Air Products and Chemicals, Inc. (APD)

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Air Products & Chemicals (APD)

Q3 2011 Earnings Call

July 22, 2011 10:00 am ET


Simon Moore - Director of Investor Relations

Paul Huck - Chief Financial Officer and Senior Vice President


Lucy Watson - Jefferies & Company, Inc.

John Hirt

Peter Cozzone - KeyBanc Capital Markets Inc.

Jeffrey Zekauskas - JP Morgan Chase & Co

Michael Harrison - First Analysis Securities Corporation

Donald Carson - Susquehanna Financial Group, LLLP

Robert Koort - Goldman Sachs Group Inc.

John McNulty - Crédit Suisse AG

Edward Yang - Oppenheimer & Co. Inc.

James Sheehan - Deutsche Bank AG

Mark Gulley - Ticonderoga Securities LLC

David Manthey - Robert W. Baird & Co. Incorporated

Kevin McCarthy



Good morning, and welcome to Air Products & Chemicals' Third 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 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. Simon Moore, Director of Investor Relations. Mr. Moore, you may begin.

Simon Moore

Thank you, Augusta. Good morning, and welcome to Air Products' Third Quarter 2011 Earnings Teleconference. This is Simon Moore. Today, our CFO, Paul Huck, and I will review our Q3 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 to access the materials. Instructions for accessing the replay of this call, beginning at 2 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. For the quarter, sales of $2.6 billion were up 14% versus prior year. Underlying sales increased 7% on 6% higher volumes, primarily in our Electronics and Performance Materials and Tonnage segments and 1% higher pricing. Favorable currency translation contributed 5%. Sequentially, sales were 3% higher, mainly due to currency. And while we did see sequential volume growth in our Electronics and Performance Materials and Tonnage segments, Merchant Gases volumes were flat sequentially and Equipment sales declined.

Operating income of $417 million increased 11% from prior year, primarily due to higher volumes. Our operating margin of 16.2% declined 40 basis points versus prior year and 80 basis points sequentially, due to higher operating costs in our Merchant segment and planned maintenance costs in our Tonnage segment.

For the quarter, net income from containing operations increased 15% and diluted earnings per share increased 14%, each, versus prior year. Return on capital employed for the quarter improved to 13%, up 30 basis points. The 16.2% operating margin for this quarter is a disappointment for us. The shortfall to our goal is primarily in the Merchant segment due to 4 factors: a lack of volume growth in North -- in the North American business where we have significant available capacity, further declines in our European business, continued operating problems that resulted in higher operating and dislocation costs and tight helium supply with increased procurement costs.

To remedy these issues, we are taking the following actions. In North America, we are continuing to add sales resources focused around our plants and on the end markets where we have strong offerings. For example, oil field services and electronics packaging. We've already seen signings in the third quarter improved, and we expect continued improvement. It does take about 6 to 9 months for new signings to come on line. We will also continue to drive price improvement.

In Europe, we continue to face a slow recovery, along with the pricing environment that is under recovering our variable cost increases. To address this, we had raised prices for a number of products and in a number of countries, and we'll have more price increases this quarter to stop price and variable margin erosion.

We will strongly defend our volumes from competitive attack. However, there are certain accounts we will either improve or shed. We are focusing our sales efforts on customers close to our plants to lower our distribution costs and to leverage our application strength in areas like cement and combustion.

For our operating performance, we are working hard across our system to increase plant availability and reduce unplanned outages. An example is argon production, where product has been tight and operating and distribution costs have been high. Tonnage expansion is currently underway, such as the new LaPorte plant scheduled to come onstream later this year, will enhance our argon availability.

Regarding helium, we have and we'll be raising prices further, and we will be bringing on additional capacity later this year. Overall, we are forecasting Merchant margins to improve next quarter, and we now expect to meet our 20% margin goal in fiscal 2012, on our way to our 21% to 24% goal for 2015.

While Merchant margins disappointed, the Electronics and Performance Materials segment exceeded their 15% goal, posting a year-to-date margin of 15.8% and 18.1% for this quarter. This performance has offset some of the Merchant shortfall. While this quarter just made it harder on ourselves, we are still committed to achieving our 17% goal for the year.

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