Air Products and Chemicals Inc (APD) 2012 Q4 法說會逐字稿

Good morning and welcome to the Air Products and Chemicals fourth-quarter earnings release call.

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

(Operator Instructions)

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

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

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

Your participation indicates your agreement.

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

Mr. Moore, you may begin.

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

This is Simon Moore.

I am pleased to be joined today by John McGlade, our CEO, and Paul Huck, our CFO.

John will first provide our overall perspective on the year, Paul will review our 2012 and Q4 results, I will review the segment results, Paul will provide an outlook for Q1 and 2013, and finally, John will provide some longer-term perspectives.

Our comments today are slightly longer than normal so we would ask you to limit yourselves to one question and one follow-up please.

We issued our earnings release this morning.

It is available on our website along with the slides for this teleconference.

Please go to AirProducts.com to access the materials.

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

Eastern Time are also available on our website.

Please turn to slide two.

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 will turn the call over to John.

Thank you, Simon.

Good morning, everyone, and thanks for joining us.

Before I share my perspective on the year I did want to make a few comments.

As you have seen from our earlier announcement, Paul has decided to retire from Air Products at the end of February.

After 33 years of exemplary service to this organization he has decided now is the right time to step back and spend more time with family and on other endeavors.

Paul has with Air Products since 1979 and has served as our Chief Financial Officer since 2004.

Over that time he has exemplified the best of everything we stand for.

He has seen this company grow tremendously during his tenure and has been a key player in every step of the way as a leader, mentor, and trusted colleague.

I think I speak for the entire Air Products Board of Directors and the entire Air Products community when I say he will be greatly missed.

Paul will remain with Air Products through February in order to transition his role to Scott Crocco.

Scott has been at Air Products for 22 years and has extensive experience in all areas of finance, including serving as the financial manager for many of our businesses.

Scott currently serves as Vice President, Controller, and Chief Accounting Officer.

I know that Paul plans to introduce Scott to many of you over the coming weeks and months so that you will have the chance to get to know him as he moves into his new role.

While we are sorry to be losing Paul, we understand his decision and have every confidence in Scott's ability to help take this organization forward.

Now please turn to slide number three for a review of the key highlights from our fiscal year 2012.

Let me begin by saying the global economy certainly proved to be more challenging than we expected for 2012 and we did not see the anticipated step-up in economic growth in the second half of our fiscal year.

To summarize, for the year we saw global manufacturing growth of about 3%, toward the low end of our planning range.

This obviously impacted our volume growth, particularly in our Merchant and Electronics and Performance Materials segments.

During the year we did take important steps to position our portfolio for future success.

We sold our European homecare business and implemented a significant restructuring program to bring our costs in line with a slower economy in Europe.

And, as we announced this morning, we are exiting our polyurethane intermediates business and our restructuring our photovoltaic business to reflect current market conditions.

Paul will provide more details on these actions shortly.

We continue to execute on acquisition opportunities to support our strategies.

In July, we closed on the purchase of a majority position in Indura, the largest independent gas company in Latin America.

This year we also invested in a 25% position in Abdullah Hashim Group, the largest industrial gas company in Saudi Arabia.

And this week we announced a complementary joint venture with ACWA, the Arabian Company for Power and Water Development, to focus on large-scale industrial gas opportunities within the Kingdom of Saudi Arabia.

Finally, we purchased the remaining 50% of our DA NanoMaterials joint venture.

We also continue to be successful in winning profitable projects in the key energy, environmental, and emerging markets.

Our 2012 capital expenditure was a record $2.8 billion, including significant wins in oxygen for coal gasification in China.

We are now executing six projects in this exciting growth market totaling over 28,000 tons per day of oxygen.

Bidding activity remains strong as these projects are driven by China's drive for energy independence.

We completed the world's largest hydrogen pipeline network in the United States Gulf Coast.

This system allows us to offer customers the highest levels of reliability and flexibility, while enabling us to optimize the energy cost and volumes from the system.

As one example, Motiva awarded us a significant new hydrogen deal, in part due to the flexibility created by the pipeline, demonstrating again the competitive advantage this pipeline gives us.

We continue to win key on-site projects in our electronics business, notably with Samsung for their large new complex in Xi'an, China, and UMC for their growth in Tainan, Taiwan.

In the energy area we announced new LNG orders in Malaysia and Australia, and we announced the exciting new energy from waste project in Tees Valley, United Kingdom.

This project leverages our on-site business model and our significant operating experience to create a renewable source of energy for the UK market.

Very importantly, we increased our dividend for the 30th consecutive year, something we are very proud of.

While I am pleased with these key actions, I am disappointed by our earnings growth in 2012.

We simply must improve our performance in 2013 and beyond.

We have increased the number of resources focused on loading existing capacity, and we continue to step up resources devoted to delivering additional productivity in our fixed and variable costs.

To be clear, we aren't relying on improved economic conditions.

We are committed to actions we can control that will deliver improving results in the near term.

Paul will now review our 2012 results.

Thanks, John.

Please turn to slide number four.

Before we get into the operating results I want to spend a moment reviewing a few items with you.

The first two are focused on our portfolio restructuring efforts.

First, we decided to exit our polyurethane intermediates business and have shut down our Pasadena, Texas, polyurethane intermediates production facility, resulting in an after-tax charge of $35 million, or $0.16 per share.

Polyurethane intermediates was one of our legacy chemicals businesses that we have been running for cash for a number of years.

We have established a buy/resale arrangement with the buyer of the business to serve the two remaining supply contracts, the largest of which expires at the end of 2013.

As a result, we would expect a negative fiscal year 2013 revenue impact of about $100 million and a negative EPS impact of about $0.05.

Also, during the fourth quarter we completed an assessment of our position in the photovoltaic market, resulting in an after-tax charge of $127 million, or $0.59 per share, primarily within our electronics business.

Consistent with the external market forecast, we had anticipated significant demand growth for thin film or Gen 2 solar panels.

To support this market we entered into a long-term take-or-pay supply agreement in 2009 for the purchase of silane gas.

For a variety of reasons, the thin film PV market did not develop as the industry expected, resulting in global silane capacity of about four to five times global demand.

We are in negotiations to terminate our silane contract.

This charge reflects estimated termination charges, loss on purchase commitments, and the write-down of production and distribution assets, inventory, and accounts receivable.

Further details on these two items are available in the footnotes to the earnings release.

Finally, we also recorded an after-tax charge of $6 million, or $0.03 per share, to write down our assets at Sparrows Point, Maryland, related to a customer bankruptcy and mill closure.

The facilities serve the steel mill as well as the merchant market with piggyback liquefier.

The assets cannot be redeployed for alternative use.

Excluding these three items, our adjusted non-GAAP earnings per share from continuing operations is $1.42 for the quarter, at the low end of our $1.42 to $1.47 guidance range, and up slightly versus last year and last quarter.

To help you with the quarterly comparisons, slide number 18 in the appendix shows earnings per share from continuing operations, ex disclosed items, for the last two years.

As John mentioned, we closed on the purchase of 65% of Indura in July so the fourth quarter includes a full quarter of Indura results.

100% of Indura is included in our merchant results with the profits from the portion we don't own eliminated from the P&L in the noncontrolling interest line.

Our integration efforts are progressing well and we are on track to deliver on our expected cost synergies and growth opportunities.

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

As an update to our Q2 European restructuring, we continue to make good progress on our cost reduction plans and in fact saw about $6 million of benefits in the past quarter, making the total for 2012 about $10 million of benefits consistent with our plans.

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

Now please turn to slide number five for a review of our 2012 results.

Sales of $9.6 billion were down 1%.

Currency and energy pass-through were both negative 2%, while acquisitions added 2%.

Our underlying sales grew 1% from higher tonnage volumes being partially offset by weakness across our merchant segment, particularly in Europe.

Overall, volume growth was much more modest than we had hoped.

While this is primarily due to a weak macro environment, particularly in Europe and Asia, we are not pleased with our performance to load our plants.

In our Merchant segment, overall volumes were down 2%.

Volume growth of 6% in tonnage gases principally came from new investments and contracts.

In electronics, growth in on-sites and equipment was offset by lower specialty materials demand.

Our operating income of $1.5 billion declined 1% and our operating margin for the year was 16%.

Earnings per share were up 1%.

And not surprisingly, given our higher capital spending, weak asset loading, and acquisitions this past year, our after-tax return on capital employed declined by 100 basis points to 11.5%.

Still well above our 8% cost of capital.

Now let's turn to our results for the quarter on slide number six.

Overall results were within our expectations.

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

Despite this weaker environment, pricing held firm.

For the quarter sales of $2.6 billion were 4% higher versus prior year in total.

On an underlying basis, sales were also up 4% on higher volumes in our Tonnage Gases, Equipment and Energy, and Electronics and Performance Materials segments.

Our Indura and DA NanoMaterials acquisitions contributed 6%, which was offset by unfavorable currency and lower energy pass-through impacts.

Sequentially, overall sales grew 11%.

Underlying sales increased 3% on higher volumes across all segments.

Additionally, the Indura acquisition contributed 6%.

Simon will provide segment and geographic details later.

Operating income of $408 million increased 3% versus prior year and prior quarter.

Our operating margin of 15.7% was down slightly versus prior year.

The impact of the acquisition and associated costs was a negative 50 basis points.

Sequentially, our margins declined 130 basis points due to the Indura acquisition, higher energy prices, and higher operating and distribution costs.

Net income and diluted earnings per share were both up modestly versus last year and sequentially.

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

Our adjusted continuing operations earnings per share of $1.42 increased by $0.01 versus last year.

Volumes increased earnings per share by $0.05, including $0.06 from acquisitions.

And as a reminder, last year's fourth quarter included $0.05 of good news from tonnage contract modifications which did not repeat this year.

Let me take a minute and talk about the overall impact of Indura.

Indura's sales were about $140 million this quarter, or a run rate of about 10% higher in local currency terms than the March last 12 months numbers we communicated when we announced the deal in June.

Within the Merchant segment we had about $6 million of transaction costs with another $5 million of one-time financing costs captured in the interest expense line.

Overall, given the acquisition costs and consistent with what we communicated last quarter, Indura was about a $0.03 headwind for us this quarter.

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

Positive cost performance was $0.02 favorable.

Currency translation and foreign exchange taken together were $0.03 unfavorable.

Equity affiliate income and noncontrolling interests taken together were neutral.

As a reminder, last year we disclosed $0.04 of good news in our equity affiliate lines from nonoperational items, which was offset by an accounting adjustment of a similar amount in noncontrolling interest.

What you see here is essentially the reversal of that item as a prior-year variance.

And, finally, interest expense was $0.04 higher due to the Indura acquisition.

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

Thanks, Paul.

Please turn to slide eight, Merchant Gases.

Merchant Gases sales of just over $1 billion were up 8% versus prior year, primarily driven by the Indura acquisition.

Underlying sales were down 3% on 4% lower volumes and 1% positive price.

The volume effect on sales was impacted by contract modifications in the prior year in US/Canada.

Excluding that affect, volumes would have been down 2%.

We also had a 4% negative currency impact.

Sales were up 16% sequentially, again primarily driven by Indura.

Underlying sales were up 1% on a 1% volume improvement and flat pricing and currency had a negative 1% effect.

Merchant Gases' operating income of $161 million was down 5% versus prior year and down 2% sequentially.

Segment operating margin of 15.8% was down 210 basis points compared to last year and down 300 basis points sequentially.

Versus last year, operating income was down on lower volumes, particularly helium and Europe packaged gases and negative currency.

Partially offsetting this were benefits from our Europe cost reduction programs and profits from the Indura acquisition.

Excluding Indura, the operating margin this quarter would have been 17.2%, or 140 basis points higher.

As we discuss when we announced the Indura acquisition, their operating margins are below our Merchant segment average due to approximately half of their sales being in lower margin hard goods.

As Paul said, the merchant Q4 segment results include about $6 million of one-time acquisition costs.

Excluding the acquisition costs, Indura's margins were in the low double digits; about what we expected.

Versus prior quarter, we did see the negative impact of higher power costs and lower ASU plant output with the higher summer temperatures.

And we saw higher distribution costs, particularly in North America, due to the tight helium and argon supply.

Let me now provide a few additional comments by region.

Please turn to slide nine.

In US/Canada sales were down 6% on lower volumes and flat pricing.

Liquid oxygen and liquid nitrogen volumes were down slightly.

While we are successfully bringing on-stream the business we have previously signed, we are seeing a number of customers shutdown operations or stop using gases and, in a few cases, switch to competitive supply.

Helium availability remains a challenge and helium volumes were down as both domestic and overseas sources did not supply as expected.

We hope to get feedstock to bring our new Wyoming facility on stream late in our fiscal year 2013 and expect helium to remain tight until at least then.

Paul mentioned the shutdown of the Sparrows Point facility.

As we discussed last quarter, this impacted our argon availability.

We are working hard to improve argon recovery at other facilities.

For example, we recently moved quickly to redeploy and idle asset to a facility in a region with supply shortages.

Overall if we had the helium and argon we had expected and excluding the impact of the contract modifications, US/Canada volumes would have been up 1% rather than down 6%.

Pricing was flat with helium increases offsetting slightly lower LOX/LIN/LAR pricing.

Contract signings stayed at the high level we saw through the first three quarters and are up 15% versus last year.

And LOX/LIN capacity utilization remained in the low 70%s.

In Europe sales were down 12% versus last year, primarily due to currency with underlying sales down 3%.

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

Helium volumes were down on supply availability.

Despite the weaker demand environment pricing remained positive, up 1%.

LOX/LIN plant [reloadings] remained in the low 80%s and new contract signings were at target.

In Asia, sales were down 1% versus last year.

Underlying sales were flat on 2% positive price and 2% lower volumes as we are clearly seeing the effect of lower demand, particularly in China, in electronics.

LOX/LIN volumes, excluding conversions, were up 2%.

Liquid argon volumes were down significantly, particularly on lower PV demand in China.

One bright spot was the continued success of our microbulk product line.

Despite the slower growth environment, pricing was up 2% on positive packaged gas and flat liquid bulk pricing.

Plant loadings are in the mid-70%s.

New contract signings for the quarter were down slightly, but we finished the year well ahead of last year.

We continue to demonstrate application technology successes, helping our customers use our products to reduce environmental emissions, increase output, and improve product quality, among other benefits.

We announced a new contract to provide a full oxy-fuel solution to Jinxin Glass in Henan, China, including a PRISM VSA oxygen generator and Cleanfire oxy-fuel burners.

And we announced an order to provide similar systems to five CEMEX cement factories in Spain.

Please turn to slide 10, Tonnage Gases.

Tonnage Gases sales of $846 million were down 4% versus last year, driven by a negative 7% impact from lower energy pass-through and a negative 2% impact from currency.

Volumes were up 5%, about evenly split between bass volume growth and new projects.

Sequentially, sales were up 10% with 4% higher volumes and a positive 6% impact of higher energy pass through.

Operating income of $141 million was down 7% versus prior year.

The volume growth and lower costs from strong operating performance improved profits.

However, the PUI business delivered about $10 million less operating income than last year, and as Paul mentioned, in Q4 of last year we had a net gain from contract modifications of about $15 million that did not repeat this year.

Operating income was up 5% sequentially as the higher volumes more than offset lower PUI results.

Operating margin of 16.7% declined 50 basis points versus prior year as the lower PUI results and prior-year contract modifications reduced operating income.

Margin declined 80 basis points sequentially on lower PUI results and higher natural gas prices.

We announced two more oxygen projects in China for coal gasification -- a new 2,000 ton per day ASU in Hebei for Cangzhou Zhengyuan Fertilizer that will also produce liquid products for the merchant market and a 2,000 ton per day project in Guiyang with Guizhou Kaiyang, a subsidiary of Yankuang Group, with whom we are currently executing a 12,000 ton per day project in [Xianji].

The new project in Guiyang will also provide liquid products to the merchant market.

Please turn to slide 11, Electronics and Performance Materials.

Segment sales of $617 million were up 5% versus last year.

Underlying sales were up 3% on 4% higher volumes and 1% lower prices.

Sequential sales were up 2% on higher volumes.

Electronic sales were up 9% versus last year on strong tonnage and equipment results and the DA Nano acquisition.

Excluding the acquisition, electronics material sales were down versus last year as we did not see the typical seasonal volume improvement.

Sales were up 10% sequentially again on strong tonnage and equipment results.

Electronic materials pricing remained relatively stable, with the exception of silane, as we mentioned last quarter.

Performance Materials sales were down 1% versus last year as volume growth was offset by lower prices and currency had a negative 3% impact.

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

Sequentially, sales were down 7% on lower volumes in all regions due to general economic weakness, a slower construction market, and cautious customer supply chain management.

We saw lower prices both versus last year and sequentially, but are also seeing lower raw material costs.

Operating income of $85 million was down 7% versus prior year and operating margin was down 180 basis points to 13.8%.

We had positive contributions from the higher volumes and good productivity performance, but this is more than offset by the impact of inventory revaluation.

This was positive last year and negative this year, consistent with lower raw material prices this year.

The segment effect is largely offset at the corporate level.

Slide 21 in the appendix provides more detail.

The net year-on-year impact of the inventory revaluation is 360 basis points.

Sequentially operating income was down 6% and operating margin was down 120 basis points.

The sequential impact of the inventory revaluation is 180 basis points.

In Electronics we announced a contract to supply four new phases of UMC's Fab 12A complex in the Tainan Science Industrial Park in Taiwan.

We will build a new ASU, additional pipelines, and a bulk supply system to complement our existing ASU and pipeline system in the Tainan Science Park where we supply major semiconductor and TFT LCD manufacturers.

Now please turn to slide 12, Equipment and Energy.

Sales of $126 million were up 32% versus prior year, primarily on higher ASU project activity.

Sequentially sales were up 33%, primarily on higher ASU and LNG project activity.

Operating income of $18 million was up 54% versus prior year on the higher activity and better cost performance.

Sequentially, income was up 81% on higher LNG project activity.

Backlog is up 35% over last year and up slightly over last quarter as LNG project development continues to be strong.

In August we announced an energy-from-waste project in Tees Valley, UK.

This innovative growth opportunity leverage our on-site business model and our experience with gasification, syngas cleanup, and power generation.

Just to clarify, this project is included in our capital spending backlog, not our Equipment and Energy sale of equipment backlog.

Now I will turn the call back over to Paul.

Thanks, Simon.

Please turn to slide 13.

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

We saw the second half of 2012 slower than the first half in most regions.

Given this lack of momentum, we expect that economic growth will be modest at best in 2013.

Globally, for the regions we operate in, we are forecasting manufacturing growth of 2% to 4%.

While US manufacturing has been a relative bright spot, we have seen growth slow as consumer confidence remains low, job creation disappoints, and concern continues regarding the potential fiscal cliff at the end of the calendar year.

European problems remain and we do not expect meaningful growth anytime soon.

In Asia we have not 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.

And we expect 2% to 4% growth in South America.

We are hopeful that electronics growth will begin to rebound in 2013 from a weak 2012.

Overall for the year, we expect square inches of silicon process to be up 4% to 6% next year.

On the positive side, our project development and contract signings continue to be very strong, a number of these orders are in China for the gasification of coal.

These projects are driven by the government's goal of developing domestic sources of energy and feedstocks utilizing their vast coal reserve.

We expect 2013 capital expenditures to be $2 billion to $2.2 billion.

This is comparable to the $2.1 billion spent in 2012, excluding the $700 million for Indura.

Our project backlog has increased again to about $3 billion, securing future profitable growth.

We are beginning to see some slowing in a few of our customers' projects as they reflect the growing economic uncertainty.

You can see an updated list of our major projects in appendix slide number 17 and a geographic and business segment capital expenditures split in slide number 19.

To help you with historical comparisons, slide number 20 in the appendix shows non-GAAP capital expenditures which includes capital lease expenditures.

This is on the same basis as our $2 billion to $2.2 billion guidance for 2013.

Based on this, our initial earnings per share guidance range is $5.65 to $5.85 per share for 2013.

While economic outcomes could vary, we are prepared to execute our business plans and adapt to whatever economic environment emerges.

Walking from our 2012 earnings per share of $5.40 we have the following factors.

New plant on-streams in 2012 and 2013 should add about $0.25 to $0.30.

These are projects that are either on-stream now or will be on-stream soon and are backed by contractual commitments to buy.

This number is slightly below our previous expectations as we have seen some customer-related delays in new project on-streams.

Loading existing assets should add $0.10 to $0.20 to EPS.

This is the factor most influenced by the economy.

Indura, net of interest expense, should add about $0.10 last year with the polyurethane intermediates business divestiture reducing earnings per share by about $0.05.

In Equipment and Energy, we expect operating results will be higher due to more LNG activity.

This is a $0.05 tailwind.

Our cost reduction in Europe should add about $0.15 a share.

Somewhat offsetting the positives pension expense will be about a $0.20 headwind due to the drop in interest rates from September 2011 to September 2012.

We expect currency and taxes to be a headwind, and given our continued strong capital spending, we would expect interest expense and shares outstanding to both increase modestly.

Overall about a $0.10 to $0.15 headwind.

Now let's turn to our first quarter outlook on slide 14.

Our guidance per quarter one is for earnings per share of $1.26 to $1.31 based on the following factors.

On the positive side, we expect to see increased earning sequentially from new plant on-streams.

Further, progress on our cost initiatives will continue and the Indura acquisition transaction costs in quarter four won't repeat.

Offsetting the sequential improvement in Electronics and Performance Materials, we expect lower seasonal demand and lower equipment sales.

In Tonnage Gases profits are expected to decline due to seasonally higher maintenance spending and lower volumes as refineries begin taking their annual outages.

We will see lower equipment and energy profits in the first quarter based on project timing, although we do expect a rebound through the rest of the year.

And higher pension expense, as previously mentioned.

Now let me turn the call back over to John to wrap up.

Thanks, Paul.

While we are pleased with the expected long-term positive impact of the portfolio actions we completed this year, we were disappointed with our overall performance during 2012.

In June of 2011 we shared our 2015 goals of $15 billion in revenue, 20% operating margin, and a 15% return on capital employed.

Since then the global economy has only delivered about half of the approximate 5% manufacturing growth that underpins our expectations.

This had a significant impact on our recent performance, particularly on merchant asset loading.

Further, while we have improved productivity, it is not at the level we need it to be.

We remain focused on attaining the operating margin goal of 20% and a return on capital employed goal of 15%.

However, based on the continued slow economy, we don't expect to be able to reach our goals in 2015.

Given the lack of economic clarity, we are not in a position to predict exactly when we will reach these goals at this time.

Now let me talk about some of our near-term actions as we drive improvement towards these margin and return goals.

We need to be more successful in driving volume growth in our merchant businesses, utilizing the investment in place to leverage margin improvement.

Our focus in Europe remains on implementing our cost reduction plan as quickly as possible, ensuring we get to the $60 million per year of benefit early in 2013.

We have also recently brought on-stream a new pricing analysis tool that should help us better target our pricing actions and improve both margins and returns in our Merchant and Electronics and Performance Materials segments.

In Tonnage, we have brought on-stream and are executing a large number of new plants.

We have to execute these projects on time and on budget and improve our plan efficiencies to drive further return improvement.

The Electronics and Performance Materials businesses have seen significant improvement over the past few years.

We need to continue to drive margin improvement and grow from these businesses through new products and focusing on our major customers.

We have won a number of new LNG orders this year.

We expect the global interest in LNG to lead to an expanded project list over the next few years, so we are adding additional manufacturing capacity in Florida.

Finally, 2012 margin and returns were helped by productivity and cost reductions.

We must continue to lower our fixed costs, improve our operating efficiencies, and leverage our fixed cost base as volumes expand.

While our 2012 results are disappointing and 2013 remains uncertain from an economic growth standpoint, we are focused on the key actions we can control to deliver our margin and return goals.

As we end today's call, again, I would like to thank Paul for his 33 years of service to Air Products and especially these past eight years as our Chief Financial Officer.

I would like to extend my congratulations to Scott Crocco.

Scott and Paul will both be on our next quarterly earnings call at the end of January.

Thank you and I will know turn the call over to Leah to take your questions.

(Operator Instructions) P.J. Juvekar, Citi.

Hi, good morning.

Just a quick question on Merchant Gases, it seems like Merchant business has been a work-in-progress for a couple of years.

Now Indura seems to be margin dilutive, so when do you think you can get your margins back to sort of normalized range of 18%, keeping in mind that your long-term goal is 21% to 24%?

So, P.J., if we take a look at that one of the key aspects here which has been holding down our margins has been our loading.

And so as we have talked about that we think that that is an important aspect of bringing us back here.

So the loading in the US, the loading in China principally, given the load factors that we are at, and that is going to be one of the things which boost it.

In Europe it is going to be the reduction in cost, which we need to put in.

The bulk of the $60 million in savings will flow through Europe.

And plus some pickup in the economy eventually in Europe will help loading, particularly in the package gas area where we have seen continued declines in things like the holdings of -- people holding the amount of cylinders has declined in Europe steadily for the past three or four years.

If that starts to pick up, people will start to hold more of those.

The rental aspect of that flows directly back to our bottom line.

So it's going to take some form of an economic pickup for us to see those things happen.

Then, secondly, you have been spending your CapEx at a rate of about more than 2 times G&A, and now you mentioned today that some customers are delaying projects.

I was just wondering if you can add some light on which areas or which segments that customers are delaying these projects.

Thank you.

And the places in which we have seen that P.J. have principally been in hydrogen within the US we have seen project delays and the electronics business.

We have not seen any significant delays in China on the gasification projects that are underway right now.

Thank you.

Duffy Fischer, Barclays.

Good morning.

Just want to go back -- on the CapEx, so we had a pretty aggressive CapEx buildout that was laid out at the investor day last year.

Since then the world has grown about half what you thought.

You have talked about some people delaying some projects.

Your stock is at a much more attractive level pricewise now.

When you compare kind of doing stock buybacks to continuing aggressive buildout into what seems like some areas that already have a little bit of oversupply, is there any thought of pulling back a little bit on CapEx and kind of readjusting that growth in a slower growth environment?

Duffy, this is John.

I think what you got to look at is certainly at a macro level the economy is growing a lot slower than we anticipated.

But more broadly, if you look at the on-site -- and most of our capital is going into our Tonnage business, which I really believe secures our long-term future growth with cash flows and internal profitability.

And most of that is going into either oxygen for gasification, largely in China, and up until very recently hydrogen projects, again, largely in North America or the United States.

As we have for many, many years, we have been very clear about communicating our priorities for the use of cash, which is really to reinvest in the businesses that fit and opportunities that fit our strategy.

If you look at the total CapEx, something like 80%, 85% of the growth CapEx in these last couple of years has been in our tonnage or on-site business model type of investment.

Okay, thank you.

Then just on photovoltaics in particular, could you size that business for us currently within your portfolio?

And then just kind of talk about what the volume growth in photovoltaics was for you last year and what you expect this next year.

Sure.

If you take a look at PV, PV between electronics and the merchant area is about $50 million in each, or about $100 million in total.

In the electronics area that is where we sell the silane, that is where we serve bulk of the Gen 2 customers which this charge is more related to.

So it is about a little under 5% of our (inaudible) sales and electronics we sell into that area.

In merchant we principally serve the people who make the polycrystalline solar, and that is where we sell them LIN and argon for those things.

I would just like to add the point, if I may, that we are not proud about this decision.

It was a terrible decision and a terrible assessment of a market opportunity at a different point in time when the world looked a lot different.

And we recognize the impact that this has to our shareholders.

I do think, however, from the standpoint of the business acknowledging this, putting this behind us I think you will begin to see the benefits that we have be able to put into the improvement of the overall electronics business going forward.

Certainly we understand the severity of this and there will be accountability associated with it.

And, Duffy, just to close, on the growth aspect of this, the growth has been very slow in this past year for that because of the people backing off on the purchase of these things and the stimulus actions retreating.

Great.

Thank you, fellas.

Jeff Zekauskas, JPMorgan.

Good morning.

I was looking at your balance sheet.

Your payables sequentially went up about $300 million to $1.9 billion and your other long-term liabilities went up about $400 million.

Can you talk about what those changes are about?

And those things are related to Indura for us as we brought Indura on, Jeff, four things.

Right, okay.

There is a lot of changes in the balance sheet both -- Indura was a big purchase.

And remember we bring on 100%, so I bring on the total balance sheet probably about $1.3 billion or so when you look at that from assets and liabilities associated with that.

And in terms of your minority interest line, because Indura made whatever it was, $9 million on an operating level, shouldn't the minority interest on the normal basis be much higher in the fourth quarter than it was in the third if you exclude these various reversals?

Yes, so the thing which confuses this whole factor is that we had some tax adjustments which also went through that line there, which there is things contained in the tax rate and they offset in the minority interest line which go around Indura for those things too.

But you are right, it will be larger in the future.

Okay.

Thank you very much.

Don Carson, Susquehanna Financial.

Got a question on sort of the interim goals [2015 by 2015] you have said is no longer valid.

What can we expect in the interim?

You are not even hitting your 17% margin targets that you had achieved back in 2011.

What interim goal should we expect?

And is the issue here one of lack of focus?

I mean it seems the results have been somewhat inconsistent and yet you are off making acquisitions in South America and joint ventures in the Middle East.

Do you need to focus more on the core operations?

Don, this is John.

As I said earlier during my part of the call, we are not going to set out an interim set of goals until we have better economic clarity.

Having said that we are absolutely focused on driving improvement here.

I think you have a fair question on are we not focusing on our existing business, and from my perspective I think we are.

Some of the operating issues that we had in the core businesses in merchant and tonnage I believe we have our arms around.

I believe we've put in the right management structures globally in these businesses.

But as Paul correctly pointed out, particularly on the merchant segment, we really need to have some economic tailwind to really be able to get the leverage out of the existing asset base that we have.

If I just took -- and Paul made these comments -- if I just took a look at Europe in particular, in some cases in the packaged gases businesses we continue to go down after several years of slow or negative growth, or negative growth in Southern Europe.

And now are seeing more the core of Europe, if you will, also starting to slow.

Don, I think one thing here is we are going to have an Investor Day in November here in Houston.

At that Investor Day, both John and I will address the path better here.

It is kind of tight on the call today, and you asked a good question; it deserves a good answer from those things.

But within the time constraints of today's call, it is hard for us to do.

But at the Investor Day, we are going to talk some more about that.

We are going to lay that out better as far as the path forward for us.

One quick follow-up on the portfolio.

You have gotten out of several non-core businesses.

Does performance materials really fit?

I mean it has got attractive financial characteristics, but it is a really a non-gases business, so is that the next leg in portfolio management?

Don, you know, we have talked about certainly performance materials over the years.

That business has been performing extremely well.

We have restructured it.

It gives us a really good insight to specific markets, and it really allows us to leverage some of their capabilities broadly across both their business and the electronics specialty materials businesses.

And quite frankly, they are a value-added approach to the market.

In terms of extracting value based on the value that we bring to that customer base is something I'd like to see more of more broadly across our portfolio.

Thank you.

Mike Harrison, First Analysis.

Good morning.

Was just hoping you could talk a little bit more about the helium situation.

It looks like you pushed out the Wyoming facility startup date from the first half to the second half of last year.

Just maybe an update on what is going on there and how confident you now are that it will be up and running before the end of next fiscal year?

And so as far as the plant in Wyoming, understand that our plant is -- and can come online at any time.

It has been ready for almost a year now.

We are waiting for our crude supplier to bring his plant online.

We now expect that to happen late in our fiscal 2013.

We do not control that aspect of things.

However, there are other things which we are attempting to do and we continue to explore them to get better supply of helium to us.

And that is going out and exploring some other places in which we can access some helium for us in the future.

And so it is in our forecast that our crude supply will start to pick up around quarter two of this year and get some improvements in that.

Then quarter three, quarter four; perhaps seeing the plant in Wyoming come on-stream in quarter four for us.

But it is obviously very important.

We are doing everything we can including taking some action's long term on the longer term, because we think the growth rate of helium is going to continue to be very strong.

Then the other question I had was on merchant in the US and Canada.

Just maybe talk a little bit about the competitive dynamics there.

I think you mentioned you are losing some business to competitors.

I would just think that giving your position and given your kind of capacity utilization situation that really nobody should be pushing harder to get business or keep business.

So why are we seeing business going to competitors?

I think, in fairness, in this business you are constantly balancing volume with pricing and margin expansion.

And so we do take a very, very customer-specific view along with the assets that we have in a particular region and make those judgments real time each and every time.

Yes, we are seeing more competitive activity there, but that isn't the lion's share of the lost business.

We also are seeing some of our customers go out of business in general.

Having said that, if I step up a level and talk more broadly, we have increased our new business signings significantly year on year and we are getting that volume starting to come into the P&L.

As we have told you over about the last year, there is typically a three-, four-quarter lag from when you sign business till it begins to show up in the P&L.

We have continued to redouble our efforts in terms of putting more feet on the ground and signing new businesses or signing on business.

And the point I trying to make a moment ago is we have seen substantial year-on-year increases in the amount of business that we have signed.

Is it fair to say we are at the four quarter end of the lag rather than three quarters, in terms of those new contracts coming on stream?

Yes, I think that is a fair statement.

I think we have started to see that.

I mean it is masked, quite honestly, by some of these other issues that we have been talking about, including the argon and the helium shortfalls and, frankly, the contract modification that we addressed in the prior-year comparisons.

But we are beginning to see that business come on.

The other point I was making is the amount of new business we were able to sign throughout this entire fiscal year 2012 was greater than our original budget and at a good trajectory from my perspective.

Signings for 2012 in the US were up by double digits, so we should see this start to improve.

All right.

Thanks, gentlemen.

Laurence Alexander, Jefferies.

Good morning.

Two related questions.

One on productivity.

I guess you have laid out; you have done various initiatives already, you still have some ongoing.

Is this it or do you feel that there is another tranche that can be done?

Or is there like a certain percentage of the business that you could label or particular regions that you could characterize as being subpar and in a fix or exit kind of mode?

Then the other question is, as you think about longer-term growth opportunities in a slower growth environment, the US natural gas related projects like the fertilizer and chemical plants are going to be that much more attractive to your competitors.

Are you worried that there is going to be downward pressure on returns on capital for people bidding for those very large projects in the US going forward?

Okay, Laurence.

Let me give a couple of thoughts and then I will turn it over to Paul to give you more specifics.

My comments, Paul's comments are we are seeing progress in productivity.

It is getting masked somewhat by the shortfalls in volume, but we also are very clear, both internally and I thought I was in my comments, that we need to do more there.

And that we are kicking up the resources broadly to continue to deploy our Lean Six Sigma tools and really, really focus here more on the variable cost productivity that we can deliver from the P&L.

On the sort of restructuring side of things, I think we have sized the organization globally for what we anticipate the growth of the economies that we are operating in to be.

We got to execute, as we said, on the restructuring, for example, in Europe and we are being very, very cautious in the addition of any additional growth-related investments in resources until we see much more visibility.

Why don't I stop there?

We could come to your second question, but, Paul, you might want to add a few comments.

Just a couple of comments, Laurence, on productivity, it is never it so you constantly strive for that.

That is what we do, so we drive for absolute cost reduction.

Plus, the other aspect of this is by the things which we have put in place, we have talked about this -- our SAP system, our shared services, our operating service centers -- we are looking to leverage our fixed cost.

And so we think that there is margin improvement which comes as we grow this company, which you don't have to add the fixed cost which you typically would have to add to service links.

So we have capabilities in those centers which we have and in those systems which can handle a lot more.

And so we think that that is a good margin improver for us as we talk about it.

So those are the things which we focus on.

Also, finally, I think regarding on the restructuring, we always look to size the business appropriately.

So it is going to depend upon the economy going forward for us.

John?

Laurence, if I understood your question on sort of the advent of lower natural gas, let's say for now in the United States or North America, certainly I think net-net that is an opportunity in terms of it ought to stimulate more manufacturing growth over the longer term.

It is certainly already showing up, if you will, in the chemical industries in the Gulf Coast.

There I believe we are very well positioned to participate.

Some of you will have the opportunity, obviously, to see the fruits of our labor in sort of the interconnecting of the world's largest hydrogen pipeline systems.

That positions us very well in syngas supply to projects like this.

But I think the other thing that we've talked about many times is Tonnage projects, by their nature, are discrete investments that have to meet our return goals both from a business level point of view and be accretive to the enterprise.

And so we have control, I guess for lack of a better set of words, on our destiny as to whether or not you take a project that is subpar from a return point of view.

Now I think we have a lot of competitive advantage with what we have created in the Gulf Coast, which is where a lot of these projects are going to be.

And we continue to stay very focused, not only our variable cost productivity, but on driving the cost of our assets and our investments down by leveraging the base that we have and leveraging the experience that we have.

Bob Koort, Goldman Sachs.

Thank you, good morning.

John, you guys in the past have talked about an industrial gas world, industry that can grow at 9% a year.

I am just wondering, do you think there has been a secular change?

Is that a little bit too aggressive?

Maybe the multiplier to GDP is not what it used to be, or do you just think we are just in this cyclical air pocket here?

So I think it is more the latter than the former.

When we have talked about those types of numbers -- we did talk about that in the context of a nominally 5% global manufacturing rate.

Then we, obviously, dissected that a little bit further by the various regions in the globe and what their level of industrial gas intensity is.

Right now we are kind of sitting with a huge dichotomy where we are seeing pretty good -- over the last couple of years good, if not above trendline, growth in the Tonnage sides of the businesses.

At the same time we are seeing that eroded, if you will, by a significant slowdown on the merchant side of the businesses.

And if I look at your global growth that you put into the guidance range, 2% to 4% of global growth, I think Paul, when you went through the work up, the bridge to fiscal 2013 you talked about maybe 3% or 4% earnings growth from end market growth.

I would have thought that would be a higher number.

Is there something specific that is different this time around?

Why wouldn't you have a little bit better base growth if you think the world might grow as much as much as 4%?

If you look at this earnings growth, I think the other thing which goes in there is the projects which we are bringing on stream are also part of that end markets for things.

And so if we look at where the bulk of the growth is in the industrial gas, is forecasted to happen, a lot of it does get around the on-site contracts.

So our new projects are going to be a larger contributor to growth and then a loading is going to be to them in the near term for us right now.

The loading aspect of growth I think comes from people starting to expand their manufacturing capabilities still in places like China and places like the US for us to get that load in there.

And that has been very slow.

Our indications in China from a manufacturing standpoint, if we look at rail freight, if we look at electricity demand, over the past few months it has been close to zero, Bob.

Very good.

Thanks for the help.

David Begleiter, Deutsche Bank.

Thank you.

John, looking at your backlog, if you look at what you will bring on-stream this year and what you are looking at it from a bid standpoint, will the backlog by year-end be higher or lower than the current $3 billion do you think?

Yes, I think what we were trying to say is we expect it probably goes a bit lower here in the near term for the points we were making where people are, frankly, slowing down some of their decisions, particularly outside of China.

The China side of gasification seems to be pretty robust still.

But I think when you look more broadly globally, whether it would be hydrogen additions on a worldwide basis, US Gulf Coast basis, or oxygen-related steel investments, or electronics investments, people are taking a bit of a pause, if you will, or a slowdown in committing.

Now I think these are valuable projects and I think when people have more clarity and insight to where this world is going they are projects that I think can quickly be accelerated.

Dave, I think another thing to point out is, and I've talked about this before, is I think capital expenditures is a much better way to look at this and then to look at backlog.

If you look at our underlying capital expenditures this year, take out the stuff with Indura, about $2.1 billion.

For next year we are saying it is $2 billion to $2.2 billion, so that is about flat for us going forward here, which kind of reflects a little slowing of growth here.

Thank you.

Just lastly, on the photovoltaics, what did that business lose within electronics in 2012 and with the restructured contracts should it be nominal for next year?

The business was about a breakeven in electronics the last year.

On the merchant side we actually make money; we make money there.

Thank you very much.

John McNulty, Credit Suisse.

This is [Avi Rajinran] calling in for John.

A couple quick questions.

Could you walk us through the rationale behind the ACWA JV in Saudi Arabia and some of the key opportunities this presents?

Sure.

From my perspective, Saudi Arabia continues to represent from the large tonnage side of the industrial gas business a real opportunity.

There is significant, obviously, hydrocarbon reserves there and investment, and we just felt that lining up with a partner like ACWA really gave us the right -- the ability to be effective in competing in that marketplace.

It really follows on from our strategy to be an investor in Abdullah Hashim Gases as well, because as you well know we really need and want to operate against an integrated gases model wherever we can.

So the tonnage plant piggybacked and then all aspects of the market.

The combination of those two relationships really allow us to look at that market in that context.

Got it.

Then another quick question just on new business trends kind of put another way.

Could you maybe touch on what sort of trends you are seeing with RFPs and how we should be thinking about any macro-related impact on those?

I think our request for quotations hasn't modified that much.

What you are getting is more of a color commentary from Paul and I in projects that might have been, let's just say, build into, and that is part of the reason we took down our 2013 number for new projects.

Because projects that are in the capital stack, the on-stream are slipping a quarter or two or three based on the customer's view of where the world is.

I think there is a lot of uncertainty and people will not necessarily act as quickly on their RFPs, but they are still trying to form projects, if you will, and understand their project economics.

In China, the comment we were making, we hadn't seen much of a slowdown, if any, in the gasification side of things.

I think we are seeing -- if I contrast that to, say, hydrogen in North America, we are seeing people just delaying how and when they want to push the button to kick their project off.

Got it.

Thanks very much.

Kevin McCarthy, Bank of America Merrill Lynch.

Yes, good morning.

Several years ago when you addressed the chemicals portion of the portfolio strategically I guess it was my impression that you had taken some steps to derisk and stabilize the polyurethane intermediates business and that was part of the rationale for including it in the Tonnage segment for reporting purposes.

Can you address what has changed in that business last couple of years and why you are now exiting if it is going to be a $0.05 dilutive to earnings?

Yes, Kevin, I don't think really our view of the business has changed at all with this.

At that point in time, really a couple of years before that, we made the decision not to take the business overseas where a lot of this production is going.

So we started playing an endgame strategy around it.

We put this into that segment because of the way the contracts are running.

They are long-term contracts and so it fit the business model for us on those things.

Now we are playing these contracts out and so we had a chance to chance to shut the plant down, which is trying to derisk the business further from them and make sure our customers still have their supply.

We will continue to have a profit contribution and a sales contribution from this business, but those contracts will eventually run out and this business will go away for us.

Okay.

And then a brief follow-up, if I may, on Indura.

Is it still your intention to acquire the remaining 35% you don't already own and when would you expect to cross over to earnings accretion for that business?

It is going to be accretive in quarter one.

So as we said, $0.10 a share we are going to see accretion in quarter one from Indura for us.

As far as acquiring the other portion of this, it is held by an individual who in the family who we bought the original -- the portion which we owned from.

And they have a put option to us which they can exercise anywhere from the end of the third year to the end of the fifth year.

Okay, thank you.

I think we have time for one more question.

Mike Sison, KeyBanc.

Paul, great working with you.

Good luck going forward.

Looks like your Yankees could use some help, but --.

You are right, Mike, they very well could.

That was a bad day for me yesterday.

I hear you.

In terms of silicon growth for 2013, can you give us a feel of how you expect that to sort of run out in the first half?

Is it down considerable in the first half?

Just trying to gauge what kind of a recovery we would need to hit that outlook.

Mike, I think you're right.

I think quarter one and quarter two are going to be slower and we are going to see upticks in quarter three and quarter four.

I know we said that last year also those things, but we never saw the rebound in consumer electronics.

We haven't seen a rebound in PCs for those things.

At some point in time, when I think the consumer starts to feel better and we get some more discretionary spending -- and at sometime on the PC market businesses are going to start pulling that forward also as they see more reason to invest on things.

So I do think it is a second half thing where we are going to see stronger growth in half two than in half one.

Okay.

Then in Merchant Gases for 2013, underpinning your outlook, given the shortages and contract [manification], can you grow volumes next year?

Yes, we can in Merchant Gases.

Yes.

Okay, great.

Thank you.

All right, thank you.

Ladies and gentlemen, that will conclude today's presentation.

We appreciate your attendance.

You may now disconnect.