Air Products and Chemicals Inc (APD) 2013 Q4 法說會逐字稿

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

Just a reminder -- 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 expressed written permission of Air Products.

Your participation indicates your agreement.

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

Mr. Moore, please go ahead.

Thank you, Audra.

Good morning, everyone, and welcome to Air Products's fourth-quarter results teleconference.

This is Simon Moore, Director of Investor Relations.

I'm pleased to be joined today by John McGlade, our Chairman, President, and CEO; and Scott Crocco, our CFO.

John will make a few opening remarks and summarize our results, Scott will provide more detail on our quarterly and fiscal-year results and update our outlook for 2014, and I will provide perspective on each of our key operating segments.

After our remarks, we'll be pleased to take your questions.

Please limit yourself to one question and a follow-up.

We issued our earnings release this morning.

It's available on our website, along with the slides for this teleconference.

Please go to airproducts.com to access the materials.

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

Please turn to Slide 2. As always, today's teleconference will contain forward-looking statements based on current expectations and assumptions.

Please review the information on these slides and at the end of today's earnings release explaining factors that may affect these expectations.

Now I'll turn the call over to John.

Thank you, Simon; and let me also wish everyone a good morning.

We greatly appreciate you joining us on the call today.

I want to start off by providing you with my perspective on our fiscal year.

In 2013, Air Products delivered on our key priorities -- cost reduction, productivity improvements, disciplined project execution, and portfolio management.

While the economy was weaker than expected, our volumes improved and our productivity initiatives more than offset inflation.

All of this produced clear benefits for our shareholders.

As you can see on Slide 3, we had a solid year.

We grew sales by 6%, and our underlying volumes ex-PUI grew by 1%.

We grew both operating income and EPS by 2% each -- short of expectations at the beginning of the year, but consistent with our recent guidance.

We increased the dividend by 11%, making this the 31st consecutive year of dividend increases by Air Products.

And we also bought back 5.7 million shares during the year at an average price of just under $81, or a 24% discount to our year-end closing price.

Overall, we have returned $4.5 billion to shareholders through dividends and share buybacks since 2008.

And we delivered a total shareholder return of 33% for the year, well in excess of the S&P 500 PSR of 19%.

In addition, we continue to make significant progress with our portfolio and productivity actions.

We delivered cost savings of $60 million from our 2012 European-focused reorganization both on time and on budget.

And we are taking additional actions aimed at reducing costs by a further $75 million, up from our target of $60 million in new savings that we discussed on our Q3 earnings call.

These actions, which include product exits and asset rationalizations as well as organizational improvements, are focused on strengthening our electronics business, particularly focused on products that serve the LED and photovoltaic or PV markets.

In addition, we are restructuring our global operations function and further optimizing our European cost structure.

We delivered solid cost performance and productivity, and our SG&A to sales of 10.5% remains the best in the industry.

And we are on track to exit the remainder of our Polyurethane Intermediates, or PUI, business in the next several months as we satisfy our final contract obligations.

We delivered on our commitments to our customers and shareholders by executing on our backlog of projects safely, on time, on budget, and at returns that are well above our cost of capital.

We brought onstream more than a dozen major new projects, including hydrogen plants and air separation plants in the United States, Europe, and China.

These investments are backed by long-term take-or-pay contracts and will drive cash flow and earnings growth in the future.

And we successfully integrated the Indura acquisition in South America, strengthening our position in this fast-growing market.

Now please turn to Slide 4. On the new business side, we had a very successful year, winning new and profitable projects.

We continue to see exciting growth in the oxygen for coal gasification market in China, the hydrogen market globally, and the LNG market around the world.

And finally, our energy from waste business and the Tees Valley 1 project are going very well.

I visited the site earlier this year and was very impressed.

We were on schedule, on budget, and meeting our safety goals.

We remain confident in the business strategy I shared with you when we announced the first Tees Valley project, including the proven on-site business model, supported by long-term contracts with firm prices; we do not take the price or volume risk for any of the inputs or outputs of the plant; a clear and compelling market need in the UK to reduce waste and create clean and renewable energy; and we have proven expertise every unit operation -- oxygen production, gasification, syngas cleanup, and power generation.

With that, we have decided to proceed with a second facility adjacent to the Tees Valley 1 project.

The schedule will be optimized to take advantage of project synergies and the Renewable Obligation Credit, or ROC, program.

Simon will provide more details; but as a result, we expect Tees Valley 2 to be more profitable than Tees Valley 1.

Before I conclude, I want to reiterate that we remain committed to delivering on our priorities for 2014.

These priorities have not changed.

We are focused on executing against our backlog, winning profitable new projects, loading existing assets, and implementing further productivity and cost initiatives.

The investments we have made over the past several years and our ability to adapt to changing economic conditions are key drivers for Air Products's future.

We believe shareholders will realize increasingly stronger returns as earnings growth from the profitable projects in our backlog contribute in 2014 and accelerate significantly in 2015 and 2016.

Now let me turn the call over to Scott.

Thanks, John.

Please turn to Slide 5 for a review of our 2013 results.

Sales of $10.2 billion increased 6%, with acquisitions contributing 5% and higher energy pass-through contributing 2%.

Our underlying sales were 1% higher on strength in our North American and Asia tonnage businesses, higher performance materials volumes, and LNG equipment orders.

These were partially offset by weakness in our electronics equipment area.

The impact of our wind-down of our PUI business was unfavorable by 2%.

Overall volume growth was more modest than we had expected.

While this was primarily due to weak macroeconomic environment, particularly in Europe and Asia, we remain focused on loading our existing assets.

Our operating income and earnings per share were both up 2%, while our operating margin for the year was 15.4%, down 60 basis points, primarily due to higher pension costs.

Our return on capital employed, or ROCE, declined by 140 basis points to 10.1% as a result of higher capital spending, including the Indura acquisition.

This is well above our 8% cost of capital.

As a reminder, we are developing, executing, and operating good projects that are accretive to ROCE over the next few years.

Turning to Slide 6, let me now take you through our fiscal Q4 results.

For the quarter, sales of $2.6 billion were 1% lower than prior year on lower volumes and stable pricing, partially offset by higher energy pass-through and currency.

Sequentially, overall sales increased 2% on 3% stronger volumes across all business segments.

Operating income of $421 million increased 3% versus prior year and 10% sequentially.

Our operating margin of 16.3% was up 60 basis points versus prior year, despite higher pension costs.

Sequentially, our margin improved 130 basis points, primarily due to higher volumes and lower costs.

Net income and diluted earnings per share were up 3% and 4%, respectively, versus last year.

Turning to Slide 7, you can see an overview of the factors that affected this quarter's performance in terms of earnings per share.

The non-GAAP items include the cost reduction program John mentioned -- a charge of $232 million before tax, $158 million after tax, or about $0.74 per share.

We expect to see annual benefits of about $75 million beginning in fiscal 2015.

The fiscal 2014 benefits we expect to see are about $45 million, or $0.15 per share.

This charge includes $141 million for actions within our electronics process materials business.

The charge includes the final contract settlement and exit from the silane business, a restructuring of our NF3 and ammonia positions in the US, and a number of headcount reductions.

The lack of growth in the PV market overall and the collapse of thin-film PV sector specifically led to overcapacity in both NF3 and silane.

As you can see, we have taken decisive actions to exit the silane business, where we were not a basic manufacturer, and to optimize our NF3 capacity by reducing production in the US.

The LED market also suffers from overcapacity, and we have reduced our US ammonia production accordingly.

To be clear, the rest of the electronics portfolio continues to deliver value, and we are comfortable with its place in our portfolio.

The on-site business is stable and grows as we win new nitrogen plant orders for new fabs.

And the advanced materials business is driven by new product development, as it is focused on providing solutions for customers' advanced node manufacturing.

We believe the strength of our on-site, advanced materials, and delivery systems businesses, combined with the positive impact of these decisive actions, positions our electronics business for continual profitable growth in the future.

The charge also includes $61 million of other costs, including further restructuring of our European merchant organization; rightsizing our Asian merchant organization for the expected slower-growth environment; restructuring our global operations team; and the elimination of additional administrative costs.

Finally, there's an additional $30 million of other asset actions within the merchant and tonnage businesses for the shutdown of underutilized facilities.

Also included in this quarter's non-GAAP items is $0.03 of costs for advisory services.

In discontinued operations, we had a $0.06 impact from lower than expected proceeds for the divestiture of the UK/Ireland homecare business that we are continuing actively marketing.

As a reminder, we recorded a $0.70 per share gain in the third quarter of fiscal 2012 when we completed the sale of the larger continental homecare business.

Excluding these items, our continuing operations EPS of $1.47 increased by $0.05, or 4% versus last year.

Volumes increased EPS by $0.08, with each business segment up year on year.

The positive impact on profits was driven by mix, primarily the impact of less lower-margin sale in the equipment businesses.

Pricing, energy, and raw materials taken together decreased EPS by $0.04, due primarily to the higher raw material costs in merchant and electronic performances businesses and lower pricing in the electronics and performance materials segments.

Net cost performance was flat, including a $0.05 unfavorable pension impact.

Our productivity efforts more than offset inflation.

Excluded from the volume and cost line is a net $0.01 unfavorable impact from our decision to exit the PUI business.

This is a smaller impact than last quarter due to our asset management efforts.

Currency translation and foreign exchange was $0.01 favorable.

Equity affiliate income contributed $0.01.

Noncontrolling interest was $0.03 unfavorable, primarily due to stronger Indura results.

Lower interest expense, tax rate, and shares outstanding each contributed $0.01.

And overall, we delivered a good quarter of solid execution and cost performance.

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

Thanks, Scott.

Please turn to Slide 8, merchant gases.

Merchant gases sales of over $1 billion were up 4% versus last year, driven by 3% stronger volumes and 1% improved pricing.

Liquid oxygen, nitrogen, and argon volumes were up again in all regions, partially offset by lower helium volumes globally due to supply challenges and packaged gases' demand weakness in Europe.

Sales were up 2% sequentially on stronger volumes and flat pricing.

Volumes were stronger in US, Canada, and Asia, while Europe saw the normal, seasonal summer slowdown.

Helium volume was below our expectations and was again down versus prior year, driven by reduced availability from our helium feedstock suppliers in the US and Algeria.

It was certainly positive that an agreement was reached to avoid shutdown of the US government helium supply; however, we expect helium to remain relatively tight over the next few years until some of the longer-term sources we are developing come onstream.

We do expect modest sequential improvement through next year as we begin to get product from our Wyoming facility late in Q1 and additional Middle Eastern supply helps the industry.

As we mentioned last quarter, we continue to actively develop new sources.

We announced yesterday a new project to extract helium from the Kinder Morgan facility already in operation in Doe Canyon, Colorado.

This new facility is expected to produce 230 million standard cubic feet per year of pure helium, replacing more than 15% of the BLM supply as that system declines.

We expect a new facility onstream in early 2015.

Globally for the full year, contract signings continue to be strong, up double digits from last year's record level.

In addition, customer retention improved significantly.

Merchant gases' operating income of $177 million was up 10% versus prior year and up 7% sequentially.

Segment operating margin of 16.7% was up 90 basis points compared to last year and up 70 basis points sequentially.

Versus last year, operating income was up on the higher volumes; improved pricing, particularly in US/Canada; and lower costs, particularly in Europe from last year's cost reduction program.

Sequentially, operating income was up on higher volumes and lower costs.

Let's now review the merchant business by region.

Please turn to Slide 9. In US/Canada, sales were up 12% on 7% higher volumes and 5% higher pricing.

Liquid oxygen/liquid nitrogen volumes were again up 5% on strength in the oilfield services, food, metals, and petrochemical markets as we continue to see positive contributions from last year's strong contract signings.

Liquid argon volumes were also up on strong demand, and we saw positive volume contribution from the EPCO acquisition; but helium volumes were down due to supply limitations.

LOX/LIN capacity utilization is up slightly, to the mid-70s.

Overall, pricing was positive, primarily driven by helium.

LOX/LIN prices were slightly positive, reflecting our price increases and recovery of higher power costs.

We announced a new West Texas liquid nitrogen facility to support the oilfield services business in the Permian Basin.

We expect this facility to deliver solid profitability when onstream in 2015 as a result of the expected strong oilfield services demand growth.

In 2012, we started up a similar facility in Oklahoma for this market, and it has more than exceeded our expectations.

These targeted capacity additions are great investments.

In Europe, sales were up 1% versus last year on 2% lower volumes, flat pricing, and a 3% increase from currency.

LOX/LIN volumes were flat versus prior year, with some strength in Central and Southern Europe.

Argon and CO2 volumes were up, while helium volumes were down on supply constraints.

Cylinder volumes were down on lower demand across the region.

Overall pricing was flat, with positive helium pricing offsetting negative LOX/LIN pricing.

And LOX/LIN plant loadings are in the mid-70s.

In Asia sales were up 5% versus last year on 7% higher volumes, 3% lower prices, and a positive 1% currency impact.

LOX/LIN volumes were up double digits across the region and in China.

Liquid argon volumes in our microbulk product line showed significant improvements, while helium was down on supply limitations and cylinder volumes were down slightly on customer profitability actions.

Plant loadings remain in the mid-70s, with moderate capacity additions.

Pricing was down in the liquid oxygen, nitrogen, and argon business, particularly in China, driven in part by the wholesale market.

Latin America is an increasingly important part of our global portfolio and a significant emerging market opportunity.

With the acquisition of Indura a year ago, we believe it is important to begin to provide a Latin America regional commentary.

As a reminder, Air Products has a wholly-owned business in Brazil; a majority-owned business, Indura; and an equity affiliate joint venture in Mexico.

So our sales and operating income commentary won't include Mexico, as their results are included in equity affiliate income.

Underlying sales were up 1% on flat volumes and 1% higher prices.

There was a negative 5% impact from currency.

Brazil volumes were flat overall, with some LOX/LIN growth offset by cylinder weakness.

We brought onstream a new liquid plant in Sao Paulo that is providing significant productivity benefits.

Indura volumes were flat, with delays in mining projects in Chile and economic weakness in Colombia and Argentina.

The LOX/LIN plant capacity utilization is in the mid-70s.

After our first year of the Indura acquisition, we remain pleased with the team and the business.

The integration has gone well.

We've exceeded our expectations for synergies and are seeing more new merchant liquid in small on-site opportunities than we had anticipated -- a real credit to the combined Air Products and Indura teams.

Please turn to Slide 10, tonnage gases.

Tonnage gases sales of $835 million were down 1% versus last year on higher energy pass-through offset by lower PUI volumes.

Volumes ex-PUI were down 1% as strong US Gulf Coast hydrogen volumes continued, but were offset by a contract termination in Latin America.

We are particularly pleased to see continued strong US Gulf Coast hydrogen volumes leveraging our pipeline system.

The exit of our PUI business by January 2014 is proceeding as we expected.

For the quarter, PUI sales were down about $55 million versus prior year, and operating income was down modestly as we continue to reduce the remaining cost structure of that business.

For the full year, as expected, PUI sales were down about $160 million, and operating income was down about $25 million.

For the segment, sequential sales were down 1% on higher volumes offset by lower energy pass-through.

Operating income of $135 million was down 4% versus prior year and down 2% ex-PUI as we saw higher maintenance costs due to more customer planned outages, higher pension costs, and the impact of the contract termination.

For the tonnage business, our maintenance cost timing is primarily driven by the timing of our customers' planned outages.

Obviously, it's beneficial to take our hydrogen plants offline for maintenance at the same time our customer has reduced demands due to their maintenance activities.

With more planned customer outages in FY 2014, we do expect an increase in costs before we return to more typical and lower levels in FY 2015.

Operating income was up 12% sequentially.

Ex-PUI operating income was up 9%, primarily on the higher volumes.

Operating margin of 16.1% was down 60 basis points versus prior year on the lower operating income and higher energy cost pass-through.

Margin was up 190 basis points sequentially on the higher operating income and lower energy cost pass-through.

As we said last quarter, we continue to see strong project development activity in the global hydrogen business and were pleased to recently announce two significant projects.

First, we will build, own, and operate an industrial gas complex to supply Bharat Petroleum's Koji, India, refinery and petrochemical complex.

Air Products will be supplying 165 million standard cubic feet a day of hydrogen and steam from two steam methane reformers, syngas from our purification system, nitrogen and oxygen from an air separation unit, and will produce our own power from a gas turbine.

As more regions focus on cleaner fuels and more customers see the value in outsourcing their industrial gases through the on-site model, we believe our leadership position in global hydrogen will continue to drive growth.

We also announced that we will build, own, and operate a new 150-million standard cubic feet a day hydrogen production unit to supply Shell Canada's Scotford facility near Edmonton, Alberta, Canada.

This plant will also supply Northwest Sturgeon refinery with approximately 25 million standard cubic feet a day and will be connected to our Heartland hydrogen pipeline system, supplying customers throughout the region.

We expect to continue to see growth opportunities as refiners and upgraders expand operations in Western Canada.

Please turn to Slide 11, electronics and performance Materials.

Segment sales of $580 million were down 6% versus last year, with volumes down 5% and pricing down 2%.

Sequentially, sales were up 3% due to higher volumes.

Versus prior year, electronics sales were down 15%, primarily driven by lower equipment sales -- both delivery systems and a sale of equipment in the on-site business last year.

Tonnage was up, and process materials was down, primarily due to our decision to exit the silane business.

Electronics sales were up 4% sequentially on improvement in delivery systems in both process and advanced materials.

Performance materials sales were up 7% versus last year, as we saw positive growth across all regions and all major product lines.

Autos were strong, construction markets improved, while marine coatings continued to be weak.

Europe was stronger on export-driven markets.

Sequentially, PMD sales were flat, which is better than the typical seasonal reduction.

Operating income of $96 million was up 12% versus prior year, primarily due to an inventory revaluation last year.

Operating margin was up 270 basis points to 16.5% on the higher operating income.

Sequentially, operating income was up 10%, and operating margin was up 120 basis points, primarily due to the higher electronic materials volumes.

Now please turn to Slide 12, equipment and energy.

Sales of $118 million were down 7% versus prior year as lower ASU activity was only partially offset by higher LNG activity, and up 14% sequentially on higher LNG activity.

Operating income of $21 million was up 16% over prior year and up 28% sequentially, primarily on the higher LNG activity.

As we said before, margins are higher on LNG projects than on ASU projects, so product mix impacts the results.

The backlog of $402 million is down 11% from last year and up 23% versus last quarter as we continue to see the sequential benefits of new LNG orders.

During the quarter we were pleased to announce a midscale LNG order for Technip in ShaanXi, China, reinforcing our commitment to supply all spectrums of the LNG market.

In addition to this exciting order, the engineering and manufacturing activity in support of our LNG business remains at a high level, and the outlook for the next several years is very promising.

We expect to have a number of additional project award announcements soon.

Air Products's liquefaction technology been selected for several of the LNG export projects being planned for North America.

As these projects progress through the necessary licensing and permitting processes, we expect that one or more will reach final investment decisions in FY 2014 and 2015, resulting in firm equipment orders for Air Products.

These projects are in addition to the Dominion Cove Point order, which was announced in April 2013.

Meanwhile, work is continuing on the two major floating LNG projects that we have in-house for Shell and Petronas, and we see continued opportunities in this market.

In support of this increased activity, our second coil-wound heat-exchanger manufacturing facility under construction in Florida will be coming online early in 2014, just in time to meet expected market demand.

As John mentioned, we are excited about the progress in our Tees Valley 1 energy from waste project and the decision to proceed with the Tees Valley 2 project at the same site.

Tees Valley 1 is on budget, meeting our safety goals, and on schedule to begin commissioning in late FY14, and we expect the plant to be fully onstream in early FY15.

The Tees Valley 2 schedule is optimized take advantage of project execution and start-up synergies, with start-up expected in early 2016.

The schedule will also allow us to take full advantage of the Renewable Obligation Credit or ROC program.

We've already secured the key contracts for waste and ROC sales with the same partners as Tees Valley 1, and we are pleased that the UK government Cabinet office will purchase all the power from Tees Valley 2 under a similar long-term committed price contract.

As a result of the project synergies, the capital cost is roughly 10% lower than Tees Valley 1, and we expect Tees Valley 2 to be more profitable than Tees Valley 1. The two projects combined also have very strong asset management opportunities.

We are very proud of these projects and the Air Products innovation and expertise that are bringing them to life.

These plants offer efficient, clean generation of power from waste.

Together, these two facilities will create 1,500 construction jobs and 100 permanent jobs; divert as much as 700,000 metric tons of nonrecyclable waste from landfills each year; and power as many as 100,000 homes.

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

Thanks, Simon.

Now please turn to Slide 13, and let me provide you a brief summary of our outlook.

Economic activity in the second half of 2013 was slower than we had initially anticipated in most regions.

Given the current economic conditions, we are planning for economic growth to be modest again in 2014.

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

In the US, uncertainty in the economy remains despite the government restart.

The combination of unresolved fiscal challenges, weak job growth, low customer confidence, and diminished global demand are likely to continue to act as a headwind on economic growth, despite the positive drivers of lower energy costs and strength in housing.

We are forecasting a range of 2% and 4% growth.

However, even the low end of the range assumes no significant impact from any potential government shutdown or debt ceiling crisis.

In Europe, challenges remain, with low confidence levels and weak job markets.

We are hopeful that we have seen the bottom, and anticipate growth of 0% to 2%.

This is dependent upon trade-offs between austerity and growth reforms.

In Asia, we expect a gradual acceleration in manufacturing growth to continue, particularly in China.

However, recent government focus on reform is expected to temper growth.

For the region, we expect growth of 5% to 7%.

In South America, we expect growth in the range of 1% to 3%.

This is dependent on global economic demand driving the export market.

We expect that electronics will begin to rebound in 2014 after two years of weakness.

Overall for the year, we forecast square inches of silicon process to be up 3% to 5% next year.

Our project development and contract signage continue to be very strong.

As Simon mentioned earlier, we have recently announced two large hydrogen projects -- one in India and one in Canada.

You've heard us talk about the increase in demand for hydrogen around the world and increased acceptance of the outsource or sale of gas business model.

This represents a great hydrogen opportunity for Air Products.

We also continue to see opportunities in China for oxygen for coal gasification, driven by the government's goal of developing domestic sources of energy and feedstocks utilizing their vast coal reserves.

And our LNG business leadership continues, with new orders for floating projects, US export terminals, midsize plants, as well as the traditional baseload projects.

The new and profitable on-site projects will drive earnings in 2016 and beyond.

Fiscal 2014 capital spending is expected to be similar to the $2 billion level we saw in fiscal 2013, although we are bidding a number of large and profitable investment opportunities.

If a number of these move ahead, we could see our CapEx rise.

Our continued success in winning profitable new projects has increased our backlog to $3.5 billion, securing additional future profitable growth.

You can see an updated list of our major projects in Appendix, Slide 17, along with the geographic and business segment capital spending split on Slide 18.

To help you with historical comparisons, Slide 19 in the Appendix shows non-GAAP CapEx, which includes capital lease expenditures.

Given our economic outlook for fiscal 2014, our EPS guidance range is $5.70 to $5.90.

Walking from our 2013 EPS of $5.50, we have the following factors.

New plant onstreams should add about $0.20 to $0.25.

These are projects that are either onstream now or will be onstream soon, and the on-site projects are backed by contractual commitments.

This number is slightly below our previous expectations due to project timing and slower merchant loading ramps.

We expect a greater contribution from new plants in FY15 and FY16.

The base business should add $0.05 to $0.15 per share through a combination of higher volumes and increased LNG business.

The higher volumes in merchant and electronics and performance materials will be the factor most influenced by the economy.

Higher maintenance costs will be about a $0.05 headwind, as a significant number of our hydrogen customers have scheduled outages next year.

Our cost reduction efforts should add about $0.15 a share.

The shutdown of our PUI business will be a $0.10 headwind.

Pension expense will be about a $0.05 tailwind due to the rise in interest rates.

We expect taxes, currency, and interest cost to be roughly flat to last year.

And the number of shares outstanding will increase modestly, resulting in about a $0.05 to $0.10 headwind.

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

Our guidance for Q1 is for earnings per share of $1.30 to $1.35, based on the following factors.

On the positive side, we expect to see increased earnings sequentially from new plant onstreams; further progress on our cost-reduction initiatives; and lower pension costs.

Offsetting the sequential improvement, in merchant gases and electronics and performance materials we expect to see lower seasonal demand.

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 significant rebound through the rest of the year.

Finally, we expect to see an adverse impact from the inventory revaluation and lower OIE.

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

Thank you, Scott.

Please turn to Slide 15.

In conclusion, our performance this quarter was driven by our ability to execute effectively on the strategic priorities we set out at the beginning of this year.

We continue to stay focused on driving our global competitiveness and improvement in our overall returns and profitability.

Moving into fiscal year 2014, the leadership team and I, with the full support of the Board, will continue to move forward aggressively on the priorities we have outlined for our investors, customers, and other stakeholders -- continued cost reduction and productivity improvement; disciplined project execution; loading of our existing assets; and winning new projects, creating profitable growth to drive shareholder value into the future.

While we do expect to see some continuing economic headwinds in fiscal year 2014, we also see great opportunities for good projects at attractive returns in our core hydrogen, oxygen for coal gasification, electronics, and LNG leadership positions.

Before we turn it over for questions, let me also take this opportunity to welcome the new Directors we have recently added to our Board -- Seifi Ghasemi, Edward Monser, and Matthew Paull.

The management team and I have met with each of them as part of their onboarding process, and we look forward to the insight these three highly qualified individuals bring to Air Products as we work to continue to create value for our shareholders.

In addition, as you all know, I've announced my retirement in 2014 after 38 great years with the Company.

It's something the Board and I have been discussing for some time now as I approach 60 years old.

To ensure we find the most qualified CEO candidate, we have formed a search committee and retained a global search firm.

Our goal is to have our new CEO in place in the first half of 2014.

And with that, thank you; and now we are ready to take your questions.

(Operator Instructions) David Begleiter, Deutsche Bank.

Thank you.

Scott, you mentioned that impact from new plant startups will be higher in 2015/2016 than 2014?

Could it be double the $0.25 number you put out there for 2014?

Yes, David; if you look at the projects that are in our backlog, I think the impact that we're going to see in 2014 moving forward, you could see that doubling in 2015 and even higher in 2016, again for those projects that are currently in our backlog.

So good ramp-up as we bring those projects onstream.

And as a reminder, over 85% of our projects in backlog have take-or-pay terms, so we don't have volume risk.

So we feel confident about the growth in earnings, particularly in 2015 and 2016.

And Scott, I would have thought the base business could do more than $0.05 to $0.15 in 2014, given the loadings you should get on your base business and even electronics.

What is limiting the growth in that base business next year -- or in 2014?

We are at a current situation economically that there is a lot of uncertainty, right?

And you heard my comments around each of the different geographies, recognizing that we've begun to see some modest sequential growth; but there's a lot of risk, there's a lot of uncertainty; and there's weak confidence.

So we are optimistic that we're going to be able to load the facilities, not only from the economy, but also our applications.

I'll also mention that in that $0.05 to $0.15 is all the base business.

So we're driving productivity efforts to offset inflation, and we're trying to manage pricing and offsetting increases in the raw material situation.

Thank you.

PJ Juvekar, Citi.

It's actually John Hirt sitting in for PJ today.

In electronics and performance materials, your operating margins were higher than they have been now for a couple of years.

And if I recall, the low end of your 2015 margin target that you talked about in the past is 18% for that segment.

Now that you've done some rightsizing, and it sounds like there is more in the pipeline, do you think you've done enough to get to that 18% number?

John, it's a good question; and obviously we're very pleased by the improvement in the segment, as we pointed out, relative to last year.

That was driven by an inventory revaluation last year.

But we had seen some sequential strength in the business; and when you look at the year-on-year sales numbers, particularly in Electronics, that's primarily a function of the equipment business, which is really tied to new fab CapEx.

So if you take a look at the on-site business in electronics, it's doing well.

If you take a look at the advanced materials part of electronics, it's doing well.

And you see the decisive actions we are taking to drive improvement in the process materials.

At the same time, the performance materials part of the business is going well.

We said we had good sales growth across all major product lines in all regions, driven by some of our new activity.

So we are comfortable and confident that with the changes we're making in electronics, that segment is positioned well to improve going forward and drive margin improvements.

Okay.

And then on the restructuring, if you had to allocate the expected $45 million of benefits that you anticipate for 2014 to your segments, how much would you anticipate falling into merchant, how much in electronics and performance materials, and how much outside those two segments?

It's a great question, John, if I could just follow up with that.

Roughly speaking, in electronics we probably see -- I don't know -- $10 million, $12 million, $14 million of the savings, okay?

And then the rest of the savings will probably be two-thirds merchant and a third tonnage.

Okay, that's helpful.

Thanks, guys.

Vincent Andrews, Morgan Stanley.

If I could just ask what your cash flow expectations are for 2014 -- both maybe cash flow from operations, and then, ultimately, free cash flow?

And I'm just thinking -- seeing the higher shares outstanding, but I see interest flat.

How much of those charges are cash-oriented?

Maybe if we could just reconcile that, it would be helpful.

This is Scott.

So if we just take a step back and talk briefly about 2013 -- when we look at cash flow from operations, just short of $1.6 billion.

And look at PP&E equity affiliate and acquisitions.

We are -- we define cash flow from operations less than is free cash flow.

We are negative by roughly $200 million, recognizing that we made a voluntary pension contribution at the beginning of the year for about $220 million.

So absent that, we are about scratch.

I'll also point out that through the course of this year, each quarter we improve the cash flow from operations sequentially, quarter to quarter; and we are going to continue to focus on that going forward, from both loading our existing assets and bringing the projects in the backlog onstream.

We would expect next year to be breakeven to probably -- possibly slightly positive from a free cash flow perspective.

And in terms of the provision, we've got -- there was a fair amount that was paid in this quarter associated with the final contract termination.

The lion's share of the provision, though, from an asset perspective is not going to be cash.

But rather just the people actions will be cash that we'll see next year.

And just as a follow-up, on the cylinder demand in Europe, it sounds like the cylinders are starting to come back.

Is that something -- do you have a line of sight on where we are on that?

Is that something that sort of took place in this quarter, and we shouldn't expect to continue going forward?

Or how should we be thinking about that?

Vincent, I think it's really -- if you do year-on-year comparisons, right, we're still seeing weakness in the cylinder business.

But I think sequentially, as we had said last quarter, we think in general we're seeing some bottoming, and there could be some signs of things starting to improve.

But that's something that we definitely want to see some more improvement on next year.

Okay, thanks very much.

I'll pass it along.

Don Carson, Susquehanna Financial.

A question on merchant loading in the US.

John, what penalty do you think you undergo because of your lack of a cylinder business?

What impact of you think that might have on your loading?

And what efforts are you doing to try and offset that?

I know you started a minibulk effort.

How successful has that been?

Has that helped loading at all in the liquid business?

And then just as a follow-up for Scott, you have outlined how you expect earnings to improve from new projects in 2015 and 2016.

How does return on capital unfold?

What construction -- what's going to be the change in construction in progress from year end 2013 to 2014 to 2015?

Okay, Don, this is John.

Thanks for the questions; let me take the first one.

Certainly, I'm not sure we've ever quantified it in the context of a percent.

Obviously, if you don't have a packaged gas business, you miss certain parts of the market verticals.

However, having said that -- and I appreciate you acknowledging it -- we really ramped up our commitment in terms of sales resources; our commitment in terms of microbulk product offerings; the EPCO acquisition; and strong applications.

And I believe the 5% or so LOX/LIN growth you're seeing really is a result of that activity.

As we talked when we started doing that, it takes a little while for these projects and the signings that you bring on to come onstream, but I think we're starting to see that in the P&L.

And I actually feel pretty good about the progress that that team has made.

Scott?

Don, to your return on capital employed comment -- so I think, first, about the backlog, say last year from a SIP perspective, maybe it was $1 billion we end this year; maybe $1.3 billion.

And given the size of the backlog going forward, maybe it's more like $1.5 billion or so in 2014.

I would say 2014, FY14 is going to be roughly flat with 2013 from an ROCE, bottoming out during the course of the year, and then turning and coming up and improving second half of 2014 into 2015 and 2016 as we bring the projects on in the backlog.

And again, I re-emphasize that over 80% of this is in take-or-pay terms, and so it doesn't have the volume risk.

Thank you.

John McNulty, Credit Suisse.

Just a couple of questions on the Tees project number two.

I believe the first one was going to take $500 million of capital and should have been about $0.10 accretive.

So is that the same level -- I know you talked about a 10% discount on the capital side.

So should we be thinking about that as $450 million, or is it going to be a bigger facility?

How should we think about the capital requirements for that?

And then in terms of the synergies and the opportunities around that that you mentioned, what does that mean for the EPS accretion?

Let me take this, John.

So I think you have it captured correctly in terms of we see some execution synergies that will reduce the capital circa the $50 million or so that you mentioned.

It also, as Simon mentioned in his words, it really gives us the opportunity, frankly, beyond the cost synergies to take the experienced team that's already executing one, move them right to two, and be able to take advantage of the Renewable Obligations Credits at their maximum levels that are out there today.

The really exciting parts, though, of this project are the asset management opportunities that one offered us, that when I mentioned that I was -- in my words -- that I was at the site and reviewed with the team, and if you just think of putting fundamentally a duplicate size and duplicate process facility next door, you just really get to leverage those up.

So I think we would say in total the contribution, when both facilities are lined out, is on the order of $0.25 to $0.30 a share in EPS.

Okay, great.

That's very helpful.

And then with regard to the merchant business, you've got -- you had some pretty decent volume growth, and yet you're still kind of looking at mid-70s utilization rates?

I guess I'm wondering if there's room for any rationalization of any of the existing capacity that you've got there -- if that could potentially make sense going forward or not?

Sure, John.

One of the things that I believe I've said in a number of these calls is we always looked at the opportunities for portfolio management, whether it be at a segment level or an asset level.

And obviously, we're looking at that as we speak.

I think, however, what you've got to -- you have to think about the loadings, sort of from a regional perspective, because there's different dynamics going on there.

If I start in Asia -- China, largely -- the turndown there came sort of as quite a bit of capacity was being added to the market in an environment where you had low double-digit growth.

And now you've ratcheted that back 300 or 400 basis points.

And so I'm pretty comfortable that we'll grow back into that capacity.

It's just going to take a few years to do that.

Europe, obviously, is the economic scenario.

And we continue to look and ask ourselves where we are on that, and do we have the right assets?

And as you have seen and heard, we've taken a lot of actions in Europe, both in 2013 and then are projecting some additional actions here in 2014.

In North America, those came down a little more by some of the targeted additions we brought in.

So we mentioned the Oklahoma facility that came into the math, if you will.

So that's more of a mathematical issue that -- again, I think with the signings that we're achieving in that marketplace, we'll get there.

And then if I go to Latin America and talk Brazil specifically, we did bring on a new plant in Brazil.

That added some incremental capacity, although the primary reason for that was really to shut down a 35-, 40-year-old asset.

And there were significant productivity benefits from that.

And right now, if you go to the Chile area, a lot of that is export-driven, which is tied to global economies.

But I think we're pretty comfortable that will come back on track as the global economies strengthen over the next year or so.

Great.

Thanks very much for the details.

Duffy Fischer, Barclays.

I was wondering two things.

The first is, if you just go to your Slide 13, where you go through the worldwide manufacturing growth numbers outlooks for next year -- where do those come in on your calendar year or your fiscal year, just so we know kind of what the delta is going forward for the next year, if you walk through those for the last 12 months?

Sure, Duffy; this is Scott.

So low end of the range, overall we would say that the global manufacturing growth came in roughly about 2%.

Now, inside of it, US/Canada would be at the low end -- 2.2% or so.

Asia came in about the middle of the range.

Europe being the big disappointment -- that came in, call it 2% negative.

So well below the range.

And then South America, likewise, at the low end of the anticipated range.

Okay.

So each -- overall, the manufacturing environment that we saw was at the low end, with some regions, particularly Europe, below the low end.

I'll also point out that from a square inches of silicon perspective, we anticipated in 2013 growth of -- in the mid-single digits.

Call it 4% to 6%.

And while we're still looking at what the final numbers come in at on our fiscal year basis, it might be just modestly favorable.

But nowhere near where we had anticipated.

Okay.

And then if you walk back, you laid out about the same slide a year ago.

Coming off a base of $540 million in 2012, you expected to grow midpoint $0.35 EPS during the last year.

Now, looking forward, you expect to grow $0.30 off of a $550 million base over the next year.

But when you look through your growth numbers, Asia and Europe are meaningfully better.

And those are two very big markets for you as you're looking forward over the next year.

And probably more important, you have put another $2 billion of capital in the ground, which should give you leverage.

So I guess I struggle to see why you would only expect to grow $0.30 over the next year when you expected to grow $0.35 if we go back a year over the future year; but yet, things seem to look better, both from a macro perspective and certainly much larger from a capital base perspective.

Right.

So if I step back and think about our view last year at this time, we anticipated that each of the geographies had bottomed out, and we're going to see sequential growth through the course of FY13, with a particularly strong second half of the year in FY13.

We didn't see it.

For each of the different geographies, we kind of saw this slow point, the low point of their manufacturing output sometime during 2013.

US, maybe the beginning of the summer.

Europe maybe late winter, and Asia somewhere in that same timeframe.

So from a momentum perspective, we're projecting going forward solid sequential growth.

But again, recognizing there's a lot of uncertainty in the economy.

But it's off of a lower base than what we had anticipated last year at this time.

The other thing, again, that we are focused on are those things that we can control.

So given the fact that the economy didn't play out, we delivered on the provision that we took last year, which, as you know, was more focused on Europe.

And now, today, we've announced a larger provision that is focused on a variety of different areas, both from a portfolio perspective in electronics, like we talked about; as well as supply chain, Europe; and then rightsizing in Asia, as well.

While we see growth in Asia, we have to make sure that we have the right level of resources, given the economic environment that we're projecting.

And then just lastly, around the your comment around the investment that we put in the ground -- we look back at the investment that we've made, and the issue is the loading of the merchant investments that we put the ground compared to the long-term take-or-pay contracts that we have on the tonnage side.

So as we have said in the past, our focus is loading the investments that we've already made and bringing onstream those projects that are in backlog to make sure that we have profitable growth -- not only in 2014, but also 2015 and 2016.

Okay, great.

Thank you, guys.

Mike Harrison, First Analysis.

Just a couple of questions related to the NF3 capacity rationalization.

How much capacity is going to be taken out at the Hometown plant?

What portion of the total NF3 production does that represent?

And are we just seeing some lower demand overall driving the overcapacity, or are you starting to see competition from increasing use of on-site fluoride?

It's a good question, Mike.

So first of all, we are really not seeing any penetration of on-site fluorine.

That's been a thing talked about in the industry for at least 10 years, and we have not seen any significant impact.

As Scott mentioned, what's really driven the NF3 supply/demand dynamics is the lack of expected growth from PV.

That was expected to grow and use up a fair bit of NF3; it hasn't happened.

So over the last year or so, you've been hearing us talk a little bit more about volume pressure and price pressure.

So we've taken an action to rationalize some capacity in the US.

We're still going to manufacture in the US.

There is still demand for NF3 in the US, but we expect to take about 20% to 25% out of our NF3 global manufacturing footprints with these actions.

And then looking at the weakness in Asia merchant pricing -- last quarter you had noted some competitive pressures you saw.

It looks like those may have intensified this quarter.

Are those pressures showing any signs of easing?

And are you guys working to increase the amount of merchant sales under contract as opposed to selling through wholesalers in China?

What a great question, Mike.

And really, I'm glad you've made that last point, because that's a really interesting dynamic in China that isn't as common in other regions for the merchant business, and that's the presence of the wholesale market.

So a couple of things here.

First of all, existing Chinese on-site customers who also built some liquid capacity -- when they are running hard, particularly a steel mill, they'll use up all their own capacity and sometimes actually import some product.

When they're not running so hard, not only do they not import, but they can export as well.

And you have a set of folks who play kind of a wholesale place in the supply chain there.

So there is more volume/price dynamic in the wholesale market in China than we see -- there isn't a similar market in other regions.

So we would not be surprised to see a little bit more volume/price changes as a result of the wholesale market.

To answer the other part of your question, we absolutely are working hard and are increasing, if you will, the retail side of the business; but at the same time, acknowledging the wholesale market is a good place to move product, particularly when assets are unloaded.

And I think this isn't too unusual, if you think about the evolution of the various markets across the globe.

The more mature markets have gone pretty much to the industry -- or the customers are supplied from the industry.

You're going to have this mix for a while, but it's something I think we understand and absolutely something we'll be driving, to the points that Simon made, as it relates to how we contract and how we make investment decisions in that market going forward.

And just to get to the crux of the question, though, are the competitive pressures easing, and you're seeing some improvement in the pricing dynamics, or not really?

I would say it continues to be a competitive market, Mike.

All right, thanks very much.

Mike Sison, KeyBanc.

John, I hope you have a lot of fun things lined up in retirement.

But in terms of -- I just want to get your perspective.

You had another year under your belt in thinking about this 20% operating margin goal that you have out there.

Do you feel better about Air Products potentially getting there?

Any structural reasons that hinder that potential longer-term?

And I'm not going to pin you on when, but when you think about that goal, is it still something that you think the Company can get to?

From my perspective, those goals were put at a time where we expected a much different economic environment.

I think the important thing, though, for us to focus on is our return on capital employed.

And as Scott mentioned earlier, we -- when we begin to bring these new on-sites on and put the SIP behind us, given to stepped-up investment that we have, I see a way to continuing to improve our return on capital employed and moving towards one of the industry-leading return on capital employed numbers out there, from a spread over our cost of capital.

So looking forward, if I look at our portfolio, if I look at how we position the business, the world sort of played out a little differently than we anticipated.

But on the plus side, the opportunities in some of our leading marketplaces, like tonnage, and hydrogen, and electronics -- that played out better.

Great, and a quick follow-up.

Scott, maybe on the new projects, the $0.20 to $0.25 -- sounds like maybe merchant is going to be a bigger portion of that than we might have thought in the past, as some of the tonnage got pushed out.

Any thoughts on the split between the two?

There's a lot of tonnage in there, recognizing that as the backlog gets worked in, as we mentioned.

Previously, the split was more evenly balanced merchant and tonnage, but recently the backlog has been over 80%, 85%.

So it's a combination of both, but there is a heavy element of take-or-pay terms.

So we feel good about that volume growth projection from new assets into 2014 as well as 2015 and 2016.

Great, thank you.

Okay.

Thanks.

John?

Yes, let me just wrap up by saying first thanks to Audra, and then conclude with saying our focus on increasing shareholder value remains unwavering.

Our emphasis on cost reduction, productivity improvement, and disciplined project execution remain key priorities.

Our future prospects are strong given our record project backlog and the significant leverage in our existing assets.

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

And thank you for joining us, and have a great and safe day.

That does conclude today's conference.

Again, thank you for your participation.