Air Products and Chemicals Inc (APD) 2016 Q4 法說會逐字稿

Good morning and welcome to the Air Products & Chemicals fourth-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 to by Air Products and all rights are reserved. Beginning today's call will be Simon Moore, Vice President of Investor Relations.

Thank you, Jim. Good morning, everyone. Welcome to Air Products' fourth-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 Executive Vice President and Chief Financial Officer; and Corning Painter, Air Products' Executive Vice President responsible for Industrial Gases. After our comments we will 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 in today's earnings release.

As you know, on October 1 Air Products completed the spinoff of Electronic Materials as Versum Materials. And we continue to make progress on the sale of Performance Materials to Evonik. The Q4 and FY16 full-year results we are sharing today include both EMD and PMD in continuing operations.

Our guidance for Q1 and FY17 does not include EMD and we have provided forward guidance both with and without the PMD business. You will see that we also provided an estimate of the comparable prior year quarter and full-year Air Products results. We continue to evaluate the progress of the PMD sale to determine when we will report PMD in discontinued operations. Now I am 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. I am very pleased to report that our team at Air Products delivered another quarter and another year of excellent results. Despite the sluggish economic growth worldwide and continued currency headwinds, our team stayed focused on executing our strategic Five-Point Plan.

For the year we have delivered what we had promised you a year ago. We had earnings per share of $7.55, which is up 14% over last year and $0.05 higher than the top end of the initial guidance range we provided you last October. As for the quarter, we delivered record earnings per share of $2.01, which is up $0.10 over last year and is the ninth consecutive quarter that Air Products has reported double-digit earnings per share growth.

I think it is important to note that we have been consistent. For the year we also improved our margins by 400 basis points and our return on capital employed increased 180 basis points to 13.8%.

I 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 continue to be the best in the industry.

Now please turn to slide number 3. Our safety performance for the year showed improvement over last year. That is good news. However, I do believe that the only acceptable goal for us is zero accidents and incidents. We have the responsibility to our employees and their families to ensure that everybody goes home every day with no injury or incident. At Air Products safety is the responsibility of everyone.

Now please turn to slide number 4 which was the reconfirmation of our overall goal for the Company. We are determined to become the safest and the most profitable industrial gas Company in the world, providing excellent service to our customers.

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 has 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 that we announced two years ago. Our strong performance is a direct result of our focus on executing this Plan. The first point of Plan is our focus on industrial gases, our core business.

In September 2015 we announced plans to spin off our Material Technology business and we said that we expected to complete that spinoff by end of fiscal year 2016, which was the end of September of this year. Although we changed the scope of this spin-off earlier this year, I'm very pleased to say that many people at Air Products worked very hard to make this happen and now Versum is a successful standalone Company trading on the New York Stock Exchange as of October 1.

We continue to make progress on the sale of our Performance Materials to Evonik. And consistent with what we have said before, we are still targeting to close this transaction before the end of this calendar year.

I truly believe this is excellent for the employees of the three companies; Air Products will be focused on its core Industrial Gases business and will grow in the future. PMD employees will be core to a world class material Company at Evonik and Versum Materials employees are now an independent best-in-class electronic materials Company. And because these are the right strategic moves I firmly believe 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 that we have visibility and control to ensure that we earn a minimum expected return of 10% on all of our 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 for our core Industrial Gases business, especially opportunities in the large oxygen and hydrogen plants.

Now please turn to slide number 7 where you can see the result of this quarter and the fiscal year for our three key metrics. Once again for the third consecutive quarter we are proud to have achieved our goal to be the most profitable Industrial Gas Company in the world as measured by each of these three metrics. We remain focused on driving further improvement as we move forward.

Now please turn to slide number 8. Here you can see a summary of our performance for the year. Scott will go through the details, but I just want to point out that despite lower sales due to lower energy and currency we improved EBITDA margin by over 400 basis points, increased EPS by 14% and return on capital employed is up 180 basis points to 13.8%.

The operational improvement actions we have taken this year and the benefit 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 9, my favorite slide, where you can see our quarterly progress. As you will note, we have improved our EBITDA margin by more than 900 basis points in the last 2.5 years.

On slide number 10 you can see several of our fiscal year accomplishments, the worldwide team at Air Products delivered strong financial results while staying focused on bringing very large projects on-stream successfully, winning new projects, spinning off Versum Materials and working towards closing the sale of PMD to Evonik. A great example of the commitment and focused effort of the people at Air Products. Once again I thank all of them for their contribution.

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

Thank you very much, Seifi. I would like to make a few additional comments on our fiscal 2016 results before discussing our fourth quarter. Please turn to slide 11.

In summary for the year productivity drove significant profit growth despite modest volume growth and currency headwinds. Total sales declined 4% driven by unfavorable currency and energy pass-through impacts of 3% each while underlying sales increased by 2% driven by higher volumes in Gases Asia and our Jazan sale of equipment project in Saudi Arabia.

Operating income increased 16%. Operating margin was up 400 basis points to 23.1% and EBITDA margin was up 420 basis points to 34.4% driven primarily by better cost performance. Only 50 basis points of the operating margin increase came from lower energy pass-throughs. Diluted EPS increased by 14% and our return on capital employed improved by 180 basis points to 13.8%.

On slide 12 we show you our distributable cash flow of more than $11 per share. We believe this measure, more than EPS, is the true measure of the wealth we are creating for our shareholders. As a result of our strong performance in FY16, our distributable cash flow increased by $200 million or 9%. This combined with lower growth capital spending in FY16 generated free cash flow of over $900 million, which is up $500 million over last year.

Now please turn to slide 13 to review our full-year EPS. Year-on-year EPS growth of $0.95 or 14% was driven primarily by lower costs and improved pricing net of raw material costs. Volume growth in Gases Asia was largely offset by economic weakness in Latin America and Europe. And in our sale of equipment businesses higher Jazan project revenue was more than offset by lower activity in LNG and our other sale of equipment businesses.

Price mix improvement of $0.29 was delivered by Gases Americas, Gases Europe and Materials Technologies. And cost contributed $0.94 as focused productivity actions in all our segments more than offset inflation. This was more than enough to overcome unfavorable currency and foreign exchange headwinds of $0.16 and $0.11 unfavorable from items below operating income detailed on the slide.

Now please turn to slide 14 for a more detailed review of our Q4 results. Sales of $2.5 billion increased 1% versus last year as higher volumes more than offset lower energy pass-through and unfavorable currency impacts of 1% each. Volumes were 3% higher primarily due to continued progress on our Jazan products. Somewhat offsetting Jazan is softness in LNG and our other sale of equipment businesses as existing projects are completed while less new projects are added to the backlog.

In other areas volumes continue to be higher in Gases Asia but were offset by economic weakness in Latin America and Europe. Materials Technology volumes rebounded nicely this quarter. Pricing was largely unchanged versus prior year. We delivered significant operating leverage again this quarter as EBITDA of $855 million improved by 9% and operating income of $584 million improved by 13%.

EBITDA margin of 34.7% and operating margin of 23.7% improved by 250 and 260 basis points respectively as we continue to execute on our Five-Point Plan. All three regional Industrial Gas segments and Materials Technologies improved margins again this quarter. Lower energy pass-through only contributed about 20 basis points to the operating margin improvement. Versus prior year net income increased by 11% and earnings per share grew 10%.

Now please turn to slide 15. You have heard Seifi and I talk about our focus on cash flow, so we were pleased to see that our free cash flow was $264 million this quarter, up $138 million versus last year due to higher EBITDA and lower growth CapEx.

Turning to slide 16, you can see an overview of this quarter's performance in terms of earnings per share. Before I comment on our Q4 operating performance I'd like to spend a moment on the non-GAAP items that total $0.17 per share or $44 million pretax. We saw Materials Technologies separation costs of $23 million for legal and advisory fees and tax costs. And we recorded a loss on early debt retirement of $7 million as part of our debt-for-debt exchange to facilitate the Versum spinoff.

Also included this quarter is $14 million for position eliminations and pension settlement costs. We expect to see cost action and pension settlement costs continue through next year. Further actions will be part of the second $300 million of operational improvements and other actions to offset stranded costs from our decision to divest Materials Technologies.

Further details on all non-GAAP items can be found in an appendix slide and the footnotes to our earnings release. Excluding these items our Q4 continuing operations EPS of $2.01 increased $0.18 per share or 10% versus last year. Volumes increased EPS by $0.06 per share; pricing, energy and raw materials taken together contributed $0.03; net cost performance was $0.13 favorable primarily driven by our productivity actions.

Currency translation and foreign exchange gains combined was $0.02 favorable as currency translation impacts were $0.03 unfavorable and foreign exchange losses from the prior year of $0.05 did not repeat. Interest expense was $0.03 higher due to lower capitalized interest and a higher tax rate reduced earnings by $0.02.

And finally I'd like to make a few comments on our September 30 balance sheet. As you know, as part of the Versum spin approximately $1 billion of debt was raised by Versum which was then paid out to Air Products. This payment came in the form of $550 million in cash and was equal to the Versum tax basis. And approximately $425 million as part of the debt-for-debt exchange which we used to retire commercial paper.

This all occurred as planned prior to the end of September. The net effect of these transactions is that Air Products has $550 million more cash and approximately $425 million less debt as of September 30.

However, since Versum debt was issued in September but Versum did not become a separate entity until October 1, Air Products' consolidated balance sheet includes the Versum debt. As you can see in total cash is up about $1 billion relative to June 30 in part due to Versum and also due to cash generation from our business including Jazan.

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

Thanks, Scott. Fiscal 2016 was another very strong year for the Industrial Gas business and I would like to thank the entire team around the world for staying focused on the things we control and in particular for exceeding our productivity goals.

On slide 17 you can see the significant EBITDA margin improvement that we delivered in each of our three regional businesses in 2016: up over 600 basis points in Americas; up over 500 basis points in EMEA; and up over 250 basis points in Asia. This strong performance was delivered in a challenging external environment with weak economic conditions and currency headwinds. We stayed focused on safety and delivered the benefits from our Taking the Lead productivity program.

As you know our business is inherently local, that is why we moved to a regional structure and incentive plan two years ago. Every employee, every distribution truck, every plant matters. The opportunity to improve our network design touches on all three of these.

For example, we recently announced the startup of a new liquid plant in Carrington UK. This plant is not just more efficient than the old plant, it's sized to allow us to consolidate all northwest England liquid bulk operations in Carrington and close the second older liquifier that was just 35 miles away. We have made great progress and are even more confident about our ability to deliver future benefits.

We are also excited to continue our success in winning new projects. We announced a project in the US and one in South Korea within the last two weeks.

Now please turn to slide 18 for a review of our Gases America's fourth-quarter results. Our profit growth and significant margin expansion was driven by our Taking the Lead productivity efforts across all sub regions. Sales of $877 million were down 3% versus last year on lower volumes.

Latin American volumes were down close to 10% which lowered overall America's volumes by 2%. We saw weakness in our packaged gases, equipment and liquid bulk businesses across most of our key geographies in Latin America.

North America volumes were lowered overall -- lowered overall America's volumes by 1% primarily due to a weakness in steel. Sequential volumes were impacted by planned customer maintenance outages. Pricing, energy pass-through and currency were all flat versus prior year. We did see a sequential increase in energy pass-through revenue as natural gas prices increased.

Operating income of $225 million was up 8% and EBITDA of $352 million was up 7% versus last year as the benefits of our Taking the Lead operational improvements more than overcame headwinds from lower volumes. Operating margin of 25.6% was up 250 basis points and EBITDA margin of 40.1% was up 350 basis points. Sequentially margins were impacted by higher natural gas prices and lower volumes.

And as I mentioned, we are excited to have signed an agreement with the Chemours Company to supply multiple industrial gases to their titanium dioxide production facility in New Johnsonville, Tennessee. We will build a new plant expected on stream in the fall of 2018 that will supply Chemours and also produce additional liquid argon to serve the northern and central regions of the United States.

Now please turn to slide 19. In our Europe, Middle East and Africa business the team continues to deliver strong profit growth despite continued volume weakness and currency headwinds. Versus last year sales of $414 million were down 10% on 4% lower volumes, a negative 3% impact from lower energy pass-through and a negative 3% impact from currency.

Liquid volumes were down in all four sub regions with more than half of the decline due to lower wholesale volumes. Packaged gases demand was down broadly. Other than the obvious currency impact, we don't believe the Brexit vote has had much impact on our business this quarter.

Operating income of $98 million was up 8% and EBITDA of $154 million was up 2% as our productivity actions more than offset the currency headwinds. Operating margin of 23.7% and EBITDA margin of 37.2% were both up over 400 basis points. Lower energy pass-through improved operating margin by about 70 basis points meaning that the underlying operating margin was up 330 basis points excluding lower energy pass-through.

Please turn to slide 20, Gases Asia. Volume growth continues from new plants and our base business while our productivity actions enhance our profitability. Sales of $449 million were up 5% as volume growth of 7% was partially offset by a negative 2% currency 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 again up double-digits as we have improved the quality of this business. Despite continuing price pressure in helium there are signs of improvement in the China LOX/LIN business, but we still expect the overcapacity to remain for some time.

Operating income of $110 million was up 5% and EBITDA of $172 million was up 4%. The profit growth was slightly muted as we had a positive on-site customer catch-up payment last year. The increase in energy pass-through revenue is at [no] margin and we had headwinds from currency and incentive compensation.

Our productivity programs continue to deliver. Our operating margin of 24.5% and EBITDA margin of 38.2% were roughly flat versus last year. Sequentially margins were impacted by higher incentive compensation and higher seasonal power costs.

Finally, we just announced earlier this week a new air separation unit in Ulsan, South Korea to support pipeline and merchant demand growth. We have been serving customers in the region for nearly 30 years and look forward to continuing our excellent track record.

I will close with a brief comment on the global gases segment. You will 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 that are not region specific.

Sales were up as we recognized over $100 million of revenue from the Jazan ASU sale of equipment this quarter, which more than offset weakness in small equipment and other ASUs. Segment profits were up as we recognized profit on the Jazan project. The profit this quarter includes a cumulative catch up related to project activity during the full year. We do expect to book revenue and profits for Jazan in FY 2017.

Now please turn to slide 21 and I will turn the call over to Simon for a comment on our other business results.

Thank you, Corning. As I mentioned earlier, we completed the spin-off of our electronic materials business as Versum Materials on October 1 and are making progress on the sale of our Performance Materials business to Evonik. Both of these businesses are included in Air Products' continuing operations for Q4 2016.

On slide 21 you can see the Materials Technologies, which includes both EMD and PMD, continue to show strong results with sales, volumes, profits and margins all up versus last year.

Please turn to slide 22 for the EMD results as reported within Air Products. I will make some brief comments and the Versum Materials team will address their results in more detail when they hold their earnings call. Sales of $248 million were up 7% on 7% higher volumes driven by strength in Advanced Materials and Delivery Systems. EBITDA of $83 million was up 5% and operating income of $70 million was up 11% versus last year.

Now please turn to slide 23 for a review of our PMD results. Sales of $267 million were up 4% on 8% higher volumes partially offset by 4% lower price. The positive volume was driven by polyurethane additive strength in spray, appliance and construction markets as well as epoxy strength in coatings and nonresidential construction markets.

Specialty additives volumes were flat as stronger coatings volumes offset weakness due to the temporary shutdown of a specific mining customer in Brazil. Overall prices were down given broader petrochemical driven deflation, but this was more than offset by lower raw material costs.

EBITDA of $74 million was up 29% and EBITDA margin of 27.8% was up 550 basis points. Operating income of $68 million was up 35% and operating margin of 25.3% was up 580 basis points primarily driven by productivity and favorable price / raw material balance.

Finally, 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 significantly lower LNG project activity and profits were down as the impact from the lower sales more than offset lower costs.

As we have said, the lack of customer decisions on new LNG projects is having a significant impact on our business, about a $0.10 headwind for FY16. We expect a further approximately $0.25 headwind in FY17 versus FY16.

Now please turn to slide 24 and I will 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 as the safest and most profitable industrial gas Company in the world. As you can see, we are providing guidance for first quarter and for fiscal year 2017 on two bases: one is with our PMD business and the second is without the PMD business.

As I said before, nothing has changed; we continue to make progress on the sale of PMD and we are still targeting to close before the end of this calendar year. However, since we are still going through the regulatory approval process, PMD is not currently in discontinued operations. Therefore we are providing guidance both including and excluding PMD.

You can see that we have also provided an estimate for continuing operation EPS results for quarter one fiscal 2016 and total fiscal year 2016 so that you can compare next year to what we actually achieved last year.

On the basis that excludes the PMD business, which is our core Industrial Gas business, our guidance for fiscal year 2017 is for earnings per share of $6.25 to $6.50, up 9% to 13% over last year. And also on the basis that excludes PMD for the first quarter of fiscal year 2017 our guidance is for an earnings per share of $1.40 to $1.50, up 3% to 10% over last year.

We expect our CapEx, excluding any significant acquisition, to be about $1.2 billion. Our EPS guidance is consistent with this CapEx guidance, in other words it does not include any acquisitions. And while things could always change, our guidance also does not include any positive effect from share repurchase.

I would like to stress these points again. Our guidance is based on our core Industrial Gases portfolio as it is today; therefore it does not include any upside from any share repurchase or future acquisitions.

Our fiscal year guidance is consistent with our long-term goal to improve Air Products' earnings per share by 10% per year over the long-term. In the last two years we have delivered much more than that and we are going to strive to continue to deliver 10% earnings per share growth every year.

And despite the weak economy a key reason we remain confident we can continue to develop a strong performance is the success of our $600 million cost improvement program that we announced 2.5 years ago. We have fully delivered the first $300 million. And in terms of the second $300 million, we delivered over $75 million in 2016, which is twice what we had promised you before, and we expect to deliver another $100 million of cost saving in addition to our debt in 2017, again ahead of our previous commitments.

To wrap up please turn to slide 25 for our priorities as we move Air Products forward. While we will always stay focused on improving our existing business, the major restructuring of Air Products is behind us and our focus is now on profitable growth.

We have the balance sheet capacity now to take advantage of the very exciting growth opportunities we see including accretive and complementary acquisitions focused on our core Industrial Gases business and large projects around the world driven by market demand for more energy, environmental improvements and emerging market growth.

And since we have had a significant amount of cash at our disposal we can be successful with these large opportunities while we maintain our current A credit rating and continue our commitment to grow our dividend every year.

And finally, we will consider share repurchases if the market provides a compelling opportunity. Let me say in closing that our people continue to step up and deliver. I want to sincerely thank them for their dedication and commitment and the hard work that they are doing every day to provide excellent service to our customers and make Air Products the best Industrial Gas Company in the world. Without their efforts we would not have been able to deliver these results.

And now we would be delighted to answer any questions that you might have.

(Operator Instructions). Robert Koort, Goldman Sachs.

Good morning, this is Chris Evans on for Bob. Impressive guide given it doesn't include the cash deployment. Could you kind of talk us through the moving pieces that get you that double-digit core growth?

Yes, absolutely. As I said, we are committed to deliver an additional $100 million of cost savings, that by itself is about $0.35. And in addition to that we have new plants that we have built that are continuing to come on stream, so we will have organic growth.

Therefore the combination of productivity and organic growth that we see based on the plants that we see coming on stream, that is what gives us the confidence to deliver the results that we are talking about next year. Because that means that next year we are not making any assumptions for any significant economic growth worldwide. We will have a currency headwind. But we feel very good about our productivity programs.

Our people did a great job in delivering the $75 million more than that last year. We are confident that we will get that and, on top of that, with the growth rate that we see we are -- as you know, we have always been committed to promise what we can deliver and usually deliver more than what we can promise.

Thank you. And then obviously can you comment on the potential impact around the round of consolidation among the global major gas companies? Do you think the regulatory environment is supportive of that deal and what would be the impacts if it went through?

Well, I don't when to comment on what other people are doing or might do, but Air Products is focused on a strategy which is based on organic growth and productivity improvement and we will continue to execute that strategy. What other people might do I don't think it will have much of an effect on us at all.

Thanks, Seifi.

Duffy Fischer, Barclays.

Probably the biggest question I am getting on you guys lately -- and, Seifi, I would love to get your color on this -- is obviously assuming that the deal to Evonik goes through you guys will be sitting on a big pile of cash come next year. How should we think about your ability to employ that maybe over the proceeding 18 months or so?

Well, obviously we are committed to do that. Sitting on top of a little bit of cash for a rainy day is okay, but sitting on top of $3 billion of cash is obviously not what we intend to do. We do have -- we believe we do have plans to deploy that cash properly. We are not in a hurry to do that, we are not going to do anything rash, but we feel very good about that.

Okay. And then there has been a part of noise in China this year around some of the rules and regulations in coal mining; the number of days they can run plants has changed a couple times. Has that impacted at all the way you view the long-term coal gasification opportunity or has that impacted any of the current business you have in that industry?

Look, Duffy, I honestly think that there is a little bit of confusion about what those rules are. What we see from those we are close to that, we are on the ground. We see absolutely no effect and actually we see positive developments.

We are very optimistic about those big projects, we think they will happen and we don't see anything in the Chinese government policy that would affect the kind of things that we want to do in terms of clean coal and coal gasification in China.

Terrific. Thank you, fellas.

Vincent Andrews, Morgan Stanley.

So, in Latin America you called out some weakness and then also EMEA had minus 4% volume growth. It seemed like those were a little bit weaker sequentially than at least we thought. Can you just talk about what dynamics are there and what might have changed particularly I guess on Europe and the minus 4% volume?

Absolutely, I think I would like Corning to address that. Corning, please.

Yes, thank you. So as I said in my comments, the big challenge there was in the liquid bulk area. If we think about the merchant business there is two spaces, packaged gases and liquid bulk. Packaged gases for some time has been impacted just by slowing construction activity, metals, fab.

But we saw a drop off in this quarter in liquid bulk larger for us than what we had in packaged gases. But more than 50% of that was in wholesale volumes. And that goes a little bit to our drive to just start driving an improved quality of our business. And our goal moving forward would be not to reload that business with wholesale volume, instead shift that to retail volume for us.

Corning, you might want to also mention about the effect -- in Europe about the effect of August in terms of sequentially --.

Yes, fair enough. So if we think about in the purely sequential look as we go through it, you just have to keep in mind that the holiday season in Europe is in this previous quarter with August. So I think that is a big part of the drop off there.

If you are looking at the raw numbers you've also got the impact that has shifted with currency with the Brexit vote, which is the one part of that that we have seen. But I would say overall you take that through and you say shifting to more of a retail-based net business I think we are well positioned there.

So with the drop off in the wholesale volume should we assume that there is going to be some volume weakness for the next couple of quarters until you lap that?

I wouldn't see it -- yes, I wouldn't see that coming back overnight, agreed.

Okay thanks very much (multiple speakers).

(Multiple speakers) pushing that to retail volume.

P.J. Juvekar, Citi.

So for a long time Industrial Gas executives believed that big M&A is not possible but that notion is being challenged. Do you have any interest in big M&A or would you rather sit back and buy any pieces that may come out?

P.J., I don't want to comment on what our competitors are doing, but we think pursuing big M&A among the four major industrial gas companies is a foolish idea and we are not going to pursue foolish ideas. So we are not going to -- we don't have any plans to participate, we will sit back and if anything happens there certainly will be a lot of pieces that comes out. We have a lot of cash, that would be kind of Christmas for us if it happens.

Great. Really thank you for that color. And then just a quick question -- just a quick question on your CapEx which is going up in 2017 versus 2016 as you start up some of these projects. What kind of EPS contribution do you expect on your project in 2017? Thank you.

From the projects that are -- any future projects that we do, whenever we announce the CapEx you should assume that that will have a minimum of 10% return. We have made that commitment.

The projects that we have on stream coming on in 2017 will be a combination of the new projects we have approved, like Big River Steel and a combination of projects which were approved many years ago. That combination of the two, as I said, the new ones will have 10% and the old ones will probably have an average of about 5% return.

Thank you. Very helpful.

David Begleiter, Deutsche Bank.

Seifi, just looking again at 2017, in terms of pricing benefits in 2017, how should we think about those from an EPS perspective?

Well, David, as you know very well, we cannot, should not and would not comment on pricing. I think I would be very hesitant to start giving you any specific number. But you would expect that with that is one of the things that we do. We are focused on improving productivity; we are focused on improving our pricing.

And our pricing can improve not only by increasing prices to cover inflation, but it will improve based on what Corning was talking about in change of the mix in terms of going from wholesale to direct sale and all of that. So there is some element of pricing in next year's guidance, yes.

Very good. Just on the deployment of the cash and the capital. As you bid for these projects are they competitive bid situations or are they more one-off negotiated transactions you are looking at?

David, I think you should assume that everything we do is a competitive situation. I don't think that for these large projects any of the customers would just want to do a private deal with us. But we are prepared for that; [they] bring a lot of value to our customers not only in terms of pricing but in terms of all of the other services we provide.

So we are prepared for competition, but we remain for optimistic that we have an advantage. And we have bought a lot of projects, some of it unfortunately we cannot announce because our customers would like to keep that confidential. But we are bidding more than our fair share of projects in the last two years. I am not worried about that at all.

Thank you very much.

Jeff Zekauskas, JPMorgan.

By what percentages is Jazan complete? And for your Indian hydrogen project of 165 million cubic feet per day, that comes on in phases. How much comes on in 2017?

We expect our projects in India to come on stream approximately in the first half of -- calendar 2017. So there will be less than half a year contribution from that project in our 2017 numbers.

As for Jazan, we have made progress and I will be hesitant to publicly talk about percentage complete. But I can say that we are moving on plan, on schedule on that project and we are obviously very optimistic and our people are delivering on that. And we have a great customer in Aramco, they are being very helpful to us and they are pushing us obviously to get the project done as soon as possible and we are on plan.

And for my follow-up, if it turns out in the course of 2017 there is nothing that you are able to buy and it also turns out that your share price is flat, would your share price then represent a compelling opportunity at the end of the year or it wouldn't?

Well, it depends on what the share price is. I mean if you are asking me that would we buy shares at $133, I am not sure I want to comment on that. But -- Jeff, you know better than I do the events in the world. I mean what is the market going to look like two weeks from now? A lot of things can happen. So the good thing is that we have the cash and we will watch what happens.

Okay, thank you very much.

Christopher Parkinson, Credit Suisse.

Just an extension of your comments right there. You have obviously spoken about kind of the key macro and some of the political risks in the context of capital deployment. But can you just give us an update on how you're actually thinking about this versus let's say three to six months ago? Are there any changes in your expectations, overall opportunities or valuations broadly, particularly outside of the US? Thank you.

Well, I guess I would have to characterize it that I am more optimistic than I was six months ago about our ability to deploy the cash. But I do want to stress that there are certain events in the world that can change everything upside down.

And I think it is very prudent for us, rather than jumping in and doing something this minute, to give ourselves a few months to see how everything settles down with the US election and with the Brexit and all of that and then we will make the appropriate moves.

Thank you. And as a quick follow-up within the gases in Asia you are seeing some decent volume growth and you are now holding prices flat on both a year-over-year and sequential basis. Can you just talk a little bit more about the broad drivers in the market specifically, any changes in merchant capacity and/or strategy that is helping overall results? Thanks.

Corning, would you like to --?

Yes, so let me answer that. I am not sure I'm going to go into all of our strategy and want to discuss that in a public setting, but maybe just to give you a little bit more color to it. So there remains significant overcapacity in the market and there remains probably over 5,000 to 10,000 tons of capacity that is either under construction or has been idle or people have delayed start up.

So I think the overcapacity story is there for a while. The positive thing for us has been for several years now we have made a strong drive to drive the retail portion of this business. And you can see that has been working for us and that gives us an improvement on the mix.

All in all I would say the pricing environment in LOX/LIN is slightly improved. You don't see that in the overall number because of the impact of helium. I would just say we didn't put that in the prepared comments because I would really like to see how this plays out a few quarters into the future before we declare a trend there.

So all in all though I would say that is positive, it is positive for us to be able to get the retail volume growth. And I think that is all in all a very good thing for Air Products going forward. A lot of confidence in the team there.

If I may just add to Corning's comment that we are very happy to be in China and we think we have a very good future there.

Thank you very much.

Steve Byrne, Bank of America Merrill Lynch.

Seifi, you mentioned in your remarks your pipeline has some large oxygen and hydrogen opportunities in it. Can you just comment on what portion of those would you see as stand-alone plants versus potential pipeline bolt-on projects? And how would you see those opportunities relative to where they have been over the last few years? Are there more or less and where?

Most of the opportunities that we see are in US Gulf Coast and in China and some in Europe. Most of the opportunities are -- some of the opportunities are on our pipeline, especially our hydrogen pipeline. But a lot of the opportunities are stand-alone plants, large plants supplying significant amount of oxygen and nitrogen to coal gasification refineries and all of that like the Jazan project. There are not that many where we are -- as you might say we are hanging on liquid capacity.

Yes, thank you for that. Just with respect to your $100 million cost reduction target in fiscal 2017, can you just comment on what are the key projects here that will be driving that?

Those key projects are under the title of what we call taking the lead project that Corning has been leading. And they are absolutely focused on operational improvements in our production and in our distribution and some in -- those are the main key areas. But I would like to comment -- Corning to comment -- elaborate on that, please.

Yes, we have tried to in each of the recent earnings releases just give a concrete example of one thing that we are working on. The reality of this business though, it is a very distributed business. We don't have world-class plants where you export all around the world from one site. We have over 700 plants.

And so it is a business of transactions in many plants and, as Seifi says, sometimes the 10,000 little things. And so a big part of this is motivating the team and keeping ourselves focused on executing across those 10,000 things.

I would say the move towards a regional structure has dramatically improved that including the operating control in the region and the move to an incentive plan based on that same regional structure has been a big part of this as well. But all of that together really comes down to just the commitment of the people and the focus to deliver on this.

If I may just add to that, as we have said many times before, we do have very detailed programs region by region in terms of what they need to do. Based on what we accomplished in 2016, I am very confident that we will deliver at least $100 million next year.

If I can just jump in on this because this is a topic we are really happy about. We are all wearing in this room these buttons right with our four S's, the new culture at Air Products. And we had those plans just like Seifi talked about and we beat them. And I think it goes to one of those S's for us is speed.

And those regional teams, we got out of the way, they were empowered, they were motivated and they went and they got it done. And I think we are very proud around the world of what these groups have done. But I think it is a sign of embracing a new culture here at Air Products.

Thank you.

Kevin McCarthy, Vertical Research Partners.

My question relates to -- with regard to Jazan, what sort of incremental profit contribution might we expect in fiscal 2017 versus 2016? And perhaps you can elaborate on the fourth quarter you just reported and the shift from a red number to a black. I think the press release indicated a cumulative catch up. Thank you.

Sure. I obviously cannot and should not comment on the profitability of the Jazan project. For 2017 we do not have a significant amount of contribution, but there will be some contribution. And quite honestly it will depend on the exact progress that we make on all of that. But there will be some.

In 2016 we did not recognize -- although we were recognizing sales throughout the year, we did not recognize profit because we wanted to get some kind of a -- more of a sure footing that the project is moving forward.

As you know, there has been a lot of talk about shutting down projects in Saudi Arabia and all of that and we wanted to make sure that this project doesn't get canceled and then we would have to divest profit and all of that. But then by the fourth quarter it became obvious that we have made enough progress that we should recognize some and that is what we did.

Thank you very much.

John Roberts, UBS.

How big is electronics now for the remaining gases business? And were your nitrogen sales to electronics roughly up in line with the Versum or the EMD volume numbers that you presented?

The size of that business order of magnitude is about $0.5 billion and we were up 11%. So we are doing well there.

Great, thank you.

Mike Sison, KeyBanc.

Seifi, when you gave your outlook for 2017 you highlighted cost of new projects and is there upside in the event the industrial world does get better? And maybe just kind of your thoughts, it doesn't sound -- do you think it could get better, is it stable, is it getting worse? I'm just surprised that you wouldn't add that as a component a potential growth next year.

Well, the thing that as compared to -- and I mean we all operate in the same boat compared to our competitors. I mean we are delivering double-digit growth while other people are showing negative growth. So we are doing something right.

With respect to next year, we are -- there is a possibility that we will do better than what we have given you as a guidance depending on the economy and all of that. But I just want to remind everybody that we are dealing with some significant worldwide events that we have to see how they will develop.

Now we have given you guidance on the basis that, barring any significant disruption, we will be able to deliver that and that is the way we operate. Now the economic conditions can get better once the US election is over and people are not sitting on the fence then, yes, it is possible that we will do better than that.

But the one thing I can assure you is that we don't operate on the basis of just delivering the guidance, we do our best to deliver whatever we can. That is kind of our goal.

Great, thank you.

James Sheehan, SunTrust Robinson Humphrey.

A question on the opportunity to buy captive ASUs. Could you say -- do you think the multiple for such acquisitions would be higher, lower or the same as other M&A opportunities? And also could you frame any synergy potential of such captive ASU acquisitions?

Well, on that one unfortunately I can't give you a general answer because it will depend on the specific situations. But what you said can apply, it can be a specific situation where there is significant synergies because we already have two plants there and an addition of another two or three plants will add value.

So sorry that I can't give you a general answer, but you can be rest assured that we will only do those if they are in line with our goal of getting return on our -- on the capital that we employ which is not less than 10%.

Great and can you also give us a sense for any stranded costs that you still have in 2017? What the timeframe would be for eliminating those and how they affect the cadence of your earnings progression in 2017?

Well, we have said that those stranded costs could be in the order of magnitude of $20 million. They have programs for eliminating those in the next year and a half. And our guidance obviously reflects that those costs are still with us and we need to work to eliminate those.

Thank you, Seifi.

Don Carson, Susquehanna Financial.

A question on your FX assumptions within your guidance. Currency was a $0.16 drag in fiscal 2016. You have got some sterling exposure. Just wondering what kind of a headwind you are assuming in your 2017 guidance.

I think the number is about $0.05, but the expert on this is Scott. So, Scott --.

Yes that is a tall order. Hi, Don. So just to remind everybody how we look at currency -- we don't try to speculate, we take the latest rates and we just project that forward. So when we do that from where we are today into 2017 and then compare full-year 2017 against 2016 we would have a headwind of about $0.05 to $0.10. That is for the full year.

And then on a quarter basis we do the same approach, just move things sideways. We would have in the first quarter both sequentially as well as versus prior year in Q1 about a $0.01 to $0.02 headwind principally driven by the pound.

And then on the project, Seifi, you mentioned that you are still working through some projects that were signed before you arrived. Are those pretty much over by the end of 2017? And what is the total -- where does the backlog stand today versus where it was at the beginning of fiscal 2016?

Well, we have a detailed chart on this thing on the slides that we have -- yes, slide 28. So you can see -- and I am sure you know very well which ones are signed before and which ones were signed after. They will not all be over in 2017 because some of them are delayed and it will drag on into 2018 also.

Okay, thank you.

Michael Harrison, Seaport Global Securities.

Seifi, you mentioned that you felt like you were gaining or winning more than your fair share of new projects in large on-site business. I was wondering if you can talk about the North American merchant business and what you are seeing in terms of new account growth there. And in particular can you maybe comment on what the core LOX/LIN volume looked like in the quarter and what the outlook is for fiscal 2017?

Sure, I think Corning can answer that very easily. Corning?

Yes, thank you for the question. So LOX/LIN, if we are going to look at that, which let's just say it is the most generic product, goes into the largest number of industries, it was probably the best sort of bellwether of everything. Year on year that was flat for us. However, sequentially we were up about 2%, so showing some positive momentum there.

Even in that year-on-year flat however, I would say that during the course of the year we did make some adjustments in our portfolio as part of our Take the Lead program. We also had one situation, not exactly the same as Carrington that I talked about, but where we did shut down a liquifier and were able to shift load around, but it also involved shedding some customers.

So all in all, I think perhaps the best indication is just the sequential moving forward which gave us 2%. And I see that as a net positive for us and I think a pretty good reflection of what is going on in North America.

All right, and then you mentioned that within the corporate segment that LNG business was going to be a $0.25 EPS headwind next year. Is there anything that could change in the market that could swing that? Or do you have pretty good visibility based on the projects that are in the pipeline now that that is going to be weaker no matter what happens?

No, I think the guidance that we have given you about $0.25 is based on what we see. But there are things that can happen that can change that because a lot of these projects, we have won the projects, but the oil and gas companies have put a hold on them, as you know very well, because of the situation.

They can change -- if the oil prices significantly change they can change their mind, they can release those and therefore we [can] start working on them. So the possibility of that I don't see being great, but it is possible, yes. But the $0.25 is real and it is based on what we have.

So I am glad you brought that up because if you take that $0.25 into account, then we are actually giving you pretty good guidance in terms of growth next year. But that is based on what we see right now.

Thanks very much.

Laurence Alexander, Jefferies.

Congratulations, you have got a pretty good engine going now with this business.

Thank you.

A longer-term question, as your business mix continues to shift towards being more and more on-site, have you had any indication from either your large customers or from the rating agencies that their tolerance for leverage would change given the better more stable mix of the business?

Well, that is something that we are hoping that would be the case, but we have to wait and see. But we are pushing toward more on-site because then you get a more stable revenue growth and a more stable profitability. But we are paying attention to all parts of our business, whether it is large on-site, our merchant business and our packaged gases business in the areas of the world where we are strong.

So we are not neglecting any part of the business but the trend seems to be more towards the large on-sites. And obviously if we win one of those projects it adds a lot to that part of the business.

And then just lastly, are you seeing -- as you have [these] discussions with customers about the next cycle of projects 2018, 2020 and so on, it looks as if the size of projects just keeps getting larger. I mean could we get to the point where you are seeing sort of one-off $500 million to $1 billion project agreements?

Well, I can actually see bigger than that. There are projects where you would -- like Jazan $2 billion, and there are projects that might require $4 billion. So you are right, the trend is toward larger projects and that is why having the balance sheet that you can do those projects becomes very important.

And that has been our target because we saw that trend before and that is one of the reasons that we wanted to restructure and make sure that Air Products has a bulletproof, solid balance sheet that we can take on those megaprojects. You are very right about that.

Got it. Okay, thank you.

Okay with that I would like to thank everybody for being on the call. Thanks for taking time from your busy schedule, especially today with all of the announcements, 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.

And again that will conclude today's conference. We thank you for your participation.