Air Products and Chemicals Inc (APD) 2016 Q3 法說會逐字稿

Good morning and welcome to the Air Products and Chemicals third-quarter earnings release conference call. Today's conference 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. Please go ahead, sir.

Thank you, Ron. Good morning, everyone. Welcome to Air Products' third-quarter 2016 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations. I'm 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.

During the call today, we will provide a progress update on the sale of Performance Materials to Evonik and the spinoff of Electronic Materials as Versum Materials. The quarterly results we are sharing today and our guidance for fourth-quarter EPS includes both PMD and EMD in continuing operations. We continue to evaluate the progress of both transactions to determine when to report these businesses in 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 schedule 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. 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; Mr. Guillermo Novo, Air Products' Executive Vice President in charge of our Materials Technologies business, who will be the future CEO of Versum Materials; and Mr. George Bitto, Vice President, Finance for Materials Technologies who will be the future CFO of Versum Materials. All of us will be participating in the call and in answering your questions.

I am very pleased to report that our team at Air Products delivered another set of excellent results this quarter. Despite the sluggish economic growth worldwide and continued currency headwinds, our team stayed focused on executing our strategic five-point plan. We delivered earnings per share of $1.92, which is up 16% over last year, and it is the eighth consecutive quarter that Air Products has reported double-digit earnings per share growth.

We also improved our EBITDA margin by more than 300 basis points, and our return on capital employed increased 200 basis points to 13.5%. I do 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 to be the best in the industry.

As we move closer to the sale of our Performance Materials division to Evonik and the tax-free spinoff of our Electronic Materials division, now called Versum, to our shareholders, we see great opportunities ahead to win key projects and invest in our core industrial gases business so that we grow Air Products in the years to come.

Now please turn to slide number 3. Our quarter-three safety performance was better than last year and last quarter. But I do want to mention that the only acceptable goal for us is zero accidents. We have the responsibility to our employees and their families to ensure that everybody goes home after a hard day of work with no injuries or incidents. At Air Products, safety is the responsibility of every single employee.

Now please turn to slide number 4, which is the statement 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 our customers. We have made great progress on the profitability side, and I'm confident that we can focus and continue to improve our performance on the safety side.

Now please turn to slide number 5. Here you can again see our overall management philosophy. 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 executing our five-point plan. The first point of the plan is our focus on industrial gases, our core business, and therefore we are in the process of divesting our non-core businesses.

Scott, Guillermo, and George will provide you details, but we are making great progress on the sale of Performance Materials to Evonik, and we expect that the deal will close before the end of this calendar year. And we are well on our way to the tax-free spinoff of Electronic Materials to our shareholders at Versum Materials.

These transactions will be excellent for the employees of all three companies. Air Products will be focused on its core industrial gases business, PMD employees will be core to a world-class materials company at Evonik, and EMD employees will be an independent best-in-class Electronic Materials company. And because these are the right strategic moves, I firmly believe that these actions will also create shareholder value in the long term.

We also continue to work hard on the fourth point of our plan: the responsible use of cash and eliminating unnecessary work. Our robust process to review every capital investment of more than $3 million means we have visibility and control to ensure we earn a minimum expected return of 10% on all of our new projects.

We continue to enjoy a strong backlog of projects that will deliver volume, revenue, and earnings growth over the next few years. I am very optimistic about the growth potential of our core industrial gases business, especially opportunities in large on-site oxygen and hydrogen plants. In addition, the separation of PMD and EMD from Air Products will leave about $20 million of stranded cost at Air Products. We are committed to eliminating additional work to offset these costs within a year of closing the transactions I mentioned.

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 want to emphasize that the operational improvement actions we have taken this year and the benefits of restructuring actions we took last year enabled us to deliver these strong results despite the weak worldwide economy and continued currency headwinds.

Now please turn to slide number 8. You can see quarter by quarter our progress during the last two years. You will note that we have improved our EBITDA margin by more than 900 -- yes, 900 -- basis points. This single chart is a great example of the focused effort of the people at Air Products. Once again, I thank all of them for their contribution.

Now please turn to slide number 9. This single slide again truly captures the essence of what the people of Air Products have achieved. Two years ago we announced that our collective goal was to be the most profitable industrial gas Company in the world as measured by each of these financial metrics. The conventional wisdom at the time was that it could not be done -- that Air Products did not have the portfolio of businesses or so-called density to achieve this goal. But the people of Air Products rolled up their sleeves, went to work, and said, yes we can.

So today, Air Products has the best EBITDA margin in the industry at 34.2%, the highest EBIT margin in the industry at 23%, and the highest return-on-capital-employed margin at 13.5%. Every single one of our 19,000 people have contributed to moving us forward to be the best in the industry. And let me tell you, our people are determined to maintain our leading position in the years to come.

Now I would like to turn the call over to Mr. Scott Crocco, our Senior Vice President and Chief Financial Officer, to discuss our quarterly results in detail. Then I will come back after comments from Corning, Guillermo, George, and Simon to make some closing remarks. And then we will be delighted to answer your questions. Scott?

Thank you very much, Seifi. Before I discuss our quarterly results, let me provide you with an update on the two transactions Seifi mentioned. In summary, things are proceeding as we expected.

First, the sale of PMD to Evonik: we said we expect to close this transaction by the end of calendar 2016, and we are working hard to meet that goal, subject to the various required approvals. We are working closely with Evonik on antitrust and other critical steps and are moving as quickly as possible.

Second is the spinoff of EMD as Versum Materials. We said we are targeting to separate the EMD business from Air Products by September and to spin off Versum as an independent publicly traded company in October. We are working hard to meet this goal, including completing a variety of legal entity separations and tax activity. George will talk about an important step in this process, the filing of the Form 10, which we did last week.

And while no one can predict what will happen in the markets, we are comfortable that, at least today, the markets would be conducive to proceeding with the spin. So although we have a lot more work to do, at this point, subject to the timing of obtaining regulatory approval, we are optimistic we will be ready to execute the spinoff in October.

Now please turn to slide 10. For our third quarter, sales of $2.4 billion decreased 1% versus last year on lower energy pass-through and unfavorable currency impacts of 3% and 2%, respectively. Volumes were 4% higher, primarily due to our Jazan project.

In other areas, volumes continued to be higher in Gases Asia and North America, offset by economic weakness in South America and Europe. Pricing was unchanged, as positive pricing in Gases Americas and Europe was offset by lower pricing in Asia and Performance Materials due to lower raw material costs.

We delivered significant operating leverage again this quarter as EBITDA of $833 million improved by 10%, and operating income of $560 million improved by 16% despite the lower sales. EBITDA margin of 34.2% and operating margin of 23% both improved by 340 basis points as we continued to execute on our five-point plan. All three regional industrial gas segments and Materials Technologies delivered margin improvement.

Lower energy pass-through only contributed about 50 basis points to the operating margin improvement. Excluding the impact of energy pass-through, operating margin improved about 290 basis points, primarily from the benefit of self-help actions we've taken and a modest benefit from price and lower raw material costs.

Versus prior year, net income increased by 17%, and earnings per share grew 16%. And we continue to improve our return on capital employed, which increased 200 basis points to 13.5% on our higher profitability.

Now please turn to slide 11. You've heard Seifi and I talk about our focus on cash flow, so we are pleased to see that our free cash flow was $191 million this quarter, up $95 million versus last year due to higher EBITDA and lower growth CapEx. 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 now to slide 12, 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 totaled $0.29 per share.

We incurred Materials Technologies separation costs of $10 million or $0.04 per share, primarily for legal and other advisory fees. As a result of our decision to separate MT, we declared a dividend to repatriate $444 million from a subsidiary in South Korea, resulting in an income tax cost of $46 million or $0.21 per share. We have recognized this book cost in Q3, because that's when the decision was made; however, the cash flow impact will be seen in Q4 when we actually pay the tax.

And as I mentioned last quarter, we have completed the actions associated with our first $300 million of restructuring, and now we are focused on our second $300 million of operational improvements. We incurred a $15 million or $0.04 per share charge associated with these operational improvement actions, and this included a $1 million pension settlement charge.

Excluding these items, our Q3 continuing operations EPS of $1.92 increased $0.26 per share or 16% versus last year. The impact from volumes increased EPS by $0.01 per share. Pricing versus raw materials taken together contributed $0.04, partially driven by lower raw material costs.

Net cost performance was $0.25 favorable, in part due to the benefit of our operational improvements and from last year's restructuring actions. Cost performance also benefited about $0.15, primarily from lower incentive compensation and lower pension costs.

Currency was $0.05 unfavorable, as many currencies 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 was $0.02 higher, primarily due to lower capitalized interest. Taxes were modestly lower, contributing $0.01 to earnings.

For the year, we still expect our effective tax rate to be in the 24% to 25% range, though likely closer to 25%. Non-controlling interest was $0.03 favorable, primarily due to our increased ownership position in Indura. And finally, higher shares outstanding reduced our diluted EPS by $0.01.

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

Thanks, Scott. I am pleased to present another quarter of very strong results and would like to thank the entire industrial gases team around the world for staying focused on the things we control. Our commitment to driving operational productivity while staying focused on safety allowed us to overcome currency headwinds and challenging economic conditions to deliver another great quarter.

In addition, we are very excited that we continue to compete for and win key projects that will support Industrial Gases' growth into the future. Just last week we announced a new plant to provide ultrahigh purity gases to customers in the Pukou Economic Development Zone in Nanjing, China. The Pukou Economic Development Zone is a state-level park that will be home to semiconductor and other high-tech manufacturing. In fact, the world's leading semiconductor foundry recently announced an investment of $3 billion for a new 300-millimeter wafer fab in this park, scheduled to commence production of 16-nanometer technology in 2018.

We are very encouraged by the progress we have made on our Taking the Lead operational improvement initiatives. We've seen positive results across all regions and are encouraged by the actions and the behaviors that will enable us to deliver our second $300 million commitment. For example, to improve distribution efficiency, we are optimizing delivery parameters such as outbound and inbound weight, customer delivery restrictions, and tank sizing. Many teams impact distribution efficiency, and our regional incentive plan helps to align their efforts.

Now please turn to slide 13 for a review of our Gases Americas results. Our double-digit EBITDA and operating income improvements were driven by our combined focus on self-help operational improvements and the benefits of last year's restructuring action.

Sales of $832 million were down 7% versus last year as the pass-through of lower energy prices reduced sales by 5% and currency reduced sales by 2%. Overall Americas volumes were down 1%, as Latin America volumes, being down midteens, negatively impacted overall Americas by 2%.

We saw weakness in our packaged gases, equipment, and liquid/bulk businesses across most of our key geographies in Latin America. In contrast, North America volumes were up, contributing a positive 1% to our overall Americas volume, as we saw the benefit of our new hydrogen plant in Canada and strong hydrogen demand in the US Gulf Coast. The new Canadian plant is running well, and we anticipate increased profit contributions from this plant as an additional customer comes onstream in late 2017.

Overall LOX/LIN volumes were down. I'd like to make three points on this. First, same-customer volumes year on year were up slightly. Second, we are beginning to lap last year's decline in the oilfield services business; however, this is still a headwind for us this quarter. And third, we have not yet seen an improvement in the steel business.

Pricing was up 1%, with particular success in Latin America. Operating income of $235 million was up 14%, and EBITDA of $362 million was up 11% versus last year as the benefits of our operational improvements and restructuring actions more than overcame headwinds from lower volumes, currency and lower energy pass-through.

We set another record operating margin, this time of 28.2% -- up over 500 basis points -- and another record EBITDA margin of 43.5%, up 700 basis points. Lower energy pass-through accounted for about 100 basis points, meaning that the underlying operating margin was up over 400 basis points, excluding the lower energy pass-through.

Now please turn to slide 14. For our Europe, Middle East, and Africa business, we continue to see our operational improvements, restructuring, and price actions more than offsetting volume weakness and currency headwinds as EBITDA and operating margins again set new records, both up over 500 basis points.

Versus last year, sales of $427 million were down 6% due to a negative 5% impact from lower energy pass-through and a negative 1% currency impact. Underlying sales were flat, with volumes down 1% on weakness in the UK/Ireland and in Central Europe, partially offset by a slight positive demand in Southern Europe. Given the timing of the Brexit vote, we don't believe it impacted this quarter, but uncertainty has clearly increased going forward.

Prices were up 1%, our sixth consecutive quarter of positive pricing despite the weak economy and low inflation. We continue to focus our efforts on ensuring that each customer is profitable for our business.

Operating income of $103 million was up 18%, and EBITDA of $160 million was up 9% as our productivity and price actions more than offset headwinds from currency and lower volumes. Record operating margin of 24.2% and record EBITDA margin of 37.4% were both up over 500 basis points. Lower energy pass-through accounted for about 100 basis points of that, meaning that the underlying operating margin was up 400 basis points, excluding lower energy pass-through.

Please turn to slide 15, Gases Asia. Volume growth and the benefits of operational improvements and cost reduction actions drove significant profit growth this quarter. Sales of $448 million were up 7%, primarily driven by volumes up 14%, partially offset by a negative 5% impact from currency, primarily from China, Korea and Taiwan and a negative 2% price impact.

Roughly two-thirds of the volume increase was from new plants, including an increase in energy pass-through revenue. Our merchant business was up mid-single digits across Asia, and our China retail LOX/LIN business was up double digits. That said, we expect the oversupply conditions in China to remain for some time, and certainly through at least next year.

Sequential volume increase of 10% was driven by a seasonal recovery from the Lunar New Year, as well as an increase in energy pass-through revenue. Pricing was down 2% versus last year, as we continue to see a moderating rate of decline in China LOX/LIN/LAR pricing; however, we have seen more price pressure in helium.

Operating income of $118 million was up 17%, and EBITDA of $182 million was up 10% as our productivity actions and stronger volumes more than offset the headwinds from currency and price. Operating margin of 26.4% was up over 200 basis points, and EBITDA margin of 40.7% was up over 100 basis points.

I'll close with a brief comment 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 gas business, which are not region-specific. Sales were up, as we recognized about $100 million of revenue from the Jazan ASU sale of equipment. That more than offset weakness in small equipment and other ASU sales. Segment profits improved on lower costs and a few nonrecurring items last year.

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. As Scott mentioned, we're making great progress on both the sale of our Performance Materials business and the spinoff of our Electronic Materials business. You can see that Materials Technologies continues to show strong results.

Given where we are on our separation journey, I'm going to focus my comments today at the division level. Please turn to slide 17 for a review of our Performance Materials Division.

Sales of $277 million were flat, as 4% higher volumes were offset by 4% lower price. The positive volume was driven by strength in our epoxy end markets, including wind, adhesives, and flooring, and improved polyurethane additives volume across most markets. This was offset by specialty additives weakness due to lower oil- and gas-related activity and the temporary shutdown of a specific mining customer in Brazil. Overall, prices were down, driven by broader petrochemical-driven deflation but were more than offset by lower raw material costs.

Performance Materials EBITDA of $69 million was up 6%, and operating income of $63 million was up 9%. EBITDA margins of 24.9% was up 130 basis points, and operating margins of 22.7% was up 180 basis points, primarily driven by productivity and favorable price/raw material balances.

Please turn to slide 18: Versum Materials, the planned spinoff of our Electronic Materials business. As I shared with you in June, I'm very excited to be responsible for Versum Materials, a company with solid growth, high margins, low capital intensity, and very high free cash flow.

Versum is a very strong business, both from a market leadership and financial perspective. We operate in the semiconductor space, which will present us with exciting and profitable growth opportunities. We are being set up for success. This is a good company that will have the capability to profitably grow organically and inorganically. And finally, our team is very excited about the opportunity to be the best-in-class pure-play electronic materials company.

On slide 19, you can see the historical EBITDA margin for our EMD business as reported within Air Products. As you can see, the sustainable and fundamental changes we made to our business will allow us to deliver strong margins into the future.

Let's take a look at the results for this quarter on slide 20. Please remember, these financials are for EMD as reported within Air Products.

Our team delivered another strong quarter, proving we're staying focused on servicing our customers and driving operational improvements while we continue to deliver new and innovative solutions to our customers. Sales of $243 million were down 8% on 6% lower volumes, flat pricing, and a 2% negative currency effect.

As you can see, all of the negative volume impact was due to delivery systems. As expected, delivery systems was down significantly compared to a high level of project activity last year, but this level of activity dropped off in the fourth quarter of last year, so it won't be a significant headwind next quarter.

Overall, materials volumes were flat as we continued to see growth in our Advanced Materials business, partially offset by softer volumes in our Process Materials. Although the foundry market has been soft in the first part of the year, we are seeing improvements in demand from our foundry customers in the last few months.

EBITDA of $86 million was down 7%, and operating income of $73 million was down 5% versus last year. EBITDA margins of 35.3% and operating margins of 30% were both up modestly. Pricing, mix, and the benefit of our operational improvement actions were more than offset by headwinds from currency and the lower delivery systems volumes.

Before I turn the call over to George to discuss our financials, let me just say that we look forward to more discussions with you about our very exciting Versum Materials business in the next few months leading up to our spinoff. Now let me pass the call over to George Bitto, our future CFO for Versum Materials. George?

Thank you, Guillermo. Please turn to slide 21, where you can see the updated trailing 12-months results for EMD. Remember, this is as reported within Air Products, so it does not include any corporate costs that are not business-specific.

Sales of almost $1 billion and EBITDA margins of 36% continue to demonstrate that Versum Materials is a very high quality business with very attractive margins. As part of our preparation for the spinoff, we filed an update to our Form 10 with the SEC last week, and we provided a few slides today to help you extract the key information from the Form 10. These slides are available on our website.

Given the requirements of the Form 10, there are a few different financial bases that I wanted to take a moment to explain. First, there are the financials you have seen reported for EMD within Air Products. Again, it's important to remember that Air Products does not allocate any non-business-specific corporate costs into the business segment.

Second, the Form 10 includes Versum audited combined financial statements. The most significant difference between these and the EMD financials is the allocation of Air Products' corporate costs to Versum. And finally, the Form 10 also includes Versum unaudited pro forma financial statements for FY2015 and the first half of FY 2016, which includes adjustments to reflect Versum on a post-separation basis.

The two major areas of adjustments to point out are a few small product lines that are currently reported in EMD which will stay with Air Products after the spin. It's about $22 million of sales and about $11 million of profits per year. And the impact of $1.15 billion of debt, down slightly from the $1.25 billion we've talked about in the past.

We continue to believe that Versum will operate very successfully with an initial debt ratio in the 3 to 4 times EBITDA range. We will continue to refine our thoughts on the right debt and leverage levels to support Versum's very exciting growth opportunities as we move closer to the spin.

Now please turn to slide 22. Given the various financials and the variety of time frames, we suggest that the most relevant cash flow numbers are shown on this slide. As referenced in the footnote, we start with $344 million of EBITDA as reported for EMD for the last 12 months ending June 30, 2016 -- the same $344 million you saw on the previous slide.

We subtract about $20 million of EBITDA for adjustments to get to Versum stand-alone, including public company costs. This adjustment includes about $15 million of expected new costs and about $5 million that was previously included as a non-cash depreciation charge.

And then we take out about $11 million and EBITDA, primarily from products that will stay with Air Products, resulting in a revised trailing 12-month EBITDA of $313 million. Assuming a 6% interest rate on the $1.15 billion of debt and factoring in estimated cash taxes and capital spending, you can see that Versum generates a very high level of free cash flow -- about $165 million that we can use to grow our business.

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

Thanks, George. 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, and profits were about flat as lower costs offset the lower sales.

As we have said, we have not seen delays or cancellations of any major equipment orders in our backlog, but the lack of customer decisions on new projects will impact our FY2016 and FY2017 results. This is likely to be about a $0.10 headwind in FY2016 versus FY2015 and will be an additional headwind for us in FY2017.

Now please turn to slide 23, and I'll turn the call back over to Seifi for a discussion of our outlook.

Thank you again, Simon. The Air Products team remains 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 fourth quarter of fiscal year 2016 is for earnings per share of $1.91 to $2.01. At midpoint, this will be an increase of about 7% over fourth quarter of last year. Our full-year fiscal 2016 guidance is now at $7.45 to $7.55. At midpoint this will be an increase of 14% over our very strong fiscal-year 2015 performance, and is $0.13 or almost 2% higher than the annual guidance we gave you in October of last year. We now expect our CapEx to be no more than $1.2 billion for the year.

As you can see from our results, we improved our cash flow by almost $100 million this quarter. As a reminder, our priorities for the use of cash remain as follows: number one, maintaining our A credit rating. That means we pay down debt to make sure that we have an A credit rating.

Number two, invest in good projects and accretive acquisitions. We are very excited about the opportunities in our core industrial gases business. Petrochemical investments in the US Gulf Coast, refinery hydrogen plants around the world, and oxygen for coal gasification in China present key growth opportunities for us. And we believe Air Products is very well positioned to win profitable deals for these very large plants.

And number three priority for use of cash is continuing, as we have, to increase our dividend. And number four, if there is any excess cash available, we are very comfortable in returning money to our shareholders in the form of share buyback. At the end of the day, the cash we generate belongs to our shareholders, and we will only spend it if we have high-return projects or good acquisitions.

And now, we will all be delighted to answer your questions.

(Operator Instructions) Duffy Fischer, Barclays.

Just wanted to see if you could break down a little bit -- on the Americas gases, you helped us with the volume look at North America versus South America. Could you do the same thing for price? And if you looked at price versus the two parts of the Americas, how was that different?

I'll turn it over to Corning to comment on that.

So we had success in our pricing effort in each area. I think it's important to recognize what's most important is price versus, let's say, power and other input costs. And that was, on net, a positive for us.

Okay, and then maybe just one comment on the recent steel tariffs that have been enacted. How do you see that affecting the global basis of your steel customers? Is that a net positive for you guys?

Duffy, the way we see that, it's not material enough yet to kind of make a comment on that. We'd like to wait a little bit more just to see that. We have not seen a significant change.

Okay. And have you seen any change in behavior in the steel production in China, either from those tariffs or from the earlier proclamations by the Chinese government that there'd be some forced consolidation in that industry?

I think Corning can comment on that.

So, I mean, there has been a large announced consolidation with Baosteel. I think after the Lunar New Year, we saw steel prices spike in Asia and China; that spike was not very long-lasted and came back down.

So I think there's, momentum, you could say, in China and a commitment -- and, clearly, a reality there is overcapacity that needs to get sorted out. But this is going to have to be worked through, and there's social implications to that.

Great. Thanks, fellas.

Thank you, Duffy.

Christopher Parkinson, Credit Suisse.

Your margins continue to impress in the Americas, but can you comment on a few different end markets? You mentioned hydrogen demand remained strong, but are there any other trends across your portfolio worth noting, particularly in the bulk business? Thank you.

This is in industrial gases?

Correct.

In industrial gases, I think Corning went through the details about the volumes and all of that. Industry-wise, we don't see any significant change. Our hydrogen volumes in the US continue to be strong because of the demand for gasoline, but nothing particular that we would want to point out, as if anything has changed in the last quarter.

Perfect. And then can you quickly comment on the longer-term potential for project activity? I know you've been optimistic on the US Gulf Coast, but do you have any incremental comments on the Middle East, Central Asia, or China, and whether or not you are more or less optimistic than you were, let's say, six months ago? Just any perspective would be appreciated. Thank you.

We continue to be optimistic. And quite frankly, today I am more optimistic than I was last quarter or the quarter before that. We see a lot of opportunities, because I think Air Products is very well positioned to take advantage of all of the opportunities that might come about in the US in the Gulf Coast and in China. So I would just summarize that we are more optimistic, yes.

That's great color, thank you.

Thank you.

David Begleiter, Deutsche Bank.

Seifi and Scott, on the Q4 guidance, still a $0.10 range here. What's the level -- what's driving the uncertainty with a wide range at this late stage?

David, the only reason -- as you know, we usually have a $0.05 range at this time of the year. The only reason we have put down $0.10 is that we have -- we are very concerned about what is actually going to happen to currency exchange rates. That's something that is not under our control.

I mean, what is going to happen to the British pound, what is going to happen to the Chinese yuan? Therefore, we wanted to have a wider range, because we can pretty well predict what our internal performance is going to be, but since we reported results and the translation is there -- we don't have a handle on that, so we didn't want to get ahead of ourselves.

Very good. And just last thing on the Jazan project, Seifi. Can you talk about why revenues were up in the quarter sequentially, but losses were up as well in the global industrial gases segment?

Well, David, we are recognizing revenue, but we are not recognizing the profit yet. The reason for that is that we want to move forward with the project a little bit more and make sure that we are going to be able to meet the commitments that we have in the contract in terms of power consumption and the schedule, because there are actual damages there. So we are being conservative in recognizing profit.

We will obviously at some point in time recognize profit, but we have not done that this quarter. We haven't done that yet.

Thank you very much.

Thank you, sir.

PJ Juvekar, Citi.

Seifi, a question on the backlog again. Can you just give the dollar amount of the backlog? And in the past year, you talked about privatization of industrial gas assets from national oil companies, projects like Jazan. Are you in discussions with those companies? And when do we see anything?

Well, our backlog -- we had a slide, slide number 27, that gives you a detail of the backlog. Our backlog currently stands at $2.1 billion. The reason it was lower than last quarter is because of our hydrogen plant coming onstream.

But in terms of those kinds of discussions, PJ, if you give me a break, I don't think it would be appropriate for me to make any comment, because we are -- you know, when it comes to national oil companies and all of that, people would like to be a little bit more discreet. So you know what our strategy is, but I don't want to comment in any details.

Okay, thank you. And then just a question for Guillermo on Versum. You know, you talked about sort of flat volumes, excluding delivery systems. Can you talk about any new wins or losses in new technologies, like 16-nanometer you mentioned? And if your high-end applications are growing, what is declining? What end markets are declining to keep overall volumes flat? Thank you.

Thanks for the question. If you look at the pure materials side of the equation, our advanced materials actually has been growing, and has been growing well, in the -- I would say low to mid-single digits. It's all driven by recovery of the foundry markets and a lot of the new technologies. I would point out memory, still being a very good market for us and driving a lot of the new growth. So that part has been doing very well, in line with our expectations.

If you look at Process Materials, I would say two things. One, we had some discontinued operations that -- we exited an ammonia business in China and some other smaller pieces of business. So that's a little bit of a headwind.

And then the volumes -- remember, we've been sort of tight on capacity in a lot of major products. We are expanding in bringing on some debottlenecking in the next few quarters. So it's just really more ups and downs in the different product lines. Overall, if you exclude discontinued business, I would say our materials business grew in the 1.7% range.

Thank you.

Thank you, PJ.

Jim Sheehan, SunTrust Robinson Humphrey.

Seifi, you've got cash coming in, the proceeds from the PMD divestiture and possibly more after EMD is finished. Can you talk about the timing of your uses of this cash? I know you've set out your priorities. Do you see using this cash for M&A or for new projects as more of a 12-month phenomenon, or would the time frame be in multiple years?

Jim, thanks for your question. The cash -- considering the timing of everything, we will really have our hands on the cash kind of beginning of 2017. Obviously, we are very cognizant of what is coming, and we would like to put that to good use.

Our number-one priority after we have paid down the debt, because of the loss of the EBITDA that we have and making sure that we have our A rating, then we still will have a lot of on hand; and as I said before, our number-one priority is organic growth. We see a lot of opportunities, and we are going to put that to work there.

We are looking at acquisitions that -- not huge ones, but smaller ones. That would be a possibility. And then the other thing is that in terms of timing, it's difficult to put a time frame on that in terms of -- because if some of these big projects happens, we can use that cash pretty quickly. But I would like to add that the fact that we have cash doesn't mean we're going to rush to spend it. We are going to be very prudent in the use of cash. I've always said that capital allocation is one of my most important responsibilities.

So we will look at things. The fact that we have cash gives us a lot of power to do things. But at the same time, we are not hurried to just go burn it up just because we have the cash.

Great. Can you talk also about the possible impact of Brexit on your project backlog and -- but, you know, both in Europe and other parts of the world? I mean, you yourself are taking a more cautious view of FX in the fourth quarter. How are project discussions going in light of Brexit?

The Brexit -- in terms of large projects, there are not that many of them in Europe, anyway. So I don't see too much of an impact on that. But the fundamental effects of Brexit -- I think it is going to take many years to manifest itself.

Personally, I think that that is going to have a very negative effect in the long term, but I don't see any immediate effect on our businesses. And we haven't seen that anybody has canceled any project in China because of Brexit. And there are people, as I'm sure you read the different articles, that argue that Brexit is going to actually weaken Europe and strengthen China, which I think might be the case.

Thank you.

Thank you.

(Operator Instructions) Bob Koort, Goldman Sachs.

Good morning, everyone. This is Chris Evans on for Bob. So I was hoping -- so cost was a big contributor in the quarter, and I guess as we look into the fourth quarter and beyond, your EPS guidance in the fourth quarter sort of implies a growth deceleration. So I kind of wanted to get your thoughts specifically on how cost might be an impact in your growth as you lap some of the benefits from the prior year?

Our guidance for the next quarter is entirely based on our activities in terms of our "Take the Lead" and cost actions. We are not counting on any significant improvement in economic activity, and we are not counting on any significant appreciation because of exchange rates.

Everything that we have done in the past two years -- the improvement that you see in EPS, the double-digit growth in EPS -- it's all due to the internal actions that the people of Air Products have taken. And that will be the contributor to our improvement for next quarter.

Thanks. And then, I guess, thinking about the Company post-reorganization, what do you think the sustainable CapEx spend would be as you look out, and especially in regards to the current environment?

We think our CapEx requirements on the stand-alone Company, after we divest of the other businesses, can be anywhere between $1 billion to $2 billion a year, depending on how successful we are with the projects.

Got you, thanks.

Thank you.

Vincent Andrews, Morgan Stanley.

Just looking at slide 8, I wanted to make sure I understood. Your EBITDA margin declined sequentially for the second time in -- well, only the second time in many quarters. And it looks like from a regional basis, Europe -- sorry, not Europe, but Asia was part of it. So what was the driver of the sequential change, and how should we be thinking about it going into 4Q?

The only reason that that margin is down, Vincent, is because we have recognized $100 million of sale for Jazan with no profit. If you exclude that, our margin actually went up. That is the primary reason.

Okay. And then in the near term, it sounds like since you're more optimistic on the project outlook -- you know, you just referenced there could be $1 billion to $2 billion of CapEx in any given year going forward. You said $1.2 billion for this year, and then you've got the cash coming in. So should we be anticipating, as we think about 2017 and 2018, that CapEx is going to wind up coming in nicely above the $1.2 billion, or how should we be dimensionalizing that?

Vincent, our goal will be to have enough projects to spend $2 billion a year because we can afford to do that. So we are optimistic about the big projects. And you know, at the end of the day, we have to deliver on what we say. But we definitely think that the figure of $1 billion to $2 billion, hopefully on the higher end, would be a real possibility.

Okay, fair enough. Thank you very much.

Thank you.

Stephen Byrne, Bank of America.

We are hearing that the Chinese central government is putting a halt on new gasification projects, but yet you included coal projects in China among the possible capital projects going forward. Have you seen any change in China with respect to new projects and/or bidding activity in that region?

No, we have not. I think Corning can expand on that, but we have not seen anything. There are a lot of projects going on.

I think you have to be careful, because most of the coal projects we are involved in are clean coal. I mean, the Chinese government would probably have a different view if you are building a power plant that is using coke. But with the clean coal technology, that is -- we haven't seen anything. But Corning?

I think if you looked back a couple of years, looking backwards, there was a pause in approving these projects. Our read of the Chinese government, the five-year plan and so forth, and just what we see on the ground is that they are moving now towards permitting and authorizing projects going forward. So I think our view of momentum is a little different than that.

Okay, thank you.

Thank you.

Nils Wallin, CLSA.

Whence you become a pure-play industrial gas company, your on-site exposure will be significantly higher than the industry. Do you think that's the right mix going forward? Or would you prefer to have even greater on-site exposure? And how might that affect the overall volatility of your long-term cash flows?

We believe very strongly that the bigger portion of your business being on-site is a very good thing. And once we become pure-play, about -- approximately probably 55% of our sales will be on-site business, which is higher than anybody else. And we will do everything to expand that. That is where we can get large projects contributing a steady cash flow to the business. That's a lot better than going buying companies that sell welding rods.

Okay. (laughter) And then just in terms of the cash that's coming in that you seek to deploy. Obviously, you've talked about a lot of your projects currently having nothing less than a 10% hurdle rate. Will you apply the same or you'll apply a higher hurdle rate to the cash that you -- that comes in from the sale and the spin?

What they have said about 10% is that is the minimum. Some of the projects that we have signed up for in the last two years have returns which are higher than that. So on the new cash, our goal will be that it will have a minimum of 10%, and hopefully higher than that.

Very good, thank you.

John Roberts, UBS.

Do you know what your 2016 guidance is on an equivalent adjusted pro forma basis for the two Versum transactions? That is, what is the $7.45 to $7.55 if we adjust it? And I ask that because a few months from now, you're going to report your fourth quarter, and you'd normally give us EPS guidance at that point. What are we going to compare next year to?

John, I'm afraid you'll have to wait until October for us to disclose that. There are too many moving parts about corporate costs and accounting that is in all of that. And I think it would be dangerous for me to get into that right now.

But we will obviously disclose that to you. Once Versum and PMD are gone, in accordance with the rules, we will go back and restate actually the last five years. So you will have total visibility on exactly what's going on.

Okay, I'll wait. Thank you.

Thank you.

Don Carson, Susquehanna Financial.

Seifi, a question on your returns. I know since you became CEO, you have hiked up your minimum return to 10%. So as we look at your project backlog, when do those higher return projects start to kick in? And when could we see an uptick in the earnings contribution from new projects?

Starting 2017 -- 2017/2018, because these projects are three- to four-year projects. So some of the ones that they approved last year will come onstream in late 2017, 2018, 2019.

Okay. and then within the quarter, I know you've given the FX impact on sales; what was the EPS impact of currency? And what is the implied full-year impact in your $7.45 to $7.55 guidance?

Sure. Scott will answer you that.

So for the quarter, Q3, currency impact versus last year was $0.05. If we look back on what we reported in both Q1 and Q2, that would bring us to a year-to-date of about $0.18 headwind. As we've talked about in the past, the way that we handle currency is we take where we ended the quarter, and we just assume that rates stay where they are for the rest of the fiscal year.

When we do that, we would see the fourth quarter relative to last year's Q4 to be about another $0.02 headwind. So total for FY2016 versus FY2015, we are anticipating about a $0.20 headwind year on year for currency.

Great. Okay. Thank you.

(Operator Instructions) Laurence Alexander, Jefferies.

Just quickly, can you give a little bit more detail on the improvement you're seeing in the Chinese liquid market? To what extent -- can you peel back how much of that is sequential demand improvement compared to better competitor behavior?

Well, we obviously cannot comment on competitor behavior, but the rest of the question -- Corning will answer that.

Yes. So if you look at our overall -- you're talking mainly liquid, let's say, in China. So if we look at the overall for that, we were actually relatively flat year on year on total. But the quality of our business went up, so we gained a substantial increase in the proportion of that that was going into retail sales. And that's really where our focus has been on.

And if you look at it maybe a little bit more granular than that, very substantial increase for us in nitrogen. Oxygen -- both retail and wholesale demand has gone down a bit, and you can really relate that to the slowdown of the steel industry there.

But all in all, even with all those effects, I think the quality of our business improved significantly over the last year. Does that answer your question?

Thank you.

Thank you.

Mike Sison, KeyBanc. Caller, your line is open, please go ahead. Mr. Sison, we are unable to hear you on the line. Make sure that you are not pressing your mute function.

It appears there's no response from that question line, and there are no further questions at this time. So I'd like to turn the conference back over to our presenters for any closing remarks.

Well, thank you very much. With that, I would like to thank everybody for being on the call. Thanks for taking time from your busy schedule to listen to our presentation. We appreciate your interest, and we look forward to discussing our results with you again next quarter.

Have a very nice day, and all the best. Thank you.

That will conclude today's conference. Thank you for your participation. You may now disconnect.