Air Products and Chemicals, Inc. (APD)

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Air Products & Chemicals (APD)

Q2 2011 Earnings Call

April 21, 2011 10:00 am ET

Executives

Simon Moore - Director of Investor Relations

Paul Huck - Chief Financial Officer and Senior Vice President

Analysts

Mark Gulley - Soleil Securities Group, Inc.

Michael Sison - KeyBanc Capital Markets Inc.

David Begleiter - Deutsche Bank AG

Donald Carson - Susquehanna Financial Group, LLLP

Jeffrey Zekauskas - JP Morgan Chase & Co

Robert Koort - Goldman Sachs Group Inc.

Robert Walker - Jefferies & Company, Inc.

John McNulty - Crédit Suisse AG

Michael Harrison - First Analysis

Laurence Alexander - Jefferies & Company, Inc.

Kevin McCarthy

P.J. Juvekar - Citigroup Inc

Presentation

Operator

Good morning, and welcome to Air Products and Chemicals Second Quarter Earnings Release Conference 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 may publish all or a portion of the teleconference. No other recordings or distribution of this telephone conference by any other party are permitted without the expressed written permission of Air Products. Your participation indicates your agreement. Beginning today's call is Mr. Simon Moore, Director of Investor Relations. Mr. Moore, you may begin.

Simon Moore

Thank you, Elizabeth. Good morning, and welcome to Air Products Second Quarter 2011 Earnings Teleconference. This is Simon Moore. Today, our CFO Paul Huck and I will review our Q2 results and outlook for the remainder of 2011.

We issued our earnings release this morning. 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 2:00 p.m. Eastern Time are also available on the website. Please turn to Slide 2.

As always, today's teleconference will contain forward-looking statements based on current expectations regarding important risk factors. Please review the information on these slides and at the end of today's earnings release, explaining factors that may affect these expectations. Now I'll turn the call over to Paul for a review of our financials.

Paul Huck

Thanks, Simon. Good morning, everyone, and thanks for joining us today. Please turn to Slide #3.

With half of our fiscal year behind us, we are well on our way towards delivering on our 2011 financial goals. For the quarter, sales of $2.5 billion were up 11% versus prior year on growth in our Electronics and Performance Materials, Tonnage and Merchant segments. Underlying sales increased 12% on 11% higher volumes and 1% higher pricing.

Sequentially, sales were 5% higher. Underlying sales were up 3%, with volumes contributing 2% and pricing adding 1%. This sequential improvement was driven primarily by our Electronics and Performance Materials segment and our Merchant Gases segment. Operating income of $425 million increased 17% from prior year, primarily on higher volumes. Our operating margins improved to 17%, up 80 basis points versus prior year. We remain on track to deliver on our 17% goal for fiscal 2011. For the quarter, net income increased 16% and diluted earnings per share increased by 15%, each versus prior year. Return on capital employed for the quarter improved to 13.3%, up 110 basis points.

Turning to Slide 4 for a review of the factors that affected the quarter's performance in terms of earnings per share. Our adjusted earnings per share increased by 15% or $0.18 per share. Higher volumes in the Electronics and Performance Materials, Tonnage and Merchant segments increased earnings per share by $0.27 year-on-year.

The impact of pricing, combined with energy and raw material costs, attracted $0.02. Costs were $0.04 unfavorable, as our productivity gains were more than offset by higher operating, maintenance and distribution costs, particularly in our Merchant segment.

Currency translation and foreign exchange netted to a $0.01 unfavorable impact, and the higher tax rate and higher shares outstanding cost us a $0.01 each. In March, we announced an 18% dividend increase, marking 29 consecutive years of increases. We are all proud of this record.

Also, in this past quarter, we repurchased $350 million of our stock, about 3.8 million shares. We have $300 million remaining on our repurchase authorization.

In summary, this was another quarter of solid gains in sales, earnings, margins and returns. Now I'll turn the call over to Simon to review our business segment results. Simon?

Simon Moore

Thanks, Paul. Please turn to Slide 5, Merchant Gases. Merchant Gases sales of just over $1 billion were up 10% versus prior year. Underlying sales improved by 9% on 8% higher volumes and positive pricing. Currency increased sales by 1%. Year-on-year sales improvement was driven by volume growth across the segment, with the greatest improvement in Asia. Sequentially, sales were up 3% with underlying sales up 2% even with the lunar New Year holiday.

Merchant Gases operating income of $185 million was up 4% versus prior year and down 8% sequentially. Segment operating margin of 18.3% was down 100 basis points versus prior year and down 200 basis points sequentially.

Versus last year, volume leverage was more than offset by higher operating, maintenance and distribution costs and lower pricing in European healthcare. We had a number of plant operating challenges that increased maintenance costs and resulted in a higher distribution cost, as we reallocated our supply chain to meet customers' needs.

Versus prior quarter, the same cost impacts, combined with the smaller sequential volume increase, drove the margin decline. We believe these challenges are largely behind us and expect operating margins to improve through the rest of the year. Let me now provide a few additional comments by region. Please turn to Slide 6.

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