2013, we expect the cost reduction plan to provide $60 million of annual savings.

Now let's turn to our operating results.

Please turn to slide number 4.

Overall results were within our expectations.

However, weaker economic growth prevented our volumes from growing as much as we had forecast and we had headwinds from the stronger dollar.

While our forecast for stronger demand in the second half of fiscal year 2012 did not come true, we are pleased that our strong operating and cost performance drove improved margins broadly.

The European recession continues and conditions worsened this quarter.

Growth in China has slowed, and the seasonal rebound in electronics and other industries has been weaker than expected.

For the quarter, sales of $2.3 billion were 5% lower versus prior year , primarily due to lower energy passthrough and a stronger dollar, particularly against the euro.

Underlying sales increased 1% year-on-year primarily due to higher pricing in Merchant Gases.

Higher Tonnage Gases volumes and higher Equipment segment sales were offset by lower volumes in both Merchant Gases and Electronics.

Sequentially, overall sales were unchanged.

Underlying sales increased 1% on higher volumes in our Tonnage Gases and Electronics and Performance Materials segments, offset by lower Equipment sales; and the DA NanoMaterials acquisition contributed 1%.

Simon will provide segment and geographic details later.

In spite of the weak volumes and unfavorable currency, operating income of $397 million increased 2% from the prior year due to excellent cost performance.

This is the result of better plant operations and fewer turnarounds, reducing maintenance spending, and the positive impact of our cost reduction plan and Europe.

Sequentially, operating income was also up 6% on improved cost performance.

Our operating margin improved to 17%, up 130 basis points versus prior year.

Sequentially our operating margin improved 100 basis points.

Net income was up 2% versus last year and 8% sequentially.

Diluted earnings per share increased by 3% versus last year and 8% sequentially.

Our return on capital employed on an instantaneous or run-rate basis is 12.2%.

On an annual basis, return on capital employed is 12.5%.

Turning now to slide 5 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 $1.41 increased by $0.04 versus last year.

Volumes decreased earnings per share by $0.04.

Like last quarter, 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 replaced higher-margin LNG heat exchanger sales in our Equipment and Energy segment.

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

And as I mentioned, excellent cost performance was $0.10 favorable.

Currency translation and foreign exchange taken together were $0.05 unfavorable.

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

Our effective tax rate was about 1% higher, which reduced earnings per share by $0.02.

And finally, fewer shares outstanding contributed $0.02.

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

Simon?

Thanks, Paul.

Please turn to slide 6, Merchant Gases.

Merchant Gases sales of $874 million were down 5% versus prior year driven by the negative currency effect.

Underlying sales were flat, with 2% positive pricing offsetting lower volumes.

Sales were down 1% sequentially, again driven by currency, as volume gains of 1% were offset by lower pricing.

Merchant Gases operating income of $165 million was up 4% versus prior year and up 8% sequentially.

Segment operating margin of 18.8% was up 160 basis points compared to last year and up 150 basis points sequentially.

Versus last year, operating income was up on higher pricing across all the regions and better cost performance.

Our distribution and production systems ran more efficiently, and we began to see the benefit of our restructuring program in Europe.

Versus prior quarter, positive volume growth offset lower pricing, with better cost performance improving profits and margins.

Let me now provide a few additional comments by region.

Please turn to slide 7.

In US/Canada, sales were up 1% on positive pricing.

Overall, volumes were flat with liquid oxygen, liquid nitrogen up slightly, liquid hydrogen up, and argon and helium down as supply availability limited sales.

As we mentioned last quarter, 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 3% on strong oil and gas injection volumes in Mexico.

Unfortunately, we did not see any improvement in the helium situation this quarter.

Supply challenges continue in both the US and Algeria.

We expect the situation to improve in FY13, helped by the onstream of our new Riley Ridge facility and other new sources we are exploring.

Argonne supply was also limited this quarter, as reduced oxygen demand for steel impacted argon coproduction.

We are working to expand argon production but expect supply limitations to extend into next year.

Pricing was up 1%.

LOX/LIN/LAR was flat, liquid hydrogen was down on lower natural gas costs, and helium was up.

Contract signings were the strongest in four years and are well above target year to date, providing confidence for growth next year.

LOX/LIN capacity utilization improved slightly, but remains in the low 70s.

In Europe, sales were down 12% versus last year primarily due to currency, with underlying sales down 2%.

Volumes were down 4% on weaker endmarket demand for both liquid bulk and packaged gases, particularly in Spain and Portugal.

Helium volumes were down on supply availability.

Pricing was 2% positive with strength broadly across the businesses.

LOX/LIN plant loadings remain in the low 80s.

And new contracts signings slowed, but we are still ahead of our target year to date.

In Asia, sales were up 6% versus last year on positive volume and price.

Overall, volumes were up 4%.

LOX/LIN volumes excluding conversions were up 7%, and packaged gas volumes continue to show strength across both our base business and the microbulk product line.

Pricing was up 3% on strength in helium and packaged gases.

Plant loadings remain in the high 70s as new capacity additions offset the volume growth.

New contract signings remain strong, and we are above target year to date.

During the quarter, we announced the acquisition of a majority position in Indura, the largest independent industrial gas company in Latin America.

Combined with our existing business in Brazil and our Mexico joint venture, Air Products will be the second largest industrial gas producer in Latin America, a region second in growth only to Asia.

We closed on the purchase of approximately 65% of Indura in early July and will be including Indura in our results beginning in our fourth quarter.

We are very excited about the great opportunities we see as we join the Indura team's local expertise with Air Products' global experience.

Please turn to slide 8, Tonnage Gases.

Tonnage Gases sales of $767 million were down 12% versus last year driven by a negative 12% impact from lower energy passthrough.

Volumes were up 2% primarily on new projects, and currency negatively impacted sales by 2%.

Sequentially, sales were down 2% driven by a negative 3% impact from lower energy passthrough and a negative 1% impact from currency.

Volumes were up 2%, again primarily on new projects.

Operating income of $134 million was up 17% versus prior year on the higher volumes and lower operating and maintenance costs.

Operating income was up 7% sequentially, as higher volumes and lower maintenance costs more than offset the anticipated impact of lower annual operating bonuses.

Operating margin of 17.5% improved 430 basis points versus prior year and 150 basis points sequentially, primarily on the higher operating income.

Lower energy passthrough contributed 80 of the 430 basis point improvement versus prior year, and 30 of the 150 basis points sequentially.

The primary driver of improved margins was the lower costs.

In terms of new business, we announced another contract to provide additional hydrogen to Motiva's Convent, Louisiana, refinery from our industry-leading Gulf Coast hydrogen pipeline system.

We have supplied Motiva for many years, and this is the second instance where our new Gulf Coast pipeline connection allows us to provide flexibility for Motiva to take product at multiple locations along the pipeline -- certainly something Motiva values.

Please turn to slide 9, Electronics and Performance Materials.

Segment sales of $604 million were flat versus last year, with growth from our DA Nano joint-venture acquisition offsetting 1% lower volumes, 1% lower pricing, and a negative 2% impact from currency.

Sequentially, sales were up 6% on higher volumes and the acquisition.

Electronics sales were up 2% versus last year.

Excluding the acquisition, electronic materials sales were down versus last year, as expected with lower semiconductor production.

On-site and equipment sales were slightly higher.

Sales were up 10% sequentially with the acquisition adding to higher base business.

In general, Electronics Materials pricing was relatively stable, but we continue to see pricing pressure in silane.

The overall photovoltaic market, and specifically thin-film PV, have not developed as was expected a few years ago.

Thin-film PV was expected to be a significant consumer of silane; and as a result, market demand has not grown to match new industry silane production capacity.

Performance Materials sales were down 2% versus last year as volume growth was offset by lower prices, and currency had a negative 2% impact.

Volumes were positive in North America and Asia, but weaker in Europe.

Sequentially, sales were up 2% on volume improvement across all the regions.

Operating income of $91 million was down 17% versus prior year, and operating margin was down 310 basis points to 15%, primarily on lower volumes and pricing.

Sequentially, operating income was up 6% and operating margin was down 10 basis points, as the sales growth was primarily driven by the acquisition.

In Electronics, we just announced a major contract from Samsung to supply their new fabs in Xi'an, China.

This is Samsung's largest-ever overseas investment, expected to be over $7 billion.

Air Products will build plants to supply Samsung and provide liquid products to the merchant market in the region.

This significant contract enhances Air Products' leading supply position with Samsung and the semiconductor industry.

We also announced a new contract with Xiamen Tianma Microelectronics for the supply of bulk gases to their new TFT-LCD facility in Fujian Province.

Now, please turn to slide 10, Equipment and Energy.

Sales of $95 million were up 19% versus prior year, primarily on higher ASU project activity.

Sequentially, sales were down 14%, primarily on lower LNG project activity.

Operating income of $10 million was up 14% versus prior year as better project cost performance overcame the mix effect.

Sequentially, income was flat.

Backlog is up 76% over last year and up 39% over last quarter, driven by our recent LNG awards, to the highest level in more than five years.

As we have been saying, LNG bidding activity remains strong.

We are pleased to have announced an agreement to supply equipment and technology to the Petronas floating LNG project 180 kilometers off the coast of Bintulu, Malaysia.

This is our second floating LNG equipment order, and we are excited about the opportunities in this new area.

We also shipped the 100th LNG heat exchanger from our Pennsylvania facility earlier this month.

Our proprietary and industry-leading technology is helping meet the world's need for clean energy in 15 countries around the world.

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 I mentioned earlier, we did not see the expected second-half global economic recovery.

We have also seen a stronger US dollar than we forecast.

Looking forward, we expect that economic growth will continue to be below our original expectations.

While US manufacturing has been an economic bright spot, recently we have seen growth start to slow as consumer confidence remains low, job creation disappoints, and concern grows regarding the potential fiscal cliff at the end of the calendar year.

European problems continue, and we do not expect a return to growth anytime soon.

In Asia, we have not yet seen the impact of Chinese stimulus actions; and the rest of developing Asia continues to experience below-trend growth as exports to Europe and the US are slow.

Electronics growth should continue this quarter.

Overall for the year, we expect square inches of silicon processed to be down about 10%.

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

A number of these orders are in China for gasification of coal.

These projects are driven by the country's need for a cleaner domestic source of energy.

We expect 2012 capital expenditures to be approximately $2.9 billion, including about $700 million for the Indura equity.

This will be up about 40% over last year, excluding Indura.

Our project backlog has stayed consistent at about $2.8 billion, which will deliver future profitable growth.

You can see an updated list of our major projects in the appendix, slide number 13.

To help you with historical comparisons, slide number 15 in the appendix shows non-GAAP capital expenditures, which includes capital lease expenditures.

This is on the same basis as our $2.9 billion guidance for 2012.

Now, let's turn to our fourth-quarter outlook.

Our guidance for quarter four is for earnings per share of $1.42 to $1.47, based on the following factors.

On the positive side, we expect to see Merchant Gases volume improvements, particularly in Asia.

Electronics should see sequential volume growth.

We will see further benefits from the implementation of our cost restructuring program, and the improved LNG backlog should increase Equipment results next quarter.

Partially offsetting this sequential improvement, the Indura acquisition is expected to be about $0.02 dilutive in quarter four, as we will recognize the transaction costs and asset write-up.

We expect the US dollar will remain strong.

We also will see higher power prices and lower cryogenic plant efficiencies due to high summer temperatures.

Therefore, we expect our earnings per share to be between $5.40 and $5.45 for the fiscal year, up 1% to 2% versus last year.

Our guidance for the full year is lower by about $0.11 per share on average for the last half of the fiscal year.

This decline is due to a stronger dollar, which has lowered our earnings by about $0.06 from our expectations last quarter.

The Indura acquisition will reduce earnings by $0.02.

Slower economic growth has reduced our forecast by approximately $0.08.

And costs as a partial offset are favorable by about $0.05.

Now, let me wrap up.

While economic growth continued to disappoint and currency headwinds were greater than expected, we are pleased with the strong cost performance delivered this quarter.

We also have taken several portfolio actions to improve our business in the future, including selling our Continental European Homecare business and the Indura and DA Nano acquisitions.

As we look beyond next quarter, we have a number of significant opportunities.

Both our US and Asia Merchant Gases business have installed capacity to sell.

When manufacturing picks up, we will have the capacity to serve it.

We are on track on our European cost reductions, and our productivity efforts worldwide are delivering results.

Our capital expenditures continue to increase, and we expect to announce more projects before the end of the year.

And LNG project interest is at an all-time high, and we expect the LNG project backlog to continue to grow.

2012 has certainly offered its challenges.

Our focus is on meeting these challenges and achieving our 2015 goals.

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

(Operator Instructions) Jeff Zekauskas, JPMorgan.

Hi, good morning.

What was your tonnage hydrogen growth in the quarter?

The growth in volumes, Jeff, was a couple of percent.

A couple of --

On volumes.

We didn't have anything new come on in this quarter.

What is your outlook for volume growth in tonnage hydrogen for the fourth quarter and for next year?

If we look at -- for the fourth quarter, we think the hydrogen growth should pick up in this quarter, principally because the refineries should run hard with the driving season in the summer or things.

So that ought to be a favorable impact.

As far as for next year, as we look at it, we will have more to say that, but it should be for growth probably in the mid to high single digits, Jeff.

So we will have more to say about that in the quarter.

Okay.

Thank you very much.

David Begleiter, Deutsche Bank.

Hi, it's Jim Sheehan sitting in for David.

Just wondering if you could talk a little about the trends you are seeing in Asia and specifically China on Merchant pricing.

What is your outlook for trends in Merchant pricing going forward?

Simon, you want to take that?

Sure.

So I think when we talk about pricing in Asia and China, it's actually a pretty good story.

We saw good volume growth and we saw decent pricing in Asia.

As we said, the volume growth perhaps not as great as we would have liked and would have expected.

We have seen announced some of the China stimulus actions.

We need those to translate into activity.

And, of course, in our Merchant segment the volumes are affected by what is going on in Electronics as well.

So we continue to see some decent pricing in China and in Asia overall, and we would expect that to continue.

And on Electronics, I guess the expected return or rebound in year-over-year comparisons is taking a little bit longer than expected.

You've made some comments about what you thought about Q4.

Is there any basis for additional optimism for 2013?

Or are you expecting trends to remain pretty consistent over the next six months or so?

I think a good portion of that, Jim, goes with how people feel from a consumer standpoint.

So we have consumers in the US and Europe and in China who right now, as we track these consumer confidence indices, which don't feel great.

So once we remove some of the uncertainty which exists around the world, I think we will see better pick-ups on those things.

But for right now I think everyone is being cautious.

They are waiting for the outcome of the US elections, some policy decisions on things, and to see how Europe resolves itself with those things.

There is a little too much uncertainty in the world right now.

All that said, I would not paint the economic situation as horrible.

It is just slow for us.

Just in Europe, you mentioned volume growth slowing a little bit there and then your outlook is basically for more of the same.

Just wondering if you are seeing any signs of stabilization in Europe yet.

As far as being stable, it is not diving -- things are not diving down.

We are still seeing decreases from a volume standpoint overall -- in certain countries, especially places like Spain, of 3% to 4% with those things.

So, it has been tough on a volume standpoint in Europe for us.

But we haven't seen that start to level off from an economic standpoint, and we are going to need that to happen sometime soon before we can return to some growth there in Europe.

Thank you so much, Paul.

Kevin McCarthy, Bank of America Merrill Lynch.

(technical difficulty) call for Kevin.

I just wanted to follow up on the new business signings in Merchant Gases in the US.

When do you expect to see volume growth flow through from that momentum?

We would expect to start to see the volumes pick up in -- probably from the signings in this quarter, probably sometime towards the end of the first quarter, the beginning of quarter two of next year.

It normally takes six to nine months to bring our customers onstream with those things.

Now, we have had momentum for a few quarters now, so we would expect to see volumes improve in quarter four in the US with things.

And to be honest with you, our volumes were pretty good in the US ex- the supply constraints which we had and Simon mentioned.

We had supply constraints in helium and argon.

If we look at that overall, we think our underlying growth in the US probably would've been about 3% to 4% if those supply constraints weren't there.

So you can look at that as an upside for us.

If we can get out of the -- out from under the supply constraints, which are going to take us a while; it's going to take us some quarters to get past there -- but there is some growth there for us to harvest.

All right.

Thanks, Paul.

As a follow-up, in the US Gulf, when you flip that pipeline on or connect it to, what impact do you expect to see right off the bat on the P&L?

The impact on the P&L is not going to be great initially.

We are going to have some more product which we can sell, and we have pretty much sold that; so we have people who are coming onstream as we look in our plannings for -- on signings on the pipeline.

So that's going to happen over 2013.

You're obviously going to see the depreciation of the pipeline coming in as a negative.

But we will also be able to run the pipeline better, to run this -- not the pipeline, but to run the system better.

That is going to take us some time to learn how to do that; but we think the efficiency gains on the system are going to be pretty good because we will be able to always run our most efficient plants and be able to cross volumes across the Louisiana system and the Gulf Coast system right now.

Great.

Thanks very much.

Vincent Andrews, Morgan Stanley.

Thanks.

I have got two questions for you.

First, could you go into a little bit more detail on the cost performance, just in terms of splitting it out between -- I guess what I am thinking about is, how much of it is a function of restructuring?

How much of it was a functioning of your operating efficiency?

And how much of it should we be carrying forward as we go into future quarters?

And what other, if any, new opportunities do you see there?

Yes.

So if you take a look at the things that happened from a restructuring benefit, as Simon said, we had about $0.01 per share benefit from the restructuring.

So it was overall $0.10 which we got from costs.

If you then -- if you look at that remaining $0.09 a share, about half of that came from variable cost efficiencies.

So that is us running our plants better, our power, the natural gas for hydrogen, using less for that to make hydrogen; saving on diesel fuel; etc..

And about -- and the other half of that comes from lower spending principally on maintenance in the operations area.

Okay, so when we think going forward, I assume the penny should be getting larger as we move forward, right?

As you move forward into the restructuring program.

And then the question is just how much of the balance of the $0.09 can you continue perpetually?

Is that fair?

Yes, and I don't think we saw anything unusual about the $0.09 going forward here.

So we think that that is going to continue and we think we can build upon that.

Okay, terrific.

If I could just ask one other question.

You've got five major projects that on slide 13 you have listed as the first half of fiscal '13.

I am just wondering if you can give us any sort of update on any of those projects, leaning more towards the beginning of the first half or the end of the first half, or anything we should be thinking about for that.

Yes, well, if you look at them -- you know, if I look at them overall, I would say about those five, about half and half roughly when you look at these things have come onstream in the first quarter.

The other half come onstream in the second quarter for us right now.

Okay.

Thanks very much.

Mike Sison, KeyBanc.

Hey, guys.

In terms of new projects this year, I think the expectation was it was supposed to add $0.30, $0.35 in EPS.

Is that roughly what it is going to contribute this year in '12?

And would you see that number increasing, staying about the same, going down in 2013?

It did, Mike, in 2012, so we did see that.

So the thing which we haven't seen is we have actually seen areas such as Europe offload from us.

But the new projects did contribute that.

If we then take a look at 2013, we think we get a similar to maybe a slightly larger amount in 2013 (multiple speakers).

Okay.

Great.

Then, Paul, I think you or maybe Simon noted that packaged gases is still seeing some strength.

Was that primarily in the US?

Could you give us a reason why that market has held up?

Yes, so Mike, good question.

I think there we were referring to Asia for packaged gases.

So obviously not having the US business; in Europe packaged gas has really been relatively weak.

So that was primarily an Asia comment.

And it is both on our, if you will, our base packaged gas business as well as strength in our microbulk product line.

Okay, great.

Last question.

You also noted weaker demand in steel for oxygen.

Was that on a sequential basis?

And is that -- did that get a little bit weaker as the quarter unfolded?

It did as the quarter came through.

We think it is going to continue in the summer also, Mike.

And it is weaker sequentially and weaker year over year.

Okay, great.

Thank you.

PJ Juvekar, Citi.

Yes, hi.

This is John Hirt on for PJ this morning.

In Merchant, it sounds like you will be facing helium and argon supply challenges for another quarter or maybe even longer.

Can you give us a sense of what the margin drag that is having currently, and how much benefit you can get in FY13 once those issues are resolved?

Yes, John, I don't know if it is having as big a drag on margin as it's having on growth.

Because the industry is tight in helium, the industry is tight in argon -- in the US particularly is where we are talking about argon.

And the discussion on helium go worldwide.

But the prices of both have been up for us.

So, from a margin percent standpoint, there has been a drag.

As I said, if you take a look at the US, we think that it probably cut back 3% to 4% on our growth within the US in those two areas.

That is about a $1 billion a year business for us, so that's somewhere between $30 million and $40 million in sales.

The contribution margins of those products are probably up in the 40% range for us.

So you can see what the impact of that is for us.

Okay, that's helpful.

Thank you.

In Electronics, can you just talk about the trends that you are seeing across each of your endmarkets, semis, LCDs, PV, and how you see that playing out for the rest of the year?

Simon, do you want to --?

Sure.

I think as always we talk mostly about the semiconductor market, because as you remember that is about 80% of our business.

Right.

So, we made a reference to PV, which is really quite weak right now.

That's only about 5% of our business.

TFT LCD is fairly flat, not showing a lot of growth.

That is only about 10% of our business.

In the semiconductor, the external forecasts that we see are forecasting a drop for our FY12 of about 10% to 11%.

So Q3 was better than Q2; it was worse than Q3 last year.

We expect kind of the same story for Q4, that things will be better than they were in Q3, but worse than they were in Q4 last year.

I think one of the key points, though, is again as we have talked many times, is our strength with the industry leaders.

Our Electronics sales were up 1% through three quarters while the industry was down, as I said, in the low double digits.

Intel's CapEx continues to be up significantly over last year.

TSMC's Q2 sales were up about 20%, stronger than the industry.

Certainly both those folks are commenting about maybe there is a little bit of weakness in Q4 and Q1.

But again, Intel, Samsung, and TSMC, where we are the leading supplier, are going to spend the majority of the industry's CapEx in this year.

So that helps us grow going forward.

Okay.

Where are your NF3 operating rates currently?

So, NF3 operating rates are probably in about the 80% range.

Okay, great.

Thanks a lot for the color, guys.

Bob Koort, Goldman Sachs.

Hey, this is actually Brian Maguire on for Bob this morning.

With some of the slowing macro numbers coming out of China I was wondering if you had seen any deferral or a little bit lengthening in the pipeline for new contract signings there, or any signs of customers wanting to differ the timing of new projects coming online over there.

We have not seen that occur.

On the speech portion of this teleconference, one of the things I talked about was that really the drive for gasification projects is to get them a clean source of energy in China.

So it is really an infrastructure project and less tied to the economic growth of the country there.

Okay.

Thanks for that.

On the tonnage volumes, I think you mentioned there was maybe a negative currency impact to the volumes in some regions.

Which regions and maybe endmarkets were you talking about specifically there?

Europe.

It was in Europe?

Europe, yes, in tonnage.

(multiple speakers) It wasn't on volumes, it was on sales.

Excuse me, yes.

It was on sales.

Oh, on sales?

As Simon talked about.

Are you seeing any of your customers in Europe on the tonnage side start to come close to their minimum take on their take-or-pay contracts?

We have not seen that.

Okay.

Thanks very much.

Mark Gulley, Gulley & Associates.

Yes, now that you have closed the Indura acquisition, can you comment a little bit about the earnings accretion you might enjoy for fiscal '13?

Yes, and so I can give you some more comments on that, Mark.

And the comments will get better as we get a good look at the write-up which is going to happen.

As you know, we have to have a third party take a look at our -- at the company and do the write-up.

But as we look at the accretion/dilution impacts for 2013 for Indura, we would expect that to be somewhere around $0.05 to $0.10 right now, depending upon what happens with the asset write-up for us.

Okay.

Turning to tonnage if I can, you reported a 2% volume gain in the quarter.

Can you break that down, as you often do, between base tonnage volumes and how much you enjoyed from new plant startups?

Mark, really that was almost all from new plant startups.

The base volumes were fairly consistent.

Overall, yes.

Overall.

Okay.

Then finally on tonnage, the maintenance expenses jump up and down a little bit.

So the margin or the operating income gain that we saw in the quarter, how much of that was due to a lower than, let's say normal maintenance expenses?

Or how much is really true underlying operating income growth that you might see into fiscal '13?

You know, I think as far as the maintenance expenses for this quarter, they were low.

It is always hard to put a number around whether that was the right number or not.

We had good performance.

We expect good performance in quarter four.

We would expect the spending to kick up in quarters one and quarters two, because they are normally higher as far as the expenditures are concerned on turnarounds.

But the performance in that area was good, Mark.

So I think overall we have had a good couple quarters in a row now on the spending in that area.

That's your best business.

Thanks very much.

Thank you.

Thanks, Mark.

Mike Harrison, First Analysis.

Hi, good morning.

You had mentioned that you weren't seeing any slowing in China tonnage projects primarily because you are still seeing gasification being a new driver.

I was just wondering, given the discussion about the potential of shale gas in China, how might that impact the gasification opportunity over time?

Are you expecting that, as we get into the later part of this decade, that maybe the coal gasification opportunity isn't as big as you might have expected a couple years ago?

We have taken a look at that, Mike, and we think that shale gas actually -- if the findings are large, which is still a question mark, and it's going to take a while to get there for China -- but that it would first eat into the LNG sales into China.

And that the gasification projects are really intended to get at the energy independence aspect of things.

And that shale gas would replace LNG right now, that would be our view.

So we don't see a lot of that curling back -- trying to cut back on that.

Now, the gasification opportunity we also think is not going to always be there.

We think there is a lot of development around that because China has the coal; they want to use the coal.

Gasification is a good way to use that call.

It makes it easier to transport the coal.

It also makes it more environmentally sound.

But we think that those gasification opportunities occur basically between now and 2020; and I don't know what happens after that.

We will see what things happen.

But there are still a lot of those opportunities that are going forward.

They are putting in place the infrastructure to do that.

So we feel sound that those projects are going to continue regardless of what happens to shale gas, because shale gas actually is a play probably out in the late portion of the decade which we are now in.

Got it, got it.

Then in terms of the Merchant volume trends, particularly on the liquid side of Merchant, just wondering if you can comment on what you saw across the three geographies in June versus May, and thus far in July versus June.

Are you seeing any deceleration as you look across those geographies?

We are not seeing a deceleration across the geographies of the trends right now.

Europe has continued to move down, and we would expect that.

Asia has started to move up, particularly in China.

It is early to call that.

We hope that that continues; but we are optimistic about that, and that is a factor which I have called out in the guidance.

The US still is for -- the forecast we have is for growth to be slow for us.

But we do expect to see growth in the US sequentially.

Then last question, Paul, is just on the share repurchase activity during Q3.

How much did you repurchase?

What was the share count at the end of the quarter?

And can you remind me what your -- what is remaining on the authorization and how you might expect to deploy that given the Indura acquisition?

We did not repurchase any shares in this past quarter, in quarter three.

We did in quarter two repurchase $53 million as far as shares are concerned.

Our diluted share count is like 214.7 million or so, I think, for us.

And if we look at going forward, given Indura as we said last quarter, we would not expect to be in the market buying back shares.

So the quarter-on-quarter decline in share count was purely the impact of activity during Q2?

Well, yes.

Yes, it was the impact of quarter two.

All right.

Thank you very much.

John McNulty, Credit Suisse.

Yes, this is actually Alina on for John.

Quick question on the Merchant business.

It seems like you guys have done a lot in terms of operating efficiency and cost cutting; so two things.

One, how much more low-hanging fruit do you have left there?

And it also seems like -- how much of the cultural changes internally, how much more do you have to go in that area?

Alina, as far as we are concerned there's probably not a lot of things which I would call low-hanging fruit.

I think we got them all back in the '90s to a great extent.

But as far as changes are concerned, we still see a lot of ability to make changes and to use -- and to run the system and gain efficiencies.

So a lot of that gets around trying to use the data we have in SAP and continuing to improve the tools we have to make our deliveries more efficient, to open up windows and things like that, and operate better, both our plants and the distribution system itself.

And also for better ways to serve and interact with our customers electronically.

So we continue on this journey every day.

Okay.

That's helpful.

Thank you.

Don Carson, Susquehanna Financial.

Yes, Paul, a question on -- going back to US Merchant.

You have talked about some time now, about additional signings, building up your minibulk sales force.

I am just wondering why we are not seeing more volume from this activity.

Can you tell us when you really expect volumes to pick up?

How those signings are going?

And speaking of Merchant overall, if you do get some of this volume growth next year, and the cost cuts that you are taking in Europe, would you expect to get back to and beyond your old 20% operating margin target in the Merchant business?

The answer on that -- on the last question is yes, Don.

We do expect to get above that 20% target in this business year.

With regard to the volumes, as I said before, I think our growth would have been about 3% to 4% in this past quarter if we didn't have the supply constraints.

So that is one of the things which we have to fix.

So we have to get more access to more argon; we are taking steps to do that.

We have to get access to more helium; we are taking steps to do that.

It is not going to all happen in one quarter.

It is going to be something which is going to unfold over 2013 for us as we work those, as we work our options there for us.

With regard to the signings which we are seeing, we are also seeing a number of customers go away, and that is occurring for a couple of reasons.

Number one, lower power prices have moved to some of our food business out as people have chosen to go to mechanical freezing.

Number two, oil field services has been slow in the Appalachian area, and principally there because of the -- it is mainly dry gas.

And the rigs have moved out of there and moved to the Bakken.

We have seen a pickup in that area for those things, but they're still drilling and so they have got -- it is a while before some of the fracking will pick up out there.

But we do have a new plant going on -- going out to serve the mid-continent area, so we feel good that we are going to have growth from that in the future.

With regard to the other aspect of signings, growth overall within the US has been slow from a process manufacturers standpoint.

Steel growth has been tempered.

Petrochemical growth has been tempered, and mainly because the new plants aren't onstream yet in those areas.

So as we look to the future we think there is lots of opportunities for us, but we got to get the economy moving a little bit stronger.

Paul, I guess I am a little confused, because your rates languish in the low 70s since the beginning of the upturn in mid '09, yet your competitors' in the low 80s now.

So would have thought that -- they have seen many of these same problems.

I would have thought your signings would have closed some of that gap by now.

Yes, and they should have, Don.

But as I said, we have also seen business move away from that, and that has been the issue.

There have been a number of people who have stopped using product or who have gone out of business for us and shut down.

Okay.

Then one follow-up.

Speaking of gaps with your competitors, your stock continues to be at quite a high historical gap with Praxair.

I know you bought Indura; you've got additional CapEx requirements.

But you have still got room on your balance sheet, it would seem, to lever up and buy back stock here at what would seem to be an attractive price if all your growth plans do come to fruition.

So, just if you can comment on why you are not buying back stock anymore.

Yes, and the reason why is because of the way in which we are going to run the Company.

We are going to maintain an A bond rating.

As we look at this we don't have room to buy back stock and maintain the A bond rating for us.

If we did, I would be the market to do that.

But we want to maintain the flexibility to operate, and we think that is best when -- at an A bond rating for ourselves.

Okay, thank you.

Laurence Alexander, Jefferies.

Good morning.

Two quick questions.

One, often when you discuss pricing for on-site projects you talk about the substitution cost that the customers face.

As the customers see their -- as the large customers see their cost of capital coming down, are you seeing more pushback on pricing for projects?

No, we are not seeing them favor the [made] case any more than that typically.

Okay.

As you look at the US economy, how would you gauge the -- your sensitivity to possibly triggering a round of productivity in the US?

Is it -- you have taken down your outlooks a couple of times.

Can you speak just a little bit about -- are you fairly comfortable with the US?

Do you feel that maybe there might be another round that is needed given the environment?

Or how you are thinking about the risks as we look out at 2013.

Our business within the US is solid.

Our margins are good.

And as we look at the growth prospects that are there, we feel good about that.

So I would not see us trying to take any action within the US.

Thank you.

John Roberts, Buckingham Research.

Thank you.

I think you said that adding in Mexico alone would have increased your North American volumes by 3%.

Was that with 100% of Mexico or just your proportional share?

And could you tell us what Mexico is up year-over-year and what the oil and gas component of that was?

Because that seemed like that drove it.

Yes, John.

So just to be clear what we said, our LOX/LIN volumes would have been up 3%.

That assumes 100% of Mexico.

The oil field services on a year-on-year basis were up pretty significantly.

I think it was in the range of 20% to 30%.

And again, most of that was driven by the liquid nitrogen for oil field services.

Thank you.

Sure, great.

There are no further questions at this time.

Okay.

Thanks, Leah.

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