Air Products and Chemicals Inc (APD) 2016 Q2 法說會逐字稿

Good morning and welcome to the Air Products and Chemicals second-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.

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

Thank you, Angela.

Good morning, everyone.

Welcome to Air Products' second-quarter 2016 earnings results teleconference.

This is Simon Moore, Vice President 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'll be pleased to take your questions.

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.

Seifi and Scott will talk more about the decision to exit Energy-from-Waste, which we announced a few weeks ago.

The quarterly results we are sharing today and the prior-year period comparisons have been restated to reflect moving the Energy-from-Waste segment to discontinued operations.

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 schedules to be on our call today.

We do appreciate your interest in Air Products.

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 our Materials Technologies business, now called Versum.

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

I am very pleased to report that Air Products delivered another set of excellent results this quarter.

Despite sluggish economic growth worldwide and currency headwinds, our team stayed focused on our five-point strategic plan and delivered $1.82 per share of earnings, which is up 17% over last year.

And on a constant currency basis, our EPS is up 20% versus last year.

Another quarter of outstanding performance is due entirely to the tireless and focused efforts of Air Products' talented, committed, and motivated employees around the world.

I once again want to thank the people of Air Products for coming together to prove that they have the determination and the capability to deliver outstanding results and move our Company forward so that we can be the best industrial gas company in the world.

That is our goal.

Please go to slide number 3. We always start our internal meetings with a discussion on safety.

And I want to do the same today in our presentation to you.

Our quarter two performance in safety was better than last year and did improve relative to our disappointing first-quarter performance.

So I am pleased that we are moving in the right direction.

However, the only acceptable goal is zero accidents.

And we have a responsibility to our employees and their families to ensure that everybody goes home every day with no injuries or accidents.

At Air Products, safety is the responsibility of every single employee.

Now please turn to slide number 4, which is the restatement of our overall goal for the Company.

We are determined to become the safest and most profitable industrial gas company in the world, providing excellent service to our customers.

We have made great progress on the profitability side, and I'm confident we can focus and improve our performance on the safety side.

Now please turn to slide number 5, our overall management philosophy that we have shared with you many times before.

But I would like to emphasize it again.

We believe strongly that cash generation is what drives long-term value.

We believe that what counts in the long term is the increase in per-share value of our stock, not the size of our Company or growth rates.

In addition, Air Products generates a significant amount of cash.

And the effective deployment of that cash is one of my most important responsibilities as the CEO of the Company.

Now please turn to slide number 6, our five-point plan.

Our strong performance this quarter and in the previous quarters is a direct result of our focus on our five-point strategic plan that we announced a year-and-a-half ago.

I reviewed our progress last quarter and I would like to make a few more comments.

The first point of this plan was to focus on industrial gases, our core business, and therefore divest of our non-core businesses.

In September 2015, we announced plans to spin off our Materials Technologies business tax-free to our shareholders and set it up as a separate public company called Versum Materials.

We submitted our initial draft Form 10 in December to the Securities and Exchange Commission and have since updated that.

And the team is making great progress on the significant amount of work necessary to implement this plan.

But most importantly, Guillermo and the Materials Technologies team are delivering very strong results quarter after quarter.

We are on track to complete the separation of this business from our core by the end of September 2016 and will continue to evaluate whether debt and equity market conditions are favorable for a spinoff.

The second non-core business is Energy-from-Waste.

Scott will take you through the details, but as a result of the decision to exit this business last month, we have taken a pre-tax charge of almost $1 billion this quarter, primarily to write down assets associated with the Energy-from-Waste business to their realizable value.

The fourth point of our plan is the responsible use of cash and eliminating unnecessary work.

We have a very robust process to review every capital investment of more than $3 million, and have established a minimum hurdle rate of 10% internal rate of return for all new projects.

We also had a strong backlog of projects that will deliver volume, revenue, and earnings growth over the next few years.

Our backlog is down this quarter because we successfully brought onstream the new hydrogen plant in Canada serving Shell and the local pipeline system there.

As I have mentioned previously, I remain very optimistic about the growth potential of our core industrial gases business, especially opportunities in larger-scale onsite oxygen and hydrogen plants.

In the area of restructuring, the actions we took last year to eliminate unnecessary work have already reduced our overhead by $300 million a year and you are seeing the benefits of these efforts in our results.

We are making great progress on our plan to achieve an additional $300 million of operational savings in the next four years through self-help measures including plant operations, distribution, sourcing, and overhead costs.

Corning will share with you some examples of the great work the organization has been doing to begin to deliver on the second $300 million.

Improving productivity and efficiency is a necessary and never-ending process that we are all committed to as we move forward so that we can stay at the leading edge of our industry.

Now please turn to slide number 7 for a summary of our results for the quarter.

Scott will take you through the details, but I wanted to emphasize that we improved EBITDA margin by over 500 basis points versus last year, increased our earnings per share by 17%, and most importantly, our return on capital employed is now up 200 basis points to 13%.

Our restructuring actions enabled us to deliver these strong results despite the weak worldwide economy and a continued currency headwind.

Also, please note that this is the seventh consecutive quarter that we have delivered double-digit earnings per share growth.

And now if you please turn to my very favorite slide, slide number 8, you will see our progress over the last two years, where we have improved our margins by 1,000 basis points -- yes, 1,000 basis points.

And during this same two-year time frame, our earning per share is up 37%.

This single chart is a great demonstration of how focused the Air Products team is, and we are determined to continue to improve our profitability.

Now I would like to turn the call over to Mr. Scott Crocco, our Vice President and Chief Financial Officer, to discuss our quarter's results in detail.

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.

For our second quarter, sales of $2.3 billion decreased 6% versus last year on unfavorable currency and lower energy pass-through impacts of 3% each.

Volumes were unchanged as Gases Asia growth continued, while other segment volumes were lower.

Corning and Guillermo will discuss more on that later.

Pricing rounded down to zero, but was just slightly positive, driven by price increases in Gases Americas and Gases Europe.

We delivered significant operating leverage again this quarter, as EBITDA of $797 million improved by 12% and operating income of $532 million improved by 20%, despite the lower sales.

EBITDA margin improved 560 basis points to 35.1%, while our operating margin improved 500 basis points to 23.4%.

We saw margin improvements across all segments.

Lower energy pass-through only contributed about 40 basis points to the operating margin improvement.

The rest of the operating margin improvement of about 460 basis points resulted primarily from the benefit of the restructuring actions we have taken and a smaller benefit from price versus raw materials.

Our actions continue to show results and this is another new record for the highest quarterly operating margin in over 25 years.

Versus prior year, net income and earnings per share grew 18% and 17%, respectively.

And we continue to improve our return on capital employed, which increased 200 basis points to 13% on our higher profitability.

As Simon mentioned previously, Energy-from-Waste has been moved to discontinued operations and is not included in these numbers.

Now please turn to slide 10.

You have 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 by about $50 million this quarter due to higher EBITDA.

I want to point out that for consistency, we have restated the prior year's growth CapEx to exclude Energy-from-Waste.

As a result of the higher EBITDA and the lower growth capital spending, free cash flow was $220 million this quarter and $121 million higher than last year.

Just as a reminder, 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 number 11, we have included some additional information regarding our decision to exit the Energy-from-Waste business that we announced earlier this month.

The decision to exit the business and stop efforts to start up and operate our Energy-from-Waste projects was based on continued difficulties encountered in starting up the first project.

Based on extended testing and analysis completed this past quarter, significant additional time and resources would have been required to make the projects operational.

In addition, the decision allows us to execute our strategy of focusing resources on our core industrial gases business.

As a result of this decision, the Energy-from-Waste segment has been moved to discontinued operations and prior-year information has been restated for comparison purposes.

We recorded a pre-tax charge of $946 million during fiscal Q2.

This loss includes $914 million to write down the plant assets to their estimated salvage value of $20 million.

The charge also includes $32 million for plant disposition and severance costs.

The projects are located on leased land that requires removal of the facility.

It is expected that dismantlement of the facility will be completed in fiscal 2017.

As a result of removing this asset value from the denominator, ROCE increases by approximately 100 basis points.

Additional exit costs estimated at $50 million to $100 million may be recorded in future periods to wind down the plant and settle remaining purchase contracts.

We are also still evaluating an ASU built primarily to serve the Energy-from-Waste site.

Its current book value is approximately $60 million and is in our Gases EMEA segment.

There is no change to our continuing operations book effective tax rate.

There will be a modest cash tax benefit totaling about $75 million to $100 million that we expect to recognize over the next 10-plus years.

In terms of future uses of cash, we see a potential net cash cost of $60 million to $110 million for the various items mentioned above.

However, as we have said, we are working to optimize the cash value of our investment.

Turning now to slide number 12, you can see an overview of this quarter's performance in terms of earnings per share.

Before I comment on our Q2 operating performance, I would like to spend a moment on the non-GAAP items that totaled $0.08 per share or $19 million pre-tax.

We incurred Materials Technologies separation costs of $7 million or $0.04 per share, primarily for legal and other advisory fees.

As I mentioned last quarter, we have completed the actions associated with our first $300 million of overhead reductions.

We are now focused on the second $300 million of operational improvements.

In Q2, we incurred a $9 million or $0.03 per-share charge associated with these actions.

We also recorded a $3 million or $0.01 per share pension settlement charge.

Further details on all non-GAAP items can be found in the appendix slide and the footnotes to our earnings release.

Excluding these items, our Q2 continuing operations EPS of $1.82 increased $0.26 per share or 17% versus last year.

The impact from lower volumes decreased EPS by $0.10 per share, primarily due to a positive prior-year contract wrap-up in Global Gases and lower LNG sale of equipment activity.

Pricing versus raw materials taken together contributed $0.08, primarily driven by lower raw material costs.

Net cost performance was $0.36 per share favorable, primarily due to the benefit of our restructuring actions taken last year and good progress on our operational improvements.

Cost performance also benefited by about $0.15 from lower incentive compensation, lower pension costs, and other income and expense.

Unfavorable currency was $0.05, as many currencies besides the euro weakened against the dollar.

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

Equity affiliate income was unchanged.

Interest expense of $0.01 was $0.01 higher, primarily due to lower capitalized interest from lower capital spending.

Taxes were $0.02 unfavorable due to higher earnings.

For the year, we still expect our effective tax rate to be in the 24% to 25% range, likely closer to 25%.

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

Thanks, Scott.

Let me start by thanking the entire Industrial Gas team around the world for delivering another very strong quarter.

Despite continuing currency headwinds and challenging economic conditions, each of the regional teams delivered EBITDA margins that were up more than 500 basis points.

We are focused on the things we control, primarily driving operational productivity.

And we also improved our safety performance this quarter.

We have described our operational productivity opportunity as 10,000 little things.

Meaning we have many opportunities to act and drive improvement.

As an example, we have a large network of plants that produce liquid oxygen, nitrogen, and argon -- LOX, LIN, and LAR.

Many of them also serve pipeline customers, like steel mills.

As pipeline customer demand swings and local power rates shift, the availability and cost of liquid product changes, too.

We are working with third-party providers, including outside distribution experts, to modernize our sales and operations planning, process, and tools to help us to reliably serve our customers for the lowest cost every day.

With that, please turn to slide 13 for a review of our Gases Americas first-quarter results.

Despite currency headwinds and weaker volumes, our continued focus on restructuring actions and self-help measures drove the significant margin expansion.

Sales of $798 million were down 10% versus last year as the pass-through of lower energy prices reduced sales by 6% and currency reduced sales by 3%.

Volumes were down 2%, primarily driven by weakness in Latin America.

We also continued to see lower oilfield service demand versus last year, although we will begin to lap that decline next quarter.

Steel remains weak.

We haven't yet seen any improvement to speak of in our customers' operations.

Although HyCO volumes were down slightly on modest customer outages, underlying demand remains strong.

Pricing was up versus prior year for the sixth consecutive quarter, with a key focus on recovering inflation in South America.

Volumes were down sequentially, primarily in South America, seasonality.

Operating income of $224 million was up 23%, and EBITDA of $341 million was up 14% versus last year, as the benefits of our restructuring actions and lower maintenance costs more than overcame headwinds from lower volumes, currency, and lower energy pass-through.

Record operating margin of 28.1% was up 770 basis points and record EBITDA margin of 42.8% was up over 900 basis points.

Lower energy pass-through, though, accounted for only about 100 basis points of that, meaning that the operating margin was up 670 basis points, excluding lower energy pass-through.

Finally, we were pleased to bring onstream our newest 150-million-standard-cubic-foot-a-day hydrogen plant, located in Scotford, northeast of Edmonton in Alberta.

This new steam methane reformer provides hydrogen and steam to Shell Canada's Scotford facility and will supply hydrogen to Northwest's refinery.

The plant is connected to our Heartland Hydrogen Pipeline system that is also fed by two hydrogen plants in Edmonton and supplies refiners, upgraders, chemical processors, and other industries.

As this plant came onstream right at the end of the quarter, it did not contribute to our Q2 results.

Now please turn to slide 14.

For the Europe, Middle East, and Africa business, we continue to see our restructuring and pricing actions more than offsetting volume weaknesses as EBITDA and operating margins again set new records, both up over 500 basis points.

Versus last year, sales of $420 million were down 6% due to a negative currency impact of 3% and a negative 4% impact from lower energy pass-through.

Underlying sales were up 1%, as 2% higher prices more than offset 1% lower volumes.

We have not really seen much demand improvement in Europe, but continue to work hard on price increases, delivering our fifth consecutive quarter of positive pricing.

Operating income of $89 million was up 26%, and EBITDA of $145 million was up 14%, as our restructuring and price actions more than offset headwinds from currency and lower volumes.

Record operating margin of 21.3% was up over 500 basis points and record EBITDA margin of 34.5% was up over 600 basis points.

Lower energy pass-through accounted for about 50 basis points of that, meaning that the operating margin was up 500 basis points, excluding lower energy pass-through.

Please turn to slide 15, Gases Asia.

Volume growth and the benefits of our restructuring actions drove significant margin improvement over last year.

Sales of $406 million were up 3%, primarily driven by volumes, up 10%, partially offset by a negative 6% impact from currency, primarily from China, Korea, and Taiwan.

Overall merchant volumes were up high-single digits both across Asia and in China, specifically.

We continue to see the benefits of large onsite plant projects we brought onstream over the last year as well as an increase in energy pass-through revenue at a few of these recently started-up plants.

Our coal gasification customers in China continue to operate their facilities at high rates.

Our plants continue to run well.

And most importantly, we continue to get paid.

Pricing was down 1%, reflecting a reduced rate of decline in LOX, LIN, and LAR pricing, despite the substantial overcapacity in China.

Operating income of $104 million was up 23%, and EBITDA of $170 million was up 18% as our restructuring actions and stronger volumes more than offset the headwinds from currency and price.

Operating margin of 25.7% was up over 400 basis points, and EBITDA margin of 41.9% was up over 500 basis points.

We did see a sequential decline in profits, driven by about $5 million of positive nonrecurring items last quarter, currency, and the expected lower merchant volumes during the Lunar New Year.

I would add that it seems that our customers' Lunar New Year outages this year were fairly typical relative to previous years and we didn't see them taking extended outages.

I'll close with a brief comment on Global Gases segment.

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

Sales were up as we recognized about $30 million of revenue from the Jazan ASU sale of equipment, and that more than offset weakness in small equipment and other ASU sales.

However, we did not recognize any profits this quarter from Jazan, as we are still early in the project.

Costs in this segment were down, but profits were down as the prior-year quarter had a nonrecurring benefit from a contract wrap-up.

Now please turn to slide 16, and I'll turn the call over to Guillermo for a review of our Materials Technologies segment results.

Thank you, Corning.

The Materials Technologies team delivered another strong quarter.

As I shared with you during our February Versum conference call, we believe we have made structural and sustainable improvements to our business, which you can see from this graph of the margin improvement over the last three years.

This improvement was driven by continuous actions on multiple fronts: innovation, focusing on our key products and markets, leveraging pricing opportunities, productivity, improving our cost structure, and taking needed portfolio actions.

While there will be normal fluctuations in quarterly results driven in part by end-market changes, we do not see this as a cyclical business.

Turning to slide 17 on this quarter's results, segment sales of $490 million (sic - see slide 17 - $494 million) were down 7% versus last year.

Volumes were down 6% on lower delivery systems and electronics and lower additives and epoxy demand in performance materials.

EBITDA of $150 million was up 1% and operating income of $129 million was up 4%, as price, raw material management, mix, and our restructuring actions more than offset headwinds from lower volumes and currency.

As a result, EBITDA margins of 30.2% was up 240 basis points and operating margin of 26.2% was up almost 300 basis points, both representing another quarterly record.

In October, I told you that we expected to deliver higher profits in 2016 than in 2015, and we are well on our way.

Through two quarters, our EBITDA is up about $20 million higher than last year.

We remain confident on our outlook for 2016 and are working to continue to deliver improved profits in second half of the year.

On slide 18, you can see the results for electronic materials.

Sales of $234 million were down 10% on lower volumes, while higher pricing offset negative currency effect.

As expected, delivery systems' activity was down significantly compared to high level of project activity last year.

Overall materials volume were roughly flat, as we continue to see growth in our advanced materials business, partially offset by weakness in our Taiwan foundry customers.

For electronic materials, EBITDA of $83 million was down 1% and operating income of $70 million was up 4% versus last year.

EBITDA margins of 35.5% were up over 300 basis points and operating margins of 30.1% was up 400 basis points.

Pricing and mix and the benefit of our restructuring actions were the key drivers more than offsetting currency headwinds.

On slide 19, you can see the results of performance materials.

Sales of $261 million were down 5% on 2% lower volumes, 2% lower prices, and 1% negative currency effect.

Epoxy volumes were down on weakness in oil and gas and marine coatings.

Additives volumes were also impacted by oil and gas weakness as well as mining, including a specific customer temporary site shut down in Brazil.

We did see stronger polyurethane additive volumes across all market segments.

Overall, prices were down, given broader petrochemical-driven deflation, but were more than offset by lower raw material costs.

For performance materials, EBITDA of $67 million was up 1% and operating income of $60 million was up 2%.

EBITDA margins of 25.8% and operating margins of 22.8% were both up 160 basis points, primarily driven by mix improvement and favorable price raw material balance.

On slide 20, you can see the updated trailing 12-month results for Materials Technologies segment: sales of over $2 billion; EBITDA of $591 million, with margins of 29.3%; and operating income of $504 million, with margins of 25%.

This is as reported within Air Products, so it does not include any allocated corporate costs.

As you can see, our results continue to demonstrate that Versum Materials is a very high-quality business with very attractive margins.

Our team remains focused on our key priorities: safety, top-line growth, and margin enhancement.

And 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 down versus last year on lower LNG project activity.

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

However, we have seen a slowdown in customer decision-making on new projects that will likely impact our FY2016 and FY2017 results.

Profits were up despite the lower sales, driven by lower costs.

Now I will turn the call back over to Seifi.

Thank you, Simon.

Now please turn to slide number 21 for a discussion of our outlook.

The Air Products team is focused on implementing our five-point strategic plan to move us forward to become the safest and most profitable industrial gas company in the world.

Our guidance for the quarter -- for the third quarter of fiscal year 2016 is for earning per share of $1.87 to $1.92.

At midpoint, this will be an increase of $0.24 or 14% over the third quarter of last year and would represent our eighth consecutive quarter of double-digit earnings growth that we have delivered.

Despite an increasingly uncertain economic background, but based on our strong focus on self-help measures, we are increasing our full-year fiscal 2016 guidance to $7.40 to $7.55 per share.

At midpoint, this will be an increase of $0.88 or 13% over our very strong fiscal-year 2015 performance and is $0.10 higher than the guidance we gave you in October.

We now expect our CapEx to be about $1.2 billion for the year, down about 30% from fiscal year 2015.

As you can see from our results, we improved our free cash flow by over $120 million this quarter.

As a reminder, our priorities for the use of cash remain as follows.

Number one: maintaining our A credit rating; number two: investing in good projects and accretive acquisitions; number three: continuing to increase our dividends.

And number four: finally, if and only if there is excess cash available, we are very comfortable returning money to our shareholders in the form of share buybacks.

At the end of the day, the cash that we generate belongs to the shareholders and we will only spend our cash if we have enough high-return projects or good acquisitions.

And now we will be delighted to answer your questions.

(Operator Instructions) Steve Byrne, Bank of America Merrill Lynch.

I was curious.

In that margin improvement chart over the last couple of years, can you tease out of that how much was just simply from lower electricity costs?

Probably hardly anything.

Almost nothing.

Okay, thank you.

Vincent Andrews, Morgan Stanley.

Just curious how much your FX headwind has changed on -- for the full year this quarter versus last quarter.

When we came out of last quarter -- and we always just project currencies to stay where they were.

The end of last quarter, we would have said that for the year, FY2016 versus prior year, our currency headwinds would have been $0.20, maybe $0.25.

Now as we close this quarter -- and again, move the currency sideways -- our current view is that year on year, FY2016 versus 2015, is about a $0.15 headwind.

So net-net, we have got about another nickel less year-on-year headwind from currency.

So hopefully I was clear on that.

I will point out also that the driver of that is all the various currencies.

The euro now has mitigated a little bit.

So when you look at our rule of thumb, it has also been not only the major ones, like the euro and the RMB that we've given you in the past, but also areas where we are smaller, but we've seen quite a bit of movement in the currencies, like the real and the Korean won and the Canadian dollar and so forth.

Okay.

Just as a quick follow-up [if I can sneak it in].

If FX is about $0.05 better off the bottom, what's the balance of the guidance increase?

Is it broad-based or is it coming from particular regions?

It is broad-based, but it is primarily driven by our delivering the second $300 million of self-help measures that we have planned for.

Excellent.

Thank you very much; very helpful.

David Begleiter, Deutsche Bank.

Excellent job on the margins.

Just on the pricing component there, you have announced a series of price increases over the past year.

How would you rate the success of those price increases?

And what is the impact, do you think, going forward?

I would like to have both Corning and Guillermo comment on that with their respective businesses.

Corning?

Yes, thank you.

So I think you can see kind of in our results the progress that we've made thus far in our pricing.

We typically only announce pricing increases in North America.

That affects some contracts more than others.

But you can see we've had broad-based success in pricing, particularly in Europe; South America as well.

So if you come down to it, if you ask me, this really turns on if you go back to that concept of focus on the core, so that we focus on gases, we give the customers good service, we earn the right to raise the price, and we got a self-confident and motivated team that goes out and gets it.

And I see that trend continuing for us.

Guillermo?

If you look at pricing in the materials space, the three big drivers that we focus on; one is value pricing.

And that's about technology and innovation and how we improve the overall mix of our business.

And that has been going very well.

Our innovation engine is doing well, and mix improvement has been a good driver of our margin improvement in growth.

I think the second driver is just competitive dynamics; where we are in different markets.

If you look at all the actions we've taken on the portfolio side and our cost actions, we are in a much more competitive position, and that has allowed us to play a much more offensive game in terms of both volumes and pricing in those kinds of segments.

Then the last segment for us is; it's mostly around our functional surfactants.

And that's more formula-based pricing, where the raw materials do have a component.

So we've had a favorable lag effect as we look through that pricing overall.

But all three of those areas have been performing very well for us.

Very good.

And just last thing, Seifi -- in Gases Americas on volume, when do you think volume can turn positive in this segment?

Is it Q3, is it Q4, or is it even later?

Well, the famous saying is that it's very difficult to make predictions if it is about the future.

So we do not have that kind of a visibility to be able to predict that.

That's why in our forecast and the guidance, we are assuming flat volumes.

I don't want to venture into predicting that because we really don't know.

Understood.

Thank you very much.

Christopher Parkinson, Credit Suisse.

Just turning back to the industrial gas side, can you just comment on your current expectations on industry price discipline, actually particularly in Europe and then in the U.S. And whether or not you've seen any improvements over the last six to 12 months.

Just any expectations going forward would be appreciated.

Thank you.

Sure.

Corning?

So I'm sorry, but no, I really cannot comment on what I think discipline would be in this industry.

I could really only talk about our own actions on pricing, which I've already really shared.

As you know, we don't comment on pricing.

It's not appropriate.

All right.

Thanks.

Duffy Fischer, Barclays.

Wanted to ask a couple questions on China.

They have come out and talked about the oversupply that they have in the steel industry and about potentially moving to some consolidation there.

Obviously, as a big supplier into that industry, are you seeing that?

Do you think there's a chance that they take off meaningful capacity in steel?

We are beginning to see that, and we are seeing that people are taking it off.

Corning is closer to this thing.

Both of us were in China.

So we can give you some comments on this.

Corning?

Yes, so I think overall, our exposure to the China end market is relatively small -- steel end market, that is.

And there's really a potential upside in this.

So for a long time the CPC, the Chinese Communist Party of China, has talked about rationalizing the steel mills.

And many of these smaller regional steel mills have their own captive air separation plants, they make liquid product; they basically dump that into the market space.

So more recently, I have to say, there has been more serious talk out of Beijing about this.

And there has been more talk of setting up funds aside to help the social transition associated with this.

And I would say we have begun to see that happening right now.

Now, steel prices are now up a little bit, so we'll have to see.

But all in all, I see this as a rational and positive development.

Great, thanks.

And then Seifi, question for you.

We've seen some noise out of the Middle East about players there wanting to raise capital, whether it's Aramco talking about potentially an IPO.

One way for them to raise capital would be if they are willing to dispose of their hydrogen plants or air separation units to a Western player.

Is that an opportunity for the industrial gas industry to buy assets away from the big Middle Eastern players who are trying to raise capital?

That's an excellent question.

I don't want to speak for the industry, but that is an excellent opportunity for Air Products.

We have identified that as an area that we are going to be very aggressive about, and I think that would be a very positive development in our growth.

That's one of the reasons we are optimistic about our growth.

And as you know, as we have organized ourselves now, we have a President for that part of the world.

We have strengthened our team there, and we are very active in that area, yes.

Great.

Thank you.

Bob Koort, Goldman Sachs.

Seifi, I appreciate your unwillingness to forecast things, so I'll ask you to look far enough out that you can't be held to it.

I'm trying to get a sense -- volumes have been pretty pathetic in the industry for awhile here.

Obviously, your earnings growth has been spectacular, mainly a function of self-help.

When you get to a steady-state, what do you see as the waterfall between sustainable revenue growth, EBITA growth, and then ultimately EPS growth?

Say, on a three-, five-, seven-year -- a longer time horizon that takes out the near-term noise?

I can certainly make some comments on that.

Number one, you know our industry very well.

I'd like to distinguish between two parts.

One is our merchant and packaged gases business and our onsite business.

The merchant and packaged gas businesses in this industry has always and will continue to grow with industrial production.

There is no change on that.

There is no change in the industry.

If you are focused on packaged gases and liquids and you try to move your portfolio toward that, as some of our competitors are doing, you are going to be stuck with growth with industrial production, whatever it is.

So there is no change in the industry.

Where we see significant opportunities for Air Products, because that is our core competency and that is the biggest part of our portfolio, is on the big onsite plants.

And on that front, both for hydrogen and for oxygen, we see significant opportunities for growth.

That is why I think for the long term, Bob, in -- our overall goal for Air Products is to continue to grow our earning per share 10% a year.

That's our goal.

And we have delivered in the last two years and that would be our goal, to continue to deliver that.

And we see that as a good possibility.

And can I ask maybe Scott why the CapEx number came down a little bit and the definition of your backlog?

It seems like a couple of second-half projects were delineated into the fourth quarter more specifically.

Could you just give us an update there?

Yes, sure, Bob.

The reason why the CapEx came down, projected for this year, is really just the spending for the projects that we already have in the backlog.

So as we project out for the year, and we get closer to the end of the year, what is the spending going to be for those projects?

That is why we moved it down.

The other thing -- in terms of the backlog, you'll note that we did bring on, as we mentioned, a big project up in Canada.

And that's the biggest reason why our backlog has come down from $2.4 billion down to $2.1 billion.

If I may just add, the project that you are talking about in Canada is not a small project.

It's about $400 million.

So that has a significant effect on reducing that backlog.

Terrific.

Thanks for the help.

John Roberts, UBS.

If you are able to reach an agreement with Evonik on performance materials, what would you do with electronic materials?

I'm not sure what you are talking about.

We haven't reached an agreement with anybody, and I do not want to speculate about market rumors.

So sorry, John, I can't comment on that.

Maybe I'll try one for Scott.

Scott, now that you give us quarterly maintenance capital, is there a way that we can connect that to the EBITDA impact from maintenance?

I would assume that the effect would at least be directionally similar, that if you spent less CapEx in a quarter on maintenance, the EBITDA impact from the maintenance activity would probably be less?

No, there is no connection there.

Our maintenance -- what we are disclosing to you is maintenance CapEx.

That is totally different than maintenance expense.

Our maintenance expense is to upkeep our plants so that they keep running and serve our customers.

We have not had any cutback on that.

We are totally focused on that.

So that's -- the maintenance CapEx is basically a function of replacing old assets that need to be replaced.

And that is what we are reporting.

So there is no real connection between the two.

Laurence Alexander, Jefferies.

This is Jeff Schnell on for Laurence.

Can you give a longer-term view of the backlog?

That is, do you think that this is a good run rate that will be stable over the next three to four years, or should it continue to decline?

And then when you look at the bids you are working on now, has there been any shift in regional trends?

With respect to our projections, obviously it depends on the projects.

But we can certainly see a situation where we are -- a capital expenditure will be somewhere between $1 billion to $1.5 billion a year.

In terms of regions, the areas with the greatest opportunity is the United States Gulf Coast, because of low natural gas, and significant potential in China.

In addition to that, there is opportunities on the area that I was asked the question about in the Middle East and all of that.

That's an additional opportunity.

So that's where we see that.

There are projects in other parts of the world, like people wanting to replace an old ASU in Europe and so on.

But the major projects are definitely in China and in the US Gulf Coast.

Thank you.

P.J. Juvekar, Citigroup.

In EMEA, your underlying price is up.

And that was encouraging to see.

Can you talk about your utilization in Europe and other areas, other regions of the world?

I'm sorry; I didn't -- quite sure I understood.

You observed the pricing trend in Europe, and your question was --?

The question was, can you talk about utilization in Europe and also other parts of the world, where the margin utilization is?

Either one of us can answer that.

That's easy.

It is about the same.

We are still at around 77%, 78% utilization in the US, Europe, and in China.

I don't think there's any significant difference.

Corning, you want to add something?

No, I would just say if you are talking about where there's a little more momentum towards loading, obviously that's in China, where you can see the volume movement.

Okay.

And then you talked about accelerating your cost-cutting plans, the economy slowdown, and probably a Phase 2 of the cost-cutting.

Can you talk about what is your latest thinking on that cost-cutting program and the cadence of that cost-cutting?

Thank you.

We still believe that we are on track to deliver that second $300 million within four years.

This will be the first year.

Therefore, by the end of the year, we will be at a run rate of $75 million, which means that this year, we will deliver at least $35 million, $36 million, $40 million, half of that.

And we are well on our way in doing that.

We are doing actually better than we thought we would be doing.

And that's one of the reasons we increased our guidance for the year.

Thank you.

Mike Harrison, Seaport Global Securities.

Corning, you mentioned that maintenance cost in the Americas was lower this quarter.

How much lower was it year on year?

And what is your expectation for Q3 and Q4 compared to this quarter?

Yes, so the maintenance reduction for us in this quarter was about $0.04 for us.

Going forward, we are going to expect that to trend up, and that's in our forecast that we've put out for the next quarter and the full year.

And then I guess I was a little bit surprised to hear you say that North America was still weak in terms of steel markets.

Are you starting to see any change with the impact of the tariffs that were put in place in the US?

And can you also comment on whether any change there would lead to a potential loosening of supply and demand in argon supply?

Yes, good question.

So a couple things.

Number one: I think it's sort of hard to talk about regional economic trends.

It is so specific what's happening in one segment versus another.

And even in North America steel.

If you are making steel that goes into a car, you are doing great.

If you are making tube, you're not doing well.

So we, in fact, have two mills that are down.

They pay their BFC, but they are down.

If they were to restart, right, and the economy picked up, that would be positive.

Yes, it would make for more argon.

But probably in that same environment, we would see demand for stainless steel increase.

And stainless steel takes a lot of argon.

So I personally think the argon market in the U.S. is going to remain relatively tight through this transition here.

All right.

And if I can just sneak one last one in.

On the equity affiliates income in Americas, it seemed to have come quite a bit lower from where it generally is.

Is there a reason for that?

Scott?

Sure.

We just had some maintenance in one of our facilities -- that's an equity affiliate in Americas.

So that's all.

It's just timing items.

It's nothing substantive and underlying.

All right.

Thanks very much.

Nils Wallin, CLSA.

Thanks for taking my question.

I was wondering if you would give us your view on the outlook for hydrogen over the next couple years.

Obviously, you are one of the biggest producers there is.

With the amount of ethylene capacity coming online in the U.S. Gulf Coast, that should increase hydrogen supply.

But then, of course, there's perhaps limited refinery growth.

So I was just curious what your supply-demand outlook is for hydrogen.

It is very positive.

We see growth around the world, not just the U.S. And we are a global supplier.

We are number one.

We are the leader in this area.

And therefore, as you see, we are bringing our big plants onstream, so we are very positive.

Corning, you want to make any additional comments?

Yes, maybe just to acknowledge.

So even today on our large pipeline system, we have some hydrogen sources where we are offtaking for a customer.

And so to the extent hydrogen is available, that's an opportunity for us to bring it in.

I think another reality is that a lot of this hydrogen is going to be consumed at that customer and a lot of is going to be used for fuel value.

Understood.

And so would you, given this positive outlook on hydrogen, would you expect that to be a greater proportion of your backlog going forward?

I don't think that's going to significantly change the future.

Understood.

Thanks very much.

James Sheehan, SunTrust Robinson Humphrey.

On your comments on Versum timing, you said that you're watching the credit and equity markets closely.

What alternatives have you explored in case markets are unfavorable for a spin at the end of September?

I would have to say just about any option that you can imagine.

We have looked at everything.

That's our job: to look at any option.

Okay.

And on your comments on the growth potential of industrial gases, you are very optimistic.

Can you talk about the sentiment of your customers right now?

Are any of them as optimistic as you are?

Are they getting closer to pulling the trigger?

Well, the customers that I am talking about in terms of growth are very the large demand for oxygen and hydrogen.

Those customers we have talked to.

I told you I was just in China the last two weeks with Corning and the rest of our people.

Those customers have big plans and are very optimistic about what they want to do.

Mike Sison, KeyBanc.

Nice quarter.

I wanted to include Guillermo a little bit.

When you think about your volume growth here for electronic materials, you said it was flat ex-delivery systems.

Are you seeing growth in all the key products for advanced materials and any growth in process materials as well?

Thank you for grilling him.

I appreciate that.

Thanks for the question.

No, if you look at our advanced materials, we are seeing -- obviously, it varies by segment.

The memory market has continued to be very strong, and our projections are that it is still going to continue to be a growth area for us.

Volumes are holding up.

We see that segment's getting impact more on pricing on our customer's side, the pricing of DRAM and NAND.

But overall, volumes are still good.

And we are very well positioned with a lot of the new technology's process of record for the next-generation node.

So that's doing very well.

On process materials, our volumes are holding up.

We have been capacity constrained, so some of the fluctuation in the markets haven't been as big an impact to us, although we did see a slowdown in the early part of the quarter and a pickup in the back end of the quarter because of the Taiwan earthquake, and just softness in the foundry market.

But we're bringing on new capacity.

And as the memory market continues to grow.

We expect demand to continue.

Okay.

And then one long-term question is -- as I think you mentioned, as OEMs consider moving from 14 nanometer to 10 nanometer sometime in 2017, how much of an opportunity is that for you?

What do your products do to help them move down that node?

Well, two comments I would make.

One is it's not just that they are going to smaller nodes and higher technology.

In general, that requires new materials, new processes, and that is what's driving our formula for growth, traditionally.

So that's something that has not changed.

What is changing now is also that a lot of the structures are going vertical.

And so you can think about if they had 25 layers before and now you have 50.

They had 50; they have 100.

So the amount of material used in the steps are getting much more complex, and you just use a lot more.

So if you think NF3 as an example in the cleaning business, now you have more steps, you have more cleaning steps, demand is going up.

And that is what has driven a lot of the volume growth on the materials side.

So from a materials perspective, the next-generation nodes, materials are going to be a much bigger driver, an enabler for the newer technologies.

And that's a good thing for our space.

Great, thank you.

Jeff Zekauskas, JPMorgan.

In general, industrial production in the United States has moved down from the fourth calendar quarter of 2015.

And it keeps dropping.

And Europe is a little bit different, where there's some upward movement in industrial production.

So is it the case in general that your U.S. industrial gas business on the margin, going into the next quarter, is weakening a little bit and the European business is strengthening little bit?

A couple -- maybe just speak to each one of those separately.

Sure.

I would say in the Americas, if you strip out oilfield services, you strip out steel, and you try to look at the core customers, the customers who were with you a year ago, are they with you now, do those customers have volume momentum?

Yes, they do.

And that's kind of my point.

I think it's hard to talk about a global macro statement.

I think it's much more useful to think about individual segments.

In Europe, I'd say, in general, it's a weak environment.

It's a little hard to say, in that this quarter that included Easter.

And a year ago, it was in the third quarter; it was in April.

So I think we are going to have to see what the actual trend turns out to be for us in Europe.

Okay.

And then as my follow-up, in terms of Versum, order of magnitude, is the probability that it is 75% that you will spin it and 25% that you will sell the individual pieces?

Or is there a different probability?

You need to let me off the hook on trying to answer that question, please.

I cannot speculate on that.

I think that would be very premature.

Sorry about that.

Okay.

Thanks very much.

Don Carson, Susquehanna Financial Group.

This is Emily Wagner on for Don.

We had a question on coal gasification units that you mentioned were running well in the quarter.

In terms of future coal gasification projects in China, do you see the government allowing more projects, or might they limit that opportunity due to coal emissions?

Well, from what I see, there are significant number of these projects on the drawing board.

And some of them are getting approval from the government.

So it looks -- from where we are, it looks very positive.

Thank you.

I think with that, I would like to thank everybody for being on the call.

Once again, thank you for taking time from your very busy schedule to listen to our presentation.

We do appreciate your interest and we look forward to discussing our results with you in the next quarter.

I hope you have a very nice day, and all the best.

Ladies and gentlemen, this does conclude today's conference.

We thank you for your participation, and you may now disconnect.