Air Products and Chemicals Inc (APD) 2015 Q3 法說會逐字稿

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

Today's call is being recorded at the request of Air Products.

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

(Operator Instructions).

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

Please go ahead.

Thank you, Dana.

Good morning, everyone.

Welcome to Air Products' third-quarter 2015 earnings 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.

Our earnings release and the slides for this call are available on our website at airproducts.com.

Please refer to the forward-looking statement disclosure on page 2 of the slides and at the end of today's earnings release.

Now, I'm pleased to turn the call over to Seifi.

Thank you, Simon, and good morning to everyone.

Thank you for taking time from your busy schedule to be on our call today.

We do appreciate your interest in our Company.

First, let me introduce the members of our team who are on the call today.

In addition to Simon, I have Mr. Scott Crocco, our Senior Vice President and Chief Financial Officer; Mr. Corning Painter, Air Products' Executive Vice President responsible for Industrial Gases, and Mr. Guillermo Novo, Air Products' Executive Vice President in charge of Materials Technologies.

All of us will be participating in the call and in answering your questions.

I am very pleased to report that Air Products team delivered great results in the third quarter of our fiscal year 2015.

Therefore, before I go any further, I want to thank all of the talented, dedicated, and committed employees of Air Products for doing such a great job.

What we are presenting you today is the result of our 20,000 employees coming to work every day, committed to serving our customers, and improving every aspect of our performance.

Our people are the force behind our progress.

I certainly consider it an honor and a privilege to be part of this winning team.

Now, please turn to slide number 3. We always start our internal and external presentations with a discussion of our safety performance.

Year-to-date, we improved our lost time injury rate by 21%, and recordable injury rate by 17%.

As we have said before, excellence in safety requires focus, discipline, process orientation, and execution.

These same characteristics are required for excellence in business performance, too.

The improvement in our safety results, which is our number-one priority, is encouraging, but our ultimate goal is zero accidents and zero incidents.

Now please turn to slide number 4. I would like to continue to remind everybody that our goal has always been, and will continue to be, to become the safest and most profitable industrial gas company in the world, providing excellent service to our customers.

This is not an aspirational goal.

It is not a goal that we just dream about.

It is real, and it is the target of the day-to-day activities of all of our 20,000 people who are determined to get us there.

Last year, we were number three.

Now we are number two.

And we are focused to becoming number one.

Now please turn to slide number 5, our overall management philosophy.

Some of you have seen this slide before, but it is important to emphasize that we believe cash is king, and the true measure of our performance is the price of our stock in the long-term.

We are very focused on proper allocation of capital.

Air Products generates a significant amount of cash.

We, the management of the Company, fully understand that the proper and sensible allocation of that cash is a clear element of value creation for our shareholders.

And as you have seen from our actions in the last year, we have moved toward a decentralized organization which has had the benefit of creating accountability and reducing our costs.

Now please turn to slide number 6, our five-point strategic plan that we announced in September of 2014.

We are diligently and consistently executing this plan, and you can certainly see the impact on our results, which clearly show the improvement in profit margins.

When we announced our strategy, we said that the proper execution of this plan will lead to an improvement in our margins of 600 basis points, or about $600 million per year.

Half of that, or about $300 million, was to come from reducing our overhead costs, enabled by the significant reorganization of the Company.

We are making great progress and expect to deliver about $150 million of these benefits into our P&L this year.

We expect to be at the full annual rate of $300 million of savings by quarter two of fiscal year 2016, so you'll see almost the full $300 million impact in our 2016 results.

The other half, or another $300 million, will be savings in distribution, operations, electrical usage, and other field operational costs.

Currently, we expect to get all of these savings in the next four years.

Now please turn to slide number 7. Scott will take you through the details, but I want to highlight a few key points.

Our EBITDA profit margin is up 430 basis points versus last year.

We are now generating free cash flow.

And our earnings per share is up 13% versus last year, despite the weak economy across the globe, and $0.11 negative impact from currency translation.

In addition, our return on capital employed now stands at 10.9%, which is an improvement of 130 basis points versus last year.

As Scott will explain, we improved our margins in all of our businesses, and specifically showed significant improvement in our core industrial gases business.

I am encouraged by the results and the progress we've made in the last year.

Now please turn to slide number 8, where you will see our steady progress in improving our EBITDA margin.

We do appreciate that we have more work to do to become the most profitable industrial gas company in the world, but as you can see, we are on our way.

Air Products is moving forward with the full force and support of all of our 20,000 people.

I am very proud of the team and very optimistic about our future.

Before I turn it over to Scott, I would like to comment on the appointment of Mr. Casey Cogut, who will be joining the Board of Air Products.

Mr. Cogut is one of the most prominent and well-known corporate lawyers in America.

He has extensive experience, has been involved in some of the largest mergers and acquisition transactions in the last 30 years, and has been a sought-after advisor to the Board of many companies.

I am very pleased to welcome him to the Air Products' Board.

He brings with him a wealth of knowledge and experience that we currently do not have on our Board.

We have issued a separate press release about his appointment and his background.

Now I would like to turn the call over to Mr. Scott Crocco, our Senior Vice President and Chief Financial Officer, to go through the details.

Then I will come back after comments from Corning, Guillermo, and Simon to make some closing remarks, and then we will be pleased to answer your questions.

Scott?

Thank you very much, Seifi.

Now please turn to slide 9 for a more detailed review of our Q3 results.

Sales of $2.5 billion decreased 6% as strong underlying growth of 4% was more than offset by an unfavorable currency impact of 6% and a lower energy pass-through impact of 4%.

Volumes increased 3%.

In gases Asia, volume growth was driven primarily by new plants in China.

Materials Technologies again saw solid growth, driven by our electronics materials businesses.

And our LNG business posted another strong quarter.

Pricing was 1% higher, driven by price increases in Gases Americas and Gases Europe, and both favorable price and mix in Materials Technologies.

We delivered significant operating leverage again this quarter, as EBITDA improved 9% and operating income improved 17% despite the lower sales.

Versus prior year, EBITDA margin improved 430 basis points to 30.7%, while our operating margin improved 380 basis points to 19.5%.

We saw improvement across all our regional Industrial Gases segments and in Materials Technologies.

Lower energy pass-through only contributed about 50 basis points.

The rest of the operating margin improvement of about 330 basis points was well-balanced, resulting from higher volumes, higher prices, and lower costs.

Higher volumes and better cost performance contributed to our sequential margin improvement.

This quarter is a new record for the highest quarterly operating margin in over 25 years.

Versus prior year, net income increased 14%, earnings per share grew by 13%, and we continued to improve our return on capital employed, which increased by 130 basis points to 10.9%.

Now please turn to slide number 10.

You've heard Seifi and I talk about our focus on cash flow, and that we do not want to borrow money to pay dividends.

As you can see, distributable cash flow increased again this quarter, and free cash flow was up $87 million as we generated higher EBITDA and spent less on both growth capital and maintenance capital.

We are focused on optimizing maintenance capital, spending the right amount at the right time, and properly supporting the base business to ensure long-term success.

These improvements were partially offset by any increase in cash taxes and dividends.

From a timing perspective, it is not unusual for items to move around quarter to quarter, particularly maintenance capital and cash taxes.

Turning to slide 11, you can see an overview of this quarter's performance in terms of earnings per share.

Before I comment on our Q3 operating performance, I'd like to spend a moment on the non-GAAP items that total $0.18 per share, or $60 million pre-tax, all related to our restructuring actions.

This includes $24 million for position eliminations and pension settlements, and $36 million for asset actions, primarily related to product line exits as we continue to focus on our core business.

We expect to see restructuring costs and pension settlement costs in fiscal Q4 as we continue to simplify the organization and reduce costs.

Excluding these items, our Q3 continuing operations EPS of $1.65 increased $0.19 per share or 13% versus last year, despite the significant currency headwind.

Higher volumes increased EPS by $0.13 per share.

Pricing, energy, and raw materials taken together contributed $0.11.

Net cost performance was $0.11 favorable, as the benefits from our cost reduction actions more than overcame a $0.10 headwind from higher incentive compensation.

As a result of our improved performance expectations for the full year, we increased our incentive compensation accrual in the quarter.

In total, our cost reduction actions delivered $0.18 per share benefit.

These benefits consist of lower personnel costs as well as actions enabled by our new, more disciplined organization.

These actions include reducing contractors, consultants, travel, and other discretionary spending.

Unfavorable currency translation was $0.11, as almost all currencies weakened against the dollar.

As a reminder, our currency exposure is primarily translational, as the vast majority of our products are made and sold in the same currency.

Interest expense was $0.01 lower.

Taxes and non-controlling interest were both $0.02 unfavorable.

Our tax rate of about 25% increased 1%.

For the full year, we still expect our tax rate to be about 24.5%.

Non-controlling interest was higher this year, due to the increased value of the minority position in Indura.

And finally, higher shares outstanding reduced earnings per share by $0.02.

Before I turn the call over to Corning, I'd like to discuss the transaction we just completed last week.

We purchased all the outstanding shares of our largest minority partner in Indura, which is one of our industrial gas businesses in Latin America.

Following this transaction, we now own about 98% of Indura.

The valuation was agreed to at the time of the initial purchase in 2012, and will be a use of cash of $278 million in Q4.

Because we previously owned a majority of Indura and we're already consolidating results, there will be no impact to reported sales, EBITDA, or operating income.

But as we now own a larger portion, there will be a smaller reduction from non-controlling interest that should improve earnings per share by about $0.02 to $0.03 per year, beginning in Q4.

We have used commercial paper to fund this purchase.

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

Thanks, Scott.

The industrial gas team continues to improve our business by executing our five-point plan.

For the three regional industrial gas segments in total, EBITDA margins were up over 500 basis points versus last year.

And each of these three segments reported the highest margins in the 11 quarters that we have provided restated financials for.

This strong performance was delivered in an uncertain economic environment with modest manufacturing growth and profit headwinds from currency, lower energy prices, and higher incentive compensation.

On a constant currency basis, operating income for the three regional segments combined was up 17%.

We delivered these results by focusing on what we control: first, reducing overhead costs by restructuring to our new, regional organization.

Next, under that organization, uncovering issues -- embracing the red, as we say -- and tackling them to unlock operational productivity with a no-excuses attitude.

This has been an eventful year at Air Products, and I would like to thank the team for grabbing the opportunity we have been given and running with it.

The results speak for themselves.

With that, please turn to slide 12 for a review of our Gases Americas results.

We again delivered strong results this quarter as significant cost improvements translated into very strong margin growth.

Sales of $898 million were down 16% versus last year, as the pass-through of lower energy prices reduced sales by 13%.

The price of natural gas in the Houston Ship Channel was down over 40%.

As a reminder, lower natural gas prices have a significant negative effect on reported revenues, a modest negative impact on profits, and a positive impact on margins.

Currency, primarily the Chilean peso, Brazilian real, and the Canadian dollar, reduced our sales by 3%.

However, underlying sales were flat, as higher pricing of 1% offset 1% lower volumes.

North America liquid oxygen and nitrogen volumes were up mid-single-digit and we did not see any drop-off through the quarter.

HyCO volumes were down slightly, but within typical customer demand fluctuations as our refinery customers continue to operate at high levels.

Helium demand remained off.

On-site oxygen demand from the steel market was lower.

And we will have a few quarters of reduced wholesale oxygen sales until that is replaced by a retail signing.

We also saw lower Latin American demand, particularly in Brazil.

Pricing was up 1% versus last year, despite reductions in some of the formula-based contracts for liquid products.

Operating income of $207 million was up 9%, and EBITDA of $328 million was up 6%, as lower costs and positive pricing more than offset profit headwinds from currency, higher incentive compensation, and lower energy pass-through.

The lower costs were primarily driven by our restructuring actions, lower planned maintenance outages versus last year, and other productivity actions.

Operating margin of 23% was up 520 basis points, with about 200 basis points from lower costs, 100 from pricing, and 200 from lower energy pass-through.

EBITDA margin of 36.5% was up 740 basis points.

Sequentially, profits were also up as volume, price, and costs were all positive.

And finally, as Scott mentioned, we are excited about the significant increase in our ownership of Indura, the Latin American industrial gases business.

And we are looking forward to more fully implementing our five-point plan and driving further business improvement.

Now, please turn to slide 13.

In the Europe, Middle East, and Africa regional business, we saw the benefit of the cost restructuring actions as both EBITDA and operating margins were up over 300 basis points.

Versus last year, sales of $455 million were reduced by 16% due to currency, primarily the euro, the British pound, and the Polish zloty.

Underlying sales were up 2%, with volumes up 1% and pricing up 1%.

We saw positive merchant volumes in the UK/Ireland; mixed in Southern Europe; and weakness in Northern and Central Europe.

We have seen some negative volume impact in our Rotterdam hydrogen pipeline, in part due to transportation fuel imports from the US negatively impacting European refinery operations.

We are pleased that our team improved pricing by 1% in this weak economic environment, with increases across both packaged gases and liquid/bulk.

Sequentially, volumes were up 2%, driven primarily by better LOX/LIN volumes.

Versus last year, reported operating income was up slightly, as the positive impact from our restructuring actions overcame the significant currency headwinds.

On a constant currency basis, operating income was up almost 20%.

Versus last quarter, EBITDA was up 16%, and operating income was up 23%, primarily on significantly improved costs, driven by the benefit from the cost reduction and productivity actions.

Please turn to slide 14.

Gases Asia delivered another strong quarter, with new plants driving both volume and profit growth.

In addition, cost reduction actions helped to increase EBITDA by 12%, and operating income by 20%.

Sales were up 14% to $418 million, driven by volumes, up 11%, primarily from the new plants.

There has been some recent excitement in the Chinese markets.

I would like to remind you that the majority of our business in China is protected by secure take-or-pay terms.

And with the large plants coming onstream, this proportion of our business is only growing.

For our most recent project, for Zhengyuan in Hebei, which came onstream in early Q3, in addition to having take-or-pay terms, we also have secure energy pass-through terms in our contracts because the customer supplies the energy in most cases for these large plants.

Occasionally we see swings in the energy pass-through around customer startups.

This has no impact on profit, but it can impact sales.

Most importantly, as I have said before, customers are executing their projects, operating their gasifiers, taking oxygen, and we are getting paid.

Overall merchant volumes were up low- to mid-single-digits across Asia.

Our China retail LOX/LIN business was up mid-single-digits, while overall China LOX/LIN was down as we focus on increasing our retail business while reducing wholesale volume.

We still see end market demand growth in China, but certainly at a slower rate and with more uncertainty than a few years ago.

Sequentially, volumes were up 5%, with merchant volumes up significantly following the Lunar New Year holiday.

Pricing was down 2%, as overcapacity in China continues to pressure liquid oxygen, nitrogen, and argon pricing.

Air Products has no new China liquid capacity to bring onstream.

However, others do.

Operating income of $101 million was up 20%; operating margin was up 130 basis points; and EBITDA was up 12% with new plant onstreams, restructuring, and productivity programs more than overcoming higher incentive compensation and pricing.

Sequential profits were up, primarily due to the acceleration of the cost savings from our restructuring actions and improved merchant volumes.

We've talked a lot about driving improvement in the existing business and executing our projects in our backlog, but we are also very excited to have won a major contract to supply both gases to the new Giga Fab Campus in South Korea.

This is an example of the industrial gases team continuing Air Products' leadership in the semiconductor industry.

I will close with a few words on the Global Gases segment.

You'll recall that this segment includes most of our air separation unit sale of equipment business, as well as costs associated with the Industrial Gases business which are not region-specific.

Our overall sales were flat with last year, although the business mix was different, with lower small equipment sales to the oil and gas market and higher ASU sales.

This business mix difference was a profit headwind.

Also, last quarter, we had more favorable contract actions than this quarter.

We did see lower cost from the restructuring actions that we are taking.

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

Thank you, Corning.

Please turn to slide 15.

The Materials Technologies team continues to deliver very strong results, with volume growth and cost focus raising margins by over 500 basis points to the highest levels in the 11 quarters we have provided financials.

In fact, our operating margins are up 900 basis points over the last two years.

Our team is working hard to become more independent within Air Products, and our people continue to be excited about the potential of our strong portfolio of businesses and leading market positions.

They are delivering both safety and business results.

Segment sales of $540 million were up 3% versus prior year.

Underlying sales were up 7% on 4% volume growth and 3% positive price/mix, with a partial offset from currency.

Electronics sales were up 18% on a constant currency basis, driven by positive volume, price, and mix.

Processed materials volumes were up on continued high memory demand.

As a result of the tighter supply/demand dynamics, we are seeing improved pricing and have signed a number of multi-year supply agreements with our customers that will improve volume and earnings stability in the future.

Advanced Materials continues to benefit from our materials being used in our customers' newest and most advanced production lines.

Delivery systems was about flat versus last year, but we have begun to see the expected slowdown on a sequential basis.

Within delivery systems, our equipment sales are holding up, but we will see a decline from less installation work, as specific customers have completed their fab projects.

Although overall Electronics Materials demand remains strong, given recent industry communications we continue to monitor the potential impact of changing macroeconomic drivers on 2016.

For our business it is critical to look at both macro drivers as well as customer-specific dynamics.

We are often asked about the impact of slower PC demand on our business.

Over the long-term, we see slower PC demand more than offset with higher demand for mobile devices and the significant computing power in many non-computing devices.

There are some indications of more moderate growth for 2016, driven by weaker PC demand and softening consumer demand in the mobile space.

In the memory market, there has been some reduction in DRAM pricing, given higher supply, but volumes have been holding up as customers bring on new capacity.

The NAND market remains strong.

Performance Materials sales were down 2% on a constant currency basis on lower volumes across our epoxy and additives businesses, driven by softness in construction, coatings, I&I, and oilfield.

We did see sequential volume improvement, but less than the typical seasonal improvement.

As Q3 end-market demand was softer than expected, especially in North America and China, we remain cautious about the outlook for seasonal improvements through 2015.

Versus last year, price is flat but margins have improved, given lower raw materials cost, and cost reduction actions.

The lower raw material costs are having some negative impact in terms of inventory revaluation.

Given our business profile and supply footprint, currency continues to be a major headwind for this business.

Over the last eight quarters, we have been able to capture significant volume growth, and several of our businesses are now running their plants at very high utilization rates.

Last year we initiated several investments to expand capacity in both the U.S. and in Asia.

These investments will support volume growth for our existing products as well as growth of the new products in our portfolio.

We are excited about a new Performance Materials production facility that is currently under construction in Pasadena, Texas.

This investment of over $100 million will support the growth of our Performance Materials portfolio over the coming years.

We are also relocating one of our Performance Materials plants in China to our main manufacturing site in Nanjing, which will provide an increase in capacity and operating synergies.

We have also made several smaller investments to support growth of a number of new product introductions in our electronics portfolio.

As we look into 2016, we are considering several smaller investments to de-bottleneck plants, add capacity, and support new product growth of our Electronics Materials portfolio.

As a shared with you at the Investor Conference, our capital intensity is much lower than Gases, and we generate a high level of free cash flow.

Our maintenance CapEx is only about 1.5% of sales.

However, we do periodically need to make investments to support new product opportunities and the growth of our overall portfolio.

Let me make some comments about innovation, as it is critical to the success of our Materials Technologies business.

We continue to be very excited about our innovation portfolio.

Our Electronics Materials portfolio is delivering strong growth from new products during 2015, and we continue to achieve process of record for new nodes, which will drive future growth.

In Performance Materials, our non-emissive technologies continue to achieve strong market penetration across a number of applications.

And our additives business is delivering growth from new product introductions across a number of specialty applications.

We are confident in the returns we are getting from our technology investments, and we are committed to maintaining the technology leadership in the market segments that we are focused on.

EBITDA of $155 million was up 27%, and EBITDA margins of 28.6% was up 540 basis points versus last year.

Operating income of $132 million was up 36%, and operating margins of 24.4% was up 600 basis points.

Volume leverage, positive price and mix, and the cost benefits of our restructuring actions overcame currency headwind and higher incentive compensation costs.

As I said, another quarter of great results by the team.

We are executing on, and remain focused on, our key priorities: safety, top-line growth, margin enhancement, and advancing our strategic initiatives to drive further business improvement.

Now I will turn the call back over to Simon for a quick comment on our corporate segment.

Thanks, Guillermo.

Our corporate segment consists of our LNG and helium container businesses, as well as corporate costs which are not business-specific.

Sales were up this quarter as we continue to see higher LNG sales more than offsetting lower helium container sales.

The LNG projects in our backlog continue with no delays or cancellations.

However, we have seen a slowdown in customer decision-making on new projects that will likely impact future results.

The improved profitability this quarter was driven by the higher LNG activity.

The positive benefit from restructuring actions was offset by higher incentive compensation.

Now I will turn the call back over to Seifi.

Thank you again, Simon.

Now please turn to slide number 16 for a discussion of our outlook.

During the year, on all of our calls, I have said that we are not going to use the weak worldwide economy, nor the negative impact of currency translation, as an excuse to reduce our guidance that we promised you back in October.

So I am very pleased to announce that at this time, based on what we know, our guidance for the fourth quarter of fiscal year 2015 is $1.75 to $1.85 per share.

At midpoint, this will be an increase of $0.14 or 8% over the previous year, and an increase of $0.15 or 9% over our fiscal-year third quarter that we are just talking about.

This takes our full-year 2015 guidance up to $6.50 to $6.60 per share.

At midpoint, this represents a 13% increase over our 2014 results, and is $0.13 higher than the target we committed to you back in October.

This is despite the fact that we don't see any significant improvement in the worldwide economy, and now expect about $0.35 negative headwind from currency translation.

As for capital expenditure in 2015, we expect about $1.7 billion, the same number that we shared with you last quarter.

We do continue to enjoy a robust backlog with a high level of secure, on-site pipeline projects.

Most importantly, we are bringing projects online that are contributing volume, sales, and profit.

At the same time, we are bidding and winning new projects in the marketplace.

As a result, our backlog of $3.2 billion remains unchanged from last quarter, and you can see a list of our major projects in the appendix slides.

In closing, I would like to say that we are totally focused on actions that we can control to deliver on the commitments that we are making here.

We are executing on our improvement programs, and our plan and our team is working together to achieve our goals.

Once again, I want to commend the Air Products team for the outstanding job that they are doing.

They are driving significant change in the Company and working hard to move Air Products forward to create value for our shareholders and customers.

At this time, now, we are delighted to answer any of your questions.

(Operator Instructions).

Jeff Zekauskas, JPMorgan.

We'll move on to P.J. Juvekar with Citi.

So, you commented that you will realize the first $300 million of cost savings by next year, and the remainder over the next four years.

What is the cadence of these cost savings over the next four years?

And how do these cost savings break down geographically?

Well, first of all, the cost savings will be across the board in all of our businesses, number one.

The second thing is that when I say $300 million over four years, that's obviously $75 million a year.

That's kind of the way it would cascade, approximately.

Okay.

And you said the geographic spread, is that sort of based on the size of business in each region?

Well, I think that -- the area that we can see the biggest amount of improvement is obviously our Latin America operations, but we do have a room to improve our results in all of the sectors.

I would like Corning to make some more comments on this.

Yes, good morning.

So, when we allocated out these targets across the regions, we clearly looked at the nature of the business, the nature of the spend, the assets in each area.

So it's not like a flat percentage for everyone; it's appropriate for each business opportunity.

Thank you.

And my second question is on energy-from-waste.

How close are you to getting these plants running, and what's your confidence level in the technology?

And you talked about divesting these plants in the future.

Are you in conversations with your partner there?

Thank you.

As far as the construction of the first unit, we are almost done with the construction, and we are in the start-up.

As far as the confidence in the technology, we'll find out.

This is one-of-a-kind; the first time anybody has built a plant of this size; and we will find out what the technology does, whether it works or it doesn't work.

We are in the middle of doing that, and I don't really have any significant update for you.

As far as far as being in conversation with anybody, no, we are not in any conversation until we get these plants operating.

Because if they are not going to operate, there is no conversation to be had.

Thank you.

Duffy Fischer, Barclays.

Congratulations on a great quarter, guys.

Thank you very much, Duffy.

Appreciate that.

Wanted to talk to -- your volumes seem to be running better than industry, so far.

How much of those volumes were new plants coming online, and how much is just you guys doing a better job of selling product in already existing markets?

I would like Corning to answer that, but we are not after gaining market share.

We are after making sure that we serve our current customers.

And most of the increase in volumes are from new plants.

But I'd like Corning to comment, because most of this is in our Industrial Gases business.

Yes.

So, I think if you looked at the regional slides that we have, you could see a large proportion of this is in Asia.

And what you're seeing in Asia is the new plants coming on stream, pretty much in total.

And that's really a large part of the picture here.

And you would expect that, because that is where we have made significant investments, and so we are now getting the benefit of that.

Fair enough.

And then just to go back to the cost cuts: so the two buckets of $300 million, one you said you'll be at a $150 million run rate on the first one by the end of this year; the whole $300 million on a run rate by Q2 of next year.

Then the second $300 million you talked about getting in four years.

Does that four years include this year just completed, or that four-year clock starts ticking as we get into 2016?

It starts as of when we get into fiscal year 2016.

Okay.

We are working on that, but that would be the approximate date.

Okay, great.

Thank you, guys.

John McNulty, Credit Suisse.

Hearing no response, we'll move on to Don Carson with Susquehanna Financial.

Seifi, I just wanted to know what turned out better in the quarter than you originally expected.

Because I know your original guidance range was 158 to 160.

So did some of the cost savings occur earlier than expected, or was organic growth better in some markets than you thought it might be?

There were two things.

Number one, when we gave our guidance at the end of last quarter, Don; as you know, we have seen really weak month of March and April.

And we were very concerned about how the economy will develop, especially in the U.S. Things have turned out better in the U.S. than we thought.

The second thing is that our plants in China came onstream sooner than we thought.

So those were the two main reasons.

The cost savings are in line with what we expected because we have a very detailed program on that.

But it was -- I mean, we were cautious because of the economy and the plants in China, and those two turned out to be better than we expected.

And then on slide 10, I noted that your maintenance and growth CapEx was down year-over-year.

And Scott talked about the focus on optimizing maintenance capital.

So is the -- you've talked in the past, the $250 million to $300 million run rate on maintenance capital.

Is the new rate lower, given your comments on how you are trying to optimize that level?

No, no, no, no.

Please be careful; we're not trying to optimize maintenance.

We are trying to -- we will maintain, and we are maintaining, our facilities.

And the number that you are quoting, about $300 million in maintenance, is absolutely correct.

The issue is that with maintenance, as you know, it's a lumpy thing depending on when customers shut down plants.

So it is going to go up and down, quarter by quarter.

But order of magnitude, $250 million to $300 million is the maintenance cost for Air Products.

Thank you.

David Begleiter, Deutsche Bank.

Seifi, Materials Technologies -- excellent results this quarter.

Has this quarter and the last quarter changed your view at all as to whether this belongs in the portfolio longer-term?

No.

We have always said that we want to focus on Industrial Gases.

So, that has been our strategy, and it will continue to be our strategy.

I'm very pleased with the job that Guillermo and his people are doing; but we still consider that business, at the end of the day, to be non-core.

And do you have a time frame for realizing that as being non-core?

David, don't -- you know that I can't give you anything like that, because we are looking at all of our options, as you know.

Understood.

Thank you.

Thanks.

Vincent Andrews, Morgan Stanley.

Just looking at slide 20, your backlog, I'm counting six new plants starting up in fiscal year 2016.

Do you have any update on the time or the cadence of those through the year, or how we should be thinking about the earnings impact for 2016?

I'd like Corning to comment on it.

But as far as I know, all of them are supposed to come onstream per plant.

Corning?

Yes, maybe just a little recognition for the team.

So, these are large plants; it's been a big effort to get them to completion and get them started up.

We talked about one we've had one come on in this quarter very smoothly.

We expect these plants to come on next year, likewise; and what you see in that appendix, that reflects our latest thinking on it.

I guess I was just looking for a little bit more detail on -- are some of them first half, are some of them second half?

Just in terms of as we look at our models.

I think when you are looking at your models, I think it would be wise to spread it evenly across the year.

Okay, thanks.

And just a follow-up on your cash flow statement.

There was a big swing for the year-to-date in payables and accrued liabilities.

Is that just a function of your reduced headcount expense, or what's causing that?

Scott will answer that.

Thanks, Vincent, for that question.

So, biggest swing in the working capital is being driven by the incentive compensation.

So, recall that that's an expense that is non-cash at this point in time.

Obviously when we get to the first quarter of FY16, we will have a payout.

But that's the big driver in terms of the improvement in working capital for the quarter.

Okay, great.

Thanks very much.

Bob Koort, Goldman Sachs.

This is Ryan Berney on for Bob.

So just had a quick question: obviously in this quarter you saw a nice cash flow expansion, at least on a year-over-year basis, as your CapEx starts to wind down, and your earnings wind up.

I and am wondering, as we look out to 2016, we should probably see some more earnings growth.

And assuming the CapEx does not rise with it, can you give us an update on what your plans are or what your priorities are for the uses of that cash?

Well, I think we -- that's an excellent question.

I'll just take a minute to answer that completely.

We have always said that we think we will create the greatest amount of value for our shareholders if we take the cash that we generate and invest it in good projects, in organic growth.

So that is our number-one priority, and the good news is that there are a lot of those projects.

So, whatever cash we generate, I think we will have a good use for it to promote organic growth.

If for some reason, because of worldwide economic conditions and so on, there are no such opportunities, then the next best use of cash is for accretive, good acquisitions.

Then, if there are no such things as that, then the third thing we think is to return it to shareholders in form of dividends or share buyback, depending on where the share price is.

So that would be our priority as we generate cash.

But the main thing is our issue has been with generating cash.

Now that we are generating cash, we have those options.

There is one other thing I would like to mention, and we have said this before: we are very focused on making sure that we maintain our A rating.

So, we always need to make sure that we have enough cash to maintain the A rating that we have.

We don't want to lose that.

Therefore, that means we are not going to go and do what I don't think makes sense, is borrow money and buy shares in order to prop up the share price.

Okay?

Understood.

Thanks, that's helpful.

And if you can, could you also provide -- as you're looking out for the best growth projects, as you're looking to build your pipeline, is there a specific region or a specific end market that is particularly attractive to you, based on what you're seeing right now?

Yes.

Obviously right now there is significant amount of opportunities in the U.S. Gulf Coast because of all of the chemical projects that are under consideration.

There are significant opportunities around the world for hydrogen.

We are the leader in hydrogen, and as a result of that that creates a lot of opportunities for us.

So, the opportunities are worldwide.

But obviously proportionally there are more opportunities in the U.S., and we are very well positioned in the U.S. And we think that we will get our fair share of the market.

Great.

Thank you very much.

David Manthey, Robert W. Baird.

First off, wondering about your decision to increase the ownership position in Indura.

I think it was a year ago, you had mentioned that the purchase price assumptions were incorrect in some way.

And I'm wondering, based on the predetermined price, can you talk about how you got comfortable with the valuation parameters this time around, and just the strategic intent of increasing your ownership there?

Well, I'm very happy that you asked the question.

We did not decide to buy the shares.

I wouldn't have bought the shares.

We, as part of the original agreement, the sellers had a put option.

And obviously it was a good price, so they put it to us.

We had no choice.

If we had the choice, we wouldn't have bought it at the price.

We would have liked to -- but it was a put option, so they put it to us.

We have to live by the contract that was negotiated at the time the purchase price was done.

So, the good news is that now, at least, we are in full control and we can do what we need in improving that business.

But it wasn't as if we sat down and decided that, gee, this is a great thing to do.

Okay.

And second, your new Board member -- his experience seems very deep in M&A.

Is there any information content there as it relates to your pace of mergers, acquisitions, and divestitures going forward?

Or is that just, like you said, filling a gap that you might have had?

It is just filling a gap.

I think it's the second thing that you said.

We just look at the Board.

And Board of any company is supposed to be a collection of people with different skills, and this was an area where we didn't have the skill.

And I think it was -- we are very fortunate that Mr. Cogut has agreed to serve on our Board.

We all have a great deal of respect for him.

He's very well known, and I think he will be a very good addition to our Board.

Thank you.

John Roberts, UBS.

Back to the Indura deal, the original deal was 884 for 67%, and now you are paying 278 for 30.5%.

So, if you just scaled on the ownership, it's about a 30% lower price for the same percent of ownership.

Is Indura down more than 30%?

Is that your comment there about you wouldn't have bought it?

It seems like a materially lower price for a similar amount of ownership.

It's just pure luck, because it's currency; because the deal was in Chilean pesos.

And as a result, the value in terms of dollars has gone down.

And then on the volumes in China, the remaining big plants come up in phases.

I assume once you are fully ramped, you will be more subject to the macros there.

How much longer before you are fully ramped in China?

We have more than four quarters left of ramping to go on there, or does it extend even beyond that?

Corning will answer that.

Yes, so I think, to some degree, the answer in your question is in that table.

So you can look out when the plants come on.

As those come on, each one of them represents a step change from that.

There's the potential that we would identify additional attractive investments between now and then, but I think that's your roadmap.

Okay.

The ones that come up in phases, are they relatively linear?

I see you've got some asterisks in that table.

Yes.

No, I think you would expect, as Seifi said earlier, that you're just going to see this spread out over the course of the next fiscal year.

Okay, thank you.

Laurence Alexander, Jefferies.

This is Dan Rizzo on for Laurence.

Just one quick question on Materials Technologies.

You said in Performance Materials, you are seeing some softness in construction and oilfield.

Well, oilfield is obviously known.

I was just wondering where you are seeing the weakness in construction.

Is there a specific region or just a specific area?

Just a little color on that.

Yes, Guillermo will answer that.

A lot of our business -- we're more on the industrial and protective coatings and flooring, so it's more of the non-residential construction.

And we're seeing most of that in the U.S., some softness versus our expectations.

And in Asia, mostly around China.

All right, thank you.

Jim Sheehan, SunTrust.

Congratulations again on an excellent quarter, Seifi.

Thank you very much.

You are very kind.

Thanks.

Thank you.

On the backlog, $3.2 billion, pretty solid figure here.

I'm just wondering if you could give your outlook for the second half of the calendar year -- would you expect that to move up or down?

And how would you characterize the bidding activity there?

Is it getting more competitive, in your view?

I don't want to comment on the competitiveness because that's not appropriate.

But in terms of the backlog changing, I think some projects will come onstream, and they go off backlog.

And hopefully we will bid on some projects and we will add to it.

So, I would not see a material change.

Okay, great.

And then on the Americas, your pricing was up.

I'm just wondering if you could break that out a little bit between Latin America and the U.S. Was pricing up more in Brazil, or could you comment specifically on how your pricing is in the U.S.?

Right.

Excellent question.

So, you can imagine in the high inflation regions it is much easier to drive pricing, and really essential to drive pricing.

So, in places like Brazil right now, prices are up quite significantly.

In the U.S. we have a situation where we have a number of contracts that are under a formula.

And as those input numbers, input costs go down, that becomes a net drag on pricing.

Of course, our input costs that we actually experience come down at the same time, so it's not really compressing margin as you might think about pricing.

That's just reflecting the natural ebb and flow of an index.

So definitely in our space, there's certainly a higher percentage increase in Latin America.

Thank you.

Mike Harrison, Global Hunter Securities.

Corning, I was wondering if you could walk through what your LOX/LIN utilization looks like by region.

And in the case of any improvement, is that improvement just volume-related, or are there any capacity reductions going on?

So, for the most part, our position right now is -- let's say we're in the 70s on a global basis, so a little bit higher in the U.S. and Canada, a little bit lower in Latin America.

The movement there, or let's say the trend-line going up, is really just going with underlying volumes at this point; not really significant capacity coming out of the system at this point.

And I would say in general, if you look at it, so LOX/LIN/LAR up in North America, up a bit in Europe as well.

I think it reflects just an overall thing that's happening here in Air Products.

This is a company that's going through a huge transformation.

Think about where we were a year ago.

Think about that graph we saw earlier about our EBITDA trend.

We've been through a big change, and I think it reflects overall that people are energized by what's happening.

And our teams are out there and they're pushing the sales; they're interacting with our customers; and I think we've got some momentum from that.

And that's going to slowly impact our overall loading.

But it's hard to beat, of course, the global economic environment.

All right.

And then a question on the hydrogen business.

You've talked in the past about the earnings impact of lower natural gas prices and hydrogen.

Have you taken any steps over the last year or two to modify some of your contracts so that you are a little bit more insulated from the earnings impact of lower natural gas prices?

Or is it still the case that you keep whatever efficiencies you can generate, and that means fewer dollars at lower natural gas prices?

Yes, so you'd imagine, these are long-term contracts tied to big assets, and it's not super-easy to go ahead and modify them.

As well as, if you think about what we're really interested in the end of the day is earnings, is profit.

And so, there's not a lot to be gained in heavily trying to reengineer that in terms of your face time with the customer.

That might change a ratio for us, but it's not going to really change EPS for us, let's say that.

So we're very focused on the things that most drive value for ourselves and for our shareholders, and really not so much an effort trying to re-engineer or re-jig the current contracts.

Mike, I think at the beginning -- during the call, I think Scott mentioned that the effect of the lower prices on profitability was minimal.

It affects our sales quite a bit, but the effect on profitability was not that huge.

Okay.

Thank you.

One more question, please.

Nils Wallin, CLSA.

With respect to the new plant that comes -- that's in the backlog for Korea, would you help us understand what it was that allowed you to get this plant?

And then if you would maybe qualitatively or quantitatively help us understand the type of returns you are looking at that plant, versus returns you had in the past.

I will answer the return question.

You know that we are not going to take any project with less than 10% return, so the return was higher than that.

But in terms of the -- we are under constraints from our customer about how much we can talk about it.

But I'd like Corning to make some comments.

Yes, so this is a reflection of having a product line approach.

We know the electronics industry, the semiconductor industry, very well.

We built a standard set of plants that are geared to driving or delivering the nitrogen at just the pressures and purities these guys need.

And I think it just reflects the ability to take that [success] and replicate it.

These are plants that we built before in other locations; and, in some cases, for this very same customer, and we'll now be doing it for them in this location.

I think it's the power of -- when we talked about focusing on the core, this is an example of that: focusing on an area of strength and continuing to grow from strength to strength.

Understood, understand.

Thank you.

And then just a follow-up with respect to your cost reductions and efficiency programs.

Obviously you put all these together when the economy maybe was not so dire, or the outlook wasn't so dire, and things have slowed down in other parts of the world.

So, once you are finished with this $600 million or so reduction in efficiency gains, do you expect there to be other opportunities, given where the economy is now?

We are committed to continuous improvement.

So, once we get the $600 million in the next four years, then we will start thinking about how we can make our operations even better.

So we are totally committed to that.

Okay?

Thank you very much.

Okay, at this time, I would like to take a second, once more, and thank everybody on the call.

We appreciate your interest, and we look forward to talking to you in three months.

Have a great day.

Thank you again.

Again, that does conclude today's presentation.

We thank you for your participation.