Air Products and Chemicals, Inc. (APD) Q3 2010 Earnings Report, Transcript and Summary

Good morning, and welcome to Air Products and Chemicals Third Quarter Earnings Release Conference Call. [Operator Instructions] Also, this teleconference presentation and the comments on behalf of Air Products are subject to copyright by Air Products, and all rights are reserved. [Operator Instructions] Beginning today's call is Mr. Nelson Squires, Director of Investor Relations. Mr. Squires, you may begin.

Thank you, Lauren. Good morning, and welcome to Air Products Third Quarter Earnings Release Conference. This is Nelson Squires. Today, our CFO, Paul Huck, and I will review our fiscal Q3 results and outlook. 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 this call, beginning at 5 p.m. Eastern Time, are also available on the website. Please turn to Slides 2 and 3. 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 these slides and at the end of today's earnings release. Now I'll turn the call over to Paul.

Thanks, Nelson. Please turn to Slide 4. Once again, our quarterly results showed the benefits of our restructuring actions and our focus on continuous improvement as we continue to drive margins and returns higher. We are delivering operating leverage to the bottom line. Sales were 14% higher versus prior year. Underlying sales increased 12% year-on-year due to higher volumes in our Electronics and Performance Materials segment and our Tonnage and Merchant segments. The Merchant segment growth continued to be driven by strength in Asia. We are also seeing improvement in both our U.S. and European Liquid Bulk businesses. Sequentially, sales were flat. Underlying sales were up 4% on volume growth across the same three business segments. The 4% underlying volume growth was offset by currency and energy pass-through impacts. Operating income of $374 million increased 22% from prior year due to higher volumes. Operating income was up 3% sequentially on operating leverage across all segments. Our operating margin improved to 16.6%, up 100 basis points versus prior year and 40 basis points versus prior quarter, and we remain on track to deliver our 17% goal in fiscal 2011. Looking forward, this margin improvement is sustainable, and margins should continue to expand as volumes recover. We still have operating leverage available, and we remain committed to driving sustainable cost reduction. For the quarter, net income increased 23%, and diluted earnings per share increased by 22%, each versus prior year. Return on capital employed improved to 12%. On an instantaneous or a run-rate basis, we have improved return on capital employed to 12.6%. Turning to Slide 5 for a review of the factors that affected the quarter's performance in terms of earnings per share, our adjusted continuing operation's earnings per share increased by $0.23. Higher volumes in Electronics and Performance Materials and Tonnage and Merchant helped to increase earnings per share by $0.36 year-on-year. Pricing, energy and raw materials together were unfavorable, subtracting $0.09. Costs were $0.01 unfavorable as higher year-over-year pension costs and the final Electronics restructuring actions offset our productivity gains. The unfavorable impact to operating income from currency translation and foreign exchange was $0.02. Higher equity affiliate income due to stronger volumes at a number of our joint ventures was offset by higher noncontrolling interest. Interest expense was $0.01 higher due to lower capitalized interest. Our effective tax rate for the quarter of 25% was within our full year guidance range and contributed $0.02, and higher shares outstanding subtracted about $0.02. In summary, we generated excellent financial results again this quarter. We are delivering on the improvements we told you about from our new investments and our cost reduction efforts. Now I'll turn the call over to Nelson to review our business segment results. Nelson?

Thanks, Paul. Please turn to Slide 6, Merchant Gases. Merchant Gases posted sales of $915 million, up 4% versus prior year. Underlying sales improved by 6%, with volumes up 7% and pricing down 1%. Currency reduced sales by 2%. Underlying sales were up versus prior year due to continued strong performance in Asia and improved volumes in North America and Europe. Sequential sales benefited from an improving economy and seasonally higher volumes, offset by a sharp decline in the euro. Merchant Gases' operating income of $176 million was up 5% versus prior year and down 1% sequentially. Segment operating margin of 19.3% was up 20 basis points versus prior year and flat sequentially. Income and margins were higher than prior year with higher volumes particularly in Asia, partially offset by the impact of currency and higher power costs. New business signings through the first three quarters of fiscal 2010 are on track to meet our full year targets in all regions, which represent significant improvement versus prior year. Let me now provide a few additional comments by region. Please turn to Slide 7. In North America, sales improved 4% versus prior year. Volumes, led again by stronger liquid argon and liquid hydrogen sales, were up 6% versus prior year. Pricing continued to be impacted by lower liquid hydrogen pricing as a result of pass-through of lower natural gas prices. LOX/LIN loadings increased slightly and remained in the mid-70s. In Europe, sales decreased 2% versus prior year. Underlying sales improved 3%, with volumes increasing by 4% and pricing down 1%. Currency decreased sales by 5%. Our Liquid Bulk volumes improved sequentially, which was expected. As a result of this increased volume, our LOX/LIN loading improved to the low 80s. In Asia, Merchant sales were up 27% versus last year. Underlying sales increased 23%, with volumes up 22% and pricing up 1%. Currency increased sales by 4%. Volumes continued to improve, driven by steel, electronics and bulk hydrogen with loadings reaching the high 80s. This was the highest revenue quarter ever in Asia. We delivered real price improvement, particularly in China, responding to higher power costs by raising prices on oxygen and nitrogen. Sequentially, liquid argon pricing also improved. Please turn to Slide 8, Tonnage Gases. Sales of $725 million increased 28% compared to last year. Volumes were up 19%, and energy and raw material pass-through increased sales by 9%. The higher volumes reflect the continuing improvement in steel and chemical end markets as well as new plant on-streams. Sequentially, sales were down 4%, with volumes up 4% and energy, raw materials and currency reducing sales by 8%. Volumes were helped by new plant on-streams and the ongoing recovery. Operating income of $120 million was up 37% versus prior year and 12% sequentially primarily due to higher volumes and new plant start-ups. Operating margin of 16.5% increase versus prior year due to higher volumes. Operating margins improved sequentially due to new on-streams and lower maintenance spending. Refinery hydrogen volumes, excluding new plant on-streams, were up slightly versus prior year. As we told you earlier in the quarter, we announced an agreement to build a steam methane reformer to produce hydrogen for PetroChina in Sichuan province. This represents the first major on-site for hydrogen at a state-owned refinery. Also, as we announced yesterday, Air Products has been selected by Pucheng Clean Energy Co. in Shaanxi province to build, own and operate three air separation plants producing over 8,200 tons per day of oxygen and 3,100 tons per day of nitrogen. We will also produce liquid products for the merchant market in the region. As you can see from these major awards, new project activity is proceeding well, and we expect additional awards this year. Please turn to Slide 9, Electronics and Performance Materials. Segment sales of $497 million were up 21% compared to last year. Volumes increased 21%. Pricing reduced sales by 1%, and currency added 1%. Each division continued to see sequential volume gains, and we are now back to pre-recession levels in this business segment. Electronic sales were up 18% compared to last year and 11% sequentially. Electronic Specialty Materials sales increased 30% versus prior year and 9% sequentially. Tonnage sales were 14% higher versus prior year. Our Equipment business is up 36% versus prior year, reflecting the expected pickup in orders in support of improving new fab CapEx. Performance Materials sales increased 26% versus last year and 10% sequentially, reflecting stronger volumes across all regions. Segment operating income of $62 million was up 60% versus prior year, which resulted in continued significant improvement in margins. Sequential margins were flat, which was better-than-expected. As we told you previously, Electronics incurred significant restructuring costs in the quarter as we completed our remaining business repositioning activities. We were pleased to meet our goal of completing the restructuring in Q3. While this did impact margins in the quarter, it was offset by higher-than-expected volumes. We expect to get the full margin benefit of the restructuring starting in Q4. We now expect millions of square inches of silicon to grow by more than 30% in our fiscal year. New business activity is heating up again in Electronics. Just yesterday, we announced two major orders from Samsung in Austin, Texas in support of their 300-millimeter fab expansion. We will double the existing on-site production of high-purity oxygen and nitrogen as well as provide a significant amount of specialty gas and chemical delivery equipment for the expansion. Please turn to Slide 10, Equipment and Energy. Sales of $116 million were down slightly and reflect slower air separation unit sales. Operating income of $21 million increased versus prior year due to higher LNG activity and lower project costs. Our backlog versus prior year is higher due to the previously announced LNG orders. Now I'll turn the call back over to Paul.

Thanks, Nelson. Now if you'll please turn to Slide 11. I'd like to share our thoughts on our outlook. Our guidance for quarter four is for earnings per share of $1.27 to $1.33 based upon the following factors. On the positive side, we expect to see increased earnings sequentially from the following areas. We expect the manufacturing economy globally to continue its gradual recovery. This should result in higher sequential volumes in Merchant Gases and the Electronics and Performance Materials segments. In Electronics and Performance Materials, we expect demand to continue to remain strong. As Nelson mentioned, we finished our restructuring efforts in quarter three, which will result in higher margins next quarter. We are on track to meet our 2011 goal of 15% margin. Looking at fiscal 2010, we are now forecasting earnings per share of $4.94 to $5, up 22% to 23% versus prior year. We have raised the bottom end of our guidance range from $4.90 and maintain the top end despite a less favorable currency outlook relative to where we were a quarter ago. At current rates, compared to last quarter's guidance, currency is about a $0.05 headwind for us over the second half of the fiscal year. For the year, we are expecting our tax rate to be in the lower part of our previously announced range of 25% to 26%. Overall, our 2010 economic assumptions haven't changed much. Our fiscal 2010 capital spending guidance remains unchanged, and as we've been telling you, we still anticipate that our CapEx will grow 15% to 20% per year over the next few years. As Nelson commented on earlier, our recent PCEC [Pucheng Clean Energy Co.] and Samsung project announcements are further evidence of the strength of our capital backlog. Now let me give everyone a brief update on our Airgas offer. Please turn to Slide #12. As you know, we raised our offer for Airgas on July 8 by $3.50 to $63.50. We remain convinced of the strong strategic rationale and sound industrial logic that underpin this transaction. As we have communicated before, this combination will create one of the world's leading, integrated, industrial gas companies. We remain confident in our ability to produce the substantial cost savings we have identified, primarily relating to reductions in corporate overhead and public company costs, supply chain efficiencies and better utilization of infrastructure. Coupled with the enhanced growth opportunities we see, this deal creates significant value for our shareholders. We believe that our offer represents excellent value to the Airgas shareholders, well above the $43.53 price Airgas shares closed at on February 4, the day before our initial offer. Despite the highly attractive nature of our all-cash offer and our repeated attempts to engage the Airgas board in discussions, they have continually refused to engage with us. As we have said previously, we have analyzed the regulatory issues thoroughly, and we are having productive discussions with the Federal Trade Commission. We are negotiating a Consent Decree, which we expect to sign in the next few weeks. That would be subject to approval by the Commission. The fundamentals of the consent are in line with our expectations. We are therefore focusing on the Airgas shareholders and asking them to send a strong message to the Airgas board to bring this process to a conclusion. If you are an Airgas shareholder, here is what we are asking you to do: Tender your shares by the August 13 deadline. Vote for our three highly-qualified, independent directors who we believe will better represent all shareholders' interests. Vote for our three bylaw amendments, which will ensure a fair and expedient process is conducted, and lastly, let the current Airgas directors know that you support Air Products on our offer. Now is the time for you to act. We are as confident as ever in being able to obtain regulatory approval and remain as committed as ever to this transaction. Our regulatory strategy and shareholder actions are designed to ensure that Airgas shareholders have the opportunity to send a clear and unambiguous message to their board at the 2010 Annual Meeting, which Airgas has disclosed in SEC filings will be held no later than September 17. Now let me wrap up. We continue to make solid progress towards our goals of improving growth, margins and return on capital, and we remain focused on these goals. We believe that our goal to become a low-cost supplier versus our competitors enables us to deliver greater growth and higher returns, resulting in significant increases in shareholder value. You are seeing evidence of this in the results we delivered today and the projects wins we announced this week. We continue to pursue our many growth opportunities around the world, and we believe we are well-positioned to win. Also, we have significant operating leverage in our businesses. This will increase earnings as the global economy recovers. Finally, we have also made significant progress in our offer to acquire Airgas. To be clear, the whole team at Air Products is excited and energized by the many opportunities we have, which we believe will deliver even greater shareholder value in the future. Thank you, and now I'll turn the call over to Lauren to take your questions.

[Operator Instructions] Our first question comes from John McNulty with Credit Suisse. John McNulty - Crédit Suisse AG: In the past, you've given guidance with regard to your project backlog and what it would mean for earnings in the upcoming year. Now that you've gotten the number of new contracts updated, can you give us an update as to what this may mean for next year?

Sure, John, and one of the things which you should realize is that the projects which we're working on, those are going to come out in 2012, 2013. However, we are in the planning stages as we look at this, and so as we look at the full year impact of this year's projects and the projects in which we'll be bringing on for 2011, it's probably around $0.30 a share or so in growth for us, 5% to 6% growth of EPS when you look at this. It's what it'll add to us. John McNulty - Crédit Suisse AG: And then with regard to the Electronics restructuring, can you remind us of what the costs of that restructuring was this quarter and how that should -- I assume that it sounds like almost none of that remains in the fiscal fourth quarter.

Yes, and it cost us a couple of cents. John, the important thing when you translate that out and you just put that on to the segment margins, it takes the segment margins up 100 points or so, 100 basis points.

Our next question comes from Kevin McCarthy with Bank with America Merrill Lynch.

I was wondering if you could update us on what you're seeing with regard to Merchant pricing in Asia. It looked like Asia was plus 1% versus slight declines in Europe and North America whereas we typically hear of a greater competitive intensity in Asia. Is that starting to change?

Nelson, why don't you take that.

Yes, Kevin. This is Nelson. We've been working very hard at that, and what we've been trying to do is implement some of the best practices that we're using around the world of when we see cost increases such as power, et cetera, that we get right out there and move those into the customer base, and so some of the subsidies have relaxed in China and so we've been very diligent, and we are seeing, as I said in the prepared remarks, real price improvement in China. Our overall picture in China looks pretty positive. The Electronics pricing has stabilized, which is a very positive development, and I realize you asked a question about Merchant, but pricing in the region is pretty decent these days and on the right trend.

And then with regard to Electronics, you had a double-digit sequential volume increase. It sounds like you're expecting ongoing increases to wrap up the year. Can you maybe give us a little bit more color as to what you're seeing on Equipment versus consumables and where you're seeing the strength?

Certainly, the strength that we've seen in the last couple of quarters and what we expect in the fourth quarter is going to be largely driven by the consumer products. Certainly, the iPhone, the iPad, et cetera where we're seeing extreme demand for memory and that's doing -- our memory customers are doing quite well. Certainly, some of our flagship customers like Intel have also reported very strong results and strong guidance, and we are the key supplier to these top-tier customers such as Intel, Samsung, TSMC, and so we're going to certainly see the benefit of that. I should point out also that our top-tier customers' utilization probably crossed 90% in the quarter, which is another good sign, and we actually expect rates at our customers to pretty much hold up to maybe slightly increase in the fourth quarter.

Yes, Kevin. A good point on this thing, on Electronics, is you have to remember is that going from our quarter two to quarter three, it goes up on a seasonal basis as production normally picks up in that time because Asia has the New Year impact in quarter two. Most of this business exists in Asia today.

Our next question comes from Paul Mann with Morgan Stanley.

Just looking at your Merchant division, I mean in the first sort of three quarters this year, you're going to report an operating margin sort of 19.5%, and I think you're targeting 20% in that division. You said that plenty of operating leverage to go. Should we view that 20% margin target as an intermediate target, and what's the longer-term margin target at that division, and what sort of operating leverage do you get? I mean what sort of incremental margins do you get in that division?

Well, the first goal, Paul, is to get it above 20% and maintain it above 20%, and we will look to keep raising those goals. So we had a long-term margin improvement goal of getting to -- and 70% as a company. In that, for two key divisions, we set goals of 20% in Merchant and 15% on the Electronics and Performance Materials area. As you can see, we are well on track to achieving those goals for us, and so if you get it to 20%, your next goal is to get it to 21% and sustain it there and keep walking up, but we felt we had a large improvement program and which we are doing there. We are going to always be looking as far as the businesses to increase margins, to reduce cost, deliver productivity and value to the bottom line.

And what was the incremental margin should we assume on return of revenues as they flow back?

Yes, in that business, I think you can pretty much assume an incremental margin of about 35% or so.

And then just thinking about your CapEx for 2011, I'm assuming that given the decent contract wins you've had, CapEx is going to go up in 2011. Is that a fair assumption?

Yes, it is. As I said in the call, we expect our capital expenditures over the next few years to grow 15% to 20% per year.

And our next question comes from P.J. Juvekar with Citi.

Recently, you won several projects in India, in clean coal in China. In places like India, your competitor was traditionally strong. So to break into that market, what kind of IRR are you expecting on these new projects?

We are expecting the same sort of return which we get around the world. This is obviously based upon the risk that we see. India is a riskier country than the United States, and so our returns are higher in India, but we will not compromise the returns on our projects to go out and win business.

And then secondly in Electronics, your volumes were up 18%. What are your operating rates in key chemicals for you like NF3?

We are rapidly filling up capacity there. We're probably around 90% in key products at this point in time.

On the NF3, P.J., one of the things that would cheer us is that we still have the -- on the Ulsan plant to bring all those lines up, so we do have ability to expand, to bring that up, and then we will wind that plant up, and I'm sure we will be able to produce more over time too.

And just to clarify, Ulsan is not running right now?

Yes, it is, but we don't have -- and all of the lines are not up. We still have capability to, yes, bring more, add more lines up.

And finally, you're not seeing any inventory build in the Electronics chain either by your customers or their customers?

P.J., this is Nelson. We are not seeing that. It's something that's obviously is very important to us. And as we've said to all of you many times before, typically, when you read about it, we already know about it because we're so far back in the supply chain. But as we have looked at our key customer demand and have mapped it out, certainly for the next three to six months, we have a pretty good feel on things, and we do not see any signs of an inventory overhang at this point.

And our next question comes from Mike Harrison with First Analysis.

You guys noted a little bit of weakness in the European Packaged Gases business. I was wondering, in what countries is that weakness most pronounced? And do you view that weakness as pretty typical lagging of Packaged Gases during a recovery? Or is it cause for greater concern?

The answer on the lag question is that it fits with the economy and where they sit. The investment activity in Europe is obviously very slow at this point in time, so there is a drag on Packaged Gases in there. So there is not a cause for concern here. We are seeing a normal recovery type of activities at this point in time. The countries in which we've been hurt the most have been the ones in the South: Spain, Portugal, Italy as examples. Those are the ones which have the largest drags on them right now because their economies have been hurt the most.

And what sort of metrics do you look at as leading indicators in that European Packaged Gases business? In which direction are they pointing right now?

Yes. If you look at it, the one thing we should look at is the manufacturing activity, is something, which is starting to point up, so that's good news. The other measure is investment activity. That's still pointing downward, so nonresidential construction is a good one. For the others, there's some other one as far as investment is concerned. But that is trending down and so that is somewhat of a drag.

And then question on the liquid hydrogen front. You mentioned that pricing was lower there due to natural gas pass-throughs, but then we look at the Tonnage business and natural gas was a positive year-over-year. So is there a lag on the liquid side? And should we see pricing pressure in liquid hydrogen subside in the next quarter?

Mike, this is Nelson. Yes, there is a lag. It's the way the contracts operate. We basically recalibrate that portion of the price, typically a quarterly basis and so that has lagged. And we would expect that to subside going forward as natural gas prices basically stabilize versus what we have seen over the year-on-year and fairly significant drops still.

Last question I had is on the guidance. You have a $0.06 range in the guidance. That's a little bit wider than the last couple of quarters. Are you guys seeing additional uncertainty right now? And can you maybe walk through some of the factors that could swing earnings toward the high end or the low end of your guidance range?

Yes, Mike. And the thing -- is reason why I have a wider range is on the currency for us. I mentioned that we had B. Currency kind of dragged us down about $0.02 against our guidance last quarter in here and it's a continuing drag, so it's about $0.05 for the last half of the year for us. So that volatility in currency is why I put a greater amount of movement up or down in that thing. I just -- normally, currency rates have not been fluctuating as much and that's why I don't think there's any more volatility in the business. We have a pretty good look on the economy going forward for us, and we still feel that it's playing out as we expected, which is for just good steady, slow growth here in the U.S. It's starting to turn in Europe in the second half, which we're starting to see. And Asia it had a B coming up, but it's not going to grow as strong year-over-year, but it's still going to be the best growth in the world. So we think our economic assumptions are still fine. They don't cause any more concerns for us going forward.

Do you have a specific euro rate that you're assuming in your FX outlook?

Yes, the rate in which I have in this whole outlook is about where the rate is today.

Our next question comes from Mike Sison with KeyBanc.

In terms of Electronics, it sounds like everything is running on full cylinders, sort of across-the-board. Any reason why we're not at that 15%? Anything else you need to do to get there in terms of operating margin?

Yes, Mike, it's a great question. And as Paul said during the call in one of the questions, we are certainly poised to be right there. Our margins would've been 100 basis points higher or so this quarter. We expect equal or better performance in the fourth quarter. It puts us very close, so there are still some loading that needs to occur. We have the capability and capacity to achieve that, but with what we expect to see in silicon growth for next year, which is going to be moderating. This year will be well over 30% in our fiscal year, it'll lower than that next year. We still expect enough volume growth to get us over the 15% margin.

And Mike, in the return which these guys actually have done through the year is actually above our plan, obviously. This has been a very good year in Electronics for us, and we're proud of what these people have achieved.

And then, when I think about your Merchant business in Europe, it had a very good quarter, and there's been a lot of concern, I guess, generally about Europe. Any changes in your outlook or anything to that degree in Europe generally speaking?

Mike, when we provided our outlook for the fiscal year back in October, we basically thought that Europe would be down for the first half of our fiscal year and then our second half, up sequentially from our first half. So the comps are still tough but we are seeing, as you can see in the numbers, the volume improvements, largely in line with some improved manufacturing numbers that we're seeing in Europe. Northern Europe is strongest but Eastern Europe, Poland, the Czech Republic have come back pretty nicely. Southern Europe is still a problem, but we're not seeing anything different than that as we look at that economy. We've always expected this to be a slow ride back and we're not seeing any systemic or micro changes that would take us away from that opinion at this point.

And last question Paul, when you think about fiscal '11, you're tracking above 16%, fairly, I wouldn't disagree, 17% seems pretty easy to get for next year. Thinking longer term, any thoughts on sort of the potential above that?

Well, certainly, Mike. And we have 17% as a goal there, we never would say, we want to stop there. We still think there is improvement for us, to improve margins and returns, deliver more value to shareholders, so we are kind of look at that as something which goes out. So if you take a look at our plans going out, we obviously have plans to increase both margins and returns in the future.

Our next question comes from David Begleiter with Deutsche Bank.

Paul, can you comment on Merchant pricing trends in the U.S.?

Nelson's close to that, so I'll let him take that.

Yes, David. We really, if you take away the impact of liquid hydrogen and look at pure price, and then look at LIN/LOX or nitrogen/oxygen, we are seeing positive pricing. So pricing has remained a pretty good story for us. We have not seen any leakage from that standpoint. It's a tough market to get price in, but the team is doing an excellent job of maintaining price and getting price where we are seeing cost increases in areas where power is being deregulated or just general power increases. We expect to be able to keep up with that going forward.

And Paul, just looking at the backlog again, what is the return profile of the entire backlog right now?

The return profile of the backlog is really unchanged. We are in the low- to mid-teens on a DCF [discounted cash flow] basis, when you look at that for fully costed for all corporate costs and everything else.

At lastly, just on the potential new projects coming on over the next few quarters, are they still pointed towards Asia and China, or are they more broadly speaking Electronics, U.S., et cetera?

And we're having success around the world. So we have projects, which are coming in here in the U.S. We have products in Europe, which we're winning projects in Asia. Now Middle East, I'll tell you this, is that Asia is going to be the area of the greatest investment for us. It's where most of the manufacturing expense is happening, but we are not ignoring the U.S., Europe. The Middle East remains an opportunity for us, which we continue to work on. We've had a few orders there, and we would expect to get some in the future.

Our next question comes from Mark Gulley with Soleil Securities.

First of all, with respect to that second project in China, I wasn't clear if that was sales equipment or sale of gas?

That is sale of gas. The Pucheng Clean Energy Corp. is a sale of gas. It's actually the largest sale of gas order we've ever taken in the company's history, so we're pretty excited about that.

Mark, the other thing on that project is it's also a great success story for us and our engineering team in what we've done, if you really get a good plan solution. As you know, in this business, having the right plan for the customer and the right plan solution is we think in the gasification area that we have the right plan solution here and for these plants in China, so we would expect orders to follow on in this area too.

Do you have piggyback liquefiers on both of those plants that you talked about for China?

Yes, as a matter of fact, we'll see those come on stream earlier than the full investment. There's a great opportunity there. We're the first mover in that region. We'll be the first major gas company in the region. So yes, we will be bringing Merchant capacity there.

And that's on the plan for PPCEC (sic) [PCEC], the PetroChina plant is a hydrogen plant market, and that's how you say it. But that also goes with -- and we also announced a previous order for that same site on the oxygen side, which we won earlier in this year, and we will also have a liquefier on that.

Sticking with Merchants, if I may, it's the largest business by earnings, but it has the slowest growth right now. So Nelson, when do you think you might get back to normal growth rates in LOX/LIN globally? And what might that level of growth be?

Well, certainly, we're well ahead of trend in Asia with regards to growth. We expect the North American numbers to improve a bit next year. We think we're in a slow steady improvement there. Europe, as Paul said earlier, we think the manufacturing trend will continue to improve. And so we think we'll begin to see a more normal profile over the next, let's say four to six quarters in terms of what our growth rates look like.

And Mark, to comment on it a little bit, I think the thing that you have to look at in the Merchant area is, that of the underlying growth rate from quarter-to-quarter was 3% up, so that's a good return and do some more growth. Europe has turned, and Europe's is not small for us in this. And so Europe has started to turn and the Liquid Bulk business, improving, Packaged Gas business is not yet improving. It's going to be a few quarters before that starts to improve and once we see that, I think, you'll see the growth rates start to pick up more.

Our next question comes from Chris Shaw with Monness, Crespi.

You might have given this number, but on the Tonnage side, you gave a 4% sequential growth in volume. I was wondering, could you split that out between what was new plants and what was actual new loadings, higher loadings?

Yes. If you look at that, it was about half and half.

And then in the Equipment and Energy, it's doing fairly well on the profit side, but is there going to be, at some point, when, I guess, the LNG shakers come on or orders start picking up, that the sales parts are going to be ramping up? Will there be an inflection points in the quarter that we should expect?

I would not see -- and the sales growth in that area is going to be large, quarter-to-quarter in the near term. The LNG margins are much better, and they're better than the air separation margins. So they've actually improved the margins as sales have declined a little bit this year for us, and the air separation mix has gotten less to the LNG mix for us.

And do you still think there's upsides in the margins from here?

Yes, there is. And we obviously had a good quarter, here, in this business, but the margins -- and they move a little bit around. I mean, it's the absolute profit in which we pay a lot of attention to in this business in the value delivered, because that's a real measure of value added and not sales.

And our next question comes from John Roberts with Buckingham Research.

I'm trying to actually find the U.S. recovery in your Merchant volumes. Your year-ago Merchant volumes in North America were down 19%, so you had a really easy comp there and you're up 6% this quarter. You're only up 5% last quarter, and the total global number was up 4% sequentially. I don't know what the North American sequential Merchant growth was, but it seasonally would pick up normally. So is there more than just a seasonal improvement? And any real sign of recovery in your Merchant Liquid business in North America?

And there is a sign of improvement as we've gone on. But as I said before, the economy is slow and steady. It is not going to be fast. We are starting to lap the improvement, the pickup which we saw. We started to see pickup in quarter three of last year, and so we have not gone down. Prior to this, what we were seeing is declines in volumes and now we're starting to see when we're lapping increases in volumes. So we are pleased by the progress in the business here as far as volume is concerned. The other thing is that the performance on price has been very good for us here, and we're going to maintain our discipline and stay at that. But overall, we believe that the progress in which we're making here, as far as volume is concerned, fits with what we're seeing in the underlying economy. We run correlations to that all the time.

And then back to Electronics, just quickly, Paul, I think you said it normally seasonally increases into your September quarter here, but I think Nelson said you expect the customer operating rates to hold up that's there. You're expecting to more than hold up?

And Chris, and the comment was that it seasonally increases from our quarter two to quarter three. And so -- and that's the March quarter to the June quarter.

It's by the things that we see.

I'm sorry, John, I misquote.

But June to September would be more stable rather than...

In June to September, yes, as far the customer operating rates, and they would be typically about the same unless they start to see some growth. And we're starting to see some of those guys, the operating rates, pick up a little bit more. So we predict a good quarter for us in Electronics on the volume side. Everything in that business looks solid. There's been some concerns on people building the inventory end of this. We are not seeing those builds come through from our customer or their concerns about that.

Our next question comes from David Manthey with Robert W. Baird. David Manthey - Robert W. Baird & Co. Incorporated: Is there any clarity on whether or not the movement of the shareholder meeting up to January at Airgas? Is that a simple majority or a super majority? Or that hasn't been decided yet?

Our position, that is a simple majority. They have obviously come back and said that it is not -- it requires -- it's governed under something else, another bible. We believe it's quite clear that we should prevail on this. It has not been challenged in court yet, so there has not been a ruling on it for things. As far as Airgas is concerned, we think we have made good progress. We are positioned well. A lot of stock has moved to the ARBs and the hedge funds and real progress on the FTC, which I mentioned earlier here. Our price, as far as things, and we made them move here to get more shares in the hands of ARBs. We think that was well timed, and we think that happened. We still have a top price and a limit there. That has not changed. As far as that -- is we do not need to do this deal. Everyone should maintain and understand. We will not chase this price up. We will not get into a bidding war on this thing as far as I'm concerned. But we think we are positioned well with the stock moving to ARBs and the progress with the FTC, which gives us real advantage. David Manthey - Robert W. Baird & Co. Incorporated: And then finally in the cost-containment efforts here, between the two quarters sequentially, it's swung about $0.13 and I know you mentioned pension and electronics restructuring. I'm just wondering if you can talk about the trend from this quarter to next quarter. Do those continue to stay at elevated levels, or can we get some relief there?

Yes. Well, as far as the trend here from quarter-to-quarter, one of the things which you should remember is that we had a distinct impact of the cost reduction efforts, which occurred in quarter three last year for us and so we had a distinct margin improvements, which were driven by costs. So our comparables got a little bit tougher. Yes, pension is up. Pension's been up for the whole year. We are on track to deliver the $0.35 of improvement from cost for the year. Cost performance should get a little bit better as I go from quarter three to quarter four. There are a few things in this quarter such as Electronics restructuring costs, et cetera, which had for us. But we are in a good position as far as costs has been. Costs are not leaking back in, our margins show that.

Our next question comes from Robert Koort with Goldman Sachs.

Just a question on the Electronics side, obviously, a dramatic recovery from the depths of despair of not so long ago. What do you see happening on -- as we go into the next fiscal year? Can you still maintain a very lofty 20-plus-percent silicon acreage growth rate? Or do you think we're going to see some pretty dramatic deceleration back to a more steady-state rate?

Yes, Bob. I do not think that, and that we're going to see, a growth rate in the 30% range. If I had -- and we're trying to look right now. I would think the thing which we're going to have is something in the low-double digits. Remember they went to a fairly easy comp for them because they dropped so much, and that's why the growth rates are so high. But we have been pleased by these markets, I mean, Electronics has proven the bounce back very well. And it's also been proven that something that consumers want to buy as consumer spending has returned.

Our next question comes from Robert Reitzes with BroadArch Capital.

Paul, just wanted to ask you one question, what gives you the confidence that you're going to have a strong second half in Europe?

And that comes from -- and the outlook on the business in which we're thinking, and we get TP [ph] and we get information from our customers all the time, and we watch volumes, we watch volume trends. We've had good signings and as we start to bring those signings on stream, we see just a solid slow growth in the business in Europe. LOX/LIN has started to pick it up, LAR has started to pick up on a sequential basis. Packaged Gases has not picked up yet, so that's still an upside for us. But overall, on a year-on-year basis, all those things considered, we had a fairly good improvement over the prior year and a decent improvement sequentially. So we expect that to continue. So it's not going to be a B, Bob. It's a long, slow ride.

Our next question comes from Laurence Alexander with Jefferies. Lucy Watson - Jefferies & Co.: This is Lucy Watson on for Laurence today. Just a couple of clarification questions. On Electronics, as your customers run closer to their capacity limit, do you expect to see any sequential slowing in month-over-month momentum until your customers start bringing more capacity on stream or I guess, would you mind just providing a little bit more color there?

Yes, Lucy this is Nelson. Our customers still have a fair amount of capacity. As Paul pointed out, we're coming back from a pretty significant down, with silicon being down 59% at the bottom of the recession, so there is still capacity available. What's encouraging about the state of affairs for our customers is that in places like memory, we're actually seeing pricing go up in memory. And so, it does look like they're being more disciplined about how they add CapEx. But as you can see from the Samsung announcement from us yesterday, some of our key customers are beginning to loosen the purse strings again and move forward. So we think it actually will allow for a normal progression from here, solid silicon growth rates, CapEx coming on in a logical manner and hopefully giving us some multiple years here of stability. Lucy Watson - Jefferies & Co.: And then just to clarify your earlier comment on the Middle East opportunity, how are you thinking about the timing of an acceleration there?

We are currently working on a number of opportunities there. It's always tough to predict when an award is going to happen, but we would hope for an award sometime within the next year.

Our next question comes from Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas - JP Morgan Chase & Co: How much were hydrogen tonnage volumes up for the quarter and for the year?

About 20% against prior year in this quarter. And that has to do with all the new capital, which we're bringing on. And if you look on the year-to-date, we're about 8%. Jeffrey Zekauskas - JP Morgan Chase & Co: And in the beginning of your presentation, you said that your underlying sales for the quarter were up about 12%. So if you looked at your business in April, May and June, what was the trend? Was June greater than 12%, or less than 12%, or a lot greater, or a lot less?

Jeff, it is always hard to take a month and compare it. And so I never get overly excited by a month because we have holidays around the world, which fall in months which are different and things like that. Jeffrey Zekauskas - JP Morgan Chase & Co: Well, what is just for all that?

No. What I'll try to do is I'll try to give you the trend here in which we're seeing. So as far as growth rates are concerned, and this goes on a sequential basis, I think we are seeing kind of slow sequential growth around the world every month. Things are getting better a little bit. We have not seen anything roll over, which gives us any concern from an economy side of things, and things which change from things. But we aren't seeing a tremendous acceleration either. So for this quarter, we saw, on Europe, and we saw them turn a little bit more positive for us, but that was as expected. It fit with our plan. Asia trends, obviously, they had a B. We expect them to not be as strong next year-over-year. They had an easy comp this year. The United States, I think, we expect the growth rate to be kind of slow and steady and fits with what we have seen. So anything growing in the summer, I think we're expecting sequential growth for us.

This concludes today's question-and-answer session. At this time, Mr. Squires, I'll turn the call back over to you for any additional or closing remarks.

Thanks, Lauren. Please go to our website to access a replay of this call beginning at 2 p.m. today. Thank you for joining us, and have a nice day.

This concludes today's conference. Thank you for your participation. You may now disconnect.