Air Products and Chemicals Inc (APD) 2014 Q3 法說會逐字稿

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

(Operator Instructions).

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

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

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

Your participation indicates your agreement.

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

Mr. Moore, you may begin.

Thank you, Kerry.

Good morning, everyone and welcome to Air Products' third-quarter 2014 results teleconference.

This is Simon Moore, Director of Investor Relations.

I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Scott Crocco, our CFO; and our senior business leaders.

After our comments, we will be pleased to take your questions.

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

We issued our earnings release this morning.

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

Please go to AirProducts.com to access the materials.

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 this slide and at the end of today's earnings release explaining factors that may affect these expectations.

Now I am pleased to turn the call over to Seifi.

Thank you very much, Simon and good morning to everyone.

Thanks for taking time from your busy schedule to be on our call.

We do appreciate your interest in our Company.

Let me first introduce our team who will be participating in this call -- Mr. Scott Crocco, our Chief Financial Officer; Mr. Corning Painter, who is responsible for our Merchant Gases; Mr. Steve Jones, who is responsible for our Tonnage Gases, Equipment & Energy; and Mr. Guillermo Novo, who is responsible for Electronics and Performance Materials.

Now please turn to slide 3. I believe that at this point it is necessary to answer a question that many of you have already asked me or Simon before this call.

And that is "why did I take this job?" I am here because I believe that Air Products has the people, technologies and geographic footprint to significantly improve its performance.

I consider it an honor and a privilege to lead and be part of this exciting time here at Air Products.

During the 1980s and early 1990s, I worked at another industrial gas company.

During that time, we always compared ourselves to Air Products since Air Products was the best industrial gas company in the world.

I had during that time a great deal of respect for Air Products' people and its leadership.

I do believe Air Products has the potential to regain its leadership position.

During the past three weeks that I have been officially here on the job, I have met more than 1,000 of our employees in small groups of 50 to 60 people to listen to their suggestions and answer their questions.

As a result of what I have seen and heard in these meetings, I am excited, encouraged and enthusiastic about the future of Air Products.

I see a team of talented, dedicated and committed people who are ready for change, they are ready to deliver results and they want to regain the respect in the industry that they deserve.

With the full support of our Board of Directors and the enthusiastic participation of our talented, committed and dedicated employees, we will move forward to create further value for our shareholders.

Now please turn to slide 4 so that I can explain some of the key principles that will guide us in managing our future.

First, we believe that cash is king.

We will focus our efforts to generate cash.

You will notice the use of EBITDA in presenting our results and measuring our performance in the future.

Second, I consider capital allocation to be a very significant part of my responsibility.

We will only allocate capital to projects and activities that will create significant value for our shareholders.

This leads to the third point that, in the long run, the growth in the per-share value of our stock is the true measure of our performance.

Sales growth and corporate size is of no value if it does not result in an increase in the per-share value of our Company's stock.

And the fourth point is that we believe high-performance people want to be given clear goals and be empowered to make decisions.

A decentralized organization with clear lines of responsibility and accountability is the best way to unleash our best people to lead at all levels of the organization and deliver results.

So with those comments, I would like to now turn the call over to Mr. Scott Crocco, our Chief Financial Officer.

Scott?

Thank you very much, Seifi.

Air Products delivered on our commitments in Q3.

Our earnings came in at the top end of the guidance range we shared with you in April.

We are focused on execution, recovering the adverse weather impacts from Q2, bringing our plants on-stream, on time, on budget and safely, delivering on our cost reductions and loading the assets we have in the ground.

As Seifi said, we have a great team that is excited about the path forward.

Turning to slide 5, let me now take you through our fiscal Q3 results.

For the quarter, sales of $2.6 billion were 3% above prior year on stronger volumes across all of our segments.

Pricing was up 1% and the underlying sales were up 4%, excluding the Polyurethane Intermediates or PUI business.

Sequentially, overall sales increased 2% with underlying sales up 4% on higher volumes in our three largest segments.

As Seifi mentioned, we are focusing more sharply on cash flow and specifically EBITDA or earnings before interest, taxes, depreciation and amortization.

We have provided you a reconciliation in the appendix to the slides.

For the quarter, adjusted EBITDA of $653 million was up 7% versus prior year and 6% sequentially driven by higher volumes and new plant on-streams.

Operating income of $414 million increased 8% versus prior year as we delivered operating leverage on higher volumes, particularly in Electronics and Performance Materials; and we delivered better pricing in Merchant Gases.

Our operating margin of 15.7% improved 70 basis points versus prior year as the positive contribution from higher volumes more than offset higher costs primarily from planned maintenance outages.

As we said last quarter, we expect maintenance costs to be lower in the fourth quarter.

Net income and diluted earnings per share were 9% and 7% higher respectively versus last year.

Our return on capital employed was 9.6%, 90 basis points lower compared to last year as a result of higher capital employed.

This remains well above our 8% cost of capital.

I want to remind you that the new projects we are developing, executing and operating will be accretive to ROCE over the next few years.

Turning to slide 6, you can see an overview of the factors that affected this quarter's performance in terms of earnings per share.

Our continuing operations EPS $1.46 increased by $0.10 versus last year.

Higher volumes across all segments increased EPS by $0.18.

Pricing, energy and raw materials taken together were flat.

Net cost performance was $0.05 unfavorable as higher costs primarily to planned tonnage maintenance outages and inflation more than offset the benefits of our 2012 and 2013 cost-reduction programs.

We have delivered on the cost-reduction actions and are seeing the benefits.

The impact of the PUI business exit was about $0.02.

Interest expense was lower and contributed a penny on lower interest rates.

Our tax rate of 24% remains unchanged and finally, higher shares outstanding reduced earnings per share by $0.02.

Now, to begin the review of our business segment results, I will turn the call over to Corning.

Thanks, Scott.

Please turn to slide 7. Overall, the Merchant Gases segment had a very strong rebound from a challenging Q2.

Volumes continued to improve, we showed good cost performance and we successfully recovered the expected portion of the Q2 weather costs.

However, I want to be clear.

We are not satisfied with this level of performance and certainly have opportunities to further improve this business.

With that said, the team delivered on our expectations for this quarter.

Merchant Gas sales of just over $1 billion were up 4% versus last year on 3% higher volumes and 1% higher pricing.

Volumes were led by strong overall growth in Asia and the US and Canada and positive liquid oxygen and nitrogen volumes across all regions; partially offset by lower helium volumes globally.

Sequentially, sales were up 4% and volumes were up 3% as we saw accelerating volumes in Europe, continued strength in Asia and an improvement in Latin America.

Our new helium plant in Wyoming is on-stream and our supplier of crude helium continues to ramp production.

While helium was still tight during the quarter, we began to see additional industry supply reduced tightness towards the end of the quarter.

We would expect the supply and demand balance to shift going forward.

Merchant Gases operating income of $174 million was up 5% versus prior year and up 21% sequentially.

Segment operating margin of 16.1% was up 10 basis points compared to last year and up 230 basis points sequentially.

As I mentioned earlier, we recovered the expected portion of last quarter's unusual US and Canadian weather-related costs and expect this recovery to continue.

While we were pleased with the move in our margin, I want to comment on the incremental margin.

We have shared with you that we expect incremental margins on existing asset loading to be in the range of 30% to 40%.

A portion of the sales growth this quarter was not incremental loading of existing assets.

The EPCO sales growth was not incremental as this was an acquisition we closed on during Q3 of last year.

Also, we shared a number of details regarding the China merchant market in last quarter's call.

As you've heard, Air Products and the industry are challenged with a supply that has grown faster than demand.

We have not made a decision to add liquid capacity in China for over 18 months, but we still have some liquid capacity to bring on-stream.

New capacity additions don't earn incremental returns and the pricing dynamics in China also limit margins in the near term.

One note as we look to Q4.

As Seifi mentioned, you are going to see a greater emphasis on cash flow from us.

As you may remember, when we sold our European healthcare business to Linde in 2012, a portion of the proceeds were contingent on a number of business retenders and we moved this business to discontinued operations.

The reconciliation is now complete and so we have made a payment to Linde in Q4 of about $158 million.

This liability was already fully reflected on our balance sheet and so will have minimal to no P&L or EBITDA impact.

But it will affect cash flow and discontinued operations in Q4.

Now let's take a look at the merchant business by region.

Please turn to slide 8. In the US and Canada, sales were up 8% on 3% higher volumes and 5% higher pricing.

We continue to see nice growth in our liquid oxygen and nitrogen volumes with strength in the metals and chemicals markets as capacity utilization remains in the upper 70s.

A full quarter of EPCO this year versus only one month last year was positive, but helium and argon were both down on limited supply.

As I mentioned, we saw some improvement in the helium supply near the end of last quarter, but still down for the quarter versus prior year.

Contract signings for the year remain above last year's strong results.

Both helium and LOX/LIN pricing continue to be positive as we work hard to continue to recover the Q2 weather impact in LOX and LIN.

In Europe, sales were up 6% versus last year due to currency as volumes were down 1% while prices were up 1%.

LOX/LIN and LAR volumes were positive, but were offset by lower helium and cylinder volumes.

LOX/LIN volume growth was solid in Central and Northern Europe and we were pleased to see strong end-user volume growth in Southern Europe.

While construction remains weak and cylinder volumes were down versus last year, we were also encouraged to see slight sequential improvement.

Contract signings for the quarter were up significantly from last year.

Overall pricing was up slightly for the first time in a year and a half as LOX/LIN pricing was flat and both helium and cylinder pricing showed improvement.

The team is very focused on aggressively managing pricing.

LOX/LIN plant loadings remain in the high 70s.

We were pleased to announce the installation of a new air separation unit for AGC Glass in the Czech Republic.

Asahi Glass, the world's largest producer of float glass, is seeing real benefits from the new plant that are helping them to meet their goals to produce the highest quality glass in an increasingly competitive market.

A great example of our industry expertise enabling us to grow a relationship that began almost 20 years ago.

In Asia, sales were up 5% versus last year on 6% higher volumes and 1% lower price.

LOX/LIN and LAR volumes continue to be up double digits in China and across the whole region while helium was down on supply limitations.

With the strong volume growth, plant loadings have moved up to the high 70s despite capacity additions.

Contract signings for the year remain above last year's strong results.

Pricing was down in the LIN, LOX and LAR business, particularly in China, driven in part by the wholesale market while helium pricing was up.

We shared a fair amount of detail on the China merchant market in last quarter's call.

As we said, we expect the supply/demand dynamics to be challenging for a few years, but it is encouraging to see an increase in our utilization rates.

We remain focused on using our applications expertise to help our customers improve throughput, reduce environmental impact and lower costs while creating new demand for industrial gases.

In Latin America, underlying sales were up 4% while currency reduced reported sales by 12%.

Brazil volumes were up and we saw a slight improvement in the rest of South America, but slower global economic demand mitigated growth in Chile.

We are seeing the benefits of our cost-reduction focus on our Indura business.

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

Now let me turn the call over to Steve for a review of our Tonnage and Equipment and Energy segments.

Thanks, Corning.

Good morning, everyone.

Please turn to slide 9. Excluding PUI, Tonnage Gases grew profits this quarter as the positive contribution from new projects and strong base business demand overcame the expected negative expense and volume impact from a higher level of plant outages.

Base demand, particularly hydrogen in the US Gulf Coast system, remains strong.

Overall sales of $835 million were down 1% versus last year.

Gases volumes were up 2% as strong US Gulf Coast hydrogen demand and a positive contribution from new plants more than offset the maintenance outage impacts.

I know many of you have asked about the potential impact of lighter, sweeter shale oil on the US Gulf Coast hydrogen demand.

As you can see from our results over the last few quarters, we continue to see our customers running hard with significant hydrogen demand.

While shale oil availability may moderate hydrogen demand growth going forward, our US Gulf Coast customers are also adding heavy Canadian oilsands to their crude slate, which brings significant hydrogen demand.

And low-cost natural gas creates an operating cost advantage for the refiners allowing them to profitably export refined products.

Overall, we may see some growth moderation, but see no risk to our existing assets.

Lower PUI volumes impacted sales by 4% or about $35 million and about $0.02 of profits.

As a reminder, we fully exited this business in Q1 of fiscal year 2014 and for the full year still expect PUI sales down about $140 million and about a $0.10 EPS headwind.

Excluding the effect of the PUI business exit, operating income was up 3% versus prior year as the positive contribution from new plants overcame higher maintenance costs.

Despite the cost and volume impacts of the outages, our team executed well.

Our maintenance costs are on budget and as we said last quarter, we expect to see a significant reduction in planned maintenance activity in the fourth quarter.

We continue to execute on the projects in our backlog and while we may see the typical slight large plant schedule changes, we are seeing our customers successfully start up their facilities.

We talked last quarter about bringing on-stream our new, world-scale hydrogen plant in St.

Charles, Louisiana, just in time to provide volume to customers as other plants were down for planned maintenance.

A great example of the value of the world's largest hydrogen pipeline network.

Now please turn to slide 10.

The Equipment and Energy segment continues to see strong growth as our leading LNG position had a positive impact on sales and backlog.

Sales of $104 million were up 1% versus prior year while operating income of $17 million was up 9%.

More higher-margin LNG projects and less lower margin ASU activity drove the profit increase.

The backlog of $584 million is up significantly, as we announced, the PETRONAS' second floating LNG project order and have received other customer awards that have not yet been announced.

The PETRONAS order represents Air Products' third LNG order for the developing floating LNG market.

A great result for our technology and our team.

Overall, LNG project development activity remains high.

Now I will turn the call over to Guillermo for a review of our Electronics and Performance Materials segment results.

Thanks, Steve.

Please turn to slide 11.

The Electronics and Performance Materials segment delivered another strong quarter as both businesses showed good volume growth and robust leverage to the bottom line from our cost improvement actions.

Segment sales of $618 million were up 9% versus last year driven by 9% higher volumes.

Versus prior year, Electronics sales were up 6% with strength across all segments.

Advanced Materials showed strong growth as our customers ramp production of their next-generation nodes driving demand for our materials.

Process Materials also saw volume growth and moderation of recent pricing pressure.

Tonnage grew on new project on-streams and the equipment business was positive versus last year.

Sequentially, Electronics sales were up 2%.

Performance Materials sales were up 12% versus last year as we saw strong growth across all regions and product lines.

In fact, this was a record volume quarter for the PMD business as we benefited from the improved global economic demand, share gains and successful new product introductions.

Sequentially, sales were up 7%, higher than the typical seasonal improvement.

Operating income of $107 million was up 23% and operating margin was up 200 basis points to 17.3% as leverage from higher volumes was expanded with cost performance.

We remain on track and are delivering on our business restructuring and cost-reduction programs.

Sequential operating income was flat and margins were down 80 basis points compared to a very strong Q2.

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

Thank you, Guillermo.

Now please turn to slide number 12.

Our guidance for the fourth quarter is for earnings per share of $1.60 to $1.65.

We do appreciate that this represents a significant increase from the third quarter and if achieved, it will be the highest quarterly earnings that this Company has ever delivered.

But this is what we have already promised to our shareholders during the last call and we will do our best to deliver what we have committed to.

We will pull all the operating levers under our control to deliver these results.

With respect to capital expenditure, we estimate about $2 billion for the fiscal year.

I think it is also appropriate to make a comment on our energy from waste project in Tees Valley in the United Kingdom.

We plan to begin commissioning the first project late in first fiscal quarter of 2015 and currently expect commercial operation late in the second fiscal quarter of 2015.

I should also add that I am fully aware that all of you want to know when we will communicate more about our strategy going forward.

We will do this and give you an update in less than two months in mid-September.

And by early calendar 2015, we will have an investor conference where you will meet our team and we will report on the progress we have made in implementing our strategy.

But today, I want to touch on another part of our effort to move Air Products forward.

That is our Company culture.

Please turn to slide number 13.

Our Company culture is an important and essential part of implementing our strategy.

I want to stress the words "Air Products culture".

We are a global company operating in more than 50 countries.

Our people in these countries have their own unique cultures and we fully respect all of those diverse cultures.

What I am referring to in this slide is the 'Air Products' culture.

That is the principles that we will follow when we are at work at Air Products.

We will relentlessly focus to achieve outstanding and world-class safety performance.

Our goal is nothing less than zero accidents and incidents.

We will work very hard to simplify our organization and we will focus every day on simplifying our work processes so that our organization will move forward.

I am very focused on this issue of simplified organization and simplified work processes because I think that is the key to improving our productivity.

We will perform our job with a sense of urgency.

We believe that speed of execution is a competitive advantage.

And finally, we will act with self-confidence, believing that we can set high goals for ourselves and have the ability to achieve them.

A positive can-do attitude and culture at Air Products is a key element of success as we move forward.

Now we will all be delighted to answer your questions.

(Operator Instructions).

Vincent Andrews, Morgan Stanley.

Thank you and good morning, everyone.

Seifi, I respect that you are not ready to talk about the go-forward yet.

I am just wondering if you can kind of give us an overview of your macro view of the world.

I am particularly interested in how you think about growth going forward in Europe and China both from a high level and then maybe from an industrial activity perspective.

Well, first of all, good morning.

I will be happy to do that, Vincent, but I will make a few comments and then I would like to turn it over to Scott to give you a more detailed view of this.

But, overall, we see improved economic activity in the United States.

Overall, Europe is kind of stable and we do see significant improvement in certain parts of Asia.

But as I said, I would like Scott to make more detailed comments on this.

Sure, hi, Vincent.

Good morning.

So our view of the economy here for fiscal 2014 is very much in line with what our expectations were when we entered the fiscal year.

So just to remind you, we will talk about it in terms of manufacturing output.

For fiscal 2014, we had projected manufacturing output to be up year on year from 2% to 4% and again, we are expecting to see the year come in like that.

In the US, we also expect to see 2% to 4% year-on-year growth.

In Europe, 0% to 2%, so the lowest area of growth, recognizing it is also coming out of the recession the latest of all the different regions.

In Asia, we have a projection of 5% to 7% manufacturing output growth year on year principally driven by China.

And then Latin America is the one area we had a range at the beginning of the year of 1% to 3% year-on-year growth.

Frankly that is the one area that is coming in at the low end of the range and perhaps below the low end of the range.

But again, overall, we are seeing the economy in terms of manufacturing output play out largely like we expected when we began the fiscal year.

Okay, just as a follow-up, in Electronics, the equipment trends that were very strong in the prior quarter appear to have continued this quarter and my sense was that that was going to slow down.

Has something changed and will this continue going forward?

I will have Guillermo answer that, please.

Yes, good morning.

The equipment orders are strong.

We expect them to continue to remain strong through this year, early part of next year and then start tapering down towards the back end of next year.

Okay, thank you very much.

I will pass it along.

John McNulty, Credit Suisse.

Hey, good morning.

Thanks for taking my question and good luck to you, Seifi, in your new role.

Thank you, John.

So I guess a couple questions.

With regard to your big focus on cash flow and cash generation, can you walk us through at least the types of metrics you think are important in terms of how we would be judging free cash generation for an industrial gas company?

Well, I think the chief area of focus is to make sure that we do projects that do generate cash.

That means that we will take a look at our hurdle rates to make sure that we have the kind of hurdle rates that when these projects come on-stream they do generate the kind of cash that we would want to have.

Are you referring to the absolute number, John, or just the relative number?

Yes, if you have got a specific say target for say a best-in-class, that's more along the lines of what I was getting at.

Well, it might be a little bit too soon for me to give you a target, John, but we do hope that we will generate a lot more cash than depreciation obviously so that -- what we want to do is we want to be free cash positive even after dividend.

That is for sure our goal.

Great, thanks.

And then just as a follow-up, I know it is a little bit early in the process, but it sounds like you have had an opportunity to meet with a lot of the people at Air Products and I am sure review the business at least to some degree.

So I guess I'm wondering at least at your first blush would you say there are any major issues with regard to the long-term contracts that may not be fixable quickly or would you say some of the operational difficulties for Air Products over the past and maybe the underperformance is more of an operational focus that is something that could be fixed?

John, I do not see any significant problems that cannot be addressed and cannot be fixed.

Our job over here is not to find excuses and complain about the past.

Our job is here to move forward and deliver results and whatever issues there might be, Air Products is a great company, great people and we will be able to address them and solve them.

I am very positive and very excited about being here.

We have a lot of projects, we have a lot of exciting things to do, some of them more difficult than others, but that's what makes life exciting and that's what makes this job very exciting.

And my team over here is very energized.

We will climb any mountain we need to climb up in order to create value for shareholders.

Great.

Thanks very much, Seifi and good luck again.

Thank you.

Duffy Fischer, Barclays.

Yes, good morning.

Seifi, just following along on your point too of kind of elements of success around the capital allocation, I am wondering if you can talk a little bit about your higher return standards going forward, maybe as they would be used as a lens to look at some of the stuff that investors have argued back and forth in the history -- so coal gasification on-site in China, Tees Valley in the UK, the Indura acquisition and then kind of build it and they will come liquid capacity historically.

As you look back at those capital decisions, can you walk through how you think those would fare in a new going-forward Air Products?

Duffy, first of all, good morning.

My job here is not to second-guess anything the Company has done.

Right now, as the CEO of the Company, I own everything.

Whatever it is, it's Air Products and my job is to look forward, not backward.

The one thing that I can tell you is that we will look very carefully at every investment and make sure that the returns are risk-adjusted based on the circumstances.

Obviously, if you are doing the project in the US versus we are doing the project somewhere else, the risk elements are different.

So I do not want to give you a target because then that is our competitive advantage.

I don't want to announce our targets and our strategy on a public call.

But the one thing that I can assure you is that we will be looking at all of these targets very carefully and I made the general comment that we will raise our hurdle rates, yes.

Okay.

And then you also made the comment that, as you talked to folks throughout the organization, they were ready for change.

As an employee, what kind of change should I expect to see over the next year?

Is it getting leaner, do we have major cost reductions we need to go through?

Is it hustling more to go out and get new business?

What kind of changes do you want to drive in the organizational look of Air Products going forward?

Well, I think I tried to address that in my last slide, which was fundamentally creating a culture, which is focused on delivering results.

We are not running a country club here.

We are running a company and everybody needs to contribute and pull their own weight.

That is the key issue and I think people are ready for that, they understand that.

And with respect to -- I delineated for you the focus on safety.

Fortunately, that already exists at Air Products and I am very happy about that.

Simplifying our organization, decentralizing our organization and a sense of urgency to get things done.

And I think as I said at the beginning, I have met with a lot of people.

I am very encouraged by what I have seen.

There is a very positive attitude and there is a great deal of pride in this Company and people are going to rise up to the occasion and deliver and become the best gas company in the world.

Great.

Thank you very much.

Thank you.

P.J. Juvekar, Citi.

Thank you.

Seifi, welcome to Air Products.

Thank you very much.

Air Products has spent about $4.5 billion in CapEx in the last three years, but that hasn't really shown up in earnings.

So what is your understanding so far why we haven't seen that impact yet?

Well, on that front, the general comment that I have is that a lot of those CapEx has been spent on long-term projects.

I mean you need to judge us on the performance of these projects over the next 15 years rather than on the first year that it comes in operation.

Projects get delayed, so the customer is delayed and all of that.

So I don't think there is anything basically wrong with these projects and in time, you will see the returns.

Our job is that while these projects are coming on-stream is to significantly improve our existing operations so that you see the better returns and better performance on a short-term basis while these projects kind of get online in the future and deliver the results.

So improving the short-term results is something that we need to do that comes from improving productivity, increasing prices and all of the other things that one needs to do.

Thank you.

You have a plan of a decentralized model.

Do you believe Air Products is too centralized and do you think decisions like pricing should be made locally?

Thank you.

Thank you.

Do I think that Air Products is too centralized?

Yes, I do.

I think we should decentralize a little bit more.

Yes.

Okay?

Thank you.

Jeff Zekauskas, JPMorgan.

Hi, good morning.

Good morning, Jeff.

Hi.

You spoke about price competition in the merchant markets in China.

When you look at your larger capital projects, your larger on-site projects in China over a multiyear period, do you now expect somewhat lower expected returns on capital because various piggyback efforts would be diminished by the price competition, which was probably unforeseen at the time that the projects were designed or is it independent?

Jeff, that is obviously a very good question.

I think Corning can answer that.

Corning, please.

Yes, thanks for the question.

I think it is fairly straightforward.

So if the pricing comes in to be below what we had expected, yes, it is going to impact the returns.

Maybe just give a little color on the China situation.

So pricing right now I think is impacted in part by just real retail or wholesale price moving, but also as we and others have brought on capacity, very typical in the early years to load that with wholesale and so as we get through the slug of capacity, I think then there is a chance to move more and more to retail using our application skills to sell direct.

And so I think we can look forward to some improvement from where we are today.

And I think you can expect projects that are closer to the coast, let's say (inaudible) or the Shanghai, Pearl River Delta, we will see that more rapidly.

I think in the north it depends a lot on government policy around the steel industry and it will just take a little bit longer as we move further west.

Okay.

And then for my follow-up, in the tonnage discussion, you spoke about hydrogen demand in the Gulf Coast being relatively strong, but volume for the quarter was only up 2%.

So what is the magnitude of the hydrogen growth and what are the specific factors or what is contracting that is diminishing the overall level of volume growth?

Jeff, another good question.

I think Steve will be able to answer that.

We were discussing that this morning.

Steve?

Sure, hi, Jeff.

Jeff, if you look at the Gulf Coast hydrogen volumes over the last seven quarters, this quarter was the highest by a fairly large margin.

So good hydrogen volumes in the Gulf Coast.

What kind of comes out on the other side of that with the counterbalance is the outages.

So if you look at the 2% volume growth, the strong volumes from US Gulf Coast, new project impacts are offset by the outages.

So the outages tend to have an impact on that.

And particularly it's around -- so I have talked to a lot of you over the years about we have base facility charges.

They are generally paid during the outages, but we also own a pipeline system.

We have spot customers and we also have customers who pay -- have a minimum take-or-pay volume.

That take-or-pay volume is over a 12-month period.

So when we have an outage, they won't necessarily take volumes and they will make that up over the next 12 months.

So you do have a volume impact that occurs when you have maintenance outages.

Okay (multiple speakers).

Jeff, if I may, I think when it gets to the second quarter and third quarter of our fiscal year next year, I think you will be able to see good improvement in the volumes, which would validate the point because we think we will be out of the outages by then.

Okay.

Thank you so much.

Thank you, sir.

David Begleiter, Deutsche Bank.

Thank you.

Seifi, good morning and welcome to Allentown.

Thank you, David.

How have you been?

Okay?

Very good, thank you.

Seifi, there is a very well-documented margin gap between yourself and your US peer.

How much of that gap is gettable, do you think, and in what timeframe?

And even if you can't quantify it, maybe qualify your answer in that sense.

David, can you wait another two months so that I can address this thing in mid-September?

I'll wait.

Yes, I appreciate that.

And then the other thing is that we always like to be number one, not number two, but we will address that for you in mid-September, okay?

And maybe just one more thing, Seifi.

On first blush, does this entire portfolio to you make sense, i.e., (inaudible) the non-gas businesses?

Do they make sense to you longer term in this portfolio?

Well, I believe that the entire portfolio of Air Products right now has room for improvement.

Therefore, we are going to take a look at that and right now push for improvement rather than saying we want to get rid of this part or that part.

Once we have improved everything then we have options to take a look at.

So I just want to say nothing is for sale right now.

We are all focused on improving the performance of all of our businesses.

And there is room for improvement in all of our businesses.

Thank you very much.

Thank you, sir.

James Sheehan, SunTrust.

Thanks.

A question for Scott.

On the second-half outlook being a little bit more muted than you thought a quarter ago, is all of that in base business improvement or are there other factors that are in play here?

So the top end of the range that we brought down was really driven more by the on-stream from the new plants and it is just timing.

It is difficult to predict exactly which plants are going to come up when.

So the second half of the year, as we had mentioned, has got -- about two-thirds of the items are specific and one-third for base improvement and there's no change to that.

And so we are focused, as Seifi mentioned, on pulling all the levers that we have at our disposal in order to deliver on the year.

Thank you.

And then a question for Seifi.

In terms of the way this business is organized, we've looked at the merchant business and having margins in that business potentially in the high teens when it's running at a steady state.

Do you still see that as an achievable objective or do you look at the Company in a different way given your cash flow focus?

Well, I believe that we have room for improvement and I'd like to turn to the gentleman who is going to deliver that for me and that is Corning.

So Corning?

So I think we have no question in anybody's mind in the merchant business that we can improve significantly from where our returns are now and get back to where we have historically been.

I think in terms of timing and so forth, I don't want to steal Seifi's thunder for what we might say in September, but absolutely positively the ability to improve this.

Thank you.

Bob Koort, Goldman Sachs.

Thanks, good morning.

Good morning, Bob.

Seifi, congrats on your move.

Clearly, the market is excited.

I think since the day you were announced, there has been a $3 billion market cap increase and -- you now trade at a 10% premium to all your industrial gas peers, so clearly the markets are embracing it.

Thank you very much.

I'm curious, as you did your due diligence, you talked about the Company culture and what you are looking for in simplicity, speed and self-confidence.

I'm assuming your view is there is quite a gap between where you want to be and where you are today.

I am wondering if you could speak just a little bit about that.

Or maybe what has caused that historically and how you can remove the impediments to being better in those regards.

Well, Bob, as usual, you like to ask very difficult questions, right?

I think that the best way for me to describe it is that we do have a lot of good people here who remember the past when they were the best in the industry and they want to get back to that.

I think the key impediments to the organization in the past have been simplicity of the organization and a sense of urgency and speed in making things happen.

And the other thing I think is the issue of empowerment.

I mean you can't run a company the size of Air Products by having one person responsible for P&L.

You need to empower people to make decisions all the way down the line.

So if I wanted to summarize it, I think simplicity, the speed of execution and empowerment have been some of the issues that we will address and I think that would create a lot of -- it has created a lot of excitement.

I spent a lot of time with our people, as I said.

I've talked to more than 1,000 people here and I intend to cover all the 21,000 people, but people are very excited about everything.

I am not facing resistance or pushing against a closed door.

This is very exciting for me quite honestly.

So, Seifi, would it be fair to say you see it, and I agree with you.

I mean if we went back to the 1980s and 1990s, you are right, Air Products was always considered sort of the premium in the industry.

Is it just a function of we've had a couple decades of accumulated cultural headwind and so you think most of the change that is required is more around culture and less around assets?

Is that fair?

I think as we go forward, Bob, in my presentation, you see what I was focusing on.

I was focusing on the Company culture and I think that is a significant opportunity for us.

And in addition to that, we also need to look at the projects as we go forward in terms of their returns and also in terms of their structure or geographic focus.

Industrial gases is a local business, but what is important is your strength in Southern Ohio, not your marketshare in all of the United States.

So we will be focused on all of that, but, yes, I do believe that the culture change is a big opportunity, yes.

Terrific and best of luck, Seifi.

Thank you very much.

Looking forward to seeing you soon, Bob.

Kevin McCarthy, Bank of America Merrill Lynch.

Good morning.

Congratulations to you, Seifi.

Given your increased focus on cash flow and your employment of higher hurdle rates in the future, can you comment, Seifi, on the shape of the project backlog and how much that might decline and how much your capital expenditures might come down in future years?

Good morning, Kevin, first of all.

I think that, first of all, whatever we do is not going to have an effect on our backlog because the backlog is what we have committed and we are going to execute.

In terms of what we will do in the future, it obviously depends on the opportunity, but it also depends on the cash generation.

One way to focus on cash generation is to cut expenditures.

Another one is to increase cash generation.

So we are going to focus to increase our cash generation by being more productive and doing a lot of the right things that one needs to do in getting more out of what we have.

But in terms of what the shape of the future will be, it will depend on opportunities, it will depend on our ability to generate the cash that we need and then we will see how it works out.

I don't see a significant drop-off because we want to participate in the growth in the industry, but we will obviously be a lot more careful about some of the things that we do.

And then second, I wanted to follow up on an earlier question.

I heard your comment that you don't have any businesses for sale today.

But are you generally happy with the composition of the portfolio or over the next several quarters, should we expect you to evaluate businesses in order to determine whether certain businesses may be core or noncore?

Will you be engaged in that way or not?

Kevin, my job is to constantly review our portfolio and see what can be done to maximize shareholder value.

I am sure you heard me say that I am not enamored with size.

Size doesn't matter.

What matters is the value of our stock.

So you should expect us to constantly review our portfolio and decide what is the best course of action to create value for our shareholders.

I don't want to prejudge that.

I do want to say that, from what I see, all of our businesses have room for improvement.

So it could be kind of premature to take any action before you get these businesses performing to the best of their ability.

Thanks very much.

Mike Sison, KeyBanc.

Hey, good morning, guys and congrats to you, Seifi, for coming to Air Products.

Thank you.

Can you maybe comment on what you see as the growth opportunities in the industrial gas industry?

Do you think that Air Products is positioned well to participate in the growth over the next two years as you change the culture?

I think Air Products is very well-positioned for participating in the future because we do have the fundamental technologies that are required.

The future in the industrial gases in terms of growth is going to be in the areas of energy, environment and all of that.

Air Products is extremely well-positioned in not only large ASUs, but the smaller ASUs, midsize ASUs.

We are world leaders in hydrogen and HyCO applications.

So wherever there is opportunity, I do not see Air Products having a technology gap to prevent us from participating on those growth areas.

Okay, great.

And just as a follow-up, when you think about decentralizing the business and maybe the way you organize your segments, is the right way to manage an industrial gas business -- is it by segment like you have it now or is it by region?

Any major changes in the way your operating management will be set up?

Can I answer that question for you in the middle of September so that I don't get ahead of myself?

Yes, you can, absolutely.

I would appreciate that.

Thanks.

Laurence Alexander, Jefferies.

Good morning.

Two quick ones just at the end.

First, do you have a metric for how much outages have been a drag to cash flow or EBITDA over the last three years?

And secondly, in the past, there has been a tension between the Air Products long-term growth and [Irona] focus and the stock market's relatively short horizon sometimes.

And as you are looking at the realignment of the business, are you willing to invest in things near term because you see the cash flows three, four, five years out or are you committing to sort of a floor, so to speak, in terms of choppiness around cash flow in the near term as well?

Well, I'd like Simon to make a comment on that, but before that let me just say we are running Air Products for the long term.

This is not something that we are going to do to make ourselves look good in one year and then damage the Company the second year.

I mean Air Products is going to be here for another 200 years and we are going to run the Company properly for the long term.

So I just wanted to make that comment.

But I would like Simon to make a comment on the other two issues that you raised and also, Scott, if you want to.

Simon?

Laurence, just a couple of quick numbers.

So as you know, we said this year we'd expect maintenance costs to be about a $0.10 headwind versus prior year.

Fundamentally, on average, our total maintenance cost for the Company is about $250 million a year of expense.

Obviously, there is also a capital component as well.

So hopefully that frames it and we can follow up later on if you'd like.

I don't have anything to add.

Okay, thanks, Laurence.

Don Carson, Susquehanna Financial.

Yes, hi, Seifi.

Two questions, one on the capital structure side.

Traditionally industrial gas companies have been pretty conservative on wanting to maintain an investment-grade rating.

Are you willing to lever the Company up more to perhaps return cash to the shareholders a little quicker than you might get from an operational improvement in cash flow?

And then, secondly, as you look at your North American position, do you think you are disadvantaged by not having a cylinder gas position to take advantage of this long forecast manufacturing renaissance?

Well, first of all, good morning, Don.

Last time you asked me a question about industrial gases was about 20 years ago.

But, anyway, good to talk to you again.

First of all, we do value our investment-grade rating, yes.

And we would want to maintain that unless a phenomenal opportunity comes about, but I don't foresee that right now.

So maintaining investment-grade is important to us.

As far as the lack of the so-called packaged gases business in the United States, well, I don't consider it a significant disadvantage.

It's something that is nice to have, but it is not a must-have.

If we can create that at a reasonable cost and a reasonable price that would be something that we would look at, but I do not consider that to be a significant competitive disadvantage.

We can compete the way we are.

Thank you.

We have time for one more question.

Mark Gulley, BGC.

Hey, good morning, Seifi.

Good morning, Mark.

Yes.

Return on capital was not mentioned either in your slide 4 or your later slide about the Ses.

Can you comment on the fact that Air Products has been below double-digit ROC and how you might see that metric going forward?

Well, I think that our ROCE is going to kind of not improve very quickly in the short term because we have a lot of CapEx that is being spent that is not currently generating revenue.

So I would see that thing going down, but our goal is to increase that return on capital to what I think the industry is capable of delivering, which is 12% to 13%.

That obviously will be our goal.

But I think in the short term -- I mean you know this, Mark -- in the short term, while these projects are being built, you obviously have depreciation without much profit against it.

And then if I just close with an observation.

I welcome, as well as others do, the fact you are showing EBITDA for the Company.

You may want to show EBITDA for each segment as well so we can track that too.

We will.

We will show EBITDA for the segment, for the business unit.

EBITDA will be what will guide us in terms of not only measuring performance, but also for our reward system.

We will be very focused on that, Mark.

And thank you for your remark.

I appreciate that.

Okay, well, thank you very much, everybody.

We do appreciate your participation in the call and we look forward to seeing many of you as we go on the road and on our next call.

Thanks again and have a great day.

Once again, ladies and gentlemen, that does conclude today's conference.

Thank you for your participation.