Air Products and Chemicals Inc (APD) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Air Products & Chemicals first-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.

(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 recordings 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.

Please go ahead sir.

Thank you, Gwen.

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

This is Simon Moore.

I'm pleased to be joined today by Paul Huck, our CFO.

As we announced in October, Paul will be retiring at the end of February.

I am also pleased to be joined by Scott Crocco, who will succeed Paul as CFO.

Paul will review our overall Q1 results, I will review the segments, and Scott will provide our outlook for Q2 and the rest of 2013.

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 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 Paul.

Thanks, Simon.

Good day, everyone, and thanks for joining us.

Let me start by saying it has been a pleasure working with all of you over the past nine years.

I will truly miss it.

Let's turn to our results for the quarter on slide number three.

Our overall earnings per share results were in the top half of our expectations.

However, softer-than-expected economic growth in the US, a deeper contraction than expected in Europe and continued soft volumes in China and a weaker electronics market prevented volumes from growing as much as we had hoped.

Despite the weaker economic environment, we continue to take actions to improve our businesses.

Pricing held firm.

We are almost complete with our Europe restructuring actions and our plants ran well.

We also repurchased 5.7 million shares this quarter.

We did this opportunistically when we saw the weakness in our share price in the fall.

Our cash projections had us repurchasing shares later in our multiyear planning cycle.

When we saw the weakness in the price, we decided to move the repurchase forward.

Overall, we spent $462 million and paid an average price of $80.69 per share.

We still have a little under $500 million left in our repurchase authorization.

Our cash priorities remain the same, investing in good, high-return projects, increasing our dividend each year and maintaining our A bond rating.

For the quarter, sales of $2.6 billion were 10% higher versus prior year, with the Indura and DA NanoMaterials acquisitions contributing 6%.

On an underlying basis, sales were up 4% on higher volumes in our Tonnage Gases segment across all regions.

Our Equipment and Energy segment and our Performance Materials business also posted strong year-over-year volume improvement.

Not surprisingly, this was partially offset by weakness in our European Merchant and Electronics businesses.

Sequentially, overall sales declined 2%, with underlying sales down 4% on seasonally lower volumes across the Merchant and Electronics and Performance Materials segments and lower activity in Equipment and Energy.

Simon will provide more segment and geographic details later.

Operating income of $372 million increased 5% versus prior year and decreased 9% sequentially.

Our operating margin of 14.5% was down 70 basis points versus prior year, mainly due to the impact of inventory accounting revaluation, higher pension costs and the Indura acquisition.

Excluding these impacts, operating margin would have been up 50 basis points, primarily due to our European cost reduction and improved plant operating efficiencies.

This quarter, we had some larger-than-normal impacts flow through our P&L related to inventory accounting and not related to cash or inventory levels.

In our year-end balance sheet, we adjust our inventory to actual costs for the year.

During the year, we use standard costs for our inventory.

This necessitates an adjustment at the beginning of the year to move from the previous year actual costs to our new standards.

Typically, this adjustment is not large, as the prior year actual and the new standard are usually close to one another.

For example, last year, the total adjustment was $2 million favorable.

This year, however, the adjustment was $10 million unfavorable due to the following actions taken to lower costs and improve our Electronics and Performance Materials business.

First, we moved to in-house production for a product which we had previously purchased.

Our in-house production cost is much lower; therefore, our standard cost is lower than the cost we used at the end of 2012.

Second, given the slow demand, we have been able to negotiate a number of price decreases for raw materials in 2013.

This also lowers our standard cost versus our costs used at year-end.

Those items are positive for the business, but produce a current period P&L expense to reflect the adjustments to the carrying value of the inventory.

As we go through the year, we should recover these expenses as the products are sold at higher margins.

Sequentially, our margins declined 120 basis points, primarily due to seasonally lower volumes and higher pension costs.

Net income and diluted earnings per share were both up 3% versus last year.

Our return on capital employed of 11.2% was lower due to our higher capital spending, acquisition and lower asset loadings.

Turning to slide four 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 $1.30 increased by $0.04 versus last year.

Volumes increased earnings per share by $0.12, including $0.07 from acquisitions.

Pricing, energy and raw materials taken together decreased earnings per share by $0.03 due to higher raw material and energy prices.

Net cost performance was $0.05 unfavorable.

Base business costs were $0.08 positive, primarily from the impact of our European cost reduction and improved plant operating efficiencies.

This was more than offset by inflation, inventory revaluation impacts and higher pension costs.

Currency translation and foreign exchange taken together were $0.02 favorable.

Equity affiliate income and non-controlling interest taken together was a penny higher.

Interest expense was $0.02 higher due to acquisitions and our share repurchases.

A higher tax rate this year reduced earnings per share by $0.02.

Our tax guidance for the year remains unchanged at approximately 25%.

And finally, lower shares outstanding contributed a penny.

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

Thanks, Paul.

Please turn to slide five, Merchant Gases.

Merchant Gases sales of just over $1 billion were up 14% versus prior year driven by the Indura acquisition.

Underlying sales were down 1% on 3% lower volumes and 2% positive price.

Sales were down 1% sequentially, underlying sales were down 2% on 1% positive price and 3% lower volumes due to seasonality.

Merchant Gases' operating income of $171 million was up 3% versus prior year and up 6% sequentially.

Segment operating margin of 16.9% was down 180 basis points compared to last year, but up 110 basis points sequentially.

Versus last year, operating income was up on the benefits from our Europe cost reduction programs and profits from the Indura acquisition, partially offset by lower volumes, particularly in our Europe packaged gas business.

Overall, we are pleased with the performance of the Indura business.

We continue to see solid growth in the base business and are excited about a number of small on-site opportunities that bring together Indura's local knowledge and our on-site expertise.

As we have said, given Indura's large hard goods business, their margins are in the low double digits, about what we expected, but below the Merchant segment average.

For the quarter, Indura negatively impacted segment margins by about 80 basis points.

Margins were also impacted by the lower volumes and higher pension costs.

Versus prior quarter, we did see the expected seasonal volume weakness and higher pension costs, but improved productivity and prior-quarter Indura acquisition costs improved margins.

Let me now provide a few additional comments by region.

Please turn to slide six.

In US/Canada sales, were up 2% on 1% higher volumes and 1% higher price.

Liquid oxygen/liquid nitrogen volumes were up on strength in chemicals, foods and metals.

We continue to be successful bringing contract signings onstream, and new signings this quarter were well above prior year.

Lost business this quarter was at more typical historical levels, much lower than we had been seeing recently.

Helium availability has improved since last summer, but helium volumes are still down versus prior year and below our expectations due to supply constraints.

We expect to get feedstock to bring our new Wyoming facility onstream late this fiscal year, and expect helium to remain tight until at least then.

We are also pursuing additional global opportunities to increase our helium supply.

Argon availability improved as we worked hard to increase production and also saw softer demand.

Pricing continues to be favorable, led by helium.

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

In Europe, sales were down 6% versus last year.

Underlying sales were down 4% on 5% lower volumes and 1% positive price as we continue to successfully implement increases.

Currency had a negative 2% impact.

LOX/LIN volumes were stronger in UK/Ireland and Central Europe, but weaker in southern Europe and the northern Continent.

Packaged gas volumes were weak across the region and helium volumes were down on supply availability.

Despite the weaker demand environment, pricing continued to be positive, up 1%, led by strength in helium.

LOX/LIN plant loadings are in the high 70s and new contract signings were up versus last year.

In Asia, sales were up 5% versus last year.

Underlying sales were up 2% on flat volumes and 2% higher price.

Currency had a positive 3% effect.

LOX/LIN volumes, excluding conversions, were up 2% across the region and up 4% in China.

Similar to last quarter, liquid argon volumes were down significantly on lower steel, wholesale and PV demand in China.

Packaged gas cylinder volume growth was moderated by customer profitability actions.

However, we continue to see good growth in our microbulk product line.

Pricing is up 2% on strength in helium, plant loadings remain in the mid-70s, and new contract signings for the quarter were up over last year and last quarter.

Please turn to slide seven, Tonnage Gases.

Tonnage Gases' sales of $898 million were up 11% versus last year on strong 13% volume growth.

Base volumes contributed about half of the growth, with particular strength on the US Gulf Coast where our new pipeline connection enabled us to support increased customer spot demand as our competitor had short-term capacity challenges.

Air Products' new projects onstream this quarter include our hydrogen plant in Detroit for Marathon and the Petro China ASU.

As we announced last quarter, we are exiting our polyurethane intermediates business and have shut down our Pasadena PUI facility.

We will be reporting PUI in continuing operations as we established a buy-resell arrangement to serve customers through the end of their contracts.

But we will help you understand the impact of changes in the PUI business.

For the quarter, sales were down less than $10 million versus prior year, and operating income was relatively flat, as we gave price relief last year to a customer.

For the full year, we expect PUI sales to be down about $150 million, more than we previously communicated, as one of our remaining customers is not currently operating their facility.

We still expect about a negative $0.05 EPS impact for the year, unchanged from our previous guidance.

For the segment, sequentially, sales were up 6% on 4% higher volumes and a positive 4% impact of higher energy passthrough.

Currency had a 1% positive impact, while PUI was negative 3%.

Operating income of $138 million was up 24% versus prior year on the strong demand, better operating performance and lower maintenance spending at our facilities.

Operating income was down 2% sequentially, primarily due to the PUI business.

Our operating margin of 15.4% was up 160 basis points versus prior year on higher volumes and lower maintenance.

Margin declined 130 basis points sequentially on lower PUI results and higher natural gas prices.

In October, we dedicated the world's largest hydrogen plant and pipeline system, stretching from the Houston ship channel in Texas to New Orleans, Louisiana.

The new pipeline connects our Texas and Louisiana systems, creating a 600-mile pipeline with over 20 hydrogen sources and increases the reliability and flexibility of our hydrogen supply, which is critical to our customers along the pipeline.

The pipeline helped us supply spot opportunities as we can move product as needed, as well as use the pipe capacity itself to respond more quickly to changes in demand.

We also announced a new long-term hydrogen agreement with OCI Beaumont to supply approximately 25 million standard cubic feet per day of hydrogen from our system to OCI's integrated methanol and ammonia plant in Beaumont, Texas.

In addition to these near-term and longer-term volume benefits, we also saw improved system efficiency, as we can manage the system to optimize the most efficient plants.

In November, we announced an agreement to expand our syngas separation unit in Geismar, Louisiana, to increase the supply of carbon monoxide, primarily for BASF's new world-scale formic acid plant in Geismar.

This expansion will also provide additional hydrogen for our Gulf Coast pipeline system.

Please turn to slide eight, Electronics & Performance Materials.

Segment sales of $549 million were up 3% versus last year, driven by the DA Nano acquisition.

Underlying sales were down 1% on flat volumes and 1% lower prices.

Sequentially, sales were down 11% on 11% lower volumes.

Versus prior year, electronic sales were flat, with the DA Nano acquisition offsetting weaker materials volumes and lower equipment sales.

Sales were down 15% sequentially on weaker seasonal materials volumes and significantly lower equipment sales.

With the lower demand and some increase in competitive pressure, Electronics Materials pricing did see some negative impact, but still remained relatively stable.

Silane, driven by very weak TV markets, continues to be an exception.

Performance Material sales were up 6% versus last year, as we saw strong volume growth across all three regions.

Prices were slightly negative, but this was offset by lower raw material costs.

Sequentially, PMD sales were down 4% on the expected seasonal slowdown.

Operating income of $61 million was down 22% versus prior year, and operating margin was down 340 basis points to 11.2%.

Paul discussed the inventory accounting revaluation.

At the segment level, we had a negative affect from inventory accounting revaluation this quarter, and a positive effect in the prior year.

Excluding this impact from both quarters, operating income was down $3 million, or 4%, and operating margin was down 100 basis points.

Ex-inventory, operating income was down, primarily driven by the weaker electronic materials demand and higher costs.

Sequentially, operating income was down 28%, and operating margin was down 260 basis points on the lower volumes and higher costs.

In Electronics, we announced another ultra-high-purity nitrogen expansion and a further extension of our pipeline in the Tainan Science Park in Taiwan.

This is in addition to the new contract announced in September to expand capacity for UMC's phase five to eight expansion.

The new expansion will add two air separation units to the system that has been successfully serving electronics customers in Tainan for over 15 years.

Air Products also serves electronics customers via pipeline networks in the US, Korea and China.

Now please turn to slide nine, Equipment & Energy.

Sales of $106 million were up 19% versus prior year, primarily on higher project activity across the business.

Sequentially, sales were down 16%, primarily due to lower ASU project activity.

Operating income of $8 million was up 15% versus prior year on the higher activity.

Sequentially, income was down 53% on the lower sales and higher project development costs.

Backlog is up 25% over last year and down 14% versus last quarter, as ASU bidding has slowed, while LNG project development continues to be strong.

Consistent with our previous outlook, we still expect Equipment & Energy to provide a $0.05 tailwind for the full year, as we expect improvement from new LNG orders starting in Q2.

Now, I'll turn the call over to Scott.

Thanks, Simon.

Now, please turn to slide 10 and let me provide you a brief summary of our outlook.

From an economic perspective, we still expect modest but improving growth in FY13, with global manufacturing at the low end of our 2% to 4% range.

In the US, inventory destocking and fiscal cliff concerns negatively impacted manufacturing in the first quarter.

The pending debt ceiling and spending debates add to uncertainty, which depresses hiring and investment and lowers consumer confidence.

Going forward, we expect slow but modestly improving growth, driven in part by the recovering housing market and the Fed monetary policy.

In any scenario, reduced government spending will lower 2013 growth.

So overall for the year, we expect US/Canada growth to be close to the low end of our 2% to 4% range.

Europe is in a recession now, and we are forecasting slow improvement through the rest of the year.

In China and throughout Asia, there were some positive signs in manufacturing in Q1, driven by stimulus spending.

We expect to see the benefits of this in the second half of the year.

In Electronics, industry production is weaker than last year and fab utilization has softened.

We expect this to slowly begin to recover in the second quarter.

Our full-year EPS guidance is $5.70 to $5.90, up $0.05 from our previous guidance, with the positive impact of the share repurchase partially offset by the slower economic environment going forward.

CapEx is expected to be about $2 billion, consistent with the more focused guidance we gave in November.

And our backlog is at $2.8 billion, down slightly from last quarter, as we brought onstream a number of projects.

As we have said in the past, it is not unusual for the backlog to move around quarter to quarter.

We still see robust bidding in the oxygen for gasification market in China, but continue to see decisions being delayed for potential hydrogen and electronics projects.

For Q2, our EPS guidance is $1.34 to $1.39, based on the following factors.

On the positive side, we expect to see improved volumes in the Electronics & Performance Materials and Equipment & Energy businesses; no inventory revaluation impact; the increasing positive effect of our cost reduction programs; and a full quarter effect of our Q1 share buyback.

Partially offsetting the sequential improvement, Tonnage Gases' profits are expected to decline due to seasonally higher maintenance spending and lower volumes as refineries begin taking their annual outages.

We also expect reduced spot sales on the US Gulf Coast.

The PUI business and the impact of Lunar New Year are also expected to be headwinds.

Now let me wrap up.

Overall, Q1 gives us a good start to the year, with solid execution in an uncertain economic environment.

We are taking actions to control our own destiny, including efficient plant operations, cost reduction programs, price improvement and excellent project execution.

We are well-positioned to grow in the long term with the size and strength of our backlog, over 80% of which is committed to long-term, on-site or pipeline contracts.

We have significant leverage on our existing assets to load them as the economy recovers.

And we are focused on our core business and cash priorities.

Finally, on behalf of John McGlade and the rest of Air Products, I would like to personally thank Paul for all he has done over his 33 years with Air Products, especially the last nine as CFO.

Paul hired me into the Company, and I have worked either directly for him or in his organization for all of my 22 years with Air Products.

While I have some big shoes to fill, I plan to approach my new role with the same integrity, transparency and passion that Paul has, and to continue to focus on driving long-term profitable growth for Air Products by increasing returns and ensuring capital discipline consistent with our cash priorities.

I enjoyed the opportunity to get out and meet a number of you in December, and I look forward to getting out again very soon as we finalize the CFO transition in late February.

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

(Operator Instructions) Don Carson, Susquehanna Financial.

Yes, two questions, actually.

On the inventory revaluation in Electronics, I know in the past there has been offsets within the corporate line.

Did that occur this time?

And am I correct in saying -- or in understanding that you expect to reverse this as the year goes on?

And then just secondly, how much of the European $60 million of restructuring did you get?

I think you had $40 million left to come there.

How about if -- I'll take the second part, if you take the first part?

Okay, yes.

On the inventory, Don, there is some offset which occurs in the in there, but there are impacts which occur in the Merchant area also.

And those -- and that offset is really around what occurs on the LIFO accounting.

And the bulk of that is offset against the Merchant area for us in this quarter.

So there is a small impact there, but for the large part, the Electronics & Performance Materials segment, that flowed directly through to the bottom line in the consolidated results.

Okay.

And the second question, Don -- this is Scott -- in terms of the Europe restructuring, we are on track to wrap that up by the end of the second quarter.

And we saw in this quarter about a $0.03 benefit.

As we take the actions then going forward, we expect to have that step up modestly in the second quarter and then to get to a run rate of about $0.05 per quarter, $60 million or so, on an annualized basis.

So consistent with what we've said in the past, we would expect to see in fiscal 2013 about a $0.15 favorable impact from the cost reduction actions in Europe.

Okay.

Thanks, Scott.

P.J. Juvekar, Citi.

Can you talk about your utilization rates in Merchant business by region?

And given some low rates, is there any possibility of consolidation of Merchant facilities in any region that you can do?

Great, P.J. Good question.

So let me just go over the numbers that we talked about.

So for the US/Canada -- and again, these are our LOX/LIN utilization rates -- so in the US/Canada, the low 70s.

In the Europe, high 70s.

In Asia, in the mid-70s.

And I think one of the things that I know you know in this business, we have a very modest distribution radius for products out of these plants, perhaps 100 miles.

And so in that environment, it gets very difficult to create value just by shutting down capacity.

It is certainly something that we look at on an ongoing basis, but it isn't really one of our expectations for one of the big drivers going forward.

We are working hard to bring load to those facilities.

We are doing that in a disciplined manner relative to pricing, with our applications expertise and loading up our sales teams.

So as we said, that is one of our big opportunities going forward as those assets load up.

I understand that -- sorry, go ahead.

I think a thing -- as Simon said, our pricing has been good in most regions here as we go through.

And so we don't think the utilization rate is impacting pricing.

No, I understand that you don't transport gases in Merchant more than 100, 200 miles.

But is there a way you can do piggybacking on on-site projects and then shut down some older Merchant facilities?

I think anytime that we have an opportunity to do that, PJ, we would absolutely take a look at that.

To be honest with you, in US/Canada, there is only a modest amount of new ASU on-site opportunities.

So again, we look at that every time.

I just -- I guess my point is I don't think that is going to be a huge driver of the growth going forward.

I think more of an opportunity is to leverage the economic recovery that we are expecting to grow the volumes.

And then secondly, in Electronics, there was a sequential decline.

How much of that was seasonal?

And then you talked about equipment decline.

Can you just talk about how much was equipment versus gases and chemicals?

Thank you.

From a sequential in Electronics, it is about half between equipment and materials, and heavily driven from a materials perspective from seasonality.

Vincent Andrews, Morgan Stanley.

Thank you and good morning.

Could you talk a little bit more on -- you talked about Electronics rebounding in your 2Q -- or I assume that was your 2Q and not the calendar 2Q.

What gives you the confidence in that at this point, and what signposts should we be looking for know that is actually happening?

It is a good question, Vince, and thank you.

I think a couple of things there.

First of all, obviously, we just talked about the seasonal pattern.

We recognize Q1 is typically weak.

We typically see improvement through the year.

So I think to some degree, you would expect a typical seasonal pattern.

I think as we talk to some of our customers, that is the feedback that they are giving to us.

They wouldn't be surprised to see utilization rates be a little bit softer here, but then continue to improve through the back half of the year.

And again, as we look at what some of our customers are talking about, they are also looking -- for example, I think both Intel and TSMC have pretty robust capital spending expectations for this upcoming year of 2013, which obviously goes to one of the concepts we've been talking about, that the big, strong players in this industry are the ones who have the ability and the capacity to continue to invest in the new fabs.

And those are the companies that we are the leading supplier to.

Okay.

And just as a separate follow-up to that, I believe in the 2Q guidance you gave, you were talking about the annual outages in refineries as being a negative for this quarter or for your second quarter.

And just help me understand, it is obviously -- there has got to be some mismatch between the size of the outages this year and last year and so forth, right?

Because otherwise, they are annual, and there really shouldn't be a comparable issue.

So what is the difference this year versus last year?

As far as that is concerned with that, Vincent, is that in last year and this year, the outages are probably about the same from a maintenance standpoint.

We -- our plants ran better in Q1 of this year than they ran in Q1 of last year.

And so we had some plant issues in Q1 of last year, which we talked about at that point in time.

We are over them, and so we had a very good first quarter in that.

As you look at this, the high point for turnarounds is typically our quarter two for the refineries.

There is also turns which occur in quarter one and quarter three.

There is not that many which occur in quarter four, I would think.

So this is typically the high point for the maintenance activities, which we would normally expect.

The operation was more in the prior year than in the current year.

And related to your own productivity versus the customer?

For last year, yes.

Okay, that's what I was trying to understand.

Thanks very much.

Jeff Zekauskas, JPMorgan.

Good morning.

When one reads accounts of Chile, there is a sense that electricity prices have really moved up.

Can you give a sense of Andorra's margins on a sequential or a year-over-year basis, and the volume growth pro forma year-over-year?

How is that acquisition doing?

The acquisition is doing very well.

We are very pleased with the business that we've acquired, and we've seen all sorts of opportunities.

I'll remind you, too, that this acquisition was -- we had some cost synergies, but it was heavy from a growth perspective.

And in the early days, here we've been able to identify several small on-site opportunities in steel and glass, and we are pursuing them.

So we are very pleased with the acquisition.

In terms of your question of margin, as we've said before, in the low teens, given that the nature of that business is more in the hard goods.

But we do see sequential growth not only from the markets that we are in, but also, as I mentioned, from our offerings.

And as we expand and identify more opportunities both from small on-sites as well as in the applications arena, we expect to see continued good growth.

So we are very pleased with that.

Okay.

And then your pension contribution, I think, was $320 million in the quarter.

Are you (multiple speakers) --

$230 million.

$230 million.

I misspoke.

I'm sorry.

Are you expecting to contribute under $300 million this year, or what is your expectation?

Modestly up from that $230 million.

It won't be $300 million.

Call it $275 million or so for the year.

Okay, good.

Thank you very much.

David Begleiter, Deutsche Bank.

Scott and Paul, just on the backlog, I know it does move up and down.

But would you expect the backlog at year-end to be higher or lower than it was at the end of Q1?

As you mentioned, it is lumpy, and especially as we've got more larger deals [trying] to gasification and so forth.

But I would expect it to end the year about where it is now, kind of bumping along but moving sideways.

Again, a lot of good opportunities that we're out there looking at.

And just Europe, Scott, I know it has been under a lot of scrutiny, restructuring, management changes.

Has the quarter been (inaudible) in Europe?

And what is the margin potential in the European Merchant business, where it is today and where it can be in 2, 3 years if filings pick up and pricing holds?

From a cost perspective, as I mentioned, we are running through and almost finalized with the provision.

But I also say that we are focused on additional cost reductions beyond simply people reductions.

We've got a lot of initiatives going on from a supply-chain perspective, as well as trying to push price.

And as you saw in our results, we do have prices up.

So in terms of where could it get overall, we are looking at this and trying to make substantial continued improvement, recognizing that the economy in the short term and for some time is not going to be a big tailwind.

So we are going to continue to drive the business and do what we need to do in order to get it profitable, both from price and cost.

But hopeful, again, from a volume perspective, through applications and making sure that we are going after the right customers and the right locations to drive margin improvement.

Thank you.

Duffy Fischer, Barclays.

Good morning.

Let me just add my thanks to Paul for all the years you've put in.

Thank you.

Thank you.

When you look at the Asia volumes being flat, we have seen your competitor come out this morning with bigger numbers there.

Now some of that may be new startups.

DuPont yesterday was kind of talking about 8% sales growth in Asia.

To be flat seems like one of the disappointing areas of this quarter.

Can you kind of talk about what you think volumes are doing in Asia and kind of how you're doing relative to the market in Asia?

Good question, and of course I know that you know one of the big differences is when we talk about this regional, we are just talking about our Merchant business -- right -- whereas other people are talking about the impact of Asia of their whole company.

So, for example, if you had large tonnage plants starting up in Asia, they would be included in the other guy's Asia comments, but not in ours.

And I know you know that.

But just if I could then focus on what we've seen in Asia.

A couple of different things going on.

We commented that argon has been particularly soft in Asia in our Merchant business.

And you have a dynamic there of some of the steel companies who own their own air separation units, sometimes they need a little bit of extra argon.

If they are not running it as hard, they actually have a little bit of extra argon to put into the marketplace.

So that has impacted our wholesale demand for argon, as well as soft photovoltaics market.

Again, as we said, LOX/LIN volumes have been up ex-conversions about 2%.

So that is a positive.

Obviously we are working hard to make that number larger.

We've also seen a little bit of softness in our cylinder business in Asia.

And as we commented, we've done some things to focus on higher-profitability customers, so have done a little bit of business shedding there as well.

So we do expect to see a pickup in economic activity and volume growth in the back half of the year in Asia, particularly in the Merchant business.

And again, just as a reminder, we have a lot of significant asset investments in the tonnage business that are expected to come onstream this year as well in Asia.

Great.

And then the opportunity with the on-site businesses around Indura, roughly what are we talking -- 2000, 4000, 6000 tons per day?

What is the cumulative opportunity over a two- or three-year period there look like?

If you take a look at that, the thing which we are looking at are what we would call the small generated gas type of plants.

So typically, most of your opportunities there are going to be under 100 tons a day.

But they turn out to be a good opportunity for us, very nice things which we do.

And we are finding a lot of them, principally because the business was focused on packaged gas previously.

And so now, as we bring our applications expertise into this country, we think we are going to be able to sell a number of these plants over the next few years.

Great.

Thank you, guys.

Kevin McCarthy, Bank of America.

Following the sizable share repurchases in the first quarter, your net debt is up to about $5.4 billion, or 2.2 to 2.3 times trailing EBITDA.

I guess two quick questions.

First, how does that compare at this point to what you would consider optimal leverage?

Is there room to take that higher?

And related to that, did you purchase any additional shares in January?

And would you care to venture any thoughts on the likely pace of execution on the remainder of the authorization?

If you take a look at our leverage overall right now, it is on the high side, so -- because we moved the share buyback forward with those things, for where we would like to run it.

Now, as far as buying back shares in January, no, we haven't.

As far as a buyback in the future of this year, we would look at this from an opportunity standpoint.

As you can see is that we bought the shares at a low price.

If the stock does drop down, we would look at that again.

Okay, and then second question, if I may, on tonnage.

Can you refresh us on projected startups in the March quarter, other projects that may be ramping, if we are thinking about sequential contributions to growth?

We've updated our major projects slide in our package, and we do have some projects we expect to come onstream here soon.

And particularly in the second quarter, really the Yankuang project in China will come onstream.

In the third quarter, we would expect to see Petro China in China.

That is, again, very exciting project, as it is the first steam methane [reform] -- the first hydrogen plant that has ever been outsourced by a state-owned oil company in China, so a great opportunity.

And then we have some electronics projects that are expected to come onstream later in the year.

So that's kind of the framework of how things look for the rest of the year.

Okay, thank you very much.

Robert Koort, Goldman Sachs.

Thank you.

Good morning.

I wanted to ask a question on the US Merchant business.

You guys have taken some lumps previously on the performance there, and you mentioned that the new signings were above the prior year, and that your lost customers were below prior periods and more normal.

Do you have a net win when it comes to new signings versus lost business?

Yes, we do.

Absolutely, Bob, and I think I would just -- for the quarter, that is absolutely the case.

We had a lot more new signings, a lot more new business coming on stream.

Obviously, when you look on the year-on-year comparison, we see some of the business that was lost through the second half of last year.

Okay.

And then maybe a longer-term question.

As we see shale gas continue to expand in the US and the promise of a lot more light oil, does this diminish the hydrogen business at all?

You've always talked about more heavy sour crude (inaudible), but it looks like the US market is maybe moving opposite to that.

So how does that impact your business?

As far as that is concerned, it depends where that goes.

For right now as we look at this, there is still a good amount of heavy crude which comes in to the refiners, which they process.

And it also gets around what sort of the product mix which they make.

We've talked about this before, that as they tend to move more and more to more transportation fuels, even a light sweet crude, they wind up cracking that further down.

So as the US market, especially the Gulf Coast where we have a large presence, turns into more of a market for export, and that is going to favor more use of hydrogen.

And principally, the export which is going out is diesel, which is the heaviest consumer of hydrogen in the mix.

Thank you.

John McNulty, Credit Suisse.

This is actually Alina Khaykin sitting in for John.

Quick question on the guidance.

I believe you've raised the midpoint by a bit, so what has changed since last quarter?

Is it more restructuring, is it the share repurchases, or is it faster growth in some of the markets?

If you look at the impact from the share repurchase, roughly $0.10 up from what the previous guidance was.

But then given the economic situation that we are in and the environment that we saw in the first quarter, and as we talked about it decelerating momentum through the quarter, we've taken that down by about half, just given the uncertainty of the economic growth going forward.

So that is what translates into taking it up by about $0.05.

Okay, got it.

And then on Indura, how are you progressing towards the $20 million synergy target and could there be upside from that?

As I mentioned before, we are progressing very well.

And again, the cost synergies are relatively modest, driven more from a corporate governance and an oversight, and we are on track there.

But really, this acquisition was driven by the top-line growth synergies that we can bring, marrying their local knowledge and the hard goods business with our application knowledge and on-sites.

So, as I mentioned before, very happy with the acquisition, it is running very well and we look forward to continue to drive top-line growth in that new market.

Okay, great.

Thanks.

Mike Harrison, First Analysis.

Just looking at the tonnage business, how much of that hydrogen spot volume growth do you think is sustainable, and sort of driven or supported by the pipeline?

And how much of that was more temporary, driven by the competitor issues that you referenced?

And can you maybe address, while you are talking about the pipeline, any surprises, pleasant or otherwise, since the pipeline has been up and running for four or five months now?

Good question.

Again, if we just kind of break down the tonnage volume growth, we said about half of that was from new projects; so obviously, that is sustainable.

The other half was from base business load-up.

And I think of that base business load-up, probably half of that was increased volumes in the US Gulf Coast.

So to be honest with you, we call them spot volumes for a reason.

There was an opportunity here where customers' demand exceeded their capacity to get product from somebody else, and we were extremely pleased that the pipeline enabled us to literally move product from one region to the other, support these customers in their time of need, and also create a good opportunity for us.

So one of the things we talked about in our sequential guidance going forward is we wouldn't be surprised if we saw a little bit of softening of some of those spot volumes.

But again, those are exactly the opportunities and exactly the reason why we invested in the pipeline.

In terms of the pipeline, I think things are going very well.

The team is becoming very familiar with that and emphasizing how to best utilize it.

We are getting the efficiency benefits that we expected out of it.

And I would say probably since it's come onstream, I would say the volume opportunities have perhaps exceeded our expectations, as well.

So things are going well down there.

And then just looking at the Merchant business, a couple questions.

One, how much of a headwind was helium on your US/Canada Merchant volumes?

And then can you give a little bit more detail on the LAR business in the US and what steps you had to take in order to alleviate the supply constraints that you were facing?

I think as we've said a couple of times in terms of helium, both overall as well as in the US/Canada, it was down in US/Canada.

So it has a little bit of an impact on the top line.

I think overall for the Company, not much of an impact.

And as we said before, given the team is out there working very hard to drive price increases, it has a very modest bottom-line impact.

In terms of argon, obviously -- I think we talked about this at our event in November -- some examples of where we worked hard to improve the recovery of argon at certain plants and also improve the purification.

So it is not one single project; it's a matter of getting a little bit more argon out of a few different locations.

And again, just also point out that we've seen a little bit of demand softening as well.

So argon, really, I think we would say generally speaking was not a constraint during the quarter.

All right.

Thanks very much.

Laurence Alexander, Jefferies.

This is Jeff Schnell on for Laurence.

Just going back to Europe, you mentioned that Europe is in a recession.

But have you seen any signs of a stabilization, or conversely, are any regions within getting worse?

We actually saw in the first quarter a deceleration and a bigger impact from the holiday slowdown.

Early on -- we are just part of the way through January -- we have seen that turn.

And we are hopeful that as we get past the holiday slowdown that we see sequential growth, not only in the second quarter, but then through the rest of the fiscal year.

And in our forecast, we anticipate that for the full year we get back about even, slightly unfavorable overall from a manufacturing output in Europe.

You mentioned briefly in your prepared remarks, but could you talk about which projects and regions you're seeing customers scale back on CapEx?

And are you seeing an increased reluctance on behalf of these customers to sign larger contracts, given the uncertainty?

As far as that is concerned, we said the gasification area in China is still plowing forward, so we are seeing contracts occur there.

Then if we turn to the hydrogen contracts in the US and around the world, and also we turn to Electronics, we are seeing customers hold back.

Certainly within the US, investment plans are holding back somewhat because of the uncertainty around tax rules and things like that, which are holding back things.

Great.

Thank you.

Mark Gulley, BGC Financial.

Want to talk a little bit about what's happening in Algeria.

Is the unrest there hurting your ability to get helium recoveries from your facility there?

And whether or not you are seeing any pressure on future LNG projects due to political uncertainty in that region.

As far as that is concerned, Mark, we haven't seen an impact on our plants for helium in Algeria.

The place where this occurs is pretty far from our plant -- with that is concerned.

But it is a situation which we obviously watch, and we want to be able to get people and to have the country still work and be able to ship product out.

So we will watch that.

As far as the impact on future LNG projects, I don't think anyone -- I don't think the situation here is going to have a single impact here on people looking at LNG projects.

They know the Middle East is a tough place to operate.

They've operated there for years with these projects.

So I'd still see projects going forward.

The other thing is that a lot of the development on LNG right now is really occurring in the Australia area and the Indonesia area.

Okay.

Then secondly, on the structure of the balance sheet and leverage, I do applaud your share repurchase plan and that sort of thing.

But if I look at your cash flow statement, it appears as if you're having to borrow to pay the dividend.

That is, your free cash flow is not quite supportive of the full dividend payment.

Is that something that would concern you, Scott, and how should I think about maybe the potential for future dividend increases, if I'm right on my logic?

I'll let Scott speak on this.

One of the things which you've got to realize here is that as we invest capital, new capital for growth, we do increase our borrowing activity.

So it looks like we are going to borrow to pay a dividend.

In actuality, we are leveraging our projects as they go in.

We make an equity contribution and a debt investment in these things -- for those things.

And that depends upon the type of projects.

Certainly, an on-site project, which we are seeing a lot of our projects being right now, we are putting a lot more debt against those projects for us.

In general, I don't see this concerning us going forward as far as the structure of the balance sheet.

Just to build on that, obviously, the focus going forward is going to be expand margins and bring those projects onstream on time and profitably, load the assets.

And so looking to generate more cash out of the investments that we've made through margin expansion.

Thank you.

Mike Sison, KeyBanc.

Good morning, guys.

Nice start to the year, and have fun there, Paul.

Thanks, Mike.

I will.

In terms of tonnage, you had a nice start to the year.

Any changes to the outlook for the contribution for earnings this year?

Is it still the same?

Is there a potential for upside?

Is it a little bit too early to tell maybe?

On tonnage -- and they have had a good start to the year, you're right -- poor thing.

I think towards the top end of the range, you are going to look at that as one of the things which is going to drive us there.

So perhaps as we look at for the full year, that -- and that we have business which is going well and we hope continue to go well.

Okay, and then second question, in terms of the outlook for silicon growth; you were at mid-single digits at the beginning of your fiscal year.

Any changes to that?

Maybe give us a feel for how the first quarter went so we can see how that is expected to unfold as the year progresses.

In general, no change, but we would expect it to be a little at the bottom end of that range that we gave before.

Okay, great.

Thank you.

We will take one more question.

David Manthey, Robert W. Baird.

Good morning.

Thank you.

I was just wondering if you could quantify the maintenance impact this quarter.

And is this a factor, as you talked about before, where it was different last year than it is this year, and therefore there is the year-to-year impact, as opposed to being significantly higher this quarter?

Or was it just higher this quarter for some reason?

If you take a look at that, the impact was about $0.03 a share for us versus the prior year (multiple speakers).

I'm sorry -- it was lower this quarter $0.03 relative to (multiple speakers) --

This quarter against the prior year.

That's right.

And that's what I said.

It was a prior-year amount of spending, which we didn't expect going into the quarter one of last year, but we had about $0.03 a share which was favorable year-over-year.

Okay, so having said that, as we move forward, the level we are at now is a more normal level.

Is that what you're saying?

No, I think as we move forward -- so if we go into quarter two, as we look at quarter two, quarter two is going to be down in the tonnage area because of increased maintenance, which comes about by the turnarounds.

Now, we get not only the cost impact, but we also get the volume impact of that flowing through also.

Right.

Okay, got it.

Thank you very much.

Okay.

Thanks, everyone.

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today.

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