Air Products and Chemicals, Inc. (APD) Q2 2008 Earnings Report, Transcript and Summary

Good morning, and welcome to Air Products and Chemicals Second Quarter 2008 Earnings Results Conference Call. Just a reminder that you will be in listen-only mode until the question-and-answer segment of today's call. [Operator Instructions]. Also this telephone conference presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Air Products will be recording this teleconference and they publish all or a portion of the teleconference. No other recording or redistribution of this telephone conference by any other party are permitted without the express written permission of Air Products. Your participation indicates your agreement. Beginning today's call is Mr. Nelson Squires, Director of Investor Relations. Mr. Squires, you may begin.

Thank you, Jimmy. Good morning, and welcome to Air Products' quarterly earnings teleconference. This is Nelson Squires. Today, our CFO, Paul Huck, and I will review our second quarter results. We issued our earnings release this morning and it is available on our website along with the slides for this teleconference. Please go to airproducts.com and click on the scrolling red banner to access the materials. Instructions for accessing the replay of the call beginning at 2 P.M. Eastern Time are also available on the website. Before we begin I would like to call your attention to two items included in this quarter's results, the sale of our Polymer Emulsions business and the pension settlement charge. These items have been excluded from our discussion this morning. A reconciliation of these items is contained in the appendix to the slides and the earnings release. Please turn to slide two. As always, today's teleconference will contain forward-looking statements based on current expectations regarding important risk factors. Please review the Safe Harbor language on this slide and at the end of today's earnings release. Now, I'll turn the call over to Paul.

Thank you, Nelson. Good morning, and thank you for joining us today. Now please turn to slide number three for a review of this quarter's results from continuing operations. As you can see, we had another good quarter and as we reached the mid point of our fiscal year we continue to make solid progress on a number of our fiscal year 2008 financial targets. For the quarter, sales grew 13% versus prior year. Growth was limited by softness in several of our equipment product offerings mainly due to customer concerns around higher capital cost and less new investment in general. Excluding equipment, sales grew 15% driven primarily by better volumes in our Electronic and Performance Materials and Tonnage segments and higher pricing in Merchant Gases. Currency contributed 4%, higher natural gas pass-through and acquisitions each contributed 2% for an underlying equivalent growth rate of 7%. We continue to make progress reducing SG&A as a percentage of sales. This quarter, SG&A was 12% of sales, an improvement from prior year. Operating income of $365 million was up 18% from prior year again due to better volumes in pricing and also favorable currency. As a result, our operating margins improved 60 basis points to 14%. Margins were down a 100 basis points sequentially related to a number of factors in each segment. Higher natural gas cost and bidding expenses impacted tonnage. SAP implementation in Central and Eastern Europe impacted Merchant. Equipment sales more than doubled quarter-on-quarter in Electronics. And finally Healthcare margins declined due to ongoing issues in the U.S. business. With the volume and pricing gains we are forecasting for the second half of the year, we are on track to achieve our operating margin goal of 15% for the year. For the quarter, our net income and diluted earnings per share increased by 24% and 27% respectively. Our return on capital improved with return on capital employed… increasing to 12.4%, up 70 basis points from last year. Now please turn to slide number four. Now, let me talk about the factors that affected the quarter's performance in terms of earnings per share. Our GAAP or as reported EPS increased 40%. This reflects $0.28 from discontinued operations, which includes the gain on the sale of our Polymer Emulsions business. And we also had a pension settlement charge of $0.08 per share. Excluding the discontinued operations and the pension settlement charge, EPS from continuing operations grew 27%. Higher volumes added $0.08. Higher pricing and margins together contributed $0.01. Our Poland acquisition improved earnings $0.02, favorable currency added $0.07. Higher equity affiliate income contributed $0.05 as we continue to see good growth in operating performance in a number of countries. $0.02 of this is attributable to the reimbursement of an anti-trust fine in our Italian affiliate. We repurchased 4 million shares spending $365 million this quarter. Fewer shares outstanding contributed $0.02. A slightly lower tax rate was pretty much offset by higher interest expense. All other items net contributed $0.01. The bottom line is that we had a very solid second quarter and our fiscal year 2008 is off to a good start. We continue to deliver leverage to the bottom line. At mid year, sales growth is 11% and our EPS growth is 22%. Now I'll turn the call over to Nelson to review our business segment results. Nelson?

Thanks, Paul. Please turn to slide five, Merchant Gases. Merchant Gases continued to grow at a solid pace during the quarter. Sales of $902 million were up 15% versus prior year. Currency contributed 7% and acquisitions contributed 5%. Pricing added 4% and volume was down 1%. Lower equipment sales reduced volumes by 4% in the quarter. Merchant Gases operating income of $167 million was up 18% versus prior year and segment operating margin of 18.5% was up 50 basis points, mainly due to pricing gains. Margins were down sequentially by 110 basis points due to higher cost to support growth including our SAP implementation in Central and Eastern Europe. Let me now provide a few highlights by region. Please turn to slide six. In North America, our sales increased 8%, driven by strong pricing gains. Overall growth was limited by the availability of argon and helium and less spot liquid hydrogen sales versus a year ago. We will implement an additional fuel surcharge in North America on the first of May to recover the cost increases incurred since our previous surcharge implementation on 1, January. New business signings were strong in the quarter and are significantly ahead of target for both the quarter and year-to-date. We expect to see the impact of these signings in the second half of the year. Sales increased 27% over prior year in Europe with price adding 3%, currency 14%, acquisitions 12%, and volumes down 2%. Business was generally soft in the UK and Spain during the quarter. Volumes were impacted by fewer spot sales versus a year ago. Availability of helium across the region and general tightness of supply of LOX/LIN on the continent. In Asia, Merchant sales were up 22% over last year, volumes contributed 15%, currency 4%, and price 3%. We saw less impact on volume for Lunar New Year than in previous years. Please turn to slide seven, Tonnage Gases. Sales of $867 million increased 25% compared to last year. Volumes increased 12% versus prior year reflecting growth from new plants in Asia and Europe and improved plant loading. Natural gas and raw material prices were higher versus prior year and added 8%, currency added 3%, and acquisitions 2%. Sequentially, volumes were up 4%. Operating income of $111 million was up 20% compared to last year. The increase over prior year was due to higher volumes and improved plant efficiencies. Operating income was flat sequentially. Operating margin of 12.8% was 50 basis points lower than last year held down by higher natural gas cost pass-through and higher project bidding expenses. This reduced margin sequentially as well. We brought our second hydrogen plant on stream, on schedule for Petro-Canada's refinery in Edmonton, Alberta in April. Bidding continues at a high level across the segment. We're making solid progress on the Tonnage projects discussed during the last call and expect to announce signed agreements during the current quarter. Please turn to slide eight, Electronics and Performance Materials. Segment sales of $562 million were up 6% compared to last year. Volumes were up 5% accounting for the majority of the gain. Electronics sales were up 2% compared to last year driven by higher sales in specialty materials and Tonnage, offset by lower equipment sales and the SKU reduction effort. Excluding equipment and the SKU reduction effort, sales increased 10%. Electronics sales were up 7% sequentially due to higher equipment sales. In Performance Materials, overall volumes grew 3% versus prior year and 7% sequentially. Continued weakness in sales to the North America housing market was more than offset by strong sales to the commercial construction markets in Europe and the Middle East. Overall, operating income of $68 million was up 20% versus prior year. Operating margin of 12% was up 130 basis points versus prior year due to the impact of the Electronics restructuring and higher volumes in Performance Materials. Margins were down 80 basis points sequentially, mainly due to higher equipment sales. We expect to see continued progress in improving our margins over the second half of this year. Please turn to slide nine, Equipment and Energy. Sales of $105 million in this segment decreased due to lower LNG activity. On a sequential basis, sales increased 4%. Operating income of $10 million decreased versus prior year and increased slightly versus prior quarter. Our backlog of projects now totals $203 million. We did receive letters of intent for a few large air separation units in the quarter, which will be added to the backlog next quarter. We are also seeing the bidding activity pick up for LNG. We expect to receive additional LNG orders later this year. Please turn to slide ten, Healthcare. Healthcare segment sales of $170 million were up 8% compared to prior year, due primarily to currency. Sequentially sales were down 1% reflecting solid results in Europe and softness in the U.S. business. Operating income of $9 million was up 34% versus prior year on higher European results and currency. Overall margins were at 5.5%, improving 100 basis points versus prior year. Our margins declined 250 basis points sequentially due to continuing issues in the U.S. business. Paul will have more to say on the U.S. Healthcare business in his closing remarks. Now I will turn the call back over to Paul.

Thanks, Nelson. Now if you turn to slide 11. As we look forward from quarter two to quarter three, we are forecasting our third quarter earnings per share on a continuing operations basis to be in the range of $1.25 to $1.30. This excludes any further divestiture impacts and represents year-on-year growth of 12% to 16%. On the positive side, we expect to see increased earnings sequentially from the following areas. In Electronics, we expect higher specialty materials volumes on increased foundry operating rates and further benefits from our product rationalization efforts. In Performance Materials, we expect to see a continued seasonal rebound in volumes into quarter three. In Merchant Gases, we expect higher volumes as we continue to drive new applications. We also continue to implement price increases and fuel-based surcharges to recover escalating cost. In Tonnage Gases, we have new plans on stream and we anticipate lower maintenance spending in quarter three. And finally, we expect to continue to see favorable currency impacts next quarter. Slightly offsetting these sequential improvements is our forecast for lower operating results in our Equipment and Energy segment due to the higher energy development spending and maintenance outages. On the economic front, we continue to see about 2% industrial production growth for U.S. manufacturing this fiscal year. The continued declines in U.S. housing and the weakness in autos is being offset by growth in manufacturing exports. In Europe, growth continues on the northern continent, while both the U.K. and Spanish economies are essentially flat. Year-on-year, we still expect to see growth in Europe at around 2%. Asia growth is also on track with our forecast at around 6% to 7%. Overall that puts our forecast for world [ph] manufacturing at around 3%, this compares to last year's growth of about 4%. While there is continued economic uncertainty and speculation, we still see strength and growth in our markets both near term and long term. Given our strong first half performance, our growing backlog of new investments and improved margins from our pricing and productivity efforts, we are raising our guidance by $0.10 on the bottom and $0.05 on the top to $4.95 to $5.05. Based upon fiscal 2007 EPS from continuing operations of $4.20, which excludes $0.30 of one-time net gains, we are forecasting a year-on-year increase of 18% to 20%. As Nelson mentioned in his business commentary, longer term, we are seeing strong bid activity across our businesses, which gives us confidence for continued growth in 2009 and beyond. Our property, plant and equipment capital spending guidance for fiscal 2008 remains unchanged at $1.1 billion to $1.2 billion. Before we take your questions, let me update you on a few items. First, we closed the Polymer Emulsions sale on January 31st. And we are on schedule towards completing the sale of the two remaining plants. We have received bids and are currently in negotiations. Second, as you’ve likely read in our earnings release today, we are behind on our plan to improve our U.S. Healthcare business. And while we continue to execute our improvement plan, we are also evaluating all of our strategic alternatives for our U.S. business. We expect to complete this process during the third fiscal quarter and we'll update you then. Finally, in spite of slower economic growth we increased our earning guidance again this quarter. Demand factors such as higher energy prices, high capital cost and circular environmental rates are creating greater opportunities for many of our product offerings. Our global businesses are well positioned to continue capturing our share of these opportunities and our people are focused on continuing to deliver double-digit sales and earnings growth, improve margins, and higher returns in the future. Thank you. And now I will turn the call over to Jimmy to take your questions. Question and Answer

Certainly. [Operator Instructions] And we'll take our first question from P.J. Juvekar with Citi.

Yes, hi, good morning, Paul.

Good morning, P.J.

Hi, P.J.

Margins were down in Tonnage and you talked about higher project bidding expenses, what a change... is it just number of projects or are you constrained by personnel?

Constrained by what?

Are you constrained by personnel? Yes.

No, it's probably... as we've mentioned before P.J., there are a number of projects which with people are starting to move forward on. And so that has increased... it’s been increased our order intake, but it’s also increased our expenses right now because as you go through the bidding expenses you put them into the P&L. So, we are working on a really a record number of projects right now. Our personnel are tight, but we still feel good about our ability to win these projects and to execute them.

Okay. So, it's really the number of projects that you are working on.

It's the number of projects, yes, it's at all-time high as far as the amount of capital and the numbers there, P. J.

Great. Well, that's a good news.

That is good news.

And once you are finished with divesting remaining chemical businesses, are you done with your portfolio, are you happy with it, or do you see more divestitures or acquisitions? Where do you see your portfolio?

Okay. As far as the portfolio is concerned, I think managing our portfolio is really something, which is going to be an active thing for us at all times. As we've said there aren't any sacred cows in our businesses. Our businesses have to perform as we go through here. And that's going to be the demand, which we make up on. I mean, it is something, which our investors, I think, should expect of the management team here.

And just lastly, you mentioned that Europe was down 2% and sort of weak U.K., Spain, is it a bigger read through for European economy in this common share?

Well, I actually said... as far as we look at the European economy, we think it's going to be up 2%, in the view of things, as we said that. Certainly, the U.K. has been weak for a long period of time. And if you look at economic growth as far as on the manufacturing side, it goes up and goes down a little bit. But for the past five or six years, I think the... if I show you the graph, you would say flat and that's what essentially we're looking at right now. As far as Spain is concerned, Spain has suffered some of the same problems from the housing bubble that and that the U.S. has suffered. Plus, we're also seeing some of the impacts of the Europe over there because some of the manufacturing is coming here for things [ph].

Okay. Thank you.

We'll hear next from David Begleiter with Deutsche Bank.

Thank you. Good morning.

Good morning, Dave.

Paul, margins were down sequentially in Merchant Gas, you mentioned some higher cost of support growth, can you detail those costs? Will they continue going forward?

Yes, as far as the Merchant, the thing which we mentioned was that our SAP cost, because we are bringing Poland and Europe live... and the Eastern Europe countries live on SAP, we have some extra cost which always occur in the months going up to that go-live. So, we do expect the margins to come back and rebound in Merchant. For the year, we're still looking to make our gain to a 19% margin or so.

And Paul, just on Electronics, you mentioned 10% growth, ex the SKU reduction and equipment. What's driving that growth, is it LCDs and what's the potential for margin in this segment going forward?

First answer, the potential for margin as we mentioned, our goal is to get the Electronics and Performance Materials margins to 15% or above. And so we are making good steady progress towards that. Now if you take a look at what's driving the growth, it is all of the product lines as we look at this, it's the chips and it's also LCD and solar is starting to make some inroads although albeit it is very small, but we are seeing a lot of bid activity around on the solar end right now. In the market for solar, Dave, would be very similar to the market for LCDs as far as products are concerned.

Thank you very much.

We'll go and take our next question from Jeff Zekauskas with J.P. Morgan.

Hi, good morning.

Hi.

Good morning, Jeff.

You mentioned that there was $0.02 share refund, I think, a fine in one of your equity income ventures. So is that $4 million or $6 million, I don't know how they treat the tax effects of that in equity income?

It… for that one, it is $6 million.

It's $6 million.

It's $6 million.

Okay.

Something like $36 million.

So your equity income is really advancing very nicely or at least this quarter it is, I mean order of magnitude, I guess it's up about 18%, though in the first quarter it was down, but maybe it was penalized by fines?

No, and… the fine actually occurred in, I think, it was Q3 '06 for us and we disclosed that at that time. And the things which have helped us as far as the equity affiliate income, and it does bounce around as a lot of things because it is contained within ventures, is that our larger affiliates are Italian affiliate and our met… our Mexican affiliate [inaudible]. We also brought the… our plan for to serving PEMEX online in the first... towards the end of the first quarter of this year. And so we got the full effect in this quarter, so that was a nice gain for us. India is also in there. That's another one that's growing very nicely for us. So we have a lot of good countries covered from growth. It's something which I feel is not... as people don't have and don't understand as well, and don't appreciate as well. It's a good source of earnings and cash for us.

In the Electronics area, I mean you've obviously made wonderful progress in your margins year-over-year, but when you look at your Electronics business sequentially, your revenues are up about $50 million and operating profits are flat. Why is that?

When Nelson went through the Electronics area, one of the things he mentioned is that the equipment sales were up. Equipment sales do not carry the same amount of profit with them. And equipment sales are bumpy in this business. They are not smooth. So we had very low equipment sales in the first quarter. We had twice as much equipment sales in the second quarter. So that did produce some of the shifts there. I think the other thing, which happens, Jeff, is that we have seen a pattern as far as on the Electronics business of seeing that the second quarter is slow and that gets down to… a lot of Electronics goes into the consumer. And so there are a lot of things which go around Christmas, so you see as your… the pick-up here is in the late spring as they start manufacturing and say, you see pickup back in our Q3, a strong Q4, a strong Q1 and then a little bit of a slowdown on a sequential basis in our Q2. That is something, which we have observed for the past few years. We wouldn't probably expect that to change, but the business still has very good strong growth fundamentals around it and continues to grow strongly. A good indicator for us is we followed very closely from the industry standpoint are the foundry operating rates, TSMC, UMC.

Yes, lastly you are exploring strategic options for your Healthcare business. Why are you doing that and is the idea to divest it on favorable terms or to grow it through joint venture? What's your bias?

Well, as far as Healthcare business and what we're talking about is not the business in Europe. The business in Europe is operating extremely well to U.S. The U.S., as we have talked to people before, it is not the same as the business in Europe, a different market for Healthcare. Healthcare is delivering in a different way and prices are set in a different way in the U.S. The first quarter we are actually a little bit behind plan although we had made some progress and are more encouraged by that, but we are even falling further behind in this quarter though our plan was based up on making volume gains and taking and doing simplification efforts on our products and saving some money. We are on track on the saving money case. We are not on track as far as the volume is concerned. And so our concern around this business goes to the volume and so we decided that it has been a drag on this company as far as earnings are concerned and we are not happy with that. And so we're going to look at other alternatives, which we have. So it includes everything, which you would think of, Jeff, of a company trying to take a good, hard, long look at your business and doing the right thing for the investors.

Okay. Thank you very much.

We'll go ahead and take our next question from Sergey Vasnetsov with Lehman Brothers.

Good morning.

Hi, Sergey.

Hi, Sergey.

Good morning. I want to ask you a couple of question from corporate lines. Your interest came down this quarter, hence the tax rate also quite a bit lower than what we expected. Is it in your run rate or it's just one-time blip on the downside?

As far as the tax rate is concerned, the answer to that is yes, and those things are going to move, and the tax rate is going to go up and down. Our tax rate guidance for the year is probably still good, which we had probably closer to the low end of the 27 to 28 for us as we look into the future. But it does depend upon planning actions, which we take. And so we booked them at a time, in which those actions are certain and we view we're going to be able to take them. So it does produce... it's not going to be steady at all times, it's my message. As far as the interest expense is concerned, we continue to pay a lot of attention to managing cash properly. But as you can see we are also paying a lot of attention to making sure we go out and buy back shares. Our capital spending, it does produce... we do take and capitalize a portion of our interest as well. But if you look at that you can model those things in your model… pretty good.

Okay. And so, as far as the share buyback, should we can expect it to continue at the run rate it had recently at around $250 million a year... a quarter?

Yes… actually, if you look at the… at what we did, the share buyback, of course, this year, for us in this quarter was higher than that. First quarter was like $189 million; this quarter it was $355 million... $365 million. And so total we're at $554 to date. We did take advantage of the drop in the market when it occurred. We had a program out there, which enabled us to do that, 10b5-1 program. We have now completed the $1.5 billion of share buyback over the... from the mid '06 buyback, we're about $100 million into our… the $1 billion, which we announced in September. So that kind of gives you the update on the stats there. The other thing is, as far as the share buyback going forward, it depends upon the capital and the cash, which we generate. I would expect that over the next two quarters that we would be back in the market buying shares, yes.

Okay. Thank you.

We'll go and take our next question from Don Carson with Merrill Lynch.

Thank you. Paul, question to follow-up on Electronics. What's your latest view on square inches of silicon process? And you talked about foundry operating rates, I know, and then as you get into... in the current quarter now with creating of three plants about to go commercial? Is that one of the reasons why you are more optimistic on the specialty materials front?

Yes. Certainly, Don, with on our expansion on [inaudible] it gives us more products to sell and helps us with our sales growth there. But as far as on the square inches, we're looking about 6% right now.

Okay. So no real change there, I think you… target that for sometime?

It's down a little, I think we said $7 million, but it's about the same.

Okay. And then on the Tonnage business, is your mix changing there, I know that you start up a few new [inaudible] plants in Europe and Asia, which I would think would improve margins of that business. So, has there been any change in sort of the mix between atmospheric and hydrogen, which will have a margin impact?

There have not been any large changes in the mix when you look at, it is a large business, about two thirds of our sales, 70% of our sales or so are hydrogen still.

Okay. And then just in terms of the quarter, I know that a lot of refineries were running at reduced operating rates due to lower crack spreads, did that have a material impact on your business especially when you combined with the higher maintenance expense or do you just take that opportunity to take more maintenance and get that behind you?

And we actually took and we took the opportunity.

All right, okay. Thank you.

Yep.

Mike Harrison with First Analysis has our next question.

Hi, good morning.

Hi, Mike.

Hi, Mike.

I was curious as you look at the growth potential in the geography like the Middle East, look at refineries as well as petrochemical plants, my understanding is that there it's mostly design and engineering business rather than Tonnage or Merchant type business. Can you talk about how you're positioned in the Middle East relative to your competitors and maybe what your expectations are for capturing some of that design and engineering business?

Yes, Mike. Historically, it has been for us to sell... and to sell equipment into there and we have done that. We have had a number of plants, which we sold both on the LNG side and the air separation side. However, in the first quarter, we did announce two plants, which went on a sale of gas onsite basis. So we're doing a conversion of that, one was in Oman, the other was in the UAE. So we have had success there in doing some of the conversions, but that's a challenge in the business going forward here, if something which were... in which we were spending a lot of people's time on trying to make that happen because we view that there is a value proposition to be offered to the customer here and a lot of growth for us for the things which we do best.

Okay. And then with regard to the helium joint venture with Matheson Tri-Gas, given that current tightness that you're seeing in the helium market, curious how that new plant is progressing and whether you have any plans to accelerate possibly when that plant is coming on stream.

And the plant is progressing well in the schedule, which we put it on what was about as aggressive as one could get on that one originally.

Okay. And then also I was hoping maybe you can give us an update on the Equipment and Energy segment, maybe what you really expect earnings to come up by the end of the year.

Well, if you look at that, the Equipment and Energy segment, we actually said about $0.15 to $0.20 a share down year-on-year was going to be the impact. I think that is still a good forecast for us. We are expecting orders to come in, in this year still. We’ve gotten some, on the air separation side, as Nelson talked about, we have some air separation orders which have come in and so we'll be announcing them shortly and we'll also be starting to execute them and put them in our backlog and starting to book sales on them. So that's good news. And then we also would expect some LNG orders in the last half of this year, probably towards the... probably more in the fourth quarter than in the third though.

All right. And then last question I had on the Electronics segment, you reported 11% growth in January and then your next sales update had 8% growth and now for the full quarter you came in at 6%. Just wondering if you could explain maybe why the growth there appears to be slowing during the quarter. Is that just a function of the additional equipment sales or how should I think about that?

Yes, and one thing... the equipment is lumpy as we talked about, but the other thing which people have to remember is we have the SKU reductions in Electronics, and so, and those are occurring here. However, as you can see they’re actually improving margins in that business year-on-year also. So and the sales... and the growth rate is held down but the growth and profit is a lot more and therefore the margins continue to get a lot better in that businesses.

All right, thanks very much.

You're welcome.

Our next question will come from Laurence Alexander with Jefferies. Laurence Alexander - Jefferies & Co.: Good morning.

Hi, Laurence. Laurence Alexander - Jefferies & Co.: I guess just a couple of questions, first on specialty gas pricing and I think it pertains mostly to Electronics but also to the Merchant business. Can you discuss pricing trends in particular liquid gases where you are seeing more scarcity, you’re not just argon but also xenon, neon, and so on?

Yes, Laurence this is Nelson. We are clearly getting price in the products that are tight xylene, xenon, argon, helium and we are seeing very good price moment in those products. In general, pricing pressure is probably, it's still there, it's probably less than it was a year ago. We are managing our supplies of NF3 reasonably well, bringing the capacity on very carefully, so I think from a trend standpoint, we are happy with where price is overall. Laurence Alexander - Jefferies & Co.: And so, if you were trying to aggregate that buckets including the Gases and the Merchant side, if there are any as well as in the Electronics, how larger buckets would that be as a percentage of sales?

Help me on the question again, Laurence. Laurence Alexander - Jefferies & Co.: I guess, I’m trying to think, if you have sort of a more favorable supply demand dynamic on the more niche specialty gases, so that—

Okay. Laurence Alexander - Jefferies & Co.: Helium, xenon, neon, xylene, put them all as a bucket, how large is that?

I would say that that roughly is probably 15% to 20%. Laurence Alexander - Jefferies & Co.: Okay, perfect. I guess, second question is in Performance Materials, can you help us to quantify the percentage of the Performance Materials business that goes into commercial construction?

On the commercial construction side in the U.S., it's about a third of the segment is Performance Materials and about a third of that is U.S. and roughly about a third. So it's little over 10% of that segment in total. Laurence Alexander - Jefferies & Co.: Okay. Perfect. And I guess lastly with the Equipment business, just to follow-up on the question about the sale of equipment in the Middle East, are you seeing certain improvements in your margins on the sale of ASUs?

Yes. Laurence Alexander - Jefferies & Co.: As you move towards larger projects and can you quantify that over time?

And we're seeing that and that has been, I think, as we have seen, demand pick-up for this thing... supply and demand is going to help, as the dynamics of that get better, our mark-ups are getting a lot better in that business also for us. It is not to the stage of the LNG mark-ups but then we don't have the same amount on the value added component. Laurence Alexander - Jefferies & Co.: So, even if LNG were not to sort of recover, I mean you would still see over time a margin improvement in the segment?

Yes, we would. Laurence Alexander - Jefferies & Co.: Okay. Thank you.

Our next question will come from Mike Judd with Greenwich.

Yes, good morning. Thanks for your comments about the equity affiliate income about how it can be kind of lumpy. I was wondering, if you are looking at the June quarter, do you think it will be up or down from the March quarter, and again I think you talked a little bit about some of the European equity affiliate income. Does that imply that maybe in the September quarter it would be lower than June or just anything you can help us because it is lumpy. I mean maybe the other way of doing it is just to take an average of the December and March quarters but any help would be appreciated. Thank you.

Yes, I think, I think as we look forward on that we think that the... and that will probably close to flat on the equity affiliate income going from the second to the third quarter.

And then it should be probably seasonally weaker in the September quarter.

It could be a little weaker. And because of the slowdown in the summer in Europe which has big... Italy is the big portion of that.

Thanks a lot for the time.

Yes.

Next we'll hear from Peter Butler with Glen Hill.

Good morning.

Good morning.

Good morning, Peter.

Hi. There is currently a pretty large gap in the value of oil versus gas, but it looks like that could close pretty quickly and so I am wondering how many potential LNG projects are you talking about and what's been the impact on these negotiations on your new technology?

There are currently more than 12 projects, which we are currently in stages of development on, as far as LNG is concerned. And that's an improvement from the prior year. If you look at the journals, there was actually an article on gas last week, I believe... I think it was Friday, which painted a very good picture for LNG in the future and when you look at that. So there is a lot of gas around the world and our… and as far as the Air Product... the Apex Technology, it actually gives us an advantage, it goes into the large field though. I mean, so you got to have the right field for it. But there are a lot of fields out there, which... and which qualify for us. So longer-term we believe LNG is going to be a very good business for us.

On the Healthcare, not to beat the dead horse, but I would bet that Mr. McGlade would knew that this thing was a goner before he even took over as CEO, and I'm wondering how long does it take to study the alternatives and if you said goodbye, what's the immediate impact on your earnings and your ROC?

Well, as far as this business is concerned, the alternatives are a lot here. We've got to study them, we've got to do the right thing for the investor. And that's why we are going to take a quarter to take a look at that. We had a plan and we made some progress against that plan in the first quarter and the progress has slowed in the second quarter and so, and we are not going to wait around. So I think... and John has made the decision to move forward and to look at all the things, which we can do to do that. The business... it loses money at the operating profit line for us now. And so that... and so it is a drag on earnings and it would improve if we were [inaudible], it does improve our return on capital, it does improve our margins, it will improve our earnings.

Is there any lesson to be learned in turn and lose your Lehigh engineers, trying to turn around the Healthcare business?

In any sort of situation, you can always learn, Peter.

Okay. Thanks for the help, guys.

All right.

Okay.

Our next question will come from Kevin McCarthy with Banc of America Securities.

Yes, good morning.

Hi, Kevin.

Paul, in the past you've expressed some interest in consolidating some of the, I guess, nearly $2 billion in unconsolidated sales that you have in your various joint ventures around the world on a 100% basis anyway. Now that you’re reviewing Healthcare, if you look out a year or two and consider portfolio management on the buy side, how would you characterize the opportunities these days to go ahead and consummate some of those fold-in type deals based on your discussions with folks in Mexico, Italy, and elsewhere?

That is something, which is out there for us. However it is not something, which we decide. And our partner gets to make that call on that timing. And so as it happened in Taiwan and Korea, the partner will... that they will give us some earning [ph] but not a lot. And that's fine with us because we maintain the capital to do these things and the balance sheet to do these things. But for right now, we continue to believe our partners add value. They are good for the business and we're happy to be in the position we are in.

Okay. And then question on the Merchant business, I understand you are implementing a new fuel surcharge rather for May 1st. Am I correct in understanding that that's a nominal adder, if you will, and if that's the case have you ever looked at moving to an index based on diesel maybe so that it’s close to in a rolling fashion?

Yes, that's actually what we do have, Kevin. Essentially what we do is look at the three quarter rolling average of diesel and set the surcharge accordingly. Now, what we are doing now is essentially adding a new line on that because it has rolled up to a new higher level, roughly $0.70, $0.75 higher in the quarter. But that's basically what we continue to do. And then our customers can look at this if diesel does go down they can see what threshold or surcharge would come off.

And just to clarify, what was that new line fee and has this had an impact on your margins for the last quarter or so?

It really hasn't... this… there is… what we're trying to do in all these activities is anticipate where we think diesel is going. So we had in place in January pretty much did cover us in North America for the quarter and this is basically a speculating where we see diesel going. The numbers, we look at are different than say what the price is at the pump. We are purchasing at a different price.

Kevin, the impact on here is to actually keep ourselves hold on these things and that's how we go and talk to our customers about it.

Understood and then finally on the new air separation units, are Reidsville and Ashland still on track for mid calendar '08 and late '08 respectively?

Yes. They are.

Okay. Thank you guys.

You're welcome.

We'll take our next question from Chris Shaw with UBS.

Hey, good morning, guys. You covered a lot already, but I still have a couple of quick ones.

Good morning, Chris.

Sure, Chris.

Just curious, in Tonnage, would margins have been flat or up if without the sort of increase in natural gas cost?

In Tonnage, no, as far as for the year is concerned, they would have been down a little bit because of the expenses on bidding.

All right, okay. And then you mentioned what the impact on volumes in Merchant was in North America from the lack of availability of helium and argon. If those were being available, what volumes would look like?

Nelson.

Yes, we would have seen growth there. It's… those are in the scheme of things just portions, the LOX/LIN drives the business there in terms of volumes, but it would have been worth a couple of percent probably.

Okay. And then I think in the comments around Electronics, I think there was a mention that without equipment it would have been up about 10% this quarter. Then, you also said it's going to be... you might... you thought it might accelerate into a 3Q because of the foundry activity. Would you be… do you expect growth faster than 10% than in third quarter?

Certainly, what we expect to see is growth from a sequential basis. On year-on-year, we also saw a pickup in last year in that thing. So as far as the growth from prior year, the 10% growth is probably a good number for us.

Okay, that’s all I have. Thanks, guys.

You're welcome.

We'll hear next from Mark Gulley with Soleil. Mark Gulley - Soleil - Gulley & Associates: Good morning, guys. I have got two questions.

Hi, Mark.

Hi, Mark. Mark Gulley - Soleil - Gulley & Associates: Trying to measure the degree of competitive intensity in Tonnage bidding. One of your global competitors has upped the ante in terms of going after Tonnage projects. But given the number of projects that are out there, are you noticing any sharper degree of competition for those projects amongst the three players that go after [inaudible] Gas basis?

No. It has always been intense, Mark. Mark Gulley - Soleil - Gulley & Associates: Okay. And then secondly with respect to the plants that you are going to be announcing here pretty soon, can you give us any idea of the split, hydrogen versus atmospheric [inaudible] or maybe U.S. versus international, just help us, compare us for what’s coming at this?

The buckle are hydrogen projects and the bulk are in the U.S. or Canada. Mark Gulley - Soleil - Gulley & Associates: And finally, on the Merchant side, I know we've talked about this already with equipment a lot of things going on, but can you attribute, at least against my model, you are kind of down. Can you attribute any of this weakness to the economy or do you think really it's not the economy at all given your markets?

We are still tracking in line with that IP number, industrial production number around 2%. The base business has grown year-on-year, as I have said earlier, driven by LOX/LIN. A couple of things pulled us down in the quarter, the availability of helium and argon. Also though in terms of a comparison, we’ve had very strong hydrogen spot sales last year in the first quarter. We did a six-week long job to support an SMR that was down and that did help our volumes. This year that wasn't there this quarter... I should say help last year and it wasn't there this quarter. But in general, one of the things we keep watching is what's going on in the base business. The base business is expanding not at the same rate it was last year, but it is expanding. And the signings continue to be strong. So we are happy with where we are right now. Mark Gulley - Soleil - Gulley & Associates: Okay, thank you.

Yep.

We will take our next question from Michael Sison with Keybanc.

Hey, guys.

Hi, Mike.

In Electronics with the product rationalization effort sort of closing, I think as I recall by year-end to get to the 15%, what's left just to grow into the business for the margin?

No, we continue to take actions on price and we continue to take actions on cost reduction and saving costs. So there are a lot of things. We would expect to see the impact of the new materials, which we've talked about. Also helping to grow margins in that business because they are going to come in and they're going to add us a slug of growth in on the business and they are going to come at a good margin too.

Okay. And back to Merchant real quick, you commented that pretty good order backlog, I suppose, and, so should we see the volumes in North America and Europe sort of accelerate to a degree into the second half of the year?

Yes, that's our expectation.

And to what degree, they get back to that high single digits, mid single digits?

Mid single is probably fair.

Okay. Then, in terms of pricing in North America, it’s been pretty strong, are you getting any incremental margin on that or is that just strictly to offset the higher cost?

The answer is that on the margins and they continue to improve. The pricing to a large extent is geared on recovering cost. But the other thing, which we continue to work on, is driving our cost out of the business, our fixed cost or SG&A cost and so, and those help improve the margin.

Okay. And last question, in Solar, I know it's a small business, what's the market growing and is this more of a Tonnage or a Merchant opportunity?

Want to take that, Nelson?

Yes, it's, what we like about the growth in Solar is with the newer technology, the thin-film technology, there is a much higher industrial gases intensity versus polycrystal and silicon. And what that means is really a mix of products, it's going to be very good for industrial gases but also specialty gases, xylene, NF3, and others that we actually do have a good position on products such as phosphorus oxychloride, for example, that we've been making for 15 years and it requires a lot of... it presents a lot of handling challenges. We've been supplying it to the industry for a long time. That appears to be one of the chemistries that we've used in greater volume. So, it will... it's going to be very good for us across the board.

Right. Thank you.

Next from Oppenheimer, we'll hear from Edward Yang. Edward Yang - Oppenheimer & Co.: All my questions have been answered. Thank you.

Okay, Ed. Thanks.

Thanks, Ed.

[Operator Instructions] Next we'll hear from Bob Koort with Goldman Sachs.

Thanks. Good morning, guys.

Hi, Bob.

Quick question maybe it's more a theoretical one, but as we're seeing natural gas prices going north of $10 and I guess there is conversions to oil, you could even dream up a $15 gas number. Is this... so what's the net effect? I would think some of your customers are getting compromised by this, on the other hand there is probably some folks who could use gas that haven't yet. So how do you see that playing out, Paul?

The net impact of prices on the Energy side for us is positive, for us. And so the thing, as we've said industrial gases are used to help improve the efficiency of processes on the Energy side, they are also used to take and to substitute fuels in. And so as you go on the environmental side and you want to go to [inaudible] your fuel, industrial gas save a lot of things to help and use the alternate fuel. So on the higher energy price side, we actually see that as a positive force.

And are there any customers that become problematic from a credit standpoint just because of high gas, energy prices are not making any money or is that not an issue?

I don't think it's a... and it will be impossible to say none. But I actually think that the... as prices for on the energy side rise, people are able to get those pass-through the economy because people see that all over. And so it does, it is need to think for people to go out and claim the need… an increase in price on and so what we see is that our customers are holding up well in this time period.

Got it. Thanks very much.

Okay.

Thank you.

And at this time it appears we have no further questions. I’ll hand the conference back to the management for any closing comments.

Thanks, Jimmy. Please go to our web site to access a replay of this call beginning at 2 P.M. today. Thank you for joining us and have a nice day.

And that will conclude our conference. Again thank you all for your participation today. We do hope you enjoy the rest of your day.